Linking the Balanced Scorecard to Strategy Essay.
“Balanced Scorecard” is the tool for motivating and measuring business unit performance with four perspectives – financial, customer, internal business processes, and learning and growth. These days, it becomes so complicated and complex to navigate competitive environment, thus some people figured out that balanced scorecard could be used as the tool for linking multiple strategies. It contains both financial and non-financial measures. It was revealed that the measure should include both outcome measures and the performance drivers of those outcomes.
It turns out that there are strategic measures for the four perspectives each.
First of all, Financial performance measures define the long-run objectives of the business unit. Business units can be categorized into three different stages simply – rapid growth, sustain, and harvest. During rapid growth stage, businesses make rational amount of investments to develop and enhance new products and services. During sustain stage, they still attract investment and reinvestment, furthermore they are demanded to earn magnificent returns on their invested capital. During harvest stage, they only focus on maximizing cash flow back to the corporation rather than investment.
Moreover, there are financial themes that can be linked to the strategies – revenue growth and mix, cost reduction/productivity improvement, and asset utilization/investment strategy.
Secondly, in the Customer perspective, managers identify the customer and market segments. It includes customer satisfaction, customer retention, new customer acquisition, customer profitability, and market and account share in targeted segments. Customer retention defines that retaining existing customers in the segment is the way for maintaining or increasing market share in targeted segments. Customer acquisition identifies acquiring new customers as the way. Customer satisfaction is the matter of meeting customers’ needs and it is the measurement of the feedback. Customer profitability means that businesses want to measure not only the satisfaction of the customer, but also the profitability that customers can evoke.
Thirdly, in Internal Business Process perspective, executives identify the critical internal processes in which the organization must excel. It enables business unit to deliver on the value propositions of customers in targeted market segments, and to satisfy shareholder expectations of excellent financial returns. On the other hand, it means there are the process that customer need turned into customer need satisfaction through innovation cycle, operations cycle, and post-sale service cycle.
Fourthly, in Learning & Growth perspective, it identifies the infra-structure that the organization has to build to create long-term growth and improvement. It comes from three sources that people, systems, and organizational procedures.
As I mentioned above, it has been the trend to link and mix multiple scorecard measures into a single strategy. The multiple measures on a properly constructed balanced scorecard should consist of a linked series of objectives and measures that are both consistent and mutually reinforcing. The scorecard should incorporate the complex set of cause-and-effect relationships, outcomes & performance drivers and linked to financial.
Cause and effect relationships can be expressed by a sequence of if-then statements and pervade all four perspectives of balanced scoreboard. It can be described as the process “employee skills(learning & growth)→process quality/process cycle time(internal) →on-time delivery→customer loyalty(customer) →ROCE(financial)”.
Outcomes and performance drivers reflect the common goals of many strategies, as well as similar structures across industries and companies. Therefore, a good balanced scoreboard should have a mix of core outcome measures and performance drivers, that’s why businesses care both outcomes and performance drivers.
Even though the strategy should have to emphasize both financial and non-financial measures, in the sense of improving business unit performance, we have to consider financial measures little bit more. Ultimately, causal paths from all the measures on a scorecard should be linked to financial objectives.
In conclusion, the balanced scorecard is more than a collection of financial and non-financial measurements. It is the translation of the business unit’s strategy into a linked set of measures that identify both the long-term strategic objectives, as well as the mechanisms for achieving and obtaining feedback on those objectives. This thesis could be applied on the Metro Bank case and National Insurance Company case.