Balanced Scorecard

These lectures cover Balanced Scorecard that measures financial performance, customer satisfaction, internal processes and learning and growth.

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The Balanced Scorecard (BSC) and Strategy Map

Strategic information using critical success factors provides a road map for the firm to use to chart its competitive course and serves as a benchmark for competitive success. Financial measures such as profitability reflect only a partial, and frequently only a short-term, mea- sure of the firm’s progress. Without strategic information, the firm is likely to stray from its competitive course and to make strategically wrong product decisions, for example, choosing the wrong products or the wrong marketing and distribution methods.
To emphasize the importance of using strategic information, both financial and nonfinan- cial, accounting reports of a firm’s performance are now often based on critical success factors in four different perspectives. One perspective is financial; the other three are nonfinancial:
1. Financial performance. Measures of profitability and market value, among others, as indicators of how well the firm satisfies its owners and shareholders.
2. Customer satisfaction. Measures of quality, service, and low cost, among others, as indicators of how well the firm satisfies its customers.
3. Internal processes. Measures of the efficiency and effectiveness with which the firm produces the product or service.
4. Learning and growth. Measures of the firm’s ability to develop and utilize human resources to meet its strategic goals now and into the future.

An accounting report based on the four perspectives is called a balanced scorecard (BSC). The concept of balance captures the intent of broad coverage, financial and nonfinancial, of all factors that contribute to the firm’s success in achieving its strategic goals. The balanced score- card provides a basis for a more complete analysis than is possible with financial data alone. The use of the balanced scorecard is thus a critical ingredient of the overall approach that firms take to become and remain competitive. An example of a balanced scorecard is shown in Exhibit 1.4. The strategy map is a method, based on the balanced scorecard, that links the various perspectives in a cause-and-effect diagram. For many companies, high achievement in the learning and growth perspective contributes directly to higher achievement in the internal process perspective, which in turn causes greater achievement in the customer satisfaction perspective, which then produces the desired financial performance. The strategy map is therefore a useful means in understanding how improvement in certain critical success factors contributes to other goals and to the ultimate financial results.