Understanding the Balance ScorecardEssay Preview: Understanding the Balance ScorecardReport this essayIn a globalized and increasing market place, constant improvements like strategies, processes and quality of products and services are required within organizations. Constant improvements are cardinal in order for companies to maintain their competitive strength and edge, and thereby guarantee their continuous survival. As such, the importance of businesses developing activities or tasks to gauge their overall efficiency and effectiveness is recognized. In this regard, Strategic performance management is a business function and useful tool in capturing and measuring a firms performance in relation to its sets goals. According to (Waal, 2007) it incorporates steering a company through systematic definition of strategies and objectives of the organization, making these measurable through key performance indicators, in order to be able to take corrective actions to keep the organization on track. One innovative tool that has been developed to measure key parameters is the Balance Scorecard. This measurement tool brings a link between strategy and action (Sinha, 2006) and as such is gaining increasing importance among different businesses today.
In time past, most companies operational and management control systems were built around financial measures and targets, which bear little consideration to the companys progress in achieving long-term strategic objectives. Therefore the emphasis most firms place on short-term financial measures leaves a gap between development of a strategy and its implementation. Financial measures utilized included a firms net income, earnings per share and return on capital. However, with companies around the world transforming themselves for competition, these financial measures were considered not sufficient in ensuring future growth. It for this reason why Kaplan and Norton in 1992 designed the balance scorecard, to encourage a more sound appraisal of a companys financial and non-financial elements, fro m a variety of perspectives. They believed that by going beyond the traditional measures of financial performance, managers would better understand how their companies are really doing.
The McKinsey report stated:
“The ‘financial performance’ of these businesses is closely linked with the quality of the company and their ‘value proposition’, which are two separate aspects of their financial statements.
“Financial performance, as measured by the financial reports, is driven primarily by the relative value of assets and investments. To the extent that an investment in an asset or investment is less valuable than an investment in a different asset, no change in value can be expected.”
Financial returns are measured with the cost of goods and services added because they are highly valueless, which means no change in the cost of goods and services would be expected to occur. Therefore, when a company makes money on its business models of improving its own quality of its assets, it can lower the cost of production, increase the profitability of its businesses, or even increase the size of its shareholders (i.e., its shareholders have a “right to control” for quality assurance, financial performance and capital). The McKinsey and Company report also pointed out that if companies are not in the present position of good management, no future development of these strategies will be sustainable.
“Financial measures to address the need for long-term transformation in these companies are not based purely on financial performance but are based on a comprehensive set of metrics. Indeed, one of the most important measures considered in a company’s financial report is the balance scorecard, which is an estimate of the relative utility of a company asset and investment.
“One of the most valuable qualities of our financial report, and one of the goals of the McKinsey report, is the way that its management reports are framed. They clearly outline the business and the goals of its business. Therefore, we have taken into account of the complexity of the global economy, in their broadest sense, and the complexity of any management approach to improve them. Our approach has been very flexible and it is a very pragmatic approach: it takes into account various factors and focuses on the more complex issues in relation to how they are resolved and how they can be solved. These factors are reflected in every assessment of future profitability. This is not the view of the shareholders. It is just that, in the absence of these very detailed management report metrics, we have not taken into account the many factors that affect profit. For example, we have not included accounting for the influence of capital investment in the planning and management of the company, the management’s internal review, the use of accounting tools, our ability to generate a reasonable long-term profit or cost outlook, the management’s understanding of the risks, the importance of transparency, transparency in the reporting of investments and other management factors, and management’s management’s involvement in the financial reporting of company entities. The management approach is not as rigorous as what I define as “efficiency”. We have also set the level of accountability and the standard of responsibility when applying it.
Since the McKinsey report was first published in 1994, it has been in the top five all over for financial planning by McKinsey.
The McKinsey scorecard states:
“Our McKinsey scorecard evaluates performance and provides a broad comparison of the companies the company has made, to the value proposition made, and it also displays real and relative business performance for each company that has achieved some measure of a comparable value proposition. Overall, McKinsey evaluates the company’s financial performance on four different levels: financial reports, financial statements and business reports. If a company’s performance, then, is better than your performance, then, and only then, its performance is based on its financial reporting quality, based on its financial reports with respect to the value proposition of assets held by each of its businesses, and its financial financial statements only.
Consequently, companies that are currently in the “middle” of the performance evaluation process include:
The McKinsey scorecard also has two special sections. The first is based on the “nonfinancial analysis”. The objective of the nonfinancial analysis is to identify the issues underlying profitability: how do the companies behave on their balance sheets to deliver profit in the short-term
By definition the balance scorecard is a strategic planning and management system used to align business activities to the vision strategy of the organization, improve internal and external communications, and monitor organizational performance against strategic goals. Designed as a compliment to financial measures, its suggested that the organization should be viewed on four basic perspectives: financial perspective, customer perspective, internal process perspective and learning and growth perspective. The financial perspective covers the financial objectives of the firm and allows managers to track financial success and shareholders value. Some financial measures include operating income, return on capital and economic value added. These measures will help to indicate if a business is improving its bottom line and the economic consequences of actions taken by the firm. The customer perspective addresses how an organization should appear to customers to achieve its vision. Measurements of this perspective includes customer satisfaction, customer retention and market share in target segments. Here the scorecard primarily focuses on customer concerns in four categories: time, quality, performance and service, and cost. This customer perspective is considered a leading indicator as if customers are not satisfied, they will switch to another supplier that will meet their needs, thus signaling future decline for the firm.
The Internal Business perspective looks at the various businesses processes the organization should excel at to satisfy shareholders and customers. In other words, this perspective covers the internal business processes, core competencies, and technologies that would satisfy customer needs. Example of these processes includes procurement, production and order fulfillment. By these metrics the manager will gain knowledge on how well their business is running and if there exist any necessary corrective measures. Lastly the learning growth perspective identifies business measures that answer the question ” Can we continue to improve and create value?” Essentially it looks at whether the company has the ability to innovate, improve and learn, such as the ability to launch new products. Employee satisfaction, employee retention and skills sets are some of the learning and growth performance measures. In this regard, high emphasis is place on employee training and corporate cultural attitudes, and these are considered critical in ensuring a firms future success.
Overtime, more and more global companies introduced the balance scorecard as a support tool for strategic management, as they