The Balanced Scorecard and Strategy Map
Financial performance measures, such as operating income and return on investment, indicate whether the company’s strategy and its implementation are increasing shareholder value. However, financial measures tend to be lagging indicators of the strategy. Firms monitor nonfinancial measures to understand whether they are building or destroying their capabilities—with customers, processes, employees, and systems—for future growth and profitability. Key nonfinancial measures are leading indicators of financial performance, in the sense that improvements in these indicators should lead to better financial performance in the future, while decreases in the nonfinancial indicators (such as customer satisfaction and loyalty, process quality, and employee motivation) generally predict decreased future financial performance.
A Balanced Scorecard is a systematic approach to performance measurement that translates an organization’s strategy into clear objectives, measures, and targets. The Balanced Scorecard integrates an appropriate mix of short- and long-term financial and non-financial performance measures used across the organization, based on the organization’s strategy.
The four measurement perspectives in the Balanced Scorecard are (1) financial, (2) customer, (3) process, and (4) learning and growth.
Increasingly, in order to succeed, organizations are relying on competitive advantage created from their intangible assets, such as loyal customers, high-quality operating and innovation processes, employee skills and motivation, data bases and information systems, and organization culture. The growing importance of intangible assets complements the growing interest in the Balanced Scorecard because the Balanced Scorecard helps organizations measure, and therefore, manage the performance of their intangible, knowledge-based, assets. With the Balanced Scorecard measurement system, companies continue to track financial results but they also monitor, with nonfinancial measures, whether they are building or destroying their capabilities—with customers, processes, employees, and systems—and how the company is managing intangible assets to create future growth and profitability. The Balanced Scorecard provides a framework for describing how intangible and tangible assets (such as property, plant, equipment, and inventory) will be combined to create value for the organization.
The two essential components of a good strategy are (1) a clear statement of the company's advantage in the competitive marketplace—what it does or plans to do differently, better, or uniquely compared to competitors; and (2) the scope for the strategy—where the company intends to compete most aggressively, such as targeted customer segments, technologies employed, geographic locations served ,or product line breadth.
clear strategy is vital for an organization for the following reasons. First, it creates a competitive advantage by positioning the company in its external environment where its internal resources and capabilities deliver something to its customers better than or different from its competitors. Second, having a clear strategy provides clear guidance for where internal resources should be allocated and enables all organizational units and employees to make decisions and implement policies that are consistent with achieving and sustaining the company’s competitive advantage in the marketplace.
A strategy map identifies linkages among essential elements for the organization’s strategy. That is, a strategy map provides a comprehensive visual representation of the linkages among objectives in the four perspectives of the Balanced Scorecard. For example, employees’ process improvement skills (learning and growth perspective) drive process quality and process cycle time (process...
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