How does the Balanced Scorecard approach differ from traditional approaches to performance measurement ? What , if anything , distinguishes the Balanced Scorecard approach from a "measure everything, and you might get what you want" Philosophy?
Traditional financial performance metrics provide information about a firm's past results, but are not well-suited for predicting future performance or for implementing and controlling the firm's strategic plan. By analysing perspectives other than the financial one, managers can better translated the organisation's strategy in to actionable objectives and better measure how well the strategic plan is executing.
The Balanced Scorecard is a management system that maps an organisation's strategic objectives into performance metrics in four perspectives: financial, internal processes, customers, and learning and growth. These perspectives provide relevant feedback as to how well the strategic plan is executing so that adjustments can be made as necessary.
In addition to measuring current performance in financial terms, the Balanced Scorecard evaluates the firm's efforts for future improvement using process, customer, and learning and growth metrics. The term "scorecard" signifies quantified performance measures and "balanced" signifies that the system is balanced between:
short-term objectives and long-term objectives
financial measures and non-financial measures
lagging indicators and leading indicators
internal performance and external performance perspectives
Financial Measures are insufficient
While financial accounting is suited to the tracking of physical assets such as manufacturing equipment and inventory, it is less capable of providing useful reports in environments with a large intangible asset base. As intangible assets constitute an ever-increasing proportion of a company's market value , there is an increase in the need for measures that better report such assets as loyal customers, proprietary processes, and highly-skilled staff.
Consider the case of a company that is not profitable but that has a very large customer base. Such as firm could be an attractive takeover target simply because the acquiring firm wants access to those customers. It is not uncommon for a company to take over a competitor with the plan to discontinue the competing product line and convert the customer base to its own products and services. The balance sheets of such takeover targets do not reflects the value of the customers who nonetheless are worth something to the acquiring firm. Clearly, additional measures are needed for such intangibles. Scorecard measures are limited in number
The balanced scorecard is more than a collection of measures used to identify problems. It is a system that integrates a firm's strategy with a purposely limited number of key metrics. Simply adding new metrics to the financial ones could result in hundreds of measures and would create information overload. To avoid this problem, the Balanced Scorecard focuses on four major areas of performance and a limited number of metrics within those areas. The objectives within the four perspectives are carefully selected and are firm specific. To avoid information overload, the total number of measures should be limited to somewhere between15 and 20, or three to four measures for each of the four perspectives. These measures are selected as the ones deemed to be critical in achieving breakthrough competitive performance; they essentially define what is meant by "performance"
A Chain of Cause-and-effect Relationships
Before the BSC, some companies already used collection of both...
Please join StudyMode to read the full document