EXECUTIVE SUMMARY

Traditional performance measures are insufficient to drive performance and guide

organizations in todays rapidly changing, complex economic landscape. Organizations need
to link performance measurement to strategy, and must measure performance in ways that
both promote positive future results and reflect past performance.
The Balanced Scorecard is a proven performance measurement system. The
Balanced Scorecard is a management system that enables organizations to clarify their
vision and strategy and translate them into action. It used balances performance drivers
(leading indicators) with outcome measures (lagging indicators).The scorecard focused on
measuring success in four key areas or perspectives which is finance, customers, internal
business processes and learning and growth. To connecting these four perspectives,
strategy maps are used. A strategy map provides a visual representation of the linkages in
the four perspectives of the balanced scorecard.
The benefits from the Balanced Scorecard are realized when the Balanced
Scorecard is used in day-to-day operations. It helps align key performances measures with
strategy at all levels of an organization. Data update, analysis and reporting are performed
regularly within the management and reporting processes. From time to time it is also
necessary to refine the Balanced Scorecard. The Balanced Scorecard should be a standard
tool used by the management team in their strategy work. Furthermore, Balanced Scorecard
is also serve as communication tool that helps each employee better understand where the
Strategy drives the organization. A broad base of leaders, managers and employees are
involved in implement balanced scorecard.
The main challenge of this system is that it can be difficult and time-consuming to
implement. Some organizations implement it quicker, for some it takes longer. The bottom
line is that the balanced scorecard requires a sustained, long-term commitment at all levels
in the organization for it to be effective.

INTRODUCTION
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The Balanced Scorecard was first developed by Robert Kaplan and David Norton in
1992. Professor Robert Kaplan and David Norton began to shape the concept of the
Balanced Scorecard during a research study of a lot of companies with the purpose of
exploring the new methods of performance measurement in the late 1980s and early 1990s.
The importance of the study was a growing belief that financial measures of performance
were ineffective for the modern business enterprise. Traditional measures of performance
relying too much on purely financial measures and failed to accurately reflect the true health
and future prospects of an organization.
Furthermore, they perceived the limitation of reliance on lagging indicators that
convey past performance results, but do not generally provide a reliable indication of future
performance. Kaplan and Norton also perceived that employees throughout a company
often did not understand how their role related to strategy and financial measures, leading
employees to feel powerless to impact the things that were being measured.
So, Kaplan and Norton introduced the Balanced Scorecard as tools that translate an
organizations mission, objectives and strategies into performances measures. In order
words, balance scorecard is a measure that drives performances. The Balanced Scorecard
is a proven performance measurement system as it has been translated and effectively
implemented in both the non-profit and public sectors. In addition, many of leading
companies worldwide now such as Microsoft used balanced scorecard as their management
system.
The purposes of balanced scorecard are to implement strategy, monitor and manage
performance, and may form part of the organizations planning cycle.
Balanced Scorecard balanced:

Four different perspectives.

Both leading and lagging indicators.

Balanced scorecard is balanced through four different strategic perspectives which are
financial, customer, internal business processes and learning and growth perspectives. Each
perspective consists of relevant strategic goals, indicators and measures to achieve them.

It is also important to balance lagging indicators and leading indicators. Lag indicators
measures focusing on result at the end of a time period, normally characterizing historical
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performance or outcome measure. For example, market share, sales and employee
satisfaction. It is an after-the-event measurement and useless when attempting to influenced
the future and lack predictive power. Lag indicator are easy to identify and capture.
To influence the future, lead indicators are used. It is measures that drive or lead to the
performance of lags measures, normally related to the processes and activities of the
business. In simple word lead indicators guide future outcome. For example, hours spent
with customers, proposal written and absenteeism. It allows company make adjustment
based on result. Good performance will lead to improved results in the future.
Lead indicators are always more difficult to determine than lag indicators. They are
predictive measures with no history at the organization and do not provide guarantee of
success. The balanced scorecard should contain a mix of lag and lead measures of
performance. Lag indicator without lead indicator will give no indication as to how a result will
be achieved and no tracking toward strategic goals. So, both indicators are important to
selecting measures and track towards strategic goals.

STAGES OF BALANCED SCORECARD

The stages involved in the development and the use of the balanced scorecard are as
follows:
1.

Translating the vision, mission

The first stage in the process is to translate the mission, the overall goals or
objectives and the strategic priorities of the organization into the specific
objectives that an organization should achieve. Senior executive management
team working together to translate its business units strategy into strategic
objectives. The purpose is to discover a common language and goal to align the
scorecard with. Identify the performance categories 4 perspectives that best link
the business vision and strategy to its results to focus attention on customer
needs and the organizations value proposition.

2. Objectives measures

Specific objectives are developed for each of the perspectives that will be used
within the balance scorecard. As part of this process, a strategy map may be
formulated to articulate the causal linkages between the different objectives and
the overall goals and strategies of the organization. Identify and develop effective
leading and lagging measures and meaningful standards for each objective,
establishing both short term milestones and long term targets. Ensure
companywide acceptance of the measures. Targets are developed for each of
the performance measures which will be used to evaluate actual performance.

3. Plan, set, align strategic initiatives

Strategic initiatives are developed that support the objectives. Make team
members aware of their responsibilities, and how they will be held accountable
for their performance. Get team members on board with the strategic plan and
the direction of the company by showing them the role they will be playing in its
success. Strategic initiatives are developed that support the objectives.
Ownership of performance measures and strategic initiatives is assigned to each
indicator and tie accountability to reporting. The appropriate staff should be
notified of reporting responsibility. The enterprise level scorecard is cascaded
down into business and support unit scorecards.

4.

Enhance strategic feedback and learning

Collect and analyse performance data and compare actual results with desired
performance. An organization will take action to unfavourable gaps. During
evaluation, the organization tries to answer questions such as, Are our strategies
working? Are we measuring the right things? has our environment changed?
And we budgeting our money strategically

PERSPECTIVES IN BALANCED SCORECARD

Kaplan and Nortons Balanced Scorecard describes strategy and performance

management from multiple perspectives. The classic Balanced Scorecard has four
perspectives:

Perspective

Key Question

Financial

To succeed financially, how should we appear to our

stakeholders?

Customer

To achieve our vision, how should we appear to our

customers?

Process

To satisfy our customers and shareholders, at what

business processes must we excel?

Learning and Growth

To achieve our vision, how will we sustain our ability to

change and improve?

Each perspective can be explained by a key question with which it is associated. The
answers to each key question become the objectives associated with that perspective, and
performance is then judged by the progress to achieving these objectives. There is an
explicit causal relationship between the perspectives: good performance in the Learning and
Growth objectives generally drives improvements in the Internal Business Process
objectives, which should improve the organization in the eyes of the customer, which
ultimately leads to improved financial results.
Though there are four basic perspectives proposed, it is important to understand that
these perspectives reflect a unique organizational strategy. So the perspectives and key
questions should be amended and supplemented as necessary to capture that strategy. For
example, a non-profit or government organization would not have the same perspectives as
a for-profit corporation.

Financial perspective
Focus on financial performances of an organization. It normally covers the revenue
and profit targets of commercial companies as well as the budget and cost-saving targets of
not-for-profit organizations. The financial health of an organization is a critical perspective for
managers to track. It is important to note that financial performance is usually the result of
good performance in the other three scorecard perspectives. For example, sales growth, and
Market share and return on equity.

Customer perspective

In the customer perspective of the Balanced Scorecard, managers identify the

customer and market segments in which the business unit will compete and the measures of
the business units performance in these targeted segments. This perspective typically
includes several core or generic measures of the successful outcomes from a wellformulated and implemented strategy. The core outcome measures include customer
satisfaction, customer retention, new customer acquisition, customer profitability, and market
share in targeted segments.
Internal process perspective
This perspective encompasses internal operational objectives and sketches the main
processes required to execute the customer objectives. Measures based on this perspective
enable the organization to recognize processes (such as manufacturing, new product
development) that are vital to satisfying customer requirements. This encompasses the
impalpable drivers of future success such as organizational capital, human capital and
informational capital including training, skills, leadership, organizational culture, systems,
databases and leadership. It is the basis upon which organizational accomplishment is
developed. The measures in this perspective facilitate the other perspectives as they
eventually lead the organization to realize its outcomes.
Learning and growth perspective
These are measures that highlight an organizations development and learning
ability. They might include the number of training days, the number of qualified staff or total
hours spent on staff training. This perspective includes staff training and attitudes to
organizational culture related to both individual and corporate self-improvement. This
quadrant recognizes that in a knowledge worker organization, people are the greatest
resource. Kaplan and Norton focus upon the fact that 'learning' is more than 'training'.

STRATEGY MAPS
Mapping a strategy is an important way to evaluate and make visually explicit an
organizations perspectives, objectives, and measures, and the causal linkages between
them. Organizing objectives in each defined perspective, and mapping the strategic
relationships among them, serves as a way to evaluate objectives to make sure they are
consistent and comprehensive in delivering the strategy.
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A strategy map provides a visual representation of the linkages in the four

perspectives of the balanced scorecard which are financial, customer, internal business
processes and learning and growth perspectives. Each of the perspective is actually
interdependent or directly related to each other. Strategy maps also clarify all cause-andeffect relationships so that an effective strategy can be developed and then optimized over
time.
An example of strategy map is Southwest Airlines in the USA. Southwest Airline
essentially invented the low-cost business model now used worldwide by many airlines.
Southwest Airlines set operating efficiency as its strategic theme. The four perspectives in
the balanced scorecard were linked together by a series of relatively simple questions and
answers below.

Figure 1: Strategy map of Southwest Airlines

The right side column of the figure 1 contains the strategy map that illustrates the
cause-and-effect relationships between strategic objectives. The objectives are in the
bubbles that show what activity must take place in each perspective to deliver the overall
goal of running a profitable airline. The four categories of key indicators are used for
evaluation of the company as a whole and all of the key indicators, the objectives are formed
to relate with this strategy.
Strategy map are read from top to bottom. For example in the Southwest Airlines
Strategy map, the top goal of a company is to increase profitability and this objective is one
of the financial key indicators. Then, followed by customer perspective. Upward need to
satisfy customer need to achieve one goal of increase profitability by providing lowest ticket
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price and on-time flight. Customers would not prefer the company when flights are not ontime even if price is low. Therefore, this key indicator is chosen to determine meeting
customer expectations.
Strong internal processes also important in this strategy. So, southwest airlines focus
on the innovation by offering fast ground turnaround. Turnaround time affects the amount of
aircraft used because when turnaround time decreases. It ensures frequent departures with
fewer craft. This provides a decrease in costs so it is an important objective for Southwest
Airlines. To achieve this, entire Southwest look at their final perspective which is learning and
growth strategy that engages and develops staff such as align ground crew and provide
employee stockholder program. All employees should be efficient to assist their clients.
Southwest Airlines belief that this strategy is very effective and helps them to ensure that
they continue adds value to it firm.
In a simple words, strategy map clearly explain what companys priorities or goal of
the firm are and how they intend to achieve them.

ADVANTAGES OF BALANCED SCORECARD

1) Involving a broad base of leaders, managers and employees
Looking at different organizational programs or units from different perspectives can be a
way of getting everyone singing from the same song sheet. If the balanced scorecard shows
customer service to be weak, focusing on everybody's customer service performance
behaviors will lead to small improvements in each department or unit, the overall effect will

be a bigger improvement in the organizations customer service performance across the

board.
2) Helps align key performances measures with strategy at all levels of an
organization
Organizations consist of numerous sectors, business units, and specialized departments,
each with its own operations and often its own strategy. Functional departments, such as
finance, manufacturing, marketing, sales, engineering, and purchasing, have their own
bodies of knowledge, language, and culture. Functional silos arise and become a major
barrier to strategy implementation since most organizations have great difficulty
communicating and coordinating across these specialty functions. For organizational
performance to be more than the sum of its parts, individual strategies must be linked and
integrated. The corporate role defines the linkages expected to create synergy and ensures
that the linkages actually occur.
3) Simple to use and understand
Strategy can be easily explained and communicated in the balanced scorecard. The strategy
map is a series of initiatives that must be completed to achieve the objectives in the
organizations business plan. A simple and visual way of communicating what the
organization plans to do to meet its financial objectives.
4) Serves as a Communication Tool
According to Kaplan and Norton, the balanced scorecard is not only a measurement tool, but
also a communication tool. The scorecard can be used to communicate strategic vision
throughout an organization that includes its board members, employees, volunteers, donors,
and clients. Thus, the scorecard helps get everyone aligned and on the same page.
DISADVANTAGES OF BALANCED SCORECARD
1) Time consuming method
It takes time to adapt to balanced scorecard strategic system. So this will require a lot of
motivation from the management to be able to successfully complete the process.
2) Lack of a well-defined strategy

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A common problem is that an organization will adopt some new non-financial measures, but
fail to align the measures adequately with strategy. According to Dr. Norton,
The biggest mistake that organizations make is thinking that the scorecard is just about
measures. Quite often they will develop a list of financial and non-financial measures and
believe they have a scorecard. This, I believe, is dangerous.

3) Tend to get what measure in scorecard

Balanced scorecard system proves to be completely efficient if integrated with an accounting
system. However, if organizations are relying on balanced scorecard method for complete
evaluation of your company's performance, it will not be completely efficient
4) Lead to higher cost
Balanced scorecards have high initial costs. Implementing a scorecard system can cost a
lot of money in training time and consultant fees which are needed during the setup
process. The costs include training costs, software, facilitation, license fees, testing fees
and labor needed to maintain the system. In addition, there will be maintenance costs for
both the software and training. These fees can add up to a large sum.

Many companies adopted Balanced Scorecard concepts to improve their

performance measurement systems. They achieved tangible but narrow results. Adopting
those concepts provided clarification, consensus, and focus on the desired improvements in
performance. More recently, we have seen companies expand their use of the balanced
scorecard, employing it as the foundation of an integrated and iterative strategic
management system. Companies are using the scorecard to:
Communicate the strategy to all employees and organizational units
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 Align employees individual objectives and incentives to successful strategy

implementation
Integrate the strategy with ongoing management processes
The balanced scorecard enables organizations to align its management processes and
focuses the entire organization on implementing long-term strategy. Without a balanced
scorecard, most organizations are unable to achieve a similar consistency of vision and
action as they attempt to change direction and introduce new strategies and processes. The
balanced scorecard provides a framework for managing the implementation of strategy while
also allowing the strategy itself to evolve in response to changes in the organization's
competitive, market, and technological environments.
All and all the value of the Balanced Scorecard can be summarized as follows: "If
directors were getting a Balanced Scorecard, they would be much more likely to be informed
about their companies on an ongoing basis. The Scorecard's emphasis on strategy (linking it
to all activities, day-to-day and long-term) could help directors to stay focused

REFERENCES
A balanced approach to sustainability. CIMA Insight, February 2004. Available from:
www.cimaglobal.com/insight

CIMA

Report

The
CIMA
Strategic
Scorecard.
www.cimaglobal.com/cimastrategicscorecard
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Available

from:

Kaplan, R.S. and Norton, D.P. Using the Balanced Scorecard as a strategic management
system. Harvard Business Review, July/August 2007, Volume 85, Issue 7-8, pp 150161

Murby, L. and Gould, S. (2005). CIMA Technical Report Effective performance

management with the Balanced Scorecard. Available from
www.cimaglobal.com/technicalreports

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