The Balanced Scorecard (BSC): A Comprehensive Guide
Business Performance
The term “business performance” is often associated with management, measurement, and evaluation. Performance can be defined as the action or process of carrying out or accomplishing an action, task, or function.
An Operational Definition of Performance
Performance is the sum of all processes that guide managers in taking appropriate actions in the present to create a high-performing organization in the future. A performing organization operates efficiently and effectively, aiming at creating value.
Balanced Scorecard (BSC)
Originating in 1992, the Balanced Scorecard (BSC) emerged to address challenges in:
- Strategy: Increasing complexity in translating strategy into action.
- Integration: Lack of integration between the strategic and operational levels of organizations.
- Financial Measures: Companies relying solely on financial measures to evaluate performance.
What is the Balanced Scorecard (BSC)?
The Balanced Scorecard is a managerial control tool and a model for analyzing and controlling organizational performance across multiple aspects. It provides a method for managing and measuring performance through variables that drive the organization towards success. It is also considered a business intelligence tool.
The BSC Process
- Clarify and translate the strategy.
- Communicate and align the strategy.
- Develop plans and organizational objectives.
- Gather feedback and promote strategic learning.
Perspectives of the BSC
- Financial: The financial results that satisfy shareholders.
- Customers: The method of introducing the business to customers.
- Internal Processes: The processes that should be enhanced to satisfy customers and shareholders.
- Learning and Growth: The business horizon and the methods that should be developed.
Reflections on the BSC
In practice, equal attention across the four BSC perspectives is ideal but not always achieved. Depending on the company’s market and strategy, an “unbalanced” but strategically aligned BSC profile may be more effective than a standard “balanced” BSC. The key is to tailor the BSC implementation and performance measurement to the specific managerial needs.
Limitations of the BSC
The Balanced Scorecard has faced criticism over the years:
- Lipe and Salterio (2002): The BSC may limit managers’ ability to fully utilize information from diverse performance measures.
- Bernard Wong-On-Wing: Found that information about strategy effectiveness in the BSC is underutilized, possibly due to cognitive limitations.
- Hanne Norreklit (2000): Emphasized the need for a comprehensive analysis of the model to identify factors for improvement.
- Hoque (2014): Highlighted that BSC measures may not capture the strategic linkages of real BSC usage and the tendency to use various quantitative measures for performance assessment.
- Richard Baker (2005): The BSC is based on an inadequate consideration of the different dimensions of organizational reality.
These criticisms suggest that applying the Balanced Scorecard may not be as straightforward as Kaplan and Norton proposed, highlighting the importance of examining real-world evidence.
Challenges in BSC Implementation
Managers often overemphasize the accounting dimension, placing excessive trust in financial indicators. This can lead to wasted time and subjectivity, hindering effective management in defining measures within the strategic map.
Furthermore, analysis reveals that management may not effectively focus the tool on the long term and struggles to understand the criteria for overall performance. The BSC can be expensive to implement, posing a barrier for firms, particularly smaller ones. Consequently, implementation and construction of the strategic tool are complex, often benefiting only large companies. Additionally, the outputs may lack clarity, and the limited number of indicators can hinder the translation of results into quantitative terms.