BALANCED SCORECARD

The balanced scorecard translates an organization's mission and strategy into a set of
performance measures that provides the framework for implementing the strategy. It does not
solely focus on achieving the financial objectives, but also highlights the non-financial objectives
that an organization must achieve to meets its financial objectives.

The scorecard measures an organization's performance from four perspectives:

(i) financial
(ii) customer
(iii) internal business processes
(iv) learning and growth

The financial perspective evaluates the profitability of the strategy. The customer perspective
identifies the targeted market segments and measures the company's success in these segments.
The internal business perspective focuses on internal operations that further the customer
perspective by creating value for customers and further the financial perspective by increasing
shareholder value. The internal business perspective has three sub processes: the innovation
process, the operations process and post sales service. The learning and growth perspective
identifies the capabilities the organization must excel at to achieve superior internal processes
that create value for customers and shareholders.

It is called the balanced scorecard because it balances the use of financial and non-financial
performance measures to evaluate short-run and long run performance in a single report. A
company's strategy influences the measures it uses to track performance in each of these
perspectives.

Advantages

1. The balanced scorecard reduces managers' emphasis on short-run financial performance such
as quarterly earnings. That is because the non-financial and operational indicators such as
product quality and customer satisfaction measure changes that a company is making for the long
run. The financial benefit of these long-run changes may not appear immediately in the short-run
earnings, but strong improvement in non-financial measures is an indicator of economic value
creation in the future.

2. By balancing the mix of financial and non-financial measures, the balanced scorecard
broadens management's attention to short run and long run performance.
Kaplan and Norton, the proponents of balanced scorecard, recommended that organizations
should articulate the major goals for each of the four perspectives and then translate these goals
into specific performance measures. Generally, three to five performance measures are set for
each goal.

Goals Performance Measures

Customer Perspective

Price Competitive price

Delivery Number of on time deliveries

Lead-time from receipt of order to
delivery to customers

Quality Own quality relative to industry

standards
Number of defects or defect level

Support Response time

Customer satisfaction surveys

Internal Business Perspective

Efficiency of manufacturing process Manufacturing cycle time

Sales penetration Annual sales versus plan sales

Increase in number of customers in a
unit of time.

New product introduction Rate of new product introduction/quarter.

Innovation and Learning Perspective

Technology leadership Product performance compared to

competition
Number of new products with patented
technology

Cost Leadership Manufacturing overheads per quarter as a

percentage of sales
 Rate of decrease in cost of quality per
quarter
Market Leadership Market share in all major markets

Research and Development Number of new products

Number of patents

Financial Perspective

Sales Revenue and profit growth

Cost of sales Extent to which it remained fixed or

decreased each year

Profitability Return on capital employed

Prosperity Cash flow