The concept involves creating a set of measurements for four strategic perspectives. These include :
1.Financial
2.Customer
3.Internal Processes
4.Learning & Growth
As a model of performance, the Balanced Scorecard is effective since "it
articulates the links between leading inputs (human and physical), processes, and lagging outcomes, and focuses on the importance of managing these components to achieve the organization's strategic priorities."
Balanced Scorecard lets executives see whether they have improved in one area at the expense of another. Knowing that will protect companies from posting sub-optimal performance.
A Balanced Scorecard defines what management means by "performance" and measures whether management is achieving desired results.
The characteristic of the balanced scorecard and its derivatives is the presentation of a mixture of financial and non-financial measures each compared to a 'target' value within a single concise report.
What Balanced Scorecards Do :
- Articulate the business's vision and strategy
- Identify the performance categories that best link the business's vision and strategy to its results (e.g., financial performance, operations, innovation, employee performance)
- Establish objectives that support the business's vision and strategy
- Develop effective measures and meaningful standards, establishing both short-term milestones and long-term targets
- Ensure company wide acceptance of the measures
- Create appropriate budgeting, tracking, communication, and reward systems
- Collect and analyze performance data and compare actual results with desired performance
- Take action to close unfavorable gaps
The emphasis is on establishing a ‘balance’ between four types of measurements :
1. Short term & Long Term
2. External & Internal (External factors include shareholders and customers and Internal include critical business processes, innovation, learning and growth)
3. Performance Drivers (Leading indicators) & Outcome measures (Lagging indicators)
4. Objective measures and Subjective measures. (Objective measures are mostly financial while Subjective measures are mostly non-financial)
