Understanding the Balance Scorecard

In a globalized and increasing market place, constant improvements like strategies, processes and quality of products and services are required within organizations. Constant improvements are cardinal in order for companies to maintain their competitive strength and edge, and thereby guarantee their continuous survival. As such, the importance of businesses developing activities or tasks to gauge their overall efficiency and effectiveness is recognized. In this regard, Strategic performance management is a business function and useful tool in capturing and measuring a firm's performance in relation to its sets goals. According to (Waal, 2007) it incorporates steering a company through systematic definition of strategies and objectives of the organization, making these measurable through key performance indicators, in order to be able to take corrective actions to keep the organization on track. One innovative tool that has been developed to measure key parameters is the Balance Scorecard. This measurement tool brings a link between strategy and action (Sinha, 2006) and as such is gaining increasing importance among different businesses today.

In time past, most companies operational and management control systems were built around financial measures and targets, which bear little consideration to the company's progress in achieving long-term strategic objectives. Therefore the emphasis most firms place on short-term financial measures leaves a gap between development of a strategy and its implementation. Financial measures utilized included a firm's net income, earnings per share and return on capital. However, with companies around the world transforming themselves for competition, these financial measures were considered not sufficient in ensuring future growth. It for this reason why Kaplan and Norton in 1992 designed the balance scorecard, to encourage a more sound appraisal of a company's financial and non-financial elements, fro m a variety of perspectives. They believed that by going beyond the traditional measures of financial performance, managers would better understand how their companies are really doing.

By definition the balance scorecard is a strategic planning and management system used to align business activities to the vision strategy of the organization, improve internal and external communications, and monitor organizational performance against strategic goals. Designed as a compliment to financial measures, it's suggested that the organization should be viewed on four basic perspectives: financial perspective, customer perspective, internal process perspective and learning and growth perspective. The financial perspective covers the financial objectives of the firm and allows managers to track financial success and shareholders value. Some financial measures include operating income, return on capital and economic value added. These measures will help to indicate if a business is improving its bottom line and the economic consequences of actions taken by the firm. The customer perspective addresses how an organization should appear to customers to achieve its' vision. Measurements of this perspective includes customer satisfaction, customer retention and market share in target segments. Here the scorecard primarily focuses on customer concerns in four categories: time, quality, performance and service, and cost. This customer perspective is considered a leading indicator as if customers are not satisfied, they will switch to another supplier that will meet their needs, thus signaling future decline for the firm.

The Internal Business perspective looks at the various businesses processes the organization should excel at to satisfy shareholders and customers. In other words, this perspective covers the internal business processes, core competencies, and technologies that would satisfy customer needs. Example of these processes includes procurement, production and order fulfillment. By these metrics the manager will gain knowledge on how well their business is running and if there exist any necessary corrective measures. Lastly the learning growth perspective identifies business measures that answer the question " Can we continue to improve and create value?" Essentially it looks at whether the company has the ability to innovate, improve and learn, such as the ability to launch new products. Employee satisfaction, employee retention and skills sets are some of the learning and growth performance measures. In this regard, high emphasis is place on employee training and corporate cultural attitudes, and these are considered critical in ensuring a firm's future success.

Overtime, more and more global companies introduced the balance scorecard as a support tool for strategic management, as they