Balanced Scorecard: A tool for effective strategy im­ple­men­ta­tion

From the initial vision to the concrete strategy and lastly to tangible success. How can you monitor whether the business strategy is actually working? Two business experts, Robert S. Kaplan and David P. Norton, devised a tool for making the strategy more suc­cess­ful. In the 1990s, they developed a system for improving con­trol­ling within companies: the balanced scorecard (BSC). Thanks to its clear pre­sen­ta­tion of cause and effect, decision-makers have a tool that they can use to manage their companies more ef­fec­tive­ly.

The balanced scorecard involves the in­ter­ac­tion of cause and effect: whatever you put into a system also de­ter­mines to some extent what you get out. Moreover, changes in one area can have con­se­quences in com­plete­ly different areas – both pos­i­tive­ly or neg­a­tive­ly. The BSC is there to visualize and measure these kinds of changes.

To use a balanced scorecard, it is first necessary to formulate a vision and a strategy, then define critical success factors (CSFs) on this basis. These key in­di­ca­tors show how suc­cess­ful­ly the strategy is being im­ple­ment­ed, with the main char­ac­ter­is­tic of this system being that they do not nec­es­sar­i­ly have to be monetary. In other words, they do not merely relate to returns and revenue figures, but they can also express the number of new customers and the as­so­ci­at­ed cause-and-effect chains, for instance.

When analyzing the company and business strategy using a balanced scorecard, four different per­spec­tives are con­sid­ered. These reflect the business areas that are critical for the success of the company and help create a com­pre­hen­sive picture of the company. These four areas are as follows:

This per­spec­tive is primarily adopted to consider the monetary values in the company. They allow the economic con­se­quences of the strategy to be un­der­stood. Revenue and prof­itabil­i­ty play a critical role here – i.e. key in­di­ca­tors that directly tie in with the continued existence of the company. This per­spec­tive also takes investors and share­hold­ers into con­sid­er­a­tion, which is why it is also important to include key in­di­ca­tors that are relevant for these two groups when analyzing the company from this per­spec­tive. For instance, the return on in­vest­ment (ROI) is par­tic­u­lar­ly important for investors.

The customer per­spec­tive concerns how consumers view the company. For them, the most in­ter­est­ing factors are not the same as those for investors: it makes sense to examine key in­di­ca­tors on customer sat­is­fac­tion, for example. The pro­por­tion of new customers is also a useful value to measure from this per­spec­tive, as is the end price of the products offered.

The process per­spec­tive refers to an internal look at the company’s processes. This per­spec­tive is used to assess and improve internal workflows. Key in­di­ca­tors that are of interest when analyzing from this per­spec­tive include the costs of working processes, as well as the adherence of processes to deadlines. Quality controls can also be relevant from the process per­spec­tive.

The learning and growth per­spec­tive helps evaluate the potential for further de­vel­op­ment. Here, the balanced scorecard shows, for example, that the employees and their qualities play a sub­stan­tial role in the suc­cess­ful im­ple­men­ta­tion of strate­gies. Key in­di­ca­tors from personnel de­vel­op­ment in par­tic­u­lar are important in this context. For example, the level of qual­i­fi­ca­tion of employees and the fluc­tu­a­tion rate within the company are sig­nif­i­cant factors from the learning and growth per­spec­tive. Besides the employees, the de­vel­op­ment of products and services also in­flu­ences the success of the company.

The name “balanced scorecard” already suggests an important char­ac­ter­is­tic for the suc­cess­ful im­ple­men­ta­tion of business strate­gies: the right balance. So far, we have only con­sid­ered one aspect of the scorecard: the mea­sure­ment of values within selected per­spec­tives. However, the per­spec­tives are not chosen in an arbitrary manner. Instead, they need to be balanced to enable as complete an eval­u­a­tion as possible. Analysis using a balanced scorecard is intended to prevent an ex­ces­sive­ly one-sided as­sess­ment of the company’s per­for­mance – for instance, by only con­sid­er­ing returns. Ex­pe­ri­ence has shown that such a re­strict­ed view only has limited benefits. In many cases, financial aspects alone do not ap­pro­pri­ate­ly reflect the success of business strate­gies.

Besides, simply measuring key in­di­ca­tors is not enough to make a strategy suc­cess­ful. The balanced scorecard method provides man­age­ment in­for­ma­tion on aspects that require work in future and on which changes are necessary in order for a suitably adjusted strategy to move the company forwards. Balance therefore not only plays a role in assessing the company but also in its de­vel­op­ment. To prevent the de­vel­op­ment of the company from only pro­gress­ing within a small area, it is important to not only define multiple per­spec­tives but also formulate goals from the different per­spec­tives. This ensures that an actual measured value is always ac­com­pa­nied by a target value. If it becomes clear that a goal will not be achieved in a certain area, swift action can be taken, avoiding a situation in which in­di­vid­ual business areas remain un­der­de­vel­oped.

Apart from the goals, re­spon­si­bil­i­ties must also be defined. Es­pe­cial­ly in larger companies, it is almost im­pos­si­ble for a single person to manage the entire business and take care of all business areas; it is therefore necessary to define who is re­spon­si­ble for ensuring the business goals are achieved in each of the areas.

There is no reason to use only one strategy map and one balanced scorecard within a company. In practice, a balanced scorecard is typically created for each company level, for each team or each region, which in turn depends on a su­per­or­di­nate level. This results in a layered structure.

The balanced scorecard serves multiple purposes at the same time: It first forces business owners to formulate clear visions and strate­gies. Secondly, key in­di­ca­tors have to be defined that are critical for im­ple­ment­ing the re­spec­tive strategy. This makes the com­plex­i­ty of a company per­cep­ti­ble and, above all, also trans­par­ent for all employees. Using a balanced scorecard can therefore be helpful first and foremost in the de­vel­op­ment and common un­der­stand­ing of a strategy.

By setting key in­di­ca­tors, the balanced scorecard also makes the success of im­ple­ment­ed strate­gies mea­sur­able (and hence also the success of the company itself to a certain degree). To take these mea­sure­ments, the company is observed ex­ten­sive­ly from all sides and at least four different per­spec­tives in order to assess its strategy much more com­pre­hen­sive­ly than would be the case with a sole focus on revenue.

In order to truly exhaust the benefits of the balanced scorecard, it is important to avoid the mistake of viewing the BSC as merely col­lect­ing key in­di­ca­tors, which are already gathered anyway when con­trol­ling. Instead, it is important to consider the key in­di­ca­tors in relation to the business strategy and to maintain an overview of the in­ter­ac­tions between the in­di­vid­ual business areas. If revenues do not match ex­pec­ta­tions, for example, it can certainly be useful to adopt the process per­spec­tive to examine whether there are factors for in­creas­ing revenue in this area.

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