Balanced Scorecard: Definition, Concept and Perspective in 2022
Balanced Scorecard (BSC) is a method of measuring work results used by the company or commonly referred to as management strategy.
The Balanced Scorecard was developed by Drs. Robert Kaplan of Harvard Business School and David Norton in the early 1990s.
Definition of Balanced Scorecard (BSC)
The Balanced Scorecard comes from two syllables, Balanced which means balanced, and scorecard which means score.
Initially, the Balanced Scorecard or BSC for short was used to improve the executive performance measurement system.
With BSC, the company knows more about the progress and progress that has been achieved.
With the BSC, it really helps the company to provide a comprehensive view of the company’s performance. In order for performance to be more effective and efficient, accurate information is needed that represents the work system being carried out.
The Balanced Scorecard provides companies with the elements needed to move from an ‘always financial’ paradigm to a new model in which the results of the balanced scorecard become the starting point for reviewing, questioning, and learning about their strategy.
The balanced scorecard will translate the vision and strategy into a coherent set of measures in four balanced perspectives.
The BSC system aims to provide managers with a more comprehensive view by complementing financial measures through additional metrics that measure performance in various areas. These areas are customer satisfaction, product innovation, and others.
This framework is outlined in a paper published by the Harvard Business Review by Robert S. Kaplan and David P. Norton in 1992.
Their paper is then widely trusted in the business world because it is considered to have developed the BSC system.
Benefits of Balanced Scorecard (BSC)
At first, the BSC was only used to improve the financial measurement system. Then it is expanded and used to measure four perspectives, namely finance, customers, internal business processes, and learning and growth.
Furthermore, the balanced scorecard has the following functions:
- As a measuring tool for the company whether the vision and mission adopted have been achieved.
- As a measure of the competitive advantage of your company.
- As a strategic guide to running your business.
- Strategy effectiveness analysis tool that has been used.
- Provide an overview to the company related to SWOT owned.
- As a company’s key performance indicator tool.
- As feedback to the company’s shareholders.
- As a communication, information, and analysis system for enterprise learning
The Balanced Scorecard (BSC) can be said to be the simplest measuring tool in the company so it has many weaknesses.
One of the drawbacks is that the information presented is limited and lacks accuracy. so that it cannot see other factors that can affect the company’s performance.
For example, when there is a crisis, government policy, or events at certain moments.
However, companies must still have measurement references such as the balanced scorecard, because in it there are four main perspectives which are indeed important points in business. What are the 4 perspectives?
- 13 Business Analysis Techniques and Their Importance for Business
- What is Brand Positioning? Definition, Function, Strategy, Examples, etc
- What is a Unique Selling Point (USP)?: Function, Strategy, Tips, etc
- What Is Revenue Stream? Types, Examples and Importance for Business
- What is Crowdsourcing? Definition, Benefits, Types, Examples & more
4 Balanced Scorecard Perspective
According to Kaplan and Norton, there are two main advantages of the four-perspective Balanced Scorecard (BSC) approach, namely:
- The Balanced Scorecard brings together the different elements of a company’s competitive agenda in one report.
- By combining all of the crucial operational metrics, managers per division or department are forced to weigh achievement against potential risks.
Regarding the second point, Kaplan and Norton state that the company’s best mission or strategy can be realized poorly.
For example, the company has set a goal , namely to market products quickly. This is achieved by increasing the introduction of new products.
The company can realize this mission. However, there is a risk that due to the standard time of marketing, product development becomes less than optimal.
It could be that the new product produced is not much different from the existing product. So that it will reduce the company’s competitive advantage in the long term.
The four perspectives of the Balanced Scorecard (BSC) are as follows:
1. Financial Perspective
In the Balanced Scorecard , the financial perspective is a perspective that cannot be ignored.
Measurement of financial performance shows whether planning, implementation, and implementation, as well as strategies, provide fundamental improvements.
The improvement can be in the form of gross operating income, return on investment or economic value-added. BSC can explain further about achieving the vision that plays a role in realizing wealth growth as follows
- Increased customer satisfaction through increased revenue
- Increased productivity and employee commitment through cost-effectiveness so that there is an increase in profit
- Increasing the company’s ability to generate financial returns by reducing the capital used or investing in projects that generate high returns
The principle of the balanced scorecard there must be a balance between a financial perspective and a non-financial perspective.
Yes, the financial perspective cannot work without a non-financial perspective, for example, the profit earned by the company because the product has value benefits for consumers or it could be due to human resources and business processes of the company.
Measurement of financial perspective can be done by analyzing financial ratios.
For example by analyzing financial trends, common size value between the company and competitors, and financial ratios such as; liability ratios, activity ratios, debt ratios, profit ratios, and solvency ratios.
The financial perspective is also useful for how attractive your company or business is to investors. It can be said that this perspective is very important and becomes the basis for measuring the health of your business.
Key financial perspectives: profitability, growth trends, economic value-added, return of equity and investment, and cash flow.
2. Customer Perspective
In the perspective of the customer’s Balanced Scorecard , the company needs to first determine the target market and customer segments.
Next, managers must determine the best measuring tool to measure the performance of each operating unit in an effort to achieve financial targets.
If a business unit is to achieve great financial performance over the long term, it must create and present a new product or service of better value to customers.
Customer benchmarks are divided into two groups, namely the core measurement group (core group) and the customer value proposition (supporting group). The core group or core measurement consists of:
- Market share or market share
- The rate of acquisition of new customers or customer acqutition
- The company’s ability to retain old customers or customer retention
- Level of customer satisfaction or customer satisfaction
- The level of customer profitability
While this support group is divided into three groups, namely:
- Product attributes (price, quality, function)
- Relationship with customers
- Image and reputation
Key consumer perspective: Satisfaction, retention, acquisition, value benefit, and consumer market share
3. Internal Business Process Perspective
The internal business process perspective presents critical processes that enable business units to provide a value proposition that is able to attract and retain customers in the desired market segment and satisfy shareholders.
Each company has unique processes and values for its customers. In general, it is divided into 3 basic principles from an internal business process perspective, namely:
The innovation process is the most important part of the whole production process. But there are also companies that put innovation outside the production process.
The innovation process itself consists of two components, namely: identifying customer desires, and carrying out a product design process that is in accordance with customer desires.
If the innovation results from the company are not in accordance with the wishes of the customer, the product will not receive a positive response from the customer. This does not provide additional income for the company.
The point is that the innovation process must be able to provide the value that consumers want.
Operational processes are activities carried out by the company. The operation process is seen from planning, forming raw materials to become finished products, marketing processes, to transaction processes between companies and buyers.
The operation process emphasizes the delivery of products to customers efficiently, and on time. This process has, in fact, become the main focus of the performance measurement systems of most organizations.
After Sales Service
After-sales service is a service provided by a company or business to consumers as a guarantee of the quality of products that have been purchased by consumers.
There are many forms of after-sales service, such as consulting, repair, maintenance, and warranty services.
4. Learning and Growth Perspective
This Balanced Scorecard perspective provides the infrastructure for achieving the three previous perspectives and for generating long-term growth and improvement.
It is important for a business entity when investing not only in equipment to produce products or services, but also investing in infrastructure, namely: human resources, systems, and procedures.
Financial performance benchmarks, customers, and internal business processes can trigger a large gap between the existing capabilities of people, systems, and procedures.
To reduce this gap, a company must invest in the form of reskilling employees, namely: improving systems and information technology capabilities, as well as rearranging existing procedures.
The learning and growth perspective includes 3 principles of capability related to the company’s internal conditions, namely:
The worker’s capability is part of the worker’s contribution to the company. In relation to the capabilities of workers, there are 3 things that management must pay attention to:
- Worker satisfaction. Worker satisfaction is a precondition for increasing productivity, responsibility, quality, and service to consumers. Elements that can be measured in worker satisfaction are worker involvement in making decisions, recognition, access to information, encouragement to work creatively and to use initiative, as well as support from superiors.
- Worker retention. Employee retention is the ability to retain the best workers in the company. Where we know workers are a long-term investment for the company. So, the absence of a worker who is not the company’s desire is a loss to the company’s intellectual capital. Employee retention is measured by the percentage of turnover in the company.
- Worker productivity. Productivity of workers is the result of the overall effect of improving skills and morale, innovation, internal processes, and customer satisfaction. The goal is to relate the output produced by workers to the number of workers who are supposed to produce that output.
Information system capabilities
The benchmarks for information system capabilities are the level of availability of information, the level of accuracy of the information available, and the time period for obtaining the required information.
An organizational climate is one that encourages motivation, and empowerment is important to create workers who take the initiative.
The benchmark for this is the number of suggestions given by workers.
In essence, from the perspective of learning and growth, the balanced scorecard emphasizes more on organizational aspects. How companies can utilize existing human resources is a competitive advantage factor.
Who Can Use the Balanced Scorecard?
The Balanced Scorecard is a management tool that can be used by various types of companies.
Typically, the Balanced Scorecard is used by the management team both at the executive level and at the divisional or departmental level.
One of the keys to the effective use of the Balanced Scorecard is to have integrity and full support for management leadership.
Because there are still many management leaders who underestimate the concept of the Balanced Scorecard.
Running or implementing the Balanced Scorecard (BSC) is not as easy as one might think. You as the leader of the management team may move forward without the support and good integration of the rest of the team.
Of course, you have to change the old leadership style and adapt it to understanding the concept of the Balanced Scorecard with team members.
You really need to be able to communicate and integrate strategic tactics well into your Balanced Scorecard.
Of course, if your team members don’t agree with the concepts you created in the Balanced Scorecard, they will not feel bound and obliged to fulfill the concepts you drafted in the Balanced Scorecard.
It is important for management to understand and implement the concept of the Balanced Scorecard in a business process.
Because with the Balanced Scorecard, the performance of company or business activities is expected to run efficiently and organizational goals will be achieved consistently. However, management does not only use the Balanced Scorecard as a managerial tool.