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24.1 Describe the Balanced Scorecard Framework

What Is the Balanced Scorecard?​

Developed by Dr. Robert Kaplan and Dr. David Norton in the early 1990s, the balanced scorecard (BSC) is a strategic management tool that translates an organization's mission and strategy into a comprehensive set of performance measures.

Key Features:

  • Focuses on four perspectives: Financial, Customer, Internal Processes, Learning & Growth
  • Connects long-term strategy to daily operations
  • Balances lagging indicators (financial) with leading indicators (non-financial)
  • Provides a framework for strategy execution
  • Encourages continuous improvement

Four Perspectives of the Balanced Scorecard​

  1. Financial Perspective: How do we appear to shareholders?

    • Measures profitability, growth, shareholder value
    • Lagging indicators (results of past efforts)

  2. Customer Perspective: How do customers see us?

    • Measures customer satisfaction, loyalty, market share
    • Leading indicators that drive financial results

  3. Internal Process Perspective: What must we excel at?

    • Measures process efficiency, quality, innovation
    • Ensures operations support strategy

  4. Learning & Growth Perspective: Can we continue to improve and create value?

    • Measures employee skills, culture, IT systems
    • Foundation for long-term success

Structure of the Balanced Scorecard​

For each perspective:

  • Objectives: Strategic goals (e.g., "Improve customer satisfaction")
  • Measures (KPIs): Quantitative metrics (e.g., customer satisfaction score)
  • Targets: Specific goals (e.g., 90% satisfaction)
  • Initiatives: Actions to achieve targets (e.g., service training)

Strategy Map​

A strategy map visually links objectives across the four perspectives to show cause-and-effect relationships:

  • Learning & growth objectives enable better internal processes
  • Improved processes lead to better customer outcomes
  • Satisfied customers drive financial results

Benefits of the Balanced Scorecard​

  • Aligns activities with strategy
  • Improves communication and understanding of strategy
  • Enables better performance measurement
  • Encourages balanced decision-making
  • Supports continuous improvement and innovation

Challenges​

  • Requires consensus on strategy and objectives
  • Needs accurate data for non-financial metrics
  • Requires cultural change and management support
  • Must avoid measuring too many metrics
  • Needs ongoing review and adjustment

Balanced Scorecard vs. Traditional Metrics​

Traditional Approach:

  • Focus on financial results (e.g., revenue, profit)
  • Reactive (reports past performance)
  • Limited insight into drivers of performance

Balanced Scorecard Approach:

  • Combines financial and non-financial metrics
  • Forward-looking (leading indicators)
  • Identifies root causes of performance (customer, process, learning)

Luxembourg Compliance Note​

Many Luxembourg companies operate in regulated markets (finance, hospitality). Balanced scorecards help them comply with stakeholder expectations (investors, regulators) by documenting customer, compliance, and sustainability metrics.

Think It Through​

Why is it insufficient to focus only on financial measures? How do non-financial indicators influence future financial performance?