Balanced Scorecard (BSC) for Strategic Development

The Balanced Scorecard (BSC) is a management tool that enables managers to achieve their strategic goals. It can be used as a structure that integrates the mission and vision and strategies of the organization together with measures for production activities. It makes vision measurable and systematically translates it into tasks, performance indicators, goals, and actions.

In the expression Balanced Scorecard, the term “balanced” means that the measures and objectives suggest the use of a multidimensional approach instead of traditional (finance or production-based) performance measurement tools. Instead, something more was needed to provide information to businesses with effective planning tools. To this end, Kaplan and Norton have introduced four (4) different perspectives from which to measure the company’s performance:

• Financial outlook (how do we perceive our shareholders?)
• Consumer perspective (how do we perceive our consumers?)
• Process perspective (in what processes should we strive for excellence in order to succeed?)
• Learning perspectives and innovative perspectives (how will we maintain our ability to change and improve?)

In recent years, it has become apparent that only organizations that adopt an appropriate consumer- and market-oriented strategy can succeed for a long time.

Figures

This is also acceptable for countries that joined the EU in May 2004, where changes are needed to a greater or lesser extent in terms of delegation of authority, innovation, customer orientation, etc.

In Hungary, the number of employees in small and medium-sized enterprises is about 75-80%. They produce 43-45% of GDP.

Q: If small and medium-sized enterprises (SMEs) are so important:

Is it a privilege for only large enterprises to use the Balanced Scorecard strategy?

Answer: No.

SME has many advantages:

• Closer relationships between managers,
• Lighter production,
• More flexibility for change,
• Less consumers, more knowledge about the desires of these consumers,
• More effective internal exchange of information,
• Employees can be better acquainted with the goals of the enterprise,
• The results of the changes can be seen faster.

These advantages allow SME to effectively use modern management tools at low costs. On many SMEs, the implementation of BSC will take less time than in large enterprises.

The BSC provides management with a comprehensive picture of production activities and a methodology that facilitates the exchange of information and the understanding of the goals and strategies of the enterprise at all levels of the organization and combines this with the process of developing competence within the enterprise.

BSC starts with the vision and strategies of the enterprise, and then defines critical indicators of success. BSC reflects the most important aspects of the business. The BSC concept supports strategic planning and execution by uniting the activities of all parts of the enterprise around a common understanding of its objectives and facilitating the evaluation and improvement of strategy.

With a well-developed balanced scorecard, the number of the most important measures should not exceed 15-20, even in large companies. All these measures and actions, based on ultimate goals, are clearly linked to strategic objectives.

What benefits can be seen when developing and implementing BSC in small and medium-sized enterprises?

The development and implementation of BSC is much faster and easier in small areas than in large organizations.

Obviously, difficulties arise only in one direction:

The collection, analysis, and comparison of relevant data, both on their own performance indicators and on the activities of competitors in terms of financial and consumer-oriented measures.

Quality systems and regular self-assessments are expected to reduce these shortcomings.

We see that the BSC, the Quality System according to ISO 9001 and the EFQM Excellence Model when applied together bring added value to the company, and the application of the BSC strategy is not a privilege of large organizations.

Align Strategic goals with specific metrics in the various sectors on the enterprise.

1. The main content of the balanced scorecard

In the industrial age, in order to promote and supervise the effective allocation of financial capital and physical capital of enterprises. Many large enterprises have established financial control systems. Using mainly single financial indicator.

Such as operating profit, return on capital, return on assets, asset-liability ratio, current ratio, quick ratio, and earnings per share, etc. Which are used to evaluate the performance of operating departments and for management. They have played an important role in providing decision-making. However, with the advent of the information age, enterprise competition is becoming increasingly fierce.

If enterprises only by improving production efficiency and internal management level. It is impossible to obtain sustainable competitive advantage. But also consider such as enterprise market share, peer enterprise competitiveness, customer retention, customer satisfaction, enterprise operation and innovation ability, employee satisfaction and other external factors.

A single financial index system can no longer meet the requirements of enterprise performance evaluation. Therefore, a new set of the scientific enterprise performance evaluation system – balanced scorecard came into being in this situation.

Set of scientific performance management

The balanced scorecard is a performance management system that decomposes the strategic objectives of the enterprise into a variety of specific and mutually balanced performance appraisal index systems.

It is evaluating the achievement of these indicators at different times, so as to establish a reliable implementation basis for the completion of strategic objectives. It divides the evaluation of business performance into four parts:

Financial aspects, customers, business processes, learning and growth. It is not only an indicator evaluation system, but also a strategic management system.

Experts’ opinions

In 1992, Kaplan and Norton published their first article on the Balanced Scorecard. “The Balanced Scorecard—A New Approach to Performance Measurement and Driven.”

In the Harvard Business Review. Since then, people no longer measure the performance of a company in terms of its financial indicators.

But from four aspects: Finance, customers, internal business processes, and learning and development.

In 1996, the first monograph on the Balanced Scorecard.

The Balanced Scorecard: Turning Strategy into Action, was published, marking the maturity of the theory, and transforming the Balanced Scorecard from a performance measurement tool to a strategy implementation tool.

In 2001, the authors published a new book, “Strategic-Centric Organizations: How Organizations Implementing the Balanced Scorecard Can Be Unbeatable in the New Competitive Environment”.

Which takes stock of the application of the Balanced Scorecard in various organizations over the past decade. In more than a decade, the Balanced Scorecard has developed tremendously in theory and has been recognized by more and more companies in the field of practice.

2. The characteristics of the balanced scorecard

The Balanced Scorecard reflects the balance between financial and non-financial measurement methods. The balance between long-term and short-term goals, the balance between external and internal goals. Balance of results and processes, and the balance of management performance and operating performance.

Therefore, it can reflect the comprehensive operation of the organization, make the performance evaluation tend to be balanced and perfect, and is conducive to the long-term development of the organization.

The Balanced Scorecard approach strikes a balance in many ways by going beyond the measurement of finance as the only metric.

Compared with the traditional evaluation system, the Balanced Scorecard has the following characteristics:

(1) The Balanced Scorecard provides strong support for the strategic management of enterprises.

With the continuous development of global economic integration and the continuous intensification of market competition.

Strategic management is more important for the sustainable development of enterprises. The evaluation content of the Balanced Scorecard is closely links to the relevant indicators and corporate strategic objectives. The implementation of the corporate strategy can be complete through the overall management of the Balanced Scorecard.

(2) The balanced scorecard can improve the overall management efficiency of enterprises.

The four contents involve in the balanced scorecard are the key elements of the future development success of the enterprise.

The seemingly unrelated elements are organically combined through the management report provided by the balanced scorecard.

Which can greatly save the time of business managers, improve the overall efficiency of enterprise management, and lay a solid foundation for the successful development of enterprises in the future.

(3) Pay attention to teamwork and prevent dysfunction of enterprise management.

Team spirit is a concentrated expression of corporate culture, balanced scorecard through the combination of various elements of the enterprise.

So that managers can simultaneously consider the different roles and functions of various functional departments in the enterprise as a whole.

So that they realize that the improvement of work in one area may be at the expense of other areas, prompting the management department to consider decision-making from the enterprise, carefully choose feasible solutions.

(4) The balanced scorecard can improve the incentive role of enterprises and expand employees’ awareness of participation.

The traditional performance evaluation system emphasizes what actions managers want (or require) subordinates to take. Then through evaluation to confirm whether subordinates have taken actions and what the results of actions are. The entire control system emphasizes the control and evaluation of behavioural results.

The balanced scorecard, on the other hand, emphasizes goal management and encourages subordinates to achieve goals creatively rather than passively. This management system emphasizes motivation. Because on specific management issues. The top managers of the enterprise do not necessarily understand the situation better than the middle and lower managers.

The decisions they make are not necessarily wiser than the subordinates. Therefore, it is inappropriate for the top management of the enterprise to dictate the behavior of subordinates.

On the other hand, most of the current enterprise performance evaluation systems are designed and supervised by financial professionals. But due to the differences in professional fields, financial professionals are not clear about the key issues in enterprise management and technological innovation. So, they cannot scientifically and reasonably measure and evaluate the overall performance of enterprises.

(5) The balanced scorecard can minimize the information burden on enterprises.

In today’s information age, enterprises rarely suffer because of too little information. With the introduction of total management, when employees or consultants make suggestions to enterprises. New information indicators are always increasing. This results in a significant increase in the burden of processing information on senior decision-makers in the enterprise.

The Balanced Scorecard allows business managers to focus on only a few but very critical relevant indicators. Ensuring that the management needs of the enterprise are met while minimizing the cost of information burden.

3. The implementation steps of the Balanced Scorecard

The implementation of the balanced scorecard can be mainly divided into the formulation of corporate long-term goals and development strategies. The transformation of organizational business strategies into a series of measurement indicators. The linking of strategies with the short-term goals of enterprises, departments, and individuals. The specific implementation of strategies, feedback and mid-term adjustments, amendments.

The establishment of a sound assessment system, and rewards and punishments according to the completion of the balanced scorecard, as follows:

(1) Formulate the long-term goals and development strategy of the enterprise.

The Balanced Scorecard runs through the entire process of corporate strategic management. Because when the Balanced Scorecard is applied, the organization’s business strategy is translating into a series of goals and metrics.

Therefore, the balanced scorecard has high requirements for enterprise strategy. Enterprises should meet and ensure the realization of corporate mission. On the basis of making full use of various opportunities in the environment and creating opportunities. Determine the relationship between enterprises and the environment, stipulate the business scope, growth direction and competition countermeasures of enterprises. Reasonably mobilize the structure of enterprises and allocate all resources of enterprises.

So that enterprises can obtain competitive advantages and formulate long-term goals and development strategies suitable for the growth and development of enterprises.

Corporate strategy should seek to meet suitability, measurability, desirability, comprehensibility, motivation, and flexibility.

Stage of life cycle

Depending on the stage of life cycle a business is in, its strategy can vary greatly. Therefore, the development strategy of the enterprise should pay attention to the development stage of the enterprise, and different development stages have different enterprise development strategies.

Generally, the strategy of a growth-stage enterprise is mainly to win the market and customers by developing products or services, and build all aspects required for the development of the enterprise. In order to obtain long-term returns. The strategy of the enterprise during the maintenance period is mainly to improve production capacity, maintain or grow market share, and obtain good profits.

The strategy of mature companies is mainly to reap the profits generated by the investment in the first two stages.

Business Strategy

The Balanced Scorecard also provides an opportunity for management to communicate concretely on business strategy by enabling management to often need to revisit and revise strategy.

At the same time, because strategy formulation and implementation are an interactive process, managers understand the implementation of the strategy and can test and adjust the strategy after using the balanced scorecard to evaluate the organization’s business performance.

(2) Translate the organization’s business strategy into a series of measurement indicators

The Balanced Scorecard is a strategy implementation mechanism that bridges the gap between strategy development and implementation by linking an organization’s strategy to a set of metrics.

The Balanced Scorecard, which links an organization’s strategy to a set of metrics, enables the effective implementation of corporate strategy.

In order to effectively implement the corporate strategy, we can gradually translate the organizational strategy into four measurement indicators: finance, customers, internal business processes, learning and growth.

1. Set metrics for important financial performance variables

The financial performance indicators of enterprises can comprehensively reflect the company’s performance, directly reflect the interests of shareholders, and indicate whether the realization of plans and assumptions has made a great contribution to improving profits.

As such, it has been widely used to control and evaluate a company’s performance and to retain it in the Balanced Scorecard. Commonly used financial performance indicators mainly include operating profit margin, cash flow, revenue growth, project efficiency, gross margin, collection rate, net profit after tax, net present value, etc.

2. Set metrics for important customer performance variables

From the perspective of the Balanced Scorecard from the customer’s perspective, managers must define the target markets in which the company wants to compete. Target markets include existing and potential customers.

Managers then design metrics to track a company’s ability to create customer satisfaction and loyalty in its target market. Customer sentiment typically includes some core or generic metrics related to customer loyalty. These output metrics include customer satisfaction, customer impressions, new customer needs, customer profitability, and share in the target market, among others.

While these customer metrics are common to businesses of all kinds, these can be personalized to fit the most profitable and fastest-growing target segments.

For example, customer satisfaction, customer impressions, customer loyalty and market share are only suitable for companies that want to become important providers in the market for products or services.

3. Set metrics for important internal business process performance variables

From an internal business process perspective, managers must establish all the important internal processes of the enterprise in implementing its strategy.

Internal processes represent the processes that enable businesses to accomplish the following tasks:

• Deliver value variables that attract and retain customers in their target markets.
• Meet the need for financial returns to shareholders.

Therefore, internal business process indicators should focus on customer satisfaction and the achievement of corporate financial goals, and some Japanese employees have annual innovation bonuses that exceed their annual salary, which fully encourages employee innovation.

The second aspect is information systems.

The productivity of information systems can be measured through the timely and accurate transmission of key customer and internal operational information to front-line employees in decision-making and work.

The third aspect is the enterprise process.

The Enterprise Program examines employee incentives with overall corporate success factors and internal business improvement rates. It is important to note that the four dimensions of the Balanced Scorecard are not independent of each other.

But rather a causal chain that demonstrates the relationship between performance and performance drivers. In order to improve business results. It is necessary to make products or services win the trust of customers; In order to make customers trust. It is necessary to provide products that satisfy customers, and to improve the internal production process. To improve internal production processes, it is necessary to train staff and develop new information systems.

According to the above steps, the organizational business strategy is translated into a series of metrics. We can establish a performance measurement index system:

Performance measurement indicator system

In the grasp of the assessment indicators, it is advisable to pay attention to the following aspects:

1. Expensive and not much, seven or eight is more suitable.
2. Expensive sensitive but not dull, can be effectively quantified.
3. Expensive is clear and not vague, what is missing to assess what.
4. You are key and not empty, and you must grasp the key performance indicators.

Follow the SMART principles, which are Special, Measurable, Attainable, Relevant, and Time-based.

The measurement of volume and the process that leads to results is combined to ultimately reflect organizational strategy. In order to effectively avoid the vertical contradiction of corporate strategic objectives, departmental planning objectives, individual performance appraisal objectives, and horizontal disharmony between departments, we decompose strategic objectives.

The theory of strategy decomposition can be implemented according to the following process, linking strategy to the goals of departments and individuals.

In the process of strategic decomposition, it is required to decompose layer by layer under the premise of ensuring the realization of enterprise goals and communicate up and down in the decomposition process to achieve consensus, so as to form a performance appraisal goal that is consistent and coordinated left and right.

Goal Decomposition process

The goal decomposition process is in which employees and superiors negotiate to develop appraisal goals, and then use these goals as the basis for performance appraisal. It is a cyclical process that begins with the setting of common corporate strategic goals and goes through the cycle to return to this point.

After the employee sets goals, they discuss, review and revise with their superiors, and ultimately satisfy both parties. While setting goals, employees must also develop detailed steps to reach them.

At the time of assessment, since the target data is already available, it is possible to assess the degree to which the employee has achieved the goal. During this period, objectives can be corrected as new or other data become available.

At the end of an evaluation period, the employee self-evaluates the work he has done with the actual data he has available. “Interview” means that the supervisor and the employee work together to test the employee’s self-assessment. The final step is to review the connection between employee work and business work.

Setting performance metrics

In order to achieve success in setting performance metrics, companies should view this as an integral part of the overall management system, not just as an add-on to the work of superiors. Superiors must delegate the authority to set goals to employees, giving them the freedom to make their own decisions (but holding employees accountable for the results of their work).

In the actual operation process, we should pay attention to the following points:

1. Superiors and employees must be willing to set goals together. The data shows that this goal-setting process can improve employee performance by 10-25%. This process works because it helps employees focus on important work and holds employees accountable for the work they do. In addition, the process establishes an automatic feedback system, as employees can often self-evaluate their work against goals.
2. The goal should be both long-term and short-term, quantifiable, and measurable. Moreover, the steps to achieve the goal must also be stated when setting the goal.
3. The expected result must be under the control of the employee, as we have previously mentioned that there may be cases where standards may be contaminated.
4. Goals must be aligned at every level.

This level can be effectively implemented and finally achieve the desired goal.

(1) High degree of information.

Organizations should provide automated ways to collect and summarize all data included in the Balanced Scorecard solution; And use existing operational, analytical and communication tools to make information accurate, reliable, timely and fast.

(2) High quality level of employees.

The quality level of employees affects the effectiveness of the implementation of the Balanced Scorecard, especially at the top and middle levels.

(3) Reasonable decomposition of strategic objectives.

A proper breakdown of corporate strategy is the key to a successful implementation of the Balanced Scorecard. Corporate strategy should be decomposed layer by layer, transformed into a series of measurable and implementable specific goals, and reasonably adjusted and revised in the middle of implementation.

Depending on the internal characteristics and implementation conditions of the Balanced Scorecard. The implementation of the Balanced Scorecard in enterprises with the following characteristics can improve the success rate and effectiveness.

(1) Strategy-oriented enterprises.

Strategy-oriented enterprises have introduced strategic management concepts and have rich experience in the formulation and decomposition of strategies, as well as their effective implementation, which has laid a good foundation for the balanced scorecard.

(2) Enterprises with fierce competition and highly competitive pressure.

In highly competitive and competitive enterprises, the implementation of the balanced scorecard is conducive to strengthening the determination and intensity of implementation and is conducive to improving the overall strength and competitive advantage of the enterprise.

Effective control solves the effective determination of financial indicators and enables enterprises to strive for breakthroughs in the management of customers, internal business processes, learning and growth.

4. The balanced scorecard needs to be further practiced and improved

The Balanced Scorecard is a new system for evaluating company performance. Judging from the American companies that have implemented the system, most of them have received good results and given high evaluations.

Since 1994, Mobil America’s marketing and refining division, from the company to the company’s related professional companies and service departments, to individual employees, has implemented a balanced scorecard, effectively promoting the smooth development of the company’s and its units.

However, on the whole, in the United States, the implementation of the balanced scorecard evaluation system is still only a small number of companies. The implementation time is not long, this performance evaluation system is still in the experimental process and needs to be supplemented and improved in more extensive and long-term practice.

Some issues still need to be explored and studied. For example, how the evaluation indicators in the balanced scorecard are related to the original company’s daily performance indicator system, and whether there are any overlaps and contradictions between them.

How should some goals and indicators in the balanced scorecard be specifically evaluated and evaluated, especially those indicators such as customer loyalty and satisfaction, employee satisfaction, etc. How to quantitatively evaluate. In a company, from the company to the various operation and service units. To the individual employees, between the management and service units, and between the individual employees, how to coordinate and maintain the goals and indicators of the balanced scorecard.