Perspectives in Balanced Scorecard (4 Perspectives )

Article shared by : Rohit Argawal

Four Perspectives of a Balance Scorecard!

The Balanced Scorecard is a set of performance targets and results relating to four dimensions
of performance—financial, customer, internal process and innovation. It recognises that
organisations are responsible to different stakeholder groups, such as employees, suppliers,
customers, com-munity and shareholders.
The balanced scorecard shows an organisation’s performance in meeting its objectives relating
to stakeholders. Sometimes different stakeholders have different wants. For example,
employees depend on an organisation for their employment. Shareholders depend on an
organisation to maintain their investment. The organisation must balance those competing
wants. Hence, the concept of a balanced scorecard is to measure how well the organisation is
doing in view of competing stakeholder wants.
Most organisations use four perspectives or four categories of performance measures. The
financial perspective indicates whether the company’s strategy and operations add value to
shareholders. For organisations that do not have shareholders, the financial perspective
indicates how well the strategy and operations contribute to improving the organisation’s
financial health. The customer perspective indicates how the company’s strategy and
operations add value to customers.
The internal business and production process perspective indicates the ability of the internal
business processes to add value to customers and to improve shareholder wealth. Finally, the
learning and growth perspective indicates the strength of the infrastructure for innovation and
long-term growth. The balanced scorecard framework derives its power by providing a holistic
view of business value through its four perspective.
Hansen and Mowen have referred to balanced scorecard as ‘strategic-based responsibility
accounting system’ which translates the mission and strategy of an organisation into
operational objectives and measures for four different perspectives: the financial perspective,
the customer perspective, the process perspective and the infrastructure (learning and growth)
perspective.
These four perspectives have been briefly discussed below:
1. Financial Perspective:
The balanced scorecard uses financial performance measures, such as net income and return
on investment, because all for-profit organisations use them. Financial performance measures
provide a common language for analysing and comparing companies. People who provide funds
to companies, such as financial institutions and shareholders, rely heavily on financial
performance measures in deciding whether to lend or invest funds. Properly designed financial
measures can provide an ag­gregate view of an organisation’s success.
Financial measures by themselves do not provide incentives for success. Financial measures tell
a story about the past, but not the future; they have importance, but will not guide
performance in creating value.
According to Brown, a sound approach to financial measurement is to make sure that your data
base includes three types of information’s:
a. Historical Data:
How did we do last month, last week, this year, last year, and so on?
b. Current Data:
How are we doing right now, today?
c. Future Data:
How will we be doing in the next few months or years?
From a financial standpoint, the purpose of a business is to create wealth for its owners. Output
measures or historical financial measures help an organization keep score of how well it is
doing at creating wealth. These data are always past-focused because they are based on events
that have already occurred: our net profit for the year versus last year, our sales revenue this
year versus last year, and our average stock price this month versus last month. These are all
measures of corporate performance that are based on history. Any financial information that
goes into a report to sharehold-ers or other stakeholders would typically fall into the category
of historical data.
Another measure of today’s financial results is the amount of cash the business has on hand or
the total value of its assets as compared with its liabilities. This is a good measure of an
organiza­tion’s overall financial health. These types of financial metrics should answer the
question: How are we doing today?
The third type of financial data needed in a complete set of measures is used to predict the
company’s future financial performance. These forecasts are used to plan for future workload
and resource requirements. Another common future-oriented financial statistic is the amounts
invested in research and development as a ratio to sales revenue or profit.
Organizations often cut back on these costs during tough times, which may cause them to
mortgage their future for the sake of short-term financial gains. Growth in sales from a
particular geographic region or a particular industry may also be a future-oriented financial
statistic if the company is looking to grow into new or emerging markets.
2. Customer Perspective:
In the customer perspective of the Balanced Scorecard, managers identify the customer and
market segments in which the business unit will compete and the measures of the business
unit’s performance in these targeted segments. This perspective typically includes several core
or generic measures of the successful outcomes from a well-formulated and implemented
strategy.
The core out-come measures include customer satisfaction, customer retention, new customer
acquisition, customer profitability, and market share in targeted segments. But the customer
perspective should also include specific measures of the value propositions that the company
will deliver to customers in targeted market segments.
The segment-specific drivers of core customer outcomes represent those factors that are
critical for customers to switch to or remain loyal to their suppliers. For example, customers
could value short lead times and on-time delivery. Or a constant stream of innovative products
and services. Or a supplier able to anticipate their emerging needs and capable of developing
new products and approaches to satisfy those needs. The customer perspective enables
business unit managers to articulate the customer and market-based strategy that will deliver
superior future financial returns.
The core measurement group of customer outcomes is generic across all kinds of organizations.

The core measurement group includes measures of:

a. Market share
b. Customer retention
c. Customer acquisition
d. Customer satisfaction
e. Customer profitability.
The Customer Perspective-Core Measures
3. Internal-Business-Process Perspective:
In the internal-business-process perspective, managers identify the critical internal processes in
which the organization must excel.
These processes enable the business organizations to:
i. Deliver the value propositions that will attract and retain customers in targeted market
segments, and
ii. Satisfy shareholder expectations of excellent financial returns.
The key to excellence in any organization is control of its processes to produce reliable and
consistent products and services. Performing the right processes in the right manner leads to
consis-tent levels of product and service quality. The difficulty lies in finding the right process
variables to measure and setting the standards appropriate to performance levels of each of
the process measures. Process and operational measures are leading-edge measures that are
more short-term-focused.
These are the measures that are typically monitored every day or at least every week. Some
process variables are even monitored continuously to ensure the production and delivery of
high-quality products and services. Achieving good performance levels on process or
operational measures leads to high-quality products and services, which, in turn, lead to
satisfied or delighted customers, which lead to repeat business and promote an organization’s
long-term survival and success. Exhibit 16.4 depicts this graphically.
In order to achieve consistently high performance, an organization must control its inputs. The
two most important inputs to good performance are knowledge of customer requirements and
high- quality goods and services from key suppliers.

Macro Process Model of an Organization

Process measures provide with the data needed to predict and control the quality of products
and services. When a problem occurs with a product or service, the cause is usually found by
looking at the process data. Results and outcomes are important for all organizations. In fact,
they may be the most important thing. But how those results are achieved—the process
measures—is also very important to tract.
Brown finds that excellent organizations measure processes and operational results in the
following manner:
a. Cycle time for all key processes is measured.
b. Rework time and/or costs are tracked for key production and service delivery processes.
c. Key measures of productivity are identified and tracked for major processes in the
organization.
d. Key processes have been identified in each unit, function, and department of the
organization, and process measures have been defined for each key process.
e. Process measures are correlated directly with product/service characteristics or performance
factors that are of prime importance to customers.
f. Standards or goals are set for all key process measures, and those standards are based upon
benchmark organizations and customer requirements.
g. Process measures promote a preventive approach to achieving consistently high-quality
products and services.
h. The organization has developed an overall safety index that is tracked at least once a month,
and consists of several output measures like lost-time accidents, as well as a number of
preventive or behavioral measures.
i. A few future-oriented process measures are tracked that will help ensure long-term survival
and success.

4. The Learning and Growth Perspective:

For incentive purposes, the learning and growth perspective focuses on the capabilities of
people. Managers would be responsible for developing employee capabilities. Key measures for
evaluating managers’ performance would be employee satisfaction, employee retention, and
em-ployee productivity.
(a) Employee Satisfaction:
Employee satisfaction recognises the importance of employee morale for improving
productivity, quality, customer satisfaction and responsiveness to situations. Managers can
measure employee satisfaction by sending surveys, interviewing employees, or observing
employees at work.
(b) Employee Retention:
Firms committed to retaining employees recognise that employees develop organisation-
specific intellectual capital and provide a valuable non-financial asset to the company.
Furthermore, firms incur costs when they must find and hire good talent to replace people who
leave. Firms measure employee retention as the inverse of employee turnover—the percent of
people who leave each year.
(c) Employee Productivity:
Employee productivity recognises the importance of output per employee. Employees create
physical output (i.e., miles driven, pages produced, or lawns mowed), or financial output (i.e.,
revenue per employee or profits per employee). The number of loans processed per loan
officer per month would provide a simple measure of productivity for loan officers at a bank.

Learning and Growth Measurement Framework

A good incentive system rewards managers who promote high employee satisfaction, low
em-ployee turnover, and high employee productivity.