Chapter 7

The Balanced Scorecard:

A Tool To Implement Strategy
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The Balanced scorecard translates an

organization’s mission and strategy into a set
of performance measures that provides the
framework for implementing strategy.
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The Balanced scorecard does not focus

solely on achieving financial objectives. It also
highlights the nonfinancial objectives that an
organization must achieve to meet its
objectives.
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The scorecard measures an organization’s

performance from four perspectives:
1. Financial
2. Customer
3. Internal processes
4. Learning and growth
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A company’s strategy influences the

measures it uses to track performance in each
of these perspectives.
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Strategic information using critical success

factors such as:
– Growth in sales and earnings
– Cash flow
– Market share
– Product quality
– Customer satisfaction, and
– Growth opportunities
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...provides a road map for a firm to chart its
competitive course and serves as a benchmark
for competitive success.

To emphasize the importance of using

strategic information, both financial and
nonfinancial reports of a firm’s performance
are now often based on critical success factors
in different dimensions.
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Financial performance measures

summarize the results of past actions and
are important to a firm’ creditors,
employees, and so forth.
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Nonfinancial performance measures

concentrate on current activities which
will be the drivers of future fiinancial
performance
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Thus, effective management requires a
balanced prospective on performance
measurement, a viewpoint that some call
the “balanced scorecard” perspective.
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The balanced scorecard integrates

performance, measures in four key areas
1. financial perspective
2. customer satisfaction
3. internal business processes, and
4. innovation and learning
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A balanced scorecard consists of an

integral system of performance measures
that are derived from and support the
company’s strategy.
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A well constructed balanced scorecard

provides a means for guiding the company
and also provides feedback concerning the
effectiveness of the company strategy.
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It is called the balanced scorecard

because it balances the use of financial
and non financial performance
measures to evaluate short-run and
long-run performance in a single report.
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The balanced scorecard reduces
managers; emphasis on short-run financial
performance, such as quarterly earnings.
That’s because the nonfinancial and
operational indicators, such as product
quality and customer satisfaction measure
changes that a company is making for the
long run.
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The financial benefits of these long-run

changes may not appear immediately in
short-run earnings but strong improvement in
nonfinancial measures is an indicator of
economic value creation in the future.
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Figure 7.1
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Four Perspective of the Balance Scorecard
1. Financial perspective – measures a
profitability and market value among others,
as indicators of how well the firm satisfies its
owners and shareholders.
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Four Perspective of the Balance Scorecard
2. Customer Satisfaction
Measures a quality service and low cost
among others, as indicators of how well
the firms satisfies its customers.
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Four Perspective of the Balance Scorecard
3. Internal Business Processes – Measures
of the efficiency and effectiveness with
which the firm produces the product or
service
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Four Perspective of the Balance Scorecard

4. Innovation and Learning – Measures the

firm’s ability to develop and uman
resources to meet nto the future
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Features of a Good Balanced Scorecard

1. The balanced scorecard should tell the

story of a company’s strategy by
articulating sequence of cause-and effect
relationship.
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Features of a Good Balanced Scorecard
For example:
If the objective of xyz Manufacturing
company is to be low-cost producer with
emphasis on growth, the balanced
scorecard describes the specific objectives
and measures in the learning and growth
perspective that lead to improvements in
internal business processes.
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Features of a Good Balanced Scorecard
These would lead to increase customer
satisfaction and market share as well as
higher operating income and shareholder
wealth. Each measure in the scorcard is
part of a cause-and-effect chain, a linkage
from strategy formulation to financial
results.
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2. It helps to communicate the strategy to all
members of the organization by translating
the strategy into a coherent and linked set to
understandable and measurable operational
targets. Managers and employees are guided
by the scorecard and take actions and make
decisions that aim to achieve the company’s
strategy.
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3. In for-profit companies, the balanced
scorecard places strong emphasis on
financial objectives and measures. When
financial and nonfinancial performance
measures are linked, many of the
nonfinancial measures serve as leading
indicators of future financial performance.
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4. The balanced scorecard should focus ony on
key measures to be used by identifying only
the most critical ones

5. The scorecard should highlight suboptimal

tradeoffs that managers may make when
they fail to consider operational and financial
measure together
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