Strategic Management Tools
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The Balanced Scorecard
In the industrial age, most of the assets of a firm were in property, plant and equipment, and the financial accounting system performed an adequate job of valuing these assets. In the information age, when much of the firm’s value is embedded in innovative processes, customer relationships, and human resources, the financial accounting system is not enough.
A new approach to strategic management was developed in the early 1990s by Drs. Robert Kaplan and David Norton. They named this system the ‘balanced scorecard’. The BSC approach provides a clear prescription as to what companies should measure in order to ‘balance’ the financial perspective.
The BSC is a measurement and management system that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results.
The BSC methodology builds on some key concepts of previous management ideas such as Total Quality Management (TQM), including customer-defined quality, continuous improvement, employee empowerment, and – primarily – measurement-based management and feedback.
The balanced scorecard views the organization from four perspectives:
– The Learning and Growth Perspective – includes measures such as employee satisfaction, employee retention, skill sets, etc.;
– The Business Process Perspective – includes measures such as cost, throughput and quality. These are for business processes such as procurement, production, and order fulfilment;
– The Customer Perspective – includes measures such as customer satisfaction, customer retention, and market share in target segments;
– The Financial Perspective – includes measures such as operating income, return on capital employed, and economic value added.
There is a logical connection between these four perspectives – learning and growth lead to better business processes, which in turn lead to increased value to the customer, which finally leads to improved financial performance. Each perspective of the balanced scorecard includes objectives, measures of those objectives, target values of those measures, and initiatives that are aimed at meeting the objectives.