THE EMERGENCE OF BALANCED SCORE CARD
Prior to 1980s many academics and consultants became concerned that too much emphasis was being put on financial and accounting measures of performance. Management accounting systems had been perfected to produce detailed cost breakdowns and extensive variance reports. It was realized that these systems were not useful for managing a business under the circumstances resulted out of the emergence of global competitive environment during 1980s.
Product quality, delivery schedules, reliability, after-sales service, customer satisfaction became key competitive variables. But none of these were measured by the traditional performance measurement systems.
During 1980s much greater emphasis was given to incorporating non-financial performance measures as mentioned above, into the management reporting system as they provided feedback on variables that are required to compete successfully in a global economic environment. But a proliferation of performance measures emerged and has resulted I confusion when some of the measured conflicted with each other and it was possible to enhance one measure at the expensing another.
The need to link financial and non-financial measures of performance and identifying key performance measures led to the emergence of “Balanced Score Card” approach developed by Norton and Kaplan (1992) in the U.S. The Balanced score card is defined as “an approach to the provision of information to management to assist strategic policy formulation and achievement. It emphasized the need to provide the user with a set of information, which addresses all relevant areas of performance in an objective and unbiased fashion”.
Kaplan and Norton identified our perspectives representing the important facets of the organization. These were:
1. Financial perspective (how do we look to shareholders)
2. Customer perspective (how the customer see us)
3. Internal business perspective (what we excel at?)
4. Innovation & Learning perspective (can we continue to improve and create value)
2. Customer perspective (how the customer see us)
3. Internal business perspective (what we excel at?)
4. Innovation & Learning perspective (can we continue to improve and create value)
The idea behind the four perspectives represents a balanced view of any organization and by creating measures under each of these headings all the important areas of business would be covered. It is important to note that the balanced score card itself is just a frame work and it doesn’t say what the specific measures should be. It is a matter for people within the organization to decide upon. The set of measures for each organization or even sections with the organization will be different. Much of the success of score card depends on how the measured are agreed, the way they are implemented and how they are acted upon. So the process of designing a score card is as important as the score card itself.
FEATURES OF A GOOD BALANCED SCORE CARD:
1. It tells the story of a company’s strategy, articulating a sequence of cause and effect relationships.
2. It helps to communicate the strategy to all members of the organization by translating the strategy into coherent and linked set of understandable and measurable operation targets.
3. A balanced score card emphasizes non-financial measures as a part of program to achieve future financial performance
4. The balanced score card limits the number of measures identifying only the most critical areas. The purpose in to focus manager’s attention on measures that most affect the implementation of strategy.
5. The balanced score card highlights less than optimal trade offs that managers may make when they fail to consider operational and financial measures together.
2. It helps to communicate the strategy to all members of the organization by translating the strategy into coherent and linked set of understandable and measurable operation targets.
3. A balanced score card emphasizes non-financial measures as a part of program to achieve future financial performance
4. The balanced score card limits the number of measures identifying only the most critical areas. The purpose in to focus manager’s attention on measures that most affect the implementation of strategy.
5. The balanced score card highlights less than optimal trade offs that managers may make when they fail to consider operational and financial measures together.