Formulating Balanced Scorecard Objectives

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To be able to successfully integrate the Balanced Scorecard approach to their organizations, managers should be able to come up with relevant balanced scorecard objectives. Check additional information about balanced scorecard objectives.

Formulating balanced scorecard objectives is a must for companies that want to use the Balanced Scorecard (BSC) approach to measure company performance.

Introduced by Robert S. Kaplan and David Norton through some journal articles, the BSC approach was designed to check whether both small-scale and large-scale plans are compatible with the company's overall strategy and vision. Since its introduction in 1993, this management approach had become widely popular and has been used by companies from varying industries.

The Balanced Scorecard Approach promotes the need for company managers to have a full perspective of their overall performance by creating a balance between financial measures as well as internal processes and results measures. Kaplan and Norton famously likened the BSC to the cockpit of an airplane. To be able to fly a plane, pilots need to know about information, such as the plane's bearing, altitude, air speed, fuel level, and other indicators that monitor the predicted environment. Pilots could not afford to just rely on one instrument. Kaplan and Norton contend that the same is also true for other companies. According to them, managers need to gather relevant information from four important perspectives to effectively steer their companies toward organizational success. These perspectives include internal business perspective, customer perspective, financial perspective, and the innovation and learning perspective.

The internal business perspective takes a look at the internal operations of the companies that are critical for them to be able to address customer needs. The question that must be answered in this perspective is, "What activities must we excel at?" Customer perspective, on the other hand, takes into account the perceptions of target customers of the company. Typical metrics for the customer perspective include customer satisfaction and retention as well as market share in target segments. The financial perspective, meanwhile, includes looking at financial measures that are related to profitability and market share. For both public and private sectors, these financial measures are considered to be highly important, especially for stakeholders. Common measures under the financial perspective include operating income, economic value added, and return on capital employed. Lastly, innovation and learning perspective looks into the ability of companies to be able to make improvements within the organization. This perspective answers the question, "What can be done to create and improve value of our products and services?" Measures relevant to this perspective include employee retention, skill sets, and employee satisfaction.

Many company managers have been convinced of the effectiveness of the BSC approach, as they see that it is very effective in predicting their companies' future performance. In contrast, traditional financial reporting seldom takes into account what may happen to the organization in the future. Focusing only on the financial perspective will not be advantageous, as it may influence managers to make wrong strategic decisions. For example, they might decide to cut their operational costs to boost earnings by reducing customer service levels. This decision will more likely lead to reduced customer satisfaction. Therefore, when formulating balanced scorecard objectives, there is a need for companies to be decisive about what their goals and come up with strategies that are aligned with these.

If you are interested in balanced scorecard objectives, check this link to find out more about roi objectives. Also, you can check other articles in Success Stories category.

Balanced Scorecard Toolkit includes step-by-step manuals, documents, presentations, check lists designed to help business professionals with successful development and implementation of Balanced Scorecard. Learn more about BSC Toolkit.