A Balanced Scorecard defines what management means by "performance" and measures whether management is achieving desired results. The Balanced Scorecard translates Mission and Vision Statements into a comprehensive set of objectives and performance measures that can be quantified and appraised. These measures typically include the following categories of performance:
-Financial performance (revenues, earnings, return on capital, cash flow);
-Customer value performance (market share, customer satisfaction measures, customer loyalty);
-Internal business process performance (productivity rates, quality measures, timeliness);
-Innovation performance (percent of revenue from new products, employee suggestions, rate of improvement index);
-Employee performance (morale, knowledge, turnover, use of best demonstrated Practices).
To construct and implement a Balanced Scorecard, managers should:
- Articulate the business’s vision and strategy;
- Identify the performance categories that best link the business’s vision and strategy to its results (e.g., financial performance, operations, innovation, employee performance);
- Establish objectives that support the business’s vision and strategy;
- Develop effective measures and meaningful standards, establishing both short-term milestones and long-term targets;
- Ensure companywide acceptance of the measures;
- Create appropriate budgeting, tracking, communication, and reward systems;
- Collect and analyze performance data and compare actual results with desired performance;
- Take action to close unfavorable gaps.
A Balanced Scorecard is used to:
- Clarify or update a business’s strategy;
- Link strategic objectives to long-term targets and annual budgets;
- Track the key elements of the business strategy;
- Incorporate strategic objectives into resource allocation processes;
- Facilitate organizational change;
- Compare performance of geographically diverse business units;
- Increase companywide understanding of the corporate vision and strategy.