1. Balanced Scorecard
The Balanced Scorecard (BSC) is regarded as a comprehensive tool for strategic planning because it considers various aspects such as human resources, capital, integrated information systems, business units, and management teams. The BSC encompasses four interrelated perspectives: Financial, Customer, Internal Business Processes, and Learning and Growth.
Why Companies Need the Balanced Scorecard:
a) Rapidly Changing Business Environment
In a competitive business environment, companies must continuously develop their capabilities and competitiveness. They need to create a realistic and actionable business development roadmap to stay on the right path. This roadmap should cover not only financial issues but also other aspects that support the desired financial conditions. The Balanced Scorecard helps companies create a solid roadmap to maintain consistency toward short-term and long-term goals.
b) Management Systems May Be Inadequate for the Business Environment
Business unit management often fails to recognize or address changes in the competitive environment. They may struggle to translate long-term plans into actionable programs. This failure complicates the definition of necessary programs, often leading to budget planning based on the previous year’s budget, which does not support new strategic initiatives. This approach increases the risk of the company being pushed out of the market. The Balanced Scorecard involves various company elements in strategic planning, addressing these issues.
c) Inadequate Performance Management Systems
Using different methods for formulating strategy, strategic planning, and performance evaluation creates assessment gaps. Consistent use of the Balanced Scorecard can close these gaps by ensuring that planning and performance measurement use the same evaluation criteria.
2. Strategic Planning with the Balanced Scorecard
The Balanced Scorecard is a managerial tool that can be used to record the achievements of business unit managers who implement programs. It compares the targets set by each business unit and the company in general with the actual achievements over a specific period. This comparison helps evaluate the company’s performance and the performance of individual managers and staff involved in operational activities. Over time, the Balanced Scorecard has evolved from a performance evaluation tool to a foundation for strategic planning.
Advantages of Using the Balanced Scorecard in Strategic Planning:
- Comprehensive, Interconnected, Measurable, and Balanced Strategic Objectives
The framework provided by the Balanced Scorecard yields a complete and thorough strategic plan. The four perspectives cover all aspects of a company, with each perspective interconnected, ensuring that success in one area contributes to success in others.
- Direct Formation of the Company Scorecard and a Starting Point for Performance Management
The Balanced Scorecard enables the immediate creation of a company scorecard, which serves as the starting point for performance management.
- Facilitates Open-Book Management
The Balanced Scorecard supports the implementation of open-book management, allowing all personnel to access financial and operational information. This transparency encourages everyone to contribute ideas to support the company’s strategy and ensure that the strategic plan remains aligned with current internal and external conditions.
Examples of Strategic Goals in a Consultancy Firm Using the Balanced Scorecard:
- Customer Perspective:
- Improve the quality of consulting services.
- Enhance customer relationships.
- Increase customer satisfaction.
- Productivity and Cost Effectiveness:
- Improve the quality of service processes.
- Speed up administrative processes.
- Reduce the time spent on administrative tasks.
- Human Resources:
- Develop more qualified employees.
- Implement interconnected information systems.
These non-financial strategic goals are essential for achieving the following financial objectives:
- Increased Revenue
- Reduced Costs
- More Stable Income
Open-Book Management Example:
In a company practicing open-book management, a new employee in operations can access the company’s financial reports. By reviewing the financial statements, the employee might identify inefficiencies in operations and suggest improvements that align with the company’s strategic goal of becoming a market leader by offering affordable products.
Interconnected Planning
Strategic planning aims to minimize unforeseen events. The Balanced Scorecard requires every element to think ahead and plan for the company’s future through various cause-and-effect relationships:
- Connecting Trendwatching, SWOT Analysis, Envisioning, and Strategy Formulation with Strategic Goals and Initiatives
Using the Balanced Scorecard helps translate vision and mission into actionable goals and initiatives, enhancing the company’s ability to respond swiftly to changes in business conditions.
- Interrelation of Strategic Goals
The Balanced Scorecard produces strategic goals that connect financial and non-financial elements and their cause-and-effect relationships. Achieving non-financial strategic goals supports the attainment of financial objectives.
- Linking Strategic Goals with Strategic Initiatives
Management must educate all elements to understand that achieving strategic goals requires the optimal execution of strategic initiatives. The Balanced Scorecard shows how achieving non-financial goals impacts financial targets.
- Relationship Between Outcome Measures and Performance Drivers
Clear differentiation is necessary between outcome measures (used to assess strategic goal achievement) and performance drivers (used to gauge the success of strategic initiatives). This relationship ensures the alignment of strategic goal achievement with the implementation of strategic initiatives.
- Alignment of Company and Unit Strategic Goals and Initiatives
Effective communication of company goals and initiatives down to individual units ensures alignment, illustrating each unit’s contribution to overall strategic objectives.
- Linking Initiatives with Programs
The planning system translates strategic initiatives into comprehensive, interconnected programs, ensuring that all initiatives align with the company’s strategic goals.
- Connecting Programs with Budgets
Resource requirements for program implementation are considered in budgeting, ensuring the support of all strategic programs. This approach minimizes budget deviations and aligns spending with strategic objectives.
7. Measurable Strategic Goals
The Balanced Scorecard clarifies company objectives within a specific timeframe, facilitating better organization. It requires each program or step to have measurable success criteria. While measuring non-financial goals can be challenging, responsible parties must establish logical and well-supported measurement bases.
The Balanced Scorecard encourages every element of the company to manage activities with measurable outcomes, reinforcing the cause-and-effect relationship between strategic goals and initiatives. It emphasizes that financial success is driven by well-executed non-financial initiatives.
Summary
To aid strategic planning, companies can use the Balanced Scorecard, which comprises four interconnected perspectives: Financial, Customer, Internal Business Processes, and Learning and Growth. The Balanced Scorecard is crucial for navigating a dynamic business environment and aligning management systems with business needs. It bridges gaps between strategy formulation, planning, and performance evaluation.
While not all companies may find it feasible to implement the Balanced Scorecard due to perceived effort versus results, it offers significant advantages in strategic planning. It ensures comprehensive, interconnected, measurable, and balanced strategic goals, facilitates performance management, and supports open-book management. The Balanced Scorecard fosters a cause-and-effect understanding between strategic goals and initiatives, ensuring better alignment and achievement of company objectives.