Aligning Strategy and Performance with a Balanced Scorecard
“Without a standard, there is no logical basis for making a decision or taking action.”
–Joseph M. Juran
There is a difference between desire and actualization. We may want to lose weight by 10 kg or increase our income by 2x or improve our relationship with our dear one. But if we only think about it, nothing will change and there is a possibility that we may get into a depression which is why I am not able to achieve it. Wherein if we can plan a road map, how we are going to achieve our ambitions and regularly review it, there is a very high possibility that we will be quite close to it.
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A balanced scorecard is a strategic management performance metric that helps companies identify and improve their internal operations to help their external outcomes. It measures past performance data and provides organizations with feedback on how to make better decisions in the future.
Once you read this blog, you will understand, What is Balance Scorecard, Why it is important for any organization and how to implement it effectively in your organization.
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Efficiency (Cl 3.7.10): Relationship between the results achieved and the resources used.
Effectiveness (Cl 3.7.11): The extent to which planned activities are realized and planned results are achieved.
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The top management is aware that unless their company has a way to track and steer the progress of strategy deployment, the strategy is worth zero. Coordinating strategy implementation is challenging, especially in larger organizations, because leaders have their priorities and focus areas, which makes it challenging to maintain the necessary focus on the future.
There are several strategy deployment methods and they all have the same goal: to support organizations in executing strategic plans. To choose the most suitable method, managers need to consider the company’s organizational structure, maturity, and the business it operates in. Each method is top-down driven; however, the biggest differences between methods concern how strategy is cascaded down and how the internal alignment is handled.
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What is Balanced Scorecard?
In the past, organizations tended to focus on primarily financial metrics and objectives to manage their business and develop strategies. While finances and revenue play an important role in the health and performance of any business, this focus gives an incomplete picture of success (or failure).
The organization can’t achieve its strategy unless each member of the organization is involved in its achievement. To ensure that the entire organization is committed and each process is monitoring its performance indicator which is aligned with the overall strategy, the organization can not achieve its overall strategy consistently.
A balanced scorecard is a performance metric used to identify, improve, and control a business’s various functions and resulting outcomes.
The concept of BSCs was first introduced in 1992 by David Norton and Robert Kaplan, who took previous metric performance measures and adapted them to include nonfinancial information.
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The balanced scorecard involves measuring four main aspects of a business:
- Learning and growth
- Business processes
To achieve the overall financial goal, the interaction and interrelationship with the other processes like a customer, internal business processes and learning & growth are pertinent. An organization may use the balanced scorecard model to implement strategy mapping to see where value is added within an organization.
Why it is Important?
The BSC allows businesses to pool together information and data into a single report rather than having to deal with multiple tools. This allows management to save time, money, and resources when they need to execute reviews to improve procedures and operations.
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How to Implement it?
The BSC is used to gather important information, such as objectives, measurements, initiatives, and goals, that result from these four primary functions of a business. Companies can easily identify factors that hinder business performance and outline strategic changes tracked by future scorecards.
Information is collected and analyzed from four aspects of a business:
Learning and Growth are analyzed through the investigation of training and knowledge resources. This first leg handles how well information is captured and how effectively employees use that information to convert it to a competitive advantage within the industry.
Some of the key questions include, does your organization provide adequate training and resources? What steps are you taking to remain competitive?
Business Processes are evaluated by investigating how well products are manufactured. Operational management is analyzed to track any gaps, delays, bottlenecks, shortages, or waste.
It can be related to the Quality process (Customer complaints, Rejection, Warranty) or Production process (Production plan, process capability, internal rejection, OEE)
Customer Perspectives are collected to gauge customer satisfaction with the quality, price, and availability of products or services. Customers provide feedback about their satisfaction with current products.
In other words, how well are you serving your customers and the stakeholders your organization was designed to serve?
Financial Data, such as sales, expenditures, and income are used to understand financial performance. These financial metrics may include sales achievement, revenue achievement, profitability, budget variances, or income targets.
The final piece of the puzzle is the organization’s financial state. Yes, this is the perspective too often over-emphasized in the past. But, though finances are lagging indicators of past decisions, they are still an important part of any organization’s health and key to understanding the overall performance and creating strategies for the future.
These four legs encompass the vision and strategy of an organization and require active management to analyze the data collected.
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The Components of the Balanced Scorecard
For each perspective, there are four main BSC components that you must define:
- Objectives: These are your high-level organizational goals. Taking into account your already-developed company strategy, you should be able to come up with 10-15 strategic objectives that you are trying to accomplish. Your objectives should be S.M.A.R.T.: specific, measurable, achievable, realistic, and time-specific.
- Goals/Measures: After you define your business objectives, you need to focus on its measures. The measures help you determine whether you are on track to achieve your objectives (Measures are the same as KPIs). Each objective should have no more than three KPIs that indicate whether you will achieve your objective. Strong KPIs should be objective enough for you to determine whether the strategy is working, use language that everyone in your company understands, measure accomplishments, show success (not just a useless metric), be able to show change over time, and reduce uncertainty.
- Indicators: You should write your targets so that they relate directly to each of your KPIs. For each KPI, you should have an associated value. Your targets should be ambitious but achievable.
- Initiatives: In your BSC framework, your initiatives should be the action items and projects that you need to help your company succeed with its strategy. These projects have start and end dates. You should identify them when writing your BSC and set them up when implementing your BSC. Your initiatives mean the difference between your company’s reality and its stretch targets.
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- How often the employees in the organization are clear about the meaning and intent of a balanced scorecard
- How often the performance indicators at all 4 levels are interlinked with each other?
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ISO 9001: 2015
ISO 9002: 2016
ISO 9004: 2018
IATF 16949: 2016
This is the 177th article of this Quality Management series. Every weekend, you will find useful information that will make your Management System journey Productive. Please share it with your colleagues too.
In the words of Albert Einstein, “The important thing is never to stop questioning.” I invite you to ask anything about the above subject. Questions and answers are the lifeblood of learning, and we are all learning. I will answer all questions to the best of my ability and promise to keep personal information confidential.
Your genuine feedback and response are extremely valuable. Please suggest topics for the coming weeks.