Balance Score Card - A Conceptual Framework


Vishal Patidar
Lecturer of Accounts & Finance
School of Management Studies
Shri Lauva Patel Trust College for Women
Amreli-365 601 GJ

The Genesis of Disparity:

Balanced Score Card (hereinafter abbreviated as BSC) is the new performance measurement system. It is an extension of the traditional performance measurement system popularly known as "Rate of Return on Capital Employed" (ROCE) or Return on Investment (ROI) or its modified versions like Social Cost-benefit Analysis or Social Return.

Traditionally the corporate plans were mere financial plans and, therefore, corporate performance indicators were also basically financial ratios. Companies used to operate in a supplier's market where buyers were at the mercy of suppliers. They had no choice. Shortages and black-marketing, long waiting lists were the order of the day. Financial planning and control through financial tools of performance measurement were adequate to manage an organization. Inputs and outputs both were having supplier market conditions.

However, the environment of business has undergone a basic change during the last two decades. Supplier' market has been replaced by buyers' market where consumer's sovereignty prevails. The buyer has abundance of supply and wider choice. Competition has become global due to globalization and liberalization. Various elements of business environment have gone very dynamic and volatile, may it be economic, social, political, legal and technological. The traditional physical and financial planning and control have turned to be adequate to manage an organization under the changed competitive environment. Management has become 'Strategic Management' and Planning has become Strategic Planning. New tools of strategic management like Total Quality Management (TQM), Business Process Re-engineering (BPR) has appeared on the scene. Profit and Profitability have given way to Value-added and Economic Value-added (EVA) and Market Value-added (MVA) analysis.


One of the basic pillars of any organization has been the successful application of performance measurement to the effectiveness and efficiency of its activities in terms of pre-determined goal. However, many successful originations are not stop to analyze and measurement of performance. They use performance measurement for managing organizations. For the purpose measurement, they are interested in measuring over all performance and for that they are using the annual results and budgets process. The present business environment is totally changes due to global change in strategy and performance appraisal tools used by successful organizations at global level.  Now they should strategically plan about to provide high quality supplies and services to their customers.

Business leaders are responsible for the business organization's performance. Performance does not mean only financial performance but here it also covered non-financial commitment and measurement to its goals. Balanced scorecards a method of defining elements of strategy, which is related to pre-determined goals. This links include products, people and process.

An organization measurement system strongly affects the behavior of people both inside and outside the organization. If companies are to survive proper in information age competition, they must use measurement and management's system derived from strategies and capabilities. Unfortunately, many organizations espouse strategies about customer relationships, Core competencies and organizational capabilities while motivating and measuring performance only with financial measures. The balanced Scorecard retains financial measurement as a critical summary of managerial and business performance but is highlights a more general and integrated set of measurements that link current customer, internal process, employee and system performance to long-term financial success.

Long-established Measurements Tool for Business:

Historically, the measurement system for business has seen financial aspect. Indeed, accounting has been known as language of business. Bookkeeping records of financial transactions can be traced back thousands of years, when they ware used by Egyptians, Phoenicians, and Sumerians to facilitate commercial transactions. After long back, the during the age of exploration, the activities of global trading companies were measured and monitored by accountants double-entry books of accounts. During the nineteenth century, spawned giant textile, railroad, steel, machine tools and retailing companies. Innovations in measuring the financial performance of these organizations played a vital role in their successful growth (1) And financial innovations, such as the return-on-investment (ROI) metric, and operating and cash budgets, were critical to the great success of early-Twentieth centaury enterprises like Dupont and General Motors (2).

The post-world War II trend to diversified enterprises created an intra corporation demands for reporting and evolution of business unit performance based on accounting information given in annual accounts. In last few decades, the financial aspect of business unit performance has seen highly developed. Many analysts have criticized the extensive, even exclusive use of financial measurements in business. An over emphasis on achieving and maintaining short-term financial results can cause companies to over invest in short-term fixes and to under invest in long-term value creation, particularly in the intangible and intellectual assets that generate future growth. The management team performed a strategy review to determine the best future course to maximize Shareholder value, but the short-run operating performance was still important, the company had to launch growth strategy. The company could maximize short-term financial results by exploiting customers through high prices or lower service. In short-run, these actions enhance reported profitability, but the lack of customer loyalty and satisfaction will leave the company highly vulnerable to competitive inroads.            

Financial measures are inadequate for guiding and evaluating organizations trajectories through competitive environments. They are lagging indicators that fail to capture much of the value that has been created or destroyed by manager's actions in the most recent accounting period. The financial measures tell something, but not all of the story about past actions and they fail to provide adequate guidance for the actions to be taken to day and the day after to create future financial value.

Necessitate of Balanced Scorecard:

The collision between the irresistible force to built long-range competitive capabilities and the immovable object of the historical -cost financial accounting model has created a new synthesis: the "Balanced Scorecard." The balanced scorecard retains financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies of which investments in long-term capabilities and customers relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology and innovation. The Balanced Scorecard complements financial measures of past performance with measures of the drivers of future performance. The objectives and measures of the Scorecards are derived from an organization's vision and strategy. The Balanced Scorecard provides managers with the instrumentation they need to navigate to future competitive success. Today, organizations are competing in complex environment so that an accurate understanding of their goods and the methods for attainting those goods is vital. The Balanced Scorecard enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth.

Now, industrial age competition & shifting at information age company. During industrial age, from 1850 to 1975, Companies succeed by how well they could capture the benefits from economics of seals and scope (3) Technology mattered, but, ultimately, success accrued to companies that could embed the new technology into physical assets that offered efficient, mass production of standard products.

The information age environment for both manufacturing and service organizations requires new capabilities for competitive success. The ability of a company to mobilize and exploit its intangible or invisible assets has become for move decisive than investing and managing physical, tangible assets (4) Intangible assets enables an organization to:

1) To develop customer relationships that retains loyalty of existing customers and enables new customer segments and market areas to be served effectively and efficiently.
2) Introduce innovative products and services derived by targeted customer segments.
3) Produce customized high - quality products and services at low cost and with short lead-time.
4) Mobilize employer skills and motivations for continuous improvements in process capabilities quality and response times; and
5) Deploy information technology, databases and systems.

The Balanced Scorecard as a Management System

Companies using the Balanced Scorecard as the cornerstone of a new strategic management system have two tasks (1) build up the scorecard and (2) use the scorecard. Many companies have performance measurement systems that incorporate financial and non-financial measures. The objectives and measures view organizational performance from four perspectives financial, customer internal business processes, and learning and growth. These four perspectives provide the framework fro the balanced scorecard. In these perspectives, each perspective identity generic measures that show up in most organization's scorecards such as the following.

Perspective   Generic measures

1) Financial                  Return on Investment and economic value added
2) Customer                 Satisfaction, retention, market and account share
3) Internal                   quality, response time, cost and new product information
4) Learning and Growth  Employer satisfaction and information system availability

The four perspectives of the scorecard permit a balance between short and long - term objectives, between outcomes desired and the performance drivers of those outcomes, and between hard objectives measures and softer, more subjective measures. All the measures are directed towards achieving an integrated strategy. The Balanced Scorecard should be used as a communication, informing, and learning system not a controlling system.

The Four Viewpoint of Balanced Scorecard

1. Financial Perspective

The Balanced Scorecard retains the financial perspective since financial measures are valuable in summarizing the readily measurable economic consequences of action already taken. Financial performance measures indicate whether a company's strategy implementation and execution are contributing to bottom - line improvement. Financial objectives basically relate to profitability - measured for example by operating in come, Return - on capital employed and economic value added. Alternative financial objectives can be rapid sales growth or generation of cash flow.

In the Balanced score card, financial measures play a vital role. They define the financial performances expected form the strategy and they serve as ultimate targets for the objectives and measures of all the other scorecard perspectives. The choice of the appropriate financial measures that company will in cooperation in its balanced scorecard also depends on the business's life cycle and strategic theme.

Finally, in addition to increasing returns, most organizations are concerned with the risk of these returns. Therefore, when it is strategically important, this organization will want to incorporate explicit risk management objectives into their financial perspective. As a conclusion, it is important to remember that eventually, all objectives and measures in the other scorecard perspectives should be linked to achieving one or more objectives in the financial perspective.

2. Customer Viewpoint

These perspective aims at identifying the customer and market segments in which the business units will choose to compete. The managers should then determine the best measures of the business unit's performance for these targeted. In this perspective, mangers must first determine core measures that will describe the successful outcomes of a well formulated and implemented strategy. These core measures include customer satisfaction, retention, new customer acquisition, customer profitability, and market and account share in each specific segment. However, these measures present some of the disadvantage of the financial measures: It reflects post performance and we the equivalent of driving by looking in the rear view mirror of your car. This perspective captures the ability of the organization to provide goods and service the effectiveness of all the facilities to customers, which are leads to higher satisfaction. Needs and desires of customers have to be attended properly because customer pay for the organization's cost and provide for its profit.

3. Internal Business Process

In this perspective, the managers must identify the internal processes that are crucial to their organizations. Those crucial processes are also the ones that should help then deliver superior value to their customer and achieve financial target. This perspective is another example of the superiority of the Balance Scorecard upon traditional performance measures. The Balanced Scorecard go beyond the simple assessment of existing processes, it will usually identify new processes that the organization should implement in order to be successful. In this perspective, Balanced Scorecard should not only consider operations processes but also innovation processes. By incorporating innovation processes measured, the Balanced Scorecard provides a manager with a set of a tool that does not only reflect the short term, but also give in insight of about the long term.

This perspective also focuses on internal result that leads to financial success and satisfied customers. Key process is monitored to ensure that outcomes will be satisfactory.

4. Learning and Growth

This perspective works at the ability of employees, the quality of information systems, and the effects of organizational alignment in supporting accomplishment of organizational goal. Internal business processes will only succeed if adequately skilled and motivated employees, supplied with accurate and timely information, are driving them.

Finally, through the learning and growth perspective, managers identify the organizational infrastructure that would best fit strategic goals. While in the other three perspectives, the managers identify where the organization stands now and where it has to be in the future in order to be successful, this fourth perspective really tells them about how to get three. The learning and the growth perspective have three dimensions: people, system, and organization perspectives. With financial, customer and internal perspective, mangers were able to identify the gaps between existing organizational resources and the ones required being successful.

The only way to close gaps is for the organizational to judicial invest in employees and information technology and to design the most appropriate organizational structures that could support their strategy.

Troubles with Balanced Scorecards

The creation of Balanced Scorecards requires a considerable amount of time on the part of every one whose performance will be measured. Defining corporate strategies can involve substantial amount of time, but the activity that consume the most time is very likely the selection of appropriate measures for the four perspectives. This is simply due to the fact that there are large numbers potential goals and targets and even more ways to measure them. People are likely to disagree about which objectives to measures and how to measure those objectives, and it will take time before consensus is achieved.

The time factor before involved in designing a Balanced Scorecard can be considerable and one factor leading is that the process must involve a lot of people in the organization. Therefore, people have to want to participate so it will go smoother. Their commitment is important not only in building the Balanced Scorecards but a specially a implementing and using it. Although Balanced Scorecards may be well design, lack of participation and commitment on the part of staff will make the Scorecard useless.

Some of the objective selected may be objective and other measures may be subjective, by definition, involve somebody's judgement and therefore, are more prove to error. Consequently, there is question whether subjective measure should be used and if so how can they make more reliable.

Winding up

The Balanced Scorecards is much more like as "NETWORK" of linked indicators. The strategy of an organization usually is articulated around a set of cause effect relationships. A well-built Scorecard should reflect the intrinsic connections between each aspect of strategy and each of the measures chosen to assess it. The Balanced Scorecard has the advantage that it provides managers with both leading indicators and lagging indicators about their companies. This explains the terms "BALANCED" Scorecard, it balances and links financial and non-financial indicators, tangible and intangible measures, internal and external aspects, performance driver and outcomes.


1) A. D. Chandler, The Visible Hand, The Managerial Revolution in American Business (Cambridge, Mass: Harvard University Press, 1977)
2) Johnson and Kaplan; " Controlling the Vertically Integrated Firm"; (The Dupont Powder Com. 1914)
3) A.D. Chandler, Jr., Scale and Scope: The Dynamics of Industrial Capitalism, (Harvard University Press, 1990)
4) H. Itani, Mobilizing Invisible Assets (Cambridge, mass: Harvard University Press, 1987) 
5) Kaplan Robert S. and David P. Norton:
"The Balanced Score Card Measures that Drive Performance" Harvard Business Review, Jan-Feb 1992.  
6) Kaplan Robert S. and David P. Norton:
"Transforming the Balanced Score Card from Performance Measurement to Strategic Management Part I and II, "American Accounting Association's Accounting Horizons, Vol. 15 No. 1. March 2001 and No. 2 June 2001.

Vishal Patidar
Lecturer of Accounts & Finance
School of Management Studies
Shri Lauva Patel Trust College for Women
Amreli-365 601 GJ

Source: E-mail September 15, 2005


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