Significance of Balance Scorecard in enhancing Financial Strategy

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Balance score card is a tool that an organization uses to monitor the performance of an organization. Financial as well as non-financial performance indicators are measured in balance scorecards. It helps management to know about the factors that causes bad performance of a company. Balance scorecards are used widely by the public, private and NGO sectors. Balance scorecards include the targets that are set for an organization. Balanced Scorecard was first brought to public attention through an article in the January 1992 edition of the Harvard Business Review article, by Robert Kaplan and David Norton drew upon the prior experiences of several firms, including Analog Devices, which appears to be where the idea was first developed in the mid-1980s(FAQ Answer: What is the balanced scorecard, 2009). Traditionally used as performance measuring device balance scorecard in modern management era has made its roots into strategic management. In today's dynamic business environment financial information alone is of lesser significance for the strategic managers thus balance scorecards aims to provide managers with richer and more relevant information about non-financial aspect of company's affair as well.

Initially described as a simple 4 box approach to performance. Apart from financial measures manager were able to assess to performance from three other perspectives which were learning and growth; internal business process; and customer which able the strategists to know the perspective of these three major stakeholders with thorough understanding. (Lawrie, 2002)

Inherent practical difficulties of the first generation scorecard were significant. Amongst which were filtering (the process of choosing specific measures to report), and clustering (deciding how to group measures into perspectives). Thus intellectuals came up with the solution of introduction of the concept of strategic objectives. Initially these strategic objectives were limited to short sentences in the four perspective. The other area of concern in this new edition was the causality. Though this was considered before but second edition developed it further. The basic idea behind the development of this second generation scorecard was to improved measurement system to a core management system Kaplan and Norton further described the use of this development of the Balanced Scorecard as the central element of a strategic management system. (Lawrie, 2002)

Third generation score card is refined form of second generation to give better functionality and more strategic relevance. Its main components are destination statement which means that organization should have this understanding that what actually organization is up to and what it wants to achieve. Second component being defining the strategic objectives as well should be clear what are its objectives in short and medium term. This approach also helps ensure the objectives chosen are mutually supportive and represent the combined thinking of the teams high-level perception of the business model. The third component of this generation scorecard is the strategic linkage model and perspective. Where these perspective being divided into four zones. Where lower two perspective are linked with internal processes and the two top perspectives emphasizing external relations. The last component considers measuring and taking initiatives because once objectives have been agreed measures can be identified and constructed with the intention to support management's ability to monitor the organization (Lawrie, 2002).

About half of major companies in the US, Europe and Asia are using Balanced Scorecard approaches. There are certain key benefits of using balance scorecards as they enhance financial strategy. The Balanced Scorecard provides a powerful framework for building and communicating strategy. The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes as well are identified to create a complete picture of the strategy. Now this allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This plan on one page facilitates the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of strategy. In the end it is impossible to execute a strategy that is not understood by everybody. The Balanced Scorecard approach forces organizations to design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and gain increasing benefits from the way this information is used to guide management and decision making. Companies using a Balanced Scorecard approach tend to produce better performance reports than organizations without such a approach to performance management. Increasing needs and requirements for transparency can be met if companies create meaningful management reports and dashboards to communicate performance both internally and externally. Organizations with a Balanced Scorecard are able to better align their organization with the strategic objectives. In order to execute a plan well, organizations need to ensure that all business and support units are working towards the same goals. Cascading the Balanced Scorecard into those units will help to achieve that and link strategy to operations. If well implemented Balanced Scorecards also help to align organizational processes such as budgeting, risk management and analytics with the strategic priorities. This will help to create a truly strategy focused organization (What is a Balanced Scorecard?).

One of the steps is getting people to use the scorecard as a routine matter - making it part of the culture. This is where most management initiatives go wrong, leading to this sage advice: If you want something to be a useful tool, make it the only initiative you try this quarter, give it your full attention, and don't take any shortcuts. Otherwise, an initiative becomes a fad and eventually appears in the Dilbert cartoons.

Once created, the scorecard should become a part of your business' daily life; it should be embedded into a company's operations as a standard decision-making tool. The scorecard makes the results of changes measurable, so stores or companies can learn what business models yield the best long-term results - in short, what works and what does not work. If it is updated regularly, the scorecard can give warnings of problems ahead, or signal opportunities. It can (and should) also be used as the focus of continuous improvement.

The balanced scorecard requires a rigorous process and commitment, but its benefits are worth the costs. Even if you only adopt a few of the elements of the balanced scorecard, the research suggests you will have a competitive advantage. Best of all, much of the scorecard is simple common sense: getting agreement on strategy, strengths, and weaknesses; measuring essential business numbers; and focusing not just on financial outcomes, but also on the issues that will affect those outcomes in the future. The balanced scorecard, and all its pieces, leverages common sense into a substantial competitive advantage (Integrated measurement systems:Balanced scorecards and organizational development).

Concept of the balanced scorecard revolutionized conventional thinking about performance metrics. By going beyond traditional measures of financial performance, the concept has given a generation of managers a better understanding of how their companies are really doing.

These nonfinancial metrics are so valuable mainly because they predict future financial performance rather than simply report what's already happened. This article, first published in 1996, describes how the balanced scorecard can help senior managers systematically link current actions with tomorrows goals, focusing on that place where, in the words of the authors, the rubber meets the sky.

As companies around the world transform themselves for competition that is based on information, their ability to exploit intangible assets has become far more decisive than their ability to invest in and manage physical assets. Several years ago, in recognition of this change, we introduced a concept we called the balanced scorecard. The balanced scorecard supplemented traditional financial measures with criteria that measured performance from three additional perspectivesthose of customers, internal business processes, and learning and growth. (See the exhibit Translating Vision and Strategy: Four Perspectives.) It therefore enabled companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth. The scorecard wasn't a replacement for financial measures; it was their complement (Norton, 2007).

The first new process translating the vision helps managers build a consensus around the organization's vision and strategy. Despite the best intentions of those at the top, lofty statements about becoming best in class, the number one supplier, or an empowered organization don't translate easily into operational terms that provide useful guides to action at the local level. For people to act on the words in vision and strategy statements, those statements must be expressed as an integrated set of objectives and measures, agreed upon by all senior executives, that describe the long-term drivers of success.

The second process communicating and linking lets managers communicate their strategy up and down the organization and link it to departmental and individual objectives. Traditionally, departments are evaluated by their financial performance, and individual incentives are tied to short-term financial goals. The scorecard gives managers a way of ensuring that all levels of the organization understand the long-term strategy and that both departmental and individual objectives are aligned with it.

The third process business planning enables companies to integrate their business and financial plans. Almost all organizations today are implementing a variety of change programs, each with its own champions, gurus, and consultants, and each competing for senior executives time, energy, and resources. Managers find it difficult to integrate those diverse initiatives to achieve their strategic goals a situation that leads to frequent disappointments with the programs results. But when managers use the ambitious goals set for balanced scorecard measures as the basis for allocating resources and setting priorities, they can undertake and coordinate only those initiatives that move them toward their long-term strategic objectives.

The fourth process feedback and learning gives companies the capacity for what we call strategic learning. Existing feedback and review processes focus on whether the company, its departments, or its individual employees have met their budgeted financial goals. With the balanced scorecard at the center of its management systems, a company can monitor short-term results from the three additional perspectives customers, internal business processes, and learning and growth and evaluate strategy in the light of recent performance. The scorecard thus enables companies to modify strategies to reflect real-time learning (Norton, 2007).

A good financial strategy includes finance and accounting measures. The idea is to plan for a financial objective of maximizing the share value by improving the internal accounting performance measures. The trouble usually comes when translating the plan to operational terms. An organization fails to implement the strategy when it remains an upper management initiative and doesn't reach the objectives of lower-level employees.

Financial strategy aligns business activities to the vision of the organization and helps to continuously monitor the organization performance against these goals. This scorecard combines nonfinancial performance measures to the traditional financial metrics, giving senior and middle managers a more "balanced" view of the performance of the organization. This strategic plan not only helps in identifying the objectives to be done and to be measured, but it also helps executives implement it on a daily basis.

This strategy does not deny the importance of traditional financial data. The decisions are still based on historical financial data, showing the profit/loss and the financial gain made at the end of the evaluating period. But the strategy emphasizes the need for integrating other perspectives like the business process, customer views and growth perspective. This provides the platform for an ideal strategic-planning and performance-measuring system (Financial Strategy on Organization).