The balanced scorecard is a management tool used to evaluate an organization. Rather than evaluating the organization on a single criterion, the balanced scorecard measures multiple features of the organization. With a balanced scorecard you measure these different features with equal weight, so a business is only deemed successful if it is successful with all features. Although you can add additional features to your own balanced scorecard to fit the needs of your organization there are four features that every good balanced scorecard should measure.
Financial evaluation is the most traditional of the balanced scorecard features. No executive will be interested in a balanced scorecard if it does not include this feature because it deals with profits, which are central to the goal of creating shareholder value. Ideally, this feature should be regarded as equal to the others (as is the point of a balanced scorecard), but it is frequently given greater emphasis than the other features. This feature includes such measures as return on equity, return on assets and profit margins.
Measuring Customer Perception
Measuring customer perception allows you to understand your organization as it is perceived by your customers, without whom you cannot exist. It is a less straightforward feature than financial evaluation because it does not have the same static performance indicators. Customer perception of an organization is usually evaluated via surveys that ask customers if they like a company, if they identify with a company and whether they associate the company with value.
Identifying Internal Business Processes
In order to thrive, a company must understand its core competencies. A balanced scorecard identifies internal business processes. This involves understanding what processes are most important to an organization in order to succeed and evaluating how well the firm performs them. The aim of this feature is to measure the efficiency of a firm's most important operations. Examples of processes these include marketing, manufacturing and distribution.
Learning and Growth
Businesses must constantly develop and advance or risk becoming obsolete. Therefore, learning and growth are included on a balanced scorecard. This is a measure of how well a company is able to develop new knowledge and processes and how well it is able to translate this into growth and development for the firm. The more dynamic a firm, the better it will score according to this feature of the balanced scorecard.
- "The Balanced Scorecard--Measures that Drive Performance"; Harvard Business Review; February 1992
- financial charts image by Chad McDermott from Fotolia.com