What Is the Balanced Scorecard? - dummies

By Charles Hannabarger, Frederick Buchman, Peter Economy

The Balanced Scorecard was developed in the early 1990s by two guys at the Harvard Business School: Robert Kaplan and David Norton. The key problem that Kaplan and Norton identified in the business of the day was that many companies tended to manage their businesses based solely on financial measures. While that may have worked well in the past, the pace of business in today’s world requires more comprehensive measures. Though financial measures are necessary, they can only report what has happened in the past — where a business has been, but not where it is headed. It’s like driving a car by looking in the rearview mirror.

To provide a management system that was better at dealing with today’s business pace and to provide business managers with the information they need to make better decisions, Kaplan and Norton developed the Balanced Scorecard.

Note that the Balanced Scorecard is a management system — not a measurement system. Yes, measurement is a key aspect of the Balanced Scorecard, but it is much more than just measurement; it is a means to setting and achieving the strategic goals and objectives for your organization.

So, what is the Balanced Scorecard? In short, it’s a management system that enables your organization to set, track, and achieve its key business strategies and objectives. After the business strategies are developed, they are deployed and tracked through the Four Legs of the Balanced Scorecard. These four legs comprise four distinct business perspectives: The Customer Leg, the Financial Leg, the Internal Business Process Leg, and the Knowledge, Education, and Growth Leg. These four legs of the Balanced Scorecard are necessary for today’s business executives and managers to be able to plan, implement, and achieve their business strategies:

  • Customer Leg: Measures your customers’ satisfaction and their performance requirements — for your organization and what it delivers, whether it’s products or services.
  • Financial Leg: Tracks your financial requirements and performance.
  • Internal Business Process Leg: Measures your critical-to-customer process requirements and measures.
  • Knowledge, Education, and Growth Leg: Focuses on how you educate your employees, how you gain and capture your knowledge, and how you use it to maintain a competitive edge within your markets.

These four legs have to be measured, analyzed, and improved together — continuously — in order for your business to thrive. If you ignore any one of these four legs, it’ll be like sitting on a four-legged stool with a broken leg. You’ll eventually lose your balance and fall flat on your face. And lying flat on your face is no way to run a business!

You not only have to measure these critical four legs, but also set strategies, goals, objectives, and tactics to make them happen. And while you’re at it, you have to make sure that your strategies and tactics are congruent. They have to work together and create a single thread, tying together in ways that make sense. This isn’t an optional exercise; it’s essential. The future of your business depends on it.