Encyclopedia of Business and Professional Ethics

Living Edition
| Editors: Deborah C Poff, Alex C. Michalos

Balanced Scorecard

  • Ogan YigitbasiogluEmail author
Living reference work entry
DOI: https://doi.org/10.1007/978-3-319-23514-1_212-1

Synonyms

Introduction

The balanced scorecard (Kaplan and Norton 1992) is a strategic management tool and a specific type of scorecard that views an organization from four perspectives or dimensions: (i) learning and growth, (ii) internal business processes, (iii) customers, and (iv) finance. Performance scorecards like the balanced scorecard have long existed in management (e.g., see Tableau de Bord conceived in the early part of the twentieth century in France) and provide a framework for developing performance metrics to collect and analyze data on an organization. The balanced scorecard has been widely adopted to support with the planning, running, and management of an organization. Managers use the balanced scorecard for three purposes: (i) decision-making and decision-rationalizing, (ii) coordination, and (iii) self-monitoring (Wiersma 2009). The balanced scorecard supports decision-making as managers can draw on the balanced scorecard data to explain and justify their decisions. The scorecard is also used as a communication tool because the selection of metrics informs employees what an organization values. Finally, the scorecard helps managers to monitor and evaluate individual or unit/firm performance.

The Four Perspectives of the Balanced Scorecard

There are four perspectives in the original balanced scorecard. The learning and growth perspective focuses on measures that capture the skills and competencies of employees and the quality of the organizational climate (e.g., number of training hours per period, employee satisfaction ratings, number of cross-trained employees). Performance indicators that relate to internal business processes measure the efficiency and effectiveness of the workings of an organization in delivering the required products and services to customers (e.g., downtime hours per period, % of capacity utilization, % of on-time deliveries). The customer dimension captures the level of customer satisfaction and keeps track of customer interaction and loyalty (e.g., market share, customer retention, number of new customers). Finally, the financial perspective focuses on more traditional measures based on monetary outcomes like revenues, profits, and return on investment. The four dimensions are linked together, although the causalities were initially not explicit in the original balanced scorecard when published (refer to strategy maps below): learning and growth leads to better business processes, which in turn improves customer value and eventually leads to better financial results.

It is important that measures in the balanced scorecard reflect the goals of an organization and are key to driving success. A balanced scorecard should include only a limited number of measures in each dimension, typically 4–6, to allow focus on what is important for an organization. In addition to being quantifiable, measures should include targets and acceptable ranges so that performance gaps can be readily identified and rectified through various initiatives.

Strategic initiatives in the balanced scorecard framework refer to action plans to meet strategic objectives. For example, problems associated with defects can be addressed through a total quality management program. Other issues may require new technologies such as advanced information systems or new policy and procedures. With this framework, the balanced scorecard offers managers a tool to plan and manage an organization, while ensuring that business activities are aligned with the vision and strategy of an organization.

Leading and Lagging Indicators

The development of specifically balanced scorecard in the 1990s was a direct response to concerns in academia and practice that traditional financial measures lead to short-term focus (also known as managerial myopia, Merchant 1990) based on financial results, while compromising long-terms interests (Hoque 2014). For example, a manager might reduce spending on employee training to boost short-term profits, although this would adversely affect long-term success, as employee skills are critical to organizations in the knowledge-based economy of today. As three of the four dimensions are nonfinancial, the balanced scorecard promotes a more balanced view of an organization’s short- and long-term objectives (Kaplan and Norton 1996). Kaplan and Norton (1996) refer to financial measures as lagging indicators because they measure the past and indicate whether long-term strategic goals have been achieved or not (e.g., increase in profit margin). In contrast, nonfinancial measures are leading indicators (e.g., % of defective products) and are highly firm specific and predictive in the sense that they can be influenced through various initiatives to change the future outcomes for lagging measures.

Balanced Scorecard and Strategy Maps

The balanced scorecard approach is also associated with the concept of strategy maps. Kaplan and Norton (1996) introduced the concept of strategy maps to explicitly show the linkages between the four perspectives and how the measures link to strategy. Strategy maps include only the most important measures (key performance indicators) from the balanced scorecard and are organized in a cause and effect relationship according to the four perspectives of the scorecard.

Balanced Scorecard for Ethics and Sustainability

The balanced scorecard can be adapted to include other perspectives or measures such as sustainability and ethics to address recent concerns in relation to environmental, social, and ethical issues. Figge et al. (2002) propose the addition of a nonmarket perspective to the balanced scorecard to keep track of measures that help preserve organizations’ legitimacy and legality. For example, organizations with corporate social responsibility programs may include indicators that measure energy, water, and material efficiency, as well as the well-being of employees within the supply network, not just within the firm. This would include suppliers and their suppliers, as well as customers in downstream markets. Additional measures, particularly in relation to the learning and growth perspective, can be introduced that would allow the monitoring of, for example, training hours of employees on ethics or policy and procedure development that enforces ethical and sustainable behavior.

Performance Dashboards as Dynamic Scorecards

Recent advancements in information and communication technologies have given rise to more dynamic scorecards, also known as performance dashboards. Dashboards display the most important measures on a single screen to effectively monitor an organization (Yigitbasioglu and Velcu 2012). Scorecards allow users to explore data interactively through drill-down and roll-up functions and may afford scenario analysis. Also the use of visualization techniques in scorecard applications provides visual cues (e.g., through different color schemes and blinking) to users and decision-makers when indicators fall below predetermined targets. Even if performance dashboards may lack the strategic aspects of a balanced scorecard (e.g., alignment of measures with strategy, strategic initiatives), they serve similar purposes. In addition to monitoring performance, these relate to problem solving, rationalization of actions, and communication and consistency of measures (Pauwels et al. 2009; Velcu-Laitinen and Yigitbasioglu 2012).

Cross-References

References

  1. Figge F, Hahn T, Schaltegger S, Wagner M (2002) The sustainability balanced scorecard–linking sustainability management to business strategy. Bus Strateg Environ 11(5):269–284CrossRefGoogle Scholar
  2. Hoque Z (2014) 20 years of studies on the balanced scorecard: trends, accomplishments, gaps and opportunities for future research. Br Account Rev 46(1):33–59CrossRefGoogle Scholar
  3. Kaplan RS, Norton DP (1992) The balanced scorecard: measures that drive performance. Harv Bus Rev 83(7):172Google Scholar
  4. Kaplan RS, Norton DP (1996) The balanced scorecard: translating strategy into action. Harvard Business School Press, BostonGoogle Scholar
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  6. Pauwels K, Ambler T, Clark BH, LaPointe P, Reibstein D, Skiera B, Wierenga B, Wiesel T (2009) Dashboards as a service: why, what, how, and what research is needed? J Serv Res 12(2):175–189CrossRefGoogle Scholar
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Additional Readings

  1. Kaplan RS, Norton DP (1992) The balanced scorecard: measures that drive performance. Harv Bus Rev 83(7):172Google Scholar
  2. Kaplan RS, Norton DP (1996) The balanced scorecard: translating strategy into action. Harvard Business School PressGoogle Scholar
  3. Kaplan RS, Norton DP (2004) Strategy maps: converting intangible assets into tangible outcomes. Harvard Business PressGoogle Scholar

Copyright information

© Springer International Publishing AG 2017

Authors and Affiliations

  1. 1.School of AccountancyQUT Business SchoolBrisbaneAustralia

Section editors and affiliations

  • Andrew West
    • 1
  1. 1.School of Accountancy, QUT Business SchoolQueensland University of TechnologyBrisbane CityAustralia