To achieve these ambitious financial goals, managers must identify long-term goals for customers, internal business processes, and learning and growth. These goals can come from a variety of sources. Ideally, customer metrics should be derived from customer encounters or expectations. Surveying both current and potential customers helps identify expectations for key performance areas.
Once objectives related to customer, internal business processes, and research and innovation are established, the Scorecard provides forecasts and focuses on continuous improvement, reengineering, and transformation programs. Rather than simply applying basic internal processes, managers must work toward change and reengineering that are critical to achieving organizational strategy success. Unlike conventional reengineering programs, the goal of this program is not just cost savings. Strategy implementation is initiated by scorecard measures such as significantly reducing cycle times, further shortening time to market, and enhancing employee capabilities. However, reducing time and developing capabilities are not the ultimate goals. The Balanced Scorecard also has the ability to help organizations integrate strategic planning with the annual budget process. At one point, when the company set three- to five-year goals for its strategic measures, planners forecasted milestones for each measure over the next fiscal year—over the course of the 12 months of the planning year. Each of these milestones provided specific targets for measuring progress toward each business unit’s long-term strategy.
Planning and the management by objectives process help organizations:
- Determine the long-term revenue that the organization wants to achieve
- Identify mechanisms and provide resources to achieve results, and
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- Establish key short-term milestones for financial and non-financial metrics on the scorecard.
2.4. Encourage strategic feedback and learning
The final role of the Balanced Scorecard is embedded in the learning strategy framework. This process is considered the most important and innovative aspect of the entire scorecard approach because it enables organizational learning at the senior management level. Today, managers in every organization often do not take the step of receiving feedback on their strategies and testing the assumptions on which the strategies are based. The scorecard helps managers monitor and adjust the implementation of their strategies, even making fundamental changes in the strategies themselves.
By identifying the authentic elements in the financial and other aspects of the Scorecard, management can still check financial results on a monthly and quarterly basis. More importantly, however, they can closely examine how each business unit is achieving its goals for customers, internal process improvement, employees, production systems, and administrative procedures. Management reviews and updates past information to learn from experience. Managers not only study past results but also monitor their expectations for the future.
In summary, the first step is the process of strategic learning, clarity in the division of vision that the organization wants to achieve. Like a language, the use of the Balanced Scorecard helps translate complex, even obscure, concepts into more precise form, which creates consensus among senior management. The second step is the process of communication and appropriate change to mobilize all employees in activities to achieve the organization's goals. The focus on cause and effect in the scorecard process has initiated dynamic systems thinking. It allows individuals in each department of an organization to understand how those parts fit together, how their roles affect each other, and even the organization as a whole. The third step is the process of strategic planning, goal setting, and initiative, which clarifies the organization's performance goals through a balance of results and direction. Comparison
The gap between desired goals and current capabilities creates a gap that strategic initiatives need to be designed to close. Therefore, the BSC does not just measure change, it encourages change.
II. Advantages and disadvantages of the Balanced Scorecard
1. Advantages of the Balanced Scorecard
Initially, BSC was just a system of measurements, balancing and clarifying financial indicators to measure the effectiveness of the business - measuring the effectiveness of the strategies set out in advance. But more and more organizations are applying BSC as a tool to link short-term activities with the company's strategy. By doing this, BSC has reduced the "theoretical" aspects of strategy implementation and replaced them with measurements and concretization of strategies. Those are the advantages that the Scorecard has brought to organizations and businesses.
Advantage 1: BSC helps overcome the direction barrier by explaining strategies . BSC is designed to share insights and translate the organization's strategy into specific goals, measurements, and targets, which are expressed in each of the BSC's perspectives. Explaining strategic direction requires the BSC implementation team to specifically define what is ambiguous and vague in the organization's strategic direction. For example: "Make an impression on customers". Through the process of implementing the balanced scorecard system, the implementation team can clarify: "Make an impression on customers" means 70% of customers will return to the business... Thus, all employees of the organization can now focus their efforts in their daily work to achieve "Impress customers" - now a completely specific goal. By using the BSC as a basis for articulating strategy, organizations create a new language for measurement that guides everyone toward achieving stated directions.
Second advantage: Dissemination and communication The Balanced Scorecard helps overcome the human barrier. For a strategy to be successfully implemented, it must be understood and implemented at all levels of the organization. And
The BSC is implemented in every department and division of the organization, giving employees the opportunity to link their daily work to the overall strategy of the organization. All levels recognize their role, position and value creation activities through the connection between their scorecard implementation and the goals of higher levels. And more than that, the Balanced Scorecard also provides feedback from the bottom up to the executive board, facilitating continuous updates of strategy implementation.
Third advantage: Strategy provides resources to overcome resource barriers. As is known, resources are a very important issue for organizations. Almost all businesses always have to implement strategies in the context of insufficient resources. So how should and should resources be divided? It can be seen that, before building the Balanced Scorecard, most companies have separate strategic planning and budgeting processes. When building the Scorecard, the business has created conditions for these processes to be linked together. BSC not only builds goals, measurement indicators, and specific indicators for each of the four aspects, but also carefully considers the ideas and action plans that will serve that goal of the scorecard. And all necessary costs and the effectiveness of each specific goal must be clearly stated in the documents and considered. This means that managers, through the Balanced Scorecard, decide which ideas and goals to implement, and which content to support or not to implement. Building the BSC creates conditions for the organization to seriously examine existing ideas. Many managers have ideas but they do not think about their strategic significance. The organization will encounter many difficulties when conflicting ideas come from different functional departments. The Marketing department tries to gain more business opportunities through massive marketing campaigns, while the Sales department expects employees to focus on existing customers and relationships. Ideas from each level and each functional department contribute to the overall goals of the organization, but what is the relationship between them and how will resources be allocated to them? The answer is in the Balanced Scorecard: when building the Balanced Scorecard, we must consider all
current ideas in the organization and decide which ideas will really fit your strategy, which ideas will not fit and why.
Fourth advantage: The learning strategy in the Balanced Scorecard helps businesses overcome the management barrier . Today we are faced with a very fast-changing business environment, so organizations need to do more than just analyze the actual fluctuations of financial indicators to make strategic decisions. The Balanced Scorecard provides the necessary elements to get out of this situation and introduce a new model in which the results of the scorecard become the input for reviewing, questioning and studying strategy. The Balanced Scorecard translates strategy and vision into a series of closely linked measurements. We immediately have more information than just financial data to consider. When looking at all the intimate connections, the results of measuring the effectiveness of the scorecard clearly describe the strategy down to the smallest detail and provide the basis for asking whether the results obtained bring the business closer to achieving the strategy and when there is any fluctuation, knowing immediately where its impact is, and how to fix it.
2. Disadvantages of the Balanced Scorecard
The Balanced Scorecard is a popular performance measurement concept, because it focuses management on a few measures and bridges different functional perspectives (both financial and non-financial). However, the Balanced Scorecard has received some criticisms that originate from the perspective of the hidden systems in organizations. In general, these criticisms are the other side of the same coin, with the other side being the advantages of the BSC mentioned above. From a hidden perspective, just a few process parameters can point to the key leverage points of the system. But how can one be sure that a dozen choices are really the right ones? Should there be more, or fewer? And do they operate under the same direction, or do they counteract each other? Furthermore, if they are the right variables, what are the appropriate values for each objective? And within this time frame, what can be achieved? If everything
linked together, where do the boundaries of these systems lie? From a theoretical perspective, these questions are worth considering. In fact, these questions become quite important when managers embark on implementing the BSC, as we will see in this study.
Behind the claimed success of BSC are some inherent weaknesses listed below:
The first drawback: The causal relationship is unidirectional and too simple. The use of a single causal loop makes it difficult to capture the accumulation and decline of strategic factors. Furthermore, there is little basis in a causal loop map to assess the rate or speed of change of key categories. Nørreklit even questions the real status of a causal relationship between the areas of the BSC measures [11]. Instead of a single causal relationship, this author believes that the relationship has more than one interdependence or two causal directions.
Second disadvantage: No mechanism for validation . The concept of the Balanced Scorecard does not provide a mechanism for maintaining the relevance of the defined measures. Neely and others have also found that the problem for managers is often not knowing what to measure, but cutting down on measures that are available to a particular (and relevant) management unit [11]. Thus, the advantage of only having to control a few parameters can become a disadvantage when the selected parameters are not suitable for the BSC. Furthermore, the advantage of bridging the gap between different areas can become a disadvantage when the performance indicators of different areas interfere or lose their effectiveness.
mutual use
Third Disadvantage: Too Internally Focused . A Balanced Scorecard is very carefully defined. Moorey and others argue that the BSC does not consider an extended value chain where the contributions of employees and suppliers are highlighted. Neely and others argue that the BSC does not
The ability to answer one of the fundamental questions of managers: what are their competitors doing? Thus, the benefit of examining only a few parameters relevant to different areas can become a disadvantage when important areas are overlooked.
III. Steps to implement a Balanced Scorecard
The outline of the Balanced Scorecard has been mentioned above, but that is just theory. So, to implement the Scorecard, what must a business do? The Balanced Scorecard is implemented from top to bottom. The entire organizational structure revolves around the strategy implementation process, and the strategy must be communicated from top to bottom: It will be initiated by the business's leadership. From the perspective of a leader, the Balanced Scorecard can be implemented as follows:
Step 1: Implementation instructions
To implement the Balanced Scorecard, leaders must understand the Balanced Scorecard. It begins with strategy implementation. Leaders must clearly define what the organization is in, identify the key challenges it faces, and decide how best to compete. Strategy development uses a variety of strategic tools, such as mission, values, and vision, environmental, economic, and competitor analysis, resource-based strategy, as well as forward-looking planning, dynamic simulation, and strategic games. It takes time to ensure that the strategy is understood, researched, and tested (this often takes time for detailed analysis and review). Other issues that build on the strategy must be well-founded and thoroughly considered.
Step 2: Prepare for change
Once the decision has been made to adopt the Balanced Scorecard, the leader will need to plan and prepare to build a support team and communicate the BSC implementation process and knowledge about the BSC; this work will take up a lot of time of all levels of management. The organization must be ready to develop the necessary objects, measures, goals, strategic creative ideas and budgets. That will be the compass for action and resource allocation. The leader will also have to describe
strategy, measure and evaluate the plan, specify the action plan, calculate the budget needed for strategic innovation ideas and decide who will lead the strategy implementation process. Furthermore, there must be a “system” of criteria as a basis for evaluation if the performance appraisal of employees is to be successful. This system must be built tightly and incorporate all related issues.
Step 3: Develop a performance measurement method
Using the overall strategy as a guide, identify the core issues that need to be addressed in each area of activity, set relevant objectives, and then propose methods for measuring performance. Measurement here should consider all four aspects: Learning and growth aspect. – Internal process aspect – Customer aspect – Financial aspect.
Financial perspective : includes traditional financial metrics that can be measured towards achieving strategic objectives, providing expected financial information to stakeholders.
Customer perspective: here, it is necessary to set goals related to customer perception in each business sector. It can include evaluation criteria such as: customer satisfaction level, number of potential customers or market penetration.
Internal process perspective : in this scope, you will identify the main business processes of the enterprise such as production, distribution or sales, then set the related objectives such as: quality, time/efficiency, and cost reduction. And here, you will find methods to improve the internal functions and systems of the enterprise.
Research and innovation aspect : Examine the evaluation criteria related to employee career development, corporate commitment and skill development opportunities. The organization can consider the criteria for research and development. The focus here is to identify the issues that need to be improved and to maintain the value created by making the most effective use of human resources in the organization.