1

How Effective Is the Balanced Scorecard in Enhancing a Firm’s

Performance?

Table of Contents
How Effective Is the Balanced Scorecard in Enhancing a Firm’s Performance?...............1
1 Introduction......................................................................................................................................2
2 Critical Literature Review on the Balanced Scorecard..........................................................2
2.1 Historical Development of Balanced Scorecard.............................................................2
2.2 Contemporary Meaning of Balanced Scorecard.............................................................3
2.2.1 Financial............................................................................................................................3
2.2.2 Customer...........................................................................................................................3
2.2.3 Internal Business Process............................................................................................3
2.2.4 Learning and Growth.....................................................................................................3
3 Findings and Analysis...................................................................................................................4
3.1 Variations in Balanced Scorecard......................................................................................4
3.2 Practical Cases to Support and Illustrate the Four Perspectives...............................5
4 Conclusions.....................................................................................................................................6
5 References.......................................................................................................................................7
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1 Introduction

Traditionally, financial reporting systems could only provide information about previous
performance and not future performance (Benková et al., 2020). The relevance of strategic
measuring systems, financial as well as non-financial, has grown in recent years. A growing
awareness that conventional measuring systems along with success indicators (financial
reports, yearly reports, et cetera) were not delivering a correct image of a company's success in
addition to management process itself has increased focus. As a “multi-source business
performance management system”, the balanced scorecard incorporates both financial along
with non-financial indicators. Using several sources of measurement allows you to portray a
more realistic image of the present and attain anticipated future results.

According to Kaplan & Norton (1992) successful organizations constantly evaluate their
functions, human capital, as well as finances, as well as industry trends and competitors. The
balanced scorecard helps manage that process. It shows whether leaders have progressed
within one section at a price of another. An organization's financial, consumer, learning and
development, also internal business course performance can be predicted using the balanced
scorecard.

2 Critical Literature Review on the Balanced Scorecard

2.1 Historical Development of Balanced Scorecard

Since the balanced scorecard notion was created in the early 1990s, it has become a popular
topic for academic research and consulting. The significant rise of Balanced Scorecard branding
consulting services indicates the tool's effectiveness as a result of buzzword identification and
effective marketing initiatives (Teichgräber et al., 2021). Many features of Kaplan & Norton's
initial strategy proved untenable in practice (Hoque 2014). However, it has grown from a gauge
selection structure to a tactical management measuring tool. Second along with third generation
BSCs fix a number of early recognized flaws.

2.2 Contemporary Meaning of Balanced Scorecard

To support business happenings with the vision of the organization`s in addition to strategy,
enhance “internal and external communications then monitor organizational performance critical
of strategic goals, a balanced scorecard is a strategic planning and management system widely
used in industry, government, also NGOs globally” (Hoque 2014). Simply said, “the BSC is a
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business performance management system” focused on the most critical organizational metrics
that utilizes multiple sources of business information. They are known as “key performance
indicators (KPIs) and contain financial, customer, internal business process, and learning &
growth metrics as major components (measurement categories).”

2.2.1 Financial

Incorporates metrics like operating income, return on invested capital, also economic value
added (Benková et al., 2020).

2.2.2 Customer

These include customer satisfaction and retention as well as market share targets for different
consumer groups (Benková et al., 2020).

2.2.3 Internal Business Process

Measures like the total cost with the quality are included. These are used in business activities
including purchasing, manufacturing, and fulfilling orders (Benková et al., 2020).

2.2.4 Learning and Growth

Include metrics like staff happiness, workforce retention, and skill sets, among others (Benková
et al., 2020).
Each category of measurement offers a simultaneous, lagging, or predictive sign of
accomplishment (Terziev et al., 2021). Concurrent measures show the organization's success in
real time, whereas trailing and predictive measures show the organization's success in the past
and in the future, respectively.

3 Findings and Analysis

According to the BSC, an organization should be examined in light of each KPI (Teichgräber et
al., 2021). To this end, Teichgräber et al. (2002) propose that five essential criteria in every
measurement group be identified to construct metrics, gather data, and consider analysis in
relation to every KPI. Choice to design a Balanced Scorecard is a journey, not project (Rohm
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2002). There are two stages to the journey: planning and execution. The balanced scorecard
attempts to answer the following four questions (Kaplan and Norton, 1992):

1) What are our consumers' opinions of us? (the viewpoint of the customer)
2) Can we keep increasing the worth of our company? (Perspectives on growth and
learning)
3) What do we have to be the best at? (From within the company)
4) What are the opinions of our stockholders on us? (From a financial standpoint)

According to the balanced scorecard, three assumptions must be made: A strategic plan and/or
company strategy are in place and have a cause-and-effect relationship. Additionally, the most
essential drivers (metrics of success) have been accurately recognized. For the most part,
companies establish their strategic goals by responding to these four fundamental issues. Once
the objectives and KPI metrics have been established, a strategic process map can be created
(Kaplan & Norton 1992).

3.1 Variations in Balanced Scorecard

The BSC aberrations that have been seen are frequently the result of tiny adjustments to the
performance management system that have been implemented in an unplanned environment
(that is government, or public sector). The BSC may be established then implemented outside
of private sector with minor adjustments to the key performance indicators (KPIs) shown below
(Frederico et al., 2021). It has become increasingly popular in corporations, government, and
health-care organizations as a result of the BSC's widespread use (Behrouzi et al., 2014).

The BSCs of the second and third generations are the most recent variations of the original
BSC. The second generation BSC included a graphical portrayal of a strategic links and goals
across KPIs, which was an improvement over the first generation (Frederico et al., 2021). The
'Destination Statements' feature was incorporated towards the end of the design process in the
third generation BSC. Destination statements are used to verify that goals, measures, and
specified targets have been met (Frederico et al., 2021). Culture was also mentioned as a fifth
key performance indicator (Hwang & Rau 2017). Because of its cross-sector applicability, BSC
is more valuable (Behrouzi et al., 2014).
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3.2 Practical Cases to Support and Illustrate the Four Perspectives

Historically, health care providers have seen their organizations as mission-driven. Thus, health
care providers frequently misunderstand their vision commitment as an application of the BSC,
failing to link their goals with strategies towards their mission (Behrouzi et al., 2014). Hospitals
also avoided financial metrics to avoid putting a monetary value on life (Behrouzi et al., 2014).
For enhanced financial reporting with disclosure to shareholders along with directors, South
Shore Hospital began using the BSC in 2001. Its organizational goals incorporate: consumer
satisfaction, clinical excellence, operations in addition to financial. The hospital's vice president
claimed that "while dashboards just summarized collected data, the BSC essentially
demonstrated how the hospital was operating" as an enterprise (Behrouzi et al., 2014).
Choosing indicators, collecting data on time, and educating stakeholders were cited as major
obstacles. The BSC enabled early detection and response to unfavorable trends, reduced
patient falls, and board comprehension of BSC structure viewpoints that clearly demonstrate the
relationships amid operation, clinic, and consumer. With the help of corporate leaders and
workers, the firm was competent to implement the BSC structure to their operation. Also,
Crandon linked every action, goal and objective to the company's vision, mission and strategy.

“BIOCO, a mid-sized biopharmaceutical company”, effectively applied and adapted the BSC
corporately and individually. They achieved this accomplishment by securing senior
management commitment, investing in training, developing strategy maps, in addition to
communicating progress (Huang & Hu 2017). Implementation with development began at a
corporate level then flowed to departments and employees. As a result of acknowledging the
cultural variations amid IT department with the remainder of the organization, BIOCO
incorporated culture as a fifth perspective.

Ford Motor Company embarked on the BSC journey to quickly respond to incorrect business
errors and pay off a “hundred million dollars debt from June 1989 to June 2004. Succeeding in
strategic management systems which integrated customer value like an operational value
resulted to the BSC's accomplishment”. Ford Motor Company needed to minimize expenses,
maintain quality products, then start customer profit-sharing. Ford Motor Company used six
processes to develop then enact their BSC: “define a vision, company and competitor analysis,
technical perspective, objective setting, action plans, plan execution, and performance
evaluation” (Hwang & Rau 2017).
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4 Conclusions

The BSC was created in the 1990s to help firms match their strategy in addition to goals with
their strategic plan. A balanced scorecard's purpose is to support an organization's mission,
goals, and strategic plan with the plan's ability to adapt to unexpected change. The BSC initially
had three modules and was meant for private segment corporate use. The original model has
been referred to by many things (perspectives, KPIs, drivers, measurements, indices, etc.) and
has undergone many revisions. It is crucial to keep questioning the KPIs used. By identifying the
wrong KPIs, organizations risk wasting money and resources. The BSC is currently widely used
in “public, private, and not-for-profit sectors”, with only minimal industry-specific adjustments.
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5 References

Behrouzi, F., Shaharoun, A. M., & Ma’aram, A. 2014. Applications of the balanced scorecard for
strategic management and performance measurement in the health sector. Australian Health
Review, 38(2), 208–217. Retrieved from
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2004&ctx_enc=info:ofi/enc:UTF-8&rfr_id=info:sid/ProQ
%253Aabiglobal&rft_val_fmt=info:ofi/fmt:kev:mtx:journal&rft.genre=article&rft.jtitle=Australian+H
ealth+Review&rft.atitle=

Benková, E., Gallo, P., Balogová, B., & Nemec, J. 2020. Factors affecting the use of balanced
scorecard in measuring Ford Motor Company erformance. Sustainability (Switzerland), 12(3).
https://doi.org/10.3390/su12031178

Frederico, G. F., Garza-Reyes, J. A., Kumar, A., & Kumar, V. 2021. Performance measurement
for supply chains in the Industry 4.0 era: a balanced scorecard approach. International Journal
of Productivity and Performance Management, 70(4), 789–807. https://doi.org/10.1108/IJPPM-
08-2019-0400

Hoque, Z. 2014. 20 years of studies on the balanced scorecard: Trends, accomplishments,

gaps and opportunities for future research. British Accounting Review, 46(1): 33-59

Huang, C. D., & Hu, Q. 2017. Achieving IT-business strategic alignment via enterprise-wide
implementation of balanced scorecards. Information Systems Management, 24(2), 173–184.
https://doi.org/10.1080/10580530701239314

Hwang, M. H., & Rau, H. 2017. Design and planning of the balanced scorecard: A case study.
Human Systems Management, 26(3), 217–227. https://doi.org/10.3233/hsm-2007-26307

Kaplan, R. S., & Norton, D. P. 1992. The balanced scorecard--measures that drive
performance. Harvard Business Review, 70(1), 71–79.

Rohm, H. 2002. A Balancing Act. Performance Management in Action, Vol. 2(2).

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Teichgräber, U., Sibbel, R., Heinrich, A., & Güttler, F. (2021). Development of a balanced
scorecard as a strategic performance measurement system for clinical radiology as a cost
center. Insights into Imaging, 12(1). https://doi.org/10.1186/s13244-021-01009-2

Terziev, V., Georgiev, M., & Andreeva, O. 2021. Using the Balanced Scorecard for Translating
Strategy Into Actions and for Exercising of Effective Control. SSRN Electronic Journal.
https://doi.org/10.2139/ssrn.3751976