What is the Balanced Scorecard?

The balanced scorecard is a strategic performance management tool used by companies to gauge the effectiveness of their business functions. This tool was developed by Dr. Robert Kaplan of the Harvard Business School in the United States and Dr. David Norton, and the term was coined in the 1990s. The balanced scorecard uses a strategic plan that focuses on four perspectives the company can use to balance different functions when developing business strategies: financial, business process, learning and growth and the customer.

The first balanced scorecard perspective relates to the financial operations of the company. The financial perspective includes operating income, rate of return on capital investments. Financial information is important to companies because all economic resources or business inputs must eventually be paid for by the business. Using too much external financing from debt or equity can limit the company’s operational effectiveness since interest must be paid for this financing. The finance perspective relates to how shareholders view a company.

The second part of the balanced scorecard is the business process perspective. This perspective focuses on a company’s business costing process for allocating goods and services, quality of goods produced, how economic resources or inputs are acquired and filling customer orders. This perspective highlights how well the company operates and which functions may need improvements to increase productivity. It relates to how well a company's products and services are meeting customer requirements.

The third part of the balanced scorecard is the learning and growth perspective. This perspective focuses on internal business operations and how well the company is maximizing its employee resources. Common measures in the learning and growth perspective include employee job satisfaction, the retention rate for company employees, skill sets of each employee and the individual abilities of each employee to effectively and efficiently complete business functions. It highlights the importance of easy communication between employees, mentoring, tutoring and efficient teaching and learning of new skill sets. The ability to effectively train employees is key to a company's ability to change with technology and not only meet customers needs, but perhaps anticipate them as well.

The final part in the balanced scorecard system is the customer perspective. This perspective involves how the company measures customer satisfaction, repeat sales and target market or demographic group analysis. Customers are an important part of the business process; using leading indicators described by the balanced scorecards' customer perspective method can help companies understand how well they are meeting consumer needs and the future desires of consumers.

The balanced scorecard combines these four perspectives to help companies make decisions about creating competitive business strategies in the business environment. This management tool may also be used to evaluate current business strategies and make corrections for improving the strategy. Companies may also use the balanced scorecard to plan, set goals and develop feedback channels for use in business operations.