Balanced Scorecard

Balanced Scorecard Simplified for You: A Chat at LUT University

Kedar: Hey Tero, I keep hearing about the "Balanced Scorecard" being used in performance management. What's the big deal? It sounds kind of complicated.

Tero: Hey Kedar, don't worry, it's not as complex as it might sound. Think of it like this: Imagine you're trying to stay healthy...

Kedar: Okay, I'm following. I definitely need to work on that!

Tero: Most people tend to focus on just one thing, like weight loss. But to be truly healthy, you need to look at more than just that. You need to consider your diet, exercise, sleep, stress levels, and even your mental well-being.

Kedar: That's true. I guess I do need to look at the bigger picture.

Tero: Exactly! The Balanced Scorecard does the same thing for organizations. It's a way of looking at performance from different perspectives, not just the financial bottom line. It considers four main areas:

1. Financial: This is like checking your weight – it's important, but not the whole story. It includes things like revenue, profit, and return on investment.
2. Customer: This is about how your customers see you – like how satisfied they are with your products or services. It's like getting feedback on your diet from a nutritionist.
3. Internal Processes: This is about how well your organization operates – like how efficient your processes are or how innovative you are. It's like checking your blood pressure and cholesterol levels to make sure everything is working smoothly inside.
4. Learning and Growth: This is about your organization's ability to learn and improve – like investing in employee training and development. It's like making sure you're getting enough sleep and exercise to keep your body healthy and strong.

Kedar: So, instead of just focusing on one thing, the Balanced Scorecard gives a more balanced view of performance?

Tero: Precisely! It's like a dashboard for your organization, showing how you're doing in all those different areas. And by tracking all these aspects, you can make better decisions that lead to long-term success.

Kedar: That makes so much more sense now! But how is it different from other performance measurement tools?

Tero: Many traditional tools only focus on financial measures, like the old saying, "What gets measured gets managed." The Balanced Scorecard goes beyond that, recognizing that non-financial factors are just as important for long-term success.

Kedar: Wow, this is really insightful. Thanks for explaining it, Tero!

Tero: No problem, Kedar! If you want to dive deeper, we can look at some examples of how LUT University or other organizations use the Balanced Scorecard. There's a whole world of possibilities to explore!

Kedar: Sure Tero. We can do that some day. Thank you so much for explaining in such a nice way.

Tero: Hey! No, Problem.  See you Next Time.

Kedar: See You. Bye!!

Academic explanation of the Balanced Scorecard and its real-world applications:

The Balanced Scorecard: A Holistic Approach to Performance Management

The Balanced Scorecard (BSC), introduced by Kaplan and Norton (1992), is a strategic management framework that translates an organization's vision and strategy into a set of actionable objectives and performance measures. It goes beyond traditional financial metrics by incorporating four key perspectives:

1. Financial Perspective: This perspective focuses on traditional financial indicators such as revenue, profitability, return on investment (ROI), and cash flow (Kaplan & Norton, 1996). It answers the question: "How do we look to shareholders?"

2. Customer Perspective: Recognizing that customer satisfaction and loyalty are critical for long-term success, this perspective measures aspects like customer satisfaction, retention, market share, and customer acquisition cost (Hoque & James, 2000). It aligns performance measurement with customer-centric strategies. It answers the question: "How do customers see us?"

3. Internal Process Perspective: This perspective focuses on the efficiency and effectiveness of internal processes that drive customer and financial outcomes. It measures operational excellence, innovation, and the ability to meet customer expectations (Ittner & Larcker, 1998). It answers the question: "What must we excel at?"

4. Learning and Growth Perspective: This perspective emphasizes the importance of organizational learning, innovation, and employee development. It measures employee satisfaction, engagement, skills, and knowledge acquisition (Kaplan & Norton, 2001). This perspective recognizes that an organization's ability to learn and adapt is essential for sustained competitive advantage. It answers the question: "Can we continue to improve and create value?"

Real-World Examples:

1. Southwest Airlines 

Let's break down how Southwest Airlines utilized the Balanced Scorecard (BSC) to align its strategy with its performance measurement system:

Southwest's Challenge:

In the highly competitive airline industry, Southwest Airlines carved a unique niche by offering low-cost, high-quality service. However, maintaining this competitive advantage while achieving sustainable growth posed a challenge. Traditional financial metrics alone were insufficient to capture the nuances of their strategy and its impact on various aspects of their business.

Southwest's Balanced Scorecard Solution:

Southwest Airlines embraced the Balanced Scorecard to align its strategy with its performance measurement system, focusing on key areas that drove its success:

1. Customer Perspective:

• Measures: Southwest tracked metrics such as customer satisfaction ratings, on-time performance, baggage handling efficiency, and overall customer experience. They used surveys, feedback forms, and data analysis to gauge customer sentiment and identify areas for improvement.
• Initiatives: The company implemented initiatives to enhance the customer experience, including faster turnaround times at airports, friendly and efficient customer service, and innovative booking and check-in processes. They empowered employees to make decisions that prioritized customer needs.

2. Internal Process Perspective:

• Measures: Southwest monitored metrics related to operational efficiency, such as aircraft turnaround time, on-time departures, employee productivity, and cost per available seat mile (CASM). They focused on streamlining processes and optimizing resource utilization.
• Initiatives: The company invested in technology and training to improve operational efficiency. They also fostered a culture of continuous improvement, encouraging employees to identify and implement innovative solutions to enhance productivity and reduce costs.

3. Learning and Growth Perspective:

• Measures: Southwest tracked metrics related to employee satisfaction, engagement, training, and development. They recognized that motivated and skilled employees were essential for delivering their unique brand of customer service.
• Initiatives: The company emphasized employee empowerment, training, and development programs. They encouraged a positive and fun work environment, recognizing that happy employees are more likely to deliver exceptional customer service.

4. Financial Perspective:

• Measures: Southwest continued to monitor traditional financial measures like revenue, profitability, and return on investment (ROI). They understood that their success in the other three perspectives would ultimately translate into financial success.
• Initiatives: By focusing on customer satisfaction, operational efficiency, and employee engagement, Southwest was able to maintain a cost advantage and offer competitive fares while still maintaining profitability.

Results:

Southwest Airlines' implementation of the Balanced Scorecard resulted in a number of positive outcomes:

• Sustained Competitive Advantage: Southwest was able to differentiate itself from competitors by consistently delivering low-cost, high-quality service.
• Improved Financial Performance: The company achieved strong financial results, with consistent profitability and growth even during challenging economic times.
• High Customer Satisfaction: Southwest consistently ranked among the top airlines in terms of customer satisfaction.
• Strong Employee Engagement: Southwest employees were known for their high levels of motivation and engagement, which translated into a positive customer experience.

Key Takeaways:

Southwest Airlines' success with the Balanced Scorecard demonstrates the power of aligning strategy with performance measures across multiple dimensions. By focusing on customer satisfaction, operational efficiency, employee engagement, and financial performance, the company was able to create a virtuous cycle of improvement that reinforced its competitive advantage and drove sustainable growth. This case study highlights the importance of a holistic approach to performance management that goes beyond traditional financial metrics.

2. Hilton Hotel    

Let's take a closer look at how Hilton Hotels leveraged the Balanced Scorecard (BSC) to elevate guest satisfaction and loyalty:

Hilton's Challenge:

In the mid-1990s, Hilton Hotels faced a common challenge in the hospitality industry: declining guest satisfaction and loyalty. They realized that traditional financial measures alone couldn't address the root causes of this issue.

Hilton's Balanced Scorecard Solution:

Hilton recognized the potential of the BSC to align their strategic vision with operational actions, focusing on key drivers of guest satisfaction and loyalty:

1. Customer Perspective:

   • Hilton prioritized measures like guest satisfaction ratings, repeat business rates, and customer feedback to gauge the quality of their guest experience.
   • They utilized customer surveys, comment cards, and post-stay follow-ups to gather feedback and identify areas for improvement.
   • They focused on exceeding customer expectations in areas like room cleanliness, service quality, and amenities.

2. Internal Process Perspective:

   • Hilton analyzed their internal processes to identify bottlenecks and inefficiencies that negatively impacted guest experiences.
   • They streamlined check-in and check-out processes, improved communication between departments, and implemented systems to track and address guest complaints promptly.
   • They invested in technology to enhance operational efficiency, such as online booking systems and mobile check-in options.

3. Learning and Growth Perspective:

   • Hilton recognized the crucial role of their employees in delivering exceptional guest experiences. They emphasized employee training and development programs to enhance service skills, empower staff, and foster a customer-centric culture.
   • They implemented employee satisfaction surveys and feedback mechanisms to ensure their team felt valued and engaged.
   • They incentivized employees based on guest satisfaction ratings, promoting a shared commitment to delivering outstanding service.

4. Financial Perspective:

   • While not the sole focus, Hilton tracked traditional financial measures like revenue per available room (RevPAR), occupancy rates, and profitability. They understood that improved guest satisfaction and loyalty would ultimately drive financial success.

Results:

Hilton's adoption of the Balanced Scorecard led to notable achievements:

• Increased Guest Satisfaction: Hilton witnessed significant improvements in guest satisfaction ratings across its properties.
• Enhanced Loyalty: Repeat business and customer loyalty increased, contributing to a stronger brand reputation.
• Improved Financial Performance: Increased guest satisfaction and loyalty translated into higher revenues and profitability.
• Stronger Brand Reputation: Hilton's commitment to guest satisfaction solidified its position as a leader in the hospitality industry.

Key Takeaways:

Hilton's successful implementation of the Balanced Scorecard demonstrates that focusing on multiple dimensions of performance, including customer satisfaction, internal processes, and employee engagement, can lead to a more holistic and sustainable approach to achieving organizational goals. By aligning their strategy with actionable measures and fostering a customer-centric culture, Hilton was able to achieve remarkable improvements in guest satisfaction, loyalty, and financial performance.

Why the Balanced Scorecard?

The Balanced Scorecard is not merely a measurement system; it's a strategic management framework that facilitates:

• Strategy Translation and Communication: It translates an organization's vision and strategy into a set of clear, actionable objectives and measures, enhancing communication and alignment across the organization (Kaplan & Norton, 1996).
• Performance Alignment: It ensures that all organizational units and individual employees are working towards common strategic goals, fostering a shared sense of purpose and direction (Ittner & Larcker, 1998).
• Long-Term Focus: By balancing short-term financial goals with long-term drivers of value creation (customer, internal processes, and learning and growth), the BSC promotes sustainable growth and competitiveness (Kaplan & Norton, 2001).
• Continuous Improvement: The BSC provides a framework for regular monitoring, feedback, and adaptation, fostering a culture of continuous learning and improvement (Niven, 2002).

References:

• Hoque, Z., & James, W. (2000). Linking balanced scorecard measures to size and market factors: Impact on organizational performance. Journal of Management Accounting Research, 12, 1-17.
• Ittner, C. D., & Larcker, D. F. (1998). Innovations in performance measurement: Trends and research implications. Journal of Management Accounting Research, 10, 205-238.
• Kaplan, R. S., & Norton, D. P. (1992). The balanced scorecard—measures that drive performance. Harvard Business Review, 70(1), 71-79.
• Kaplan, R. S., & Norton, D. P. (1996). Using the balanced scorecard as a strategic management system. Harvard Business Review, 74(1), 75-85.
• Kaplan, R. S., & Norton, D. P. (2004). Strategy maps: Converting intangible assets into tangible outcomes. Harvard Business School Press.
• Kaplan, R. S., & Norton, D. P. (2008). The execution premium: Linking strategy to operations for competitive advantage. Harvard Business Press.
• Niven, P. R. (2002). Balanced scorecard step-by-step: Maximizing performance and maintaining results. John Wiley & Sons.