How does the Balanced Scorecard build the relationship between non-financial objectives and financial objectives?

A balanced scorecard is an important concept in the management of any given organization, as organizations cannot be successful without adopting the right strategy that will guarantee such success. The reason for this is that organizations must align consumers' needs and desires with their production process to ensure that what they bring to market is what the market requires.

A balanced scorecard, in its most basic definition, is a strategic planning and management tool that is widely used in the business setting to align business activities with the organization's vision and strategy, thereby improving internal and external communication and monitoring the organization's performance (Kaplan and Norton, 1996a, b, c).

While it has been given different names, the idea behind the balanced scorecard can be traced back for ages, as it has been previously adopted for different financial and non-financial purposes in the past in order to evaluate the performance of companies.

This draws our attention to the purpose of this week’s discussion, which is to understand how a balanced scorecard can be used to build relationships between financial and non-financial objectives of companies. The main purpose of designing a balance sheet is to ensure that there are sufficient financial resources for meeting the non-financial objectives. Thus, the balance sheet does build a strong relationship between financial and non-financial objectives, as a company is only capable of spending what it has. This is demonstrated with company XYZ below.

XZY is a bank with a deposit of $ 700 billion in US dollars and an excess advance of $300 billion, a network of $ 500 billion, and a fee income of approximately 5% of its net worth.How the scorecard is used to build relationships between financial and non-financial objectives of firms in the company (as is generally achievable) is demonstrated below.

Strategic analysis: the bank’s managers developed a SWOT analysis of the bank in order to highlight its strengths and weaknesses, making them better positioned to understand areas where it has underperformed and also draft the right strategies to increase the bank’s overall performance.

Strategic mapping: the managers also conducted detailed mapping of the bank with a balanced scorecard. Strategic mapping is a pictorial description of a company’s strategies, and it establishes a strong link between the company’s financial and non-financial objectives (Norton and Kaplan, 2001). This was immensely helped in bank XYZ by the balanced scorecard.

Measurement of objectives—once the bank has mapped out its objectives (both financial and non-financial) with strategic mapping above, the next thing the managers did was to define management tactics that will be used to determine whether they have successfully met such objectives. This will include highlights on the bank’s achievement on its net percent increase in shares and a host of other performance indicators.

From the above analysis, it is now clear that a balanced scorecard helps establish a relationship between financial and non-financial objectives of a company because it aids in strategic analysis, mapping, and measurement of such objectives. The company’s attention is drawn to its overall performance by weighing up what it has done with what it has, as demonstrated in the case of XYZ Bank above.

References

Kaplan, R S and Norton, D P (1996a). The Balanced Scorecard: Translating Strategy into Action, Boston: Harvard Business School Publishing.

Kaplan, R S and Norton, D P (1996b). “Using the Balanced Scorecard as a Strategic Management System,” Harvard  Business Review,  January - February, 75-85.

Kaplan, R S and Norton, D P (1996c), “Linking the Balanced Scorecard to Strategy,” California Management Review, Fall, 53-79.

Norton, David and Kaplan, Robert (2001).  The Strategy Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment, Boston, MA: Harvard Business School Press.