The Balanced Scorecard for Small BusinessSet Goals!

Posted byRon Carroll

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Organization leaders generally have a pretty clear picture of the direction

they want their company to go. However, research shows that just 5% of the
workforce understands their companys strategy, and only 25% of managers
have incentives linked to that strategy (Kaplan).

To help remedy this, Doctors Robert S. Kaplan and David P. Norton of

Harvard Business School introduced the Balanced Scorecard in 1991. It
has gained wide acceptance as an effective strategic management system, a
performance measurement system, and a communication tool.

Simply put, the Balanced Scorecard enables organization leaders to

convert mission, vision and strategy into specific and measurable goals, with
action plans to achieve those goals. And it's actually quite easy to do.

The scorecard is described as balanced for the following reasons:

1. It recognizes the need to balance financial indicators of success such

as sales with non-financial indicators such as customer
satisfaction (business measures).

2. It balances internal requirements of employees and processes, with

the external requirements of customers and shareholders.
3. It looks at past performance (lagging indicators) such as financial
statements as well as current performance (leading indicators) including the
measurement of daily business systems and processes.

4. Finally, it provides a balance between short-term and long-term

objectives.

A completed Balanced Scorecard will not only link your business

strategy to measurable company goals, but it aligns employee efforts and
business processes to those objectives. It is the foundation for creating a culture
of continuous improvement!

The Four Perspectives of Balanced Scorecard Goals

When setting Balanced Scorecard goals, you will look at your business
strategy from four different perspectives.

1. The Financial Perspective promotes strategies for growth, profitability,

cash flow, return on investment, and mitigation of risk, as viewed by an
owner or shareholder.
2. The Customer Perspective promotes strategies for creating product
value, market differentiation, and customer loyalty.

3. The Internal Processes Perspective promotes strategies for developing

high-performance business systems and processesoperational
excellence.

4. The Learning and Growth Perspective promotes strategies that create a

culture of continuous learning, innovation, and the personal growth and
retention of valued people.

While a Balanced Scorecard may seem like a tool for big-business, it is

simply a form divided into four sections, one for each of the four
perspectives. In column one, you write several objectives within each
perspective. In column two, indicate a unit of measure such as numbers,
dollars or percent. In column three, express the target goal in that unit of
measure. In column four, briefly indicate your plan of action to achieve the
target goal.

Below is an example of an abbreviated Balanced Scorecard developed by a

home builder.

Financial Perspective (How can we increase growth, profitability, cash

flow, and return on investment?)

OBJECTIVE MEASUREMENT TARGET ACTION PLAN

Number of new housing

Increase Sales 10 new Expand geographic market /
growth starts open new office
starts per month

Improve Percent income from 10% profit Reduce construction cycle

profitability operations margin time and unit costs

Customer Perspective (How can we create product value, market

differentiation, "killer customer care," and raving fans?)

OBJECTIVE MEASUREMENT TARGET ACTION PLAN

Create a quality score

Points / quality Subcontractor must
High-quality sheet for each sub and
rating of maintain 90 point
homes provide them job
subcontractors average of 100 possible
feedback

Fast Average days to 30 days from building Intense scheduling

completion complete permit to close system / reduce delay

Internal Processes Perspective (What systems can we create or elevate

to achieve operational excellence?)

OBJECTIVE MEASUREMENT TARGET ACTION PLAN

Fast Start Submit application

Reduce upfront interface
Minimize time from to city within 5
Days in-process and preparation time
contract to building days of customer
with customer
permit contract

Percent of work 75% of jobs started

Effectively schedule Purchase BuildStar
started at within 1 day of
sub-contractors management software
scheduled time schedule

Learning and Growth Perspective (How can we promote learning,

innovation, and the personal growth and retention of valued people?)

OBJECTIVE MEASUREMENT TARGET ACTION PLAN

Subcontractor Number of subs that are 75% of subs Create subcontractor

certification certified are certified certification program

Improve staff
Number of skill sets 80% skill Create a staff training
building-process
times number of people competency program
skills
For instance, let's say from the financial perspective you want to increase
sales by 20% next year. Your unit of measure is dollars. Your target goal is
$1,000,000, and your plan of action is to spend 20% more money on lead-
generation advertising.

In another example, from an internal-processes perspective, your goal is to

reduce product defects. Your unit of measure is a percent. Your target goal is
99% yield, or expressed as 1% waste. Your action plan is to apply Six Sigma
analysis to the manufacturing process and dramatically reduce production
errors.

System Scorecards

The Systems Thinker also aligns goals at the system or process level with the
major Balanced Scorecard objectives of the company as described above.

Let's take a closer look. A company Balanced Scorecard has an objective

of 10% sales growth in the coming year. The action plan is to add six more
sales per week. Based on the sales conversion rate in this example, the
marketing department must receive twenty-four additional leads each week.
To achieve this, their action plan for this System Scorecard objective is to
increase the weekly advertising mailers by 1500. Likewise, the production
department must increase its target to manufacture six more units per
week.

Every department plays a role in accomplishing the high-level company

goals.

By cascading the strategy and objectives down through all levels of the
organization, every employee and internal process is engaged in achieving a
common set of goals. People throughout the organization ask, Which
company objectives or measures are we in the best position to influence?
and What can we do at our level to help the organization achieve its goals?

Strategy is everyone's job in a Balanced Scorecard environment. It is a

top-down responsibility to communicate strategy and unite the workforce,
and a bottom-up responsibility to internalize and execute the strategy.

In one page, your Balanced Scorecard tells the whole storyeverything

importantabout your organization's current strategy and targeted
objectives!

I have prepared several worksheets to help you determine your unique

business strategy and create a company Balanced Scorecard. You can
get them in the Zone.
What is the Balanced Scorecard?

The Balanced Scorecard is a set of financial and non-financial measures relating to a

companys critical success factors (p. 21). It is an attempt to capture the essence of the
organizations critical value-creating activities (p. 23). It has integrative components
that reinforce one another in indicating what the current and future prospects of a
company will be. Its purpose is to concentrate corporate focus on performance
measurement innovation since traditional reporting systems arent able to measure
performance in the new manufacturing environments and are not helpful in increasing
market share and profits.

Advantages of the Balanced Scorecard

It puts strategy, structure, and vision at the center of management focus.

Since it integrates traditional and nontraditional performance measures, it keeps

management focused on the entire business process and helps ensure that actual
current operating performance is in line with the long-term strategy and customer
values (p. 22).

It maintains a balance between building long range competitive abilities and

recognizing investors attention to financial reports.

Financial measures are viewed in the larger context of the companies long range
competitive strategies for creating future value through investment in customers,
suppliers, employees, processes, technology, and innovation. (p. 22).

It enhances the overall goals and objectives and a company

It allows management attention to focus on managing results from the perspective of

customers, internal business processes, and learning and growth.

Major Components of a Balanced Scorecard

A Balanced Scorecard must combine past financial measures with measures of the
firms drivers of future performance. The specific objectives and measures come from
the firms vision and strategy. The basic framework will include at least four major
perspectives:
1. Financial perspective: Determines what kind of financial performance to provide to
investors.

2. Customer perspective: Companies identify their customer and the market segments
in which they want to compete and align their measures of customer values with their
targeted market segments.

3. Internal business processes perspective: Improve the internal processes that will
help reach the financial and customer perspectives. It may require defining a complete
internal process value chain that identifies current and future customer needs and
creating solutions for them.

4. Learning and growth perspective: Based on the previous three, the company must
identify objectives and measures to drive continuous organizational learning and
growth. These objectives should be the drivers of successful outcomes in the first
three perspectives.

With these perspectives, managers are able to see how their business units are creating
value for current and future customers and identify when internal capabilities need to
be enhanced as well as improve future performance. The Balanced Scorecard
communicates goals and rewards employees who enhance them. It also retains an
interest in short-term performance, but at the same time, clearly reveals those drivers
leading to long-term financial and competitive performance (p. 23).

Fitting the Balanced Scorecard to the Organization

It is custom designed to its company with its focus on the integration of the entire
business process. First, make a preliminary assessment of the overall business
strategy. Identify business processes, goals and objectives and then rank the measures
that will capture the organizations progress toward those goals and objectives. In this
paper this was done for four small companies whose sizes ranged from 110-1200
employees; an electronics firm, a food ingredients company, a commercial bank, and a
Biotechnology firm.

Different Goals and Scorecards

In this study, the food ingredients company was most interested in the financial
perspective, the biotechnology firm was most interested in the customer perspective,
and the commercial bank created its own separate community perspective category
which included things like supporting community activities and being good corporate
citizens. This shows that managers are designing the goals and measures that fit their
own unique needs and that the Balanced Scorecard can be effective in small
companies as well as in large ones.

Four new Management Processes

The Balanced Scorecard will let managers introduce four new management processes
that separately and in combination, contribute to linking long term strategic objectives
with short term actions (p. 25). The first process translates the vision and strategy
into operational terms for employees to understand. They are stated as an integrated
set of objectives and measures that describe the long term drivers of success. The
second process is communicating and linking. It ties the overall objectives and
strategies to departments and individual objectives. This takes the place of evaluating
departments using financial performance and individual incentives. By using this
approach you make sure that all the levels of the organization are aware of the
companys long term strategy. The third process is business planning. Businesses can
integrate their business and financial planning. The Balanced scorecard helps set goals
that provide a basis for allocating resources and setting priorities. It also helps in
eliminating some initiatives and selecting others that are more effective for moving
the organization toward its long-term strategic objectives (p. 26). Finally, the fourth
process is feedback and learning. It helps facilitate learning and supplies strategic
feedback. It can help organizations modify their strategies in response to changing
circumstances.

The Personal Scorecard

Personal scorecards are a way of translating the companys scorecard into specific
goals and measures for each individual. They will also not be identical since each
individual fills a unique role in the organization and each individual has different
skills, talents, and interests. To achieve the greatest success, these individual
differences must be exploited and synergies must be created among the workers since
a corporation runs best with coordination and cooperation and specialization among
its members. Individual personal scorecards should be consistent with the companys
overall strategies, goals, and measures but must also be flexible to accommodate to
the individuals strengths and weaknesses.

One thing that still remains in question is whether or not a companys compensation
system should be linked to its Balanced Scorecard. Some companies have done so
because they believe tying financial reward to performance is very motivating, but
they must also realize that there are risks involved in doing this.

If the emphasis on individual achievement shifts to cooperation and teamwork, a

companys short term formula based incentive compensation system will also have to
change. Since a longer term viewpoint is used in the balanced scorecard, incentive
rewards may need to be set more subjectively. Longer term subjective evaluations are
less likely to be distorted. Its role in the incentive compensation system is still to be
discovered.

10 steps To Implementing the Balanced Scorecard

1. A strategic planning retreat with all levels of management reaches a consensus on

the overall vision, strategic goals, and objectives of the company and identifies the
critical perspectives.

2. A strategic planning committee formulates objectives for each perspective from step
1.

3. With the balanced scorecard as a communication tool, committee seeks comments

and acceptance from all members.

4. Revise balanced scorecard.

5. Communicate the revised version to everyone and then each individual creates their
own personal balanced scorecard to supplement the overall goals and objectives
described.

6. Strategic planning committee reviews individual balanced scorecards and revises

those as well as the companys.

7. Management formulates a five-year strategic plan for the overall organization based
on the balanced scorecard. The first year plan is expanded into the annual operating
plan for the next year.

8. Review individual and company progress quarterly and identify areas that need
attention.
9. Based on personal balanced scorecards, the company evaluates each members
performance for the past year and makes recommendations relating to retention,
promotion, salary increases or other rewards (p .27).

10. Strategic planning committee revises the companys balanced scorecard and the
five-year strategic plan based on external and internal scanning of the current
condition and changes in the economic environment (p. 27).

The scorecard for the 21st Century

The balanced score card is a new idea that will help restructure firms and help them
make it through difficult and changing times. It allows management to focus on those
goals and objectives and the measures that will help reach those goals and objective to
meet the needs of the 21st century. The best thing about it is that scorecards are unique
to the company and will specifically fit the needs of the company, subunit, or
individual.