The four perspectives of a balanced scorecard

- [Instructor] When you create a balanced scorecard, you are including four different perspectives. You're not just looking at finance. In fact, you are looking at finance and three other areas. Those four perspectives are, of course, financial. If you don't have any money, you can't run your company. The customer perspective, internal processes, and also learning and growth. Let's take a look at each of these in turn. We'll start with the financial perspective. There are a number of different measures that you can use to evaluate financial performance. First would be return on investment and value add. In other words, the amount that you add to the value of the inputs to a process. You should also look at revenue and your revenue mix. For example, you don't want all of your money coming from a single class of customers. For example, if you sell a commodity product that is only differentiable by cost savings from those of your competitors, then you should look for ways to add value and get more economic value into your products. You should also look very carefully at your cost and productivity. Always look for ways to save money on your inputs and also take a look at your productivity. The efficiency of your processes matters a great deal when you are looking at your enterprise as a whole. You should also look carefully at asset utilization. If you have some inventory that you don't think you'll be able to sell at regular price, market down and whatever you can sell it for, will be more than you would make that you would receive to have it just sitting in a warehouse somewhere. Next, you can look at the customer perspective. And the customer perspective of course includes market share. If you are looking for specific market segments, then you want to take a look at how much of that market you are getting. Also look at your customer acquisition costs, your customer retention. Do you have a lot of turnover? In other words, are your customers extremely fickle and they're the types who move from company to company based on who has the best deal at the moment? Or do you keep your customers for a long time and extract significant customer lifetime value? And, of course, you need to look at customer satisfactions. If your customers aren't happy, it is very unlikely that they will stay around for long. And if they don't stay, then you'll have trouble staying in business. Profitability matters. You need to turn a reasonable profit to be able to fund future operations, learning and growth within the organization, and to reward your company's stakeholders. Internal business processes are extremely important because they allow you to innovate, to improve your operations, and also to focus on post-sale service. Unless you're a company, the very rare type of company that sells something, and then you can just completely forget about your customer, you need to make sure that post-sale service is addressed within your business. You also need to make sure that you are doing it effectively. Also look at your manufacturing cycle effectiveness or MCE. This is the amount of time within a manufacturing cycle that you're actually adding value to a product or it could also be a service. For example, if you get inventory into a factory and it sits for three weeks before you start putting it into a product, then your cycle is not very effective because an input that you are paying to store and manage is not adding value to the company. The final perspective is learning and growth. And this is all about your employee capabilities, improving them, your information capabilities, and this term information capabilities is kind of a throwback to 1996, when the balanced scorecard was originally published. All companies these days focus on information and information systems, but back in 1996, which as of this recording is 23 years ago, that movement wasn't as far along as it is now. So, even though this is something that we focus on now quite a bit, it was a real area for growth and innovation in the mid 1990s. You should also look at employee motivation. Unmotivated employees are not pushing your company forward. Instead, they're just collecting a paycheck, and they're not really serving your interest or your customers'. Next is empowerment. You need to make sure that your employees are able to make significant and meaningful change within the company. That doesn't mean that they can go off in an entirely different direction, something that isn't part of your plan of record or your strategy. But instead, they are empowered to do what they need to do to implement the strategy that is expressed within the balanced scorecard. And finally, alignment. You need to make sure that the choices you make align with the goals that are expressed in the balanced scorecard. If your strategy is not aligned with your balanced scorecard, and the metrics that you use to evaluate the company, then you will have a strong disconnect and employees will become frustrated and will probably look for other places to work. So let's take these perspectives as a whole and put them in perspective. One insight that Kaplan and Norton provide in their book is that they don't need to be weighted equally. Some companies will put finance at 60% of the balanced scorecard weight in terms of overall performance, and have learning and growth as 5% and mix the other two to take up the remaining 35. You should also avoid overlap. You don't want to measure the same thing twice. Next, you must verify your balanced scorecard against results. One philosophy that Kaplan and Norton repeat throughout their book and then I will repeat in this course is that a balanced scorecard is a theory of a business. In other words, when you develop a balanced scorecard, you're saying if we do these things, then our company will perform more effectively. After you've had your balanced scorecard in play for a while, you need to make sure that as long as you're implementing the strategy that is inherent within the balanced scorecard, your company is doing better. If not, you need to look at why that's the case. And finally, a balanced scorecard needs to be updated. If you find that your theory of the business was wrong, then you need to update your balanced scorecard to reflect the new information that you have received. Creating a balanced scorecard is not a one time thing. You can't just publish it and say this is how we are evaluating the company. Go forth and do good. Instead, you need to manage that change, you need to make sure that individuals are on board with that change. And also you need to be willing to update the balanced scorecard to reflect the information that you get about your business once the initial score card has been put into place.