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Balanced Scorecard in Strategy Formulation

1940 words (8 pages) Business Assignment

12th Nov 2020 Business Assignment Reference this

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Introduction and Central Issues/Problems Discussed

Most organizations focus solely on financial metrics (such as ROI and operating income) when evaluating the performance of its business activities. However, they are simply direct and ‘short-term’ measures on what has happened in the last period, and are not indicating future performance, nor informing how the organization can improve performance in the next period. In addition, financial measures are ‘operational measures’ derived from ad hoc or bottom up processes, which are not related to any of the organization’s strategic goals or objectives. Furthermore, with the introduction of new goals and initiatives, these old measures may no longer be relevant or sufficient.

Besides, there is disconnection between strategies and the projects that are supposed to execute these strategies. One of the main issues when selecting projects to be executed as part of the organization's portfolio is whether the project is aligned to the organization's strategic objectives. If this is not the case, there is a high probability that the organization and its stakeholders will not get a proper return on their investments. It is a common issue that there are no systematic processes in place to implement and obtain feedback on organizational strategies, as well as tools to supplement the traditional financial measures with criteria that measure performance from broader and non-financial measures.

Balanced Scorecard (BSC) Methodology

Overview of BSC

According to Kaplan & Norton (2007), the balanced scorecard (BSC) supplemented the traditional financial measures with criteria that measure performance from three additional perspectives – those of customers, internal business process, and learning and growth (p.2). It enables the company to track financial results while also monitoring progress in building capabilities and acquiring assets needed for future growth. As mentioned by Kaplan & Norton (2007), BSC relies on four processes to bine short-term activities to long-term objectives which include translating the vision by coming to agreement on metrics use to operationalize the visions (p.2), communicating and linking vision by bringing high-level strategic goals to lower-level units and tying these financial and customer targets to individual performance and compensation (p.8), planning business by integrating strategic planning, budgeting and resource allocation processes (p.10), as well as fostering feedback and learning by periodic performance review to learn about and improve strategies (p.13).

BSC in Strategic Performance Management

BSC is also considered as a strategic performance management tool which is used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from these actions (The Balanced Scorecard, 2011). It provides a linkage between inputs such as financial and human resources, processes and outcomes, and it focuses on the importance in managing these component projects to achieve the organization’s strategic goals. According to Toledo (2011), the BSC method of design is based on having a set of strategic objectives plotted on a strategic linkage model from which measures are selected. The strategic objectives are distributed across four measurement perspectives to form a visual presentation of strategy and measurements including financial, internal processes, customer, and learning and growth. These measurement perspectives may vary in order to fit the organizational needs, and senior management will select and prioritize a few strategic objectives within each of these perspectives so that individual units can align their goals with these objectives.

Using Balanced Scorecard in Strategy Formulation

Strategy Formulation Process

Strategy formulation is a continuous and systematic process for making decisions about an organization’s future, developing necessary procedures and operations to achieve that future, and determining how success is measured. It is a systematic process through which the organization agrees and builds commitments among stakeholders to prioritize which are essential to its vision and mission and to be responsive to the ever-changing environment (Marjan, 2009, p.2). Put it in a simple word, strategy formulation is the process of determining appropriate courses of actions for achieving organizational objectives and purposes. There are three key phases in strategy formulation – diagnosis, formulation and implementation. In my experience, the diagnosis phase is to carry out internal situation analysis such as identifying the organization’s current mission and vision, analyzing its strength and weakness, and also external situation analysis to identify opportunities, challenges and its competitors in the market. Strategy formulation phase focuses on coming up with a set of clear recommendations and supplying strategies for accomplishing the missions and objectives.

Balanced Scorecard in Strategy Formulation

BSC provides a comprehensive view of the organization’s performance which allows organization to attain a more balanced measure in addition to financial perspective. As mentioned above, disconnection between strategy formulation and implementation is a central issue in most organizations. BSC is a tool that bridges the gap as it assists the organization to manage its performance through organizational objectives that linked to the strategic goals and objectives. From my reading and personal experience, BSC allows three critical success factors for strategy formulation and implementation be identified: 

1. It articulate the vision and strategic goals

The holistic vision and strategic goals are communicated to the entire organization, and individual efforts are linked to business unit objectives. It describes the company’s shared vision, defining clearly in operational terms the outcomes that the company as a team is trying to achieve (Kaplan & Norton, 2007, p.2). By translating vision, the organization facilitates consensus and employee’s buy-in around the organization’s vision and strategy which helps ensuring everyone is working towards the same strategic direction.

2. It recognizes market intelligence in terms of behaviors of customers and competitors in strategy in strategy formulation

Customer measures under the BSC framework enables senior management to formulate customer-focused objectives that deliver values to target customers. For instance, Customer satisfaction, customer profitability, customer retention and new customer acquisition are examples of customer-related measures (Koukula, 2014, loc. 1485). Customer satisfaction is key in creating a long-term relationship with customers. The longer customers stay satisfied, the more often they will return to the company in the future. Besides, assessing existing and potential competitors can better help the company in setting long term strategies and continuously improving its business processes to respond to these ‘threats’.

3. It supplies a strategic feedback system and facilitates strategic review

Instead of using periodic meetings to evaluate past performances as the traditional financial review process does, scorecard users review the feedback in a way to gain a better understanding of if the strategy is being reached, how is it being reached, and should the strategy be modified based on new information. This gives the organization a forward focus.

Develop Project Portfolio Management (PPM) with Balanced Scorecard

Our hospital has recently developed a new strategic plan for the nursing department, with three strategic goals: (1) develop a competent nursing workforce, (2) improve nursing quality and health outcomes, and (3) optimize technology in nursing. However, it is a challenging task in translating the strategic initiatives into a feasible endeavor, for instance, a portfolio of programs and projects that fulfills the expected objectives of the strategic goals. Moreover, there is also a lack of communication between nursing leaders and the nursing teams to disseminate the new strategic initiatives.

The BSC can be a useful tool in bridging the gap between PPM and the strategic plan. Given the hospital’s mission, vision, values and strategic initiatives, we can know how do we need to perform financially to achieve our mission and values (financial perspective), how do we need to meet the needs and expectations from our patients and physicians (customer perspective), at which clinical and healthcare delivery processes should we excel (internal business processes), and what type of culture, tools, skills and technology do we need to incorporate to support our goals and processes (learning and growth perspective).

Before introducing BSC to the hospital, the first step is to clearly communicate the strategic goals to every nursing unit (including PICU, Oncology, Emergency Room, etc) to get their commitment and consensus to the strategies. Afterwards, each unit should develop their BSCs by translating the strategies into its own BSC. By reviewing BSCs from each individual nursing unit, it allows the senior leadership to identify if refinements are needed for the strategic visions. Then each unit will start initiating and executing programs and projects that align with the four perspectives under the BSC and evaluate the performance based on the BSC with proper processes including project selection and prioritization.

Conclusion

The Balanced Scorecard (BSC) is not only a performance measurement tool, it is also a useful tool in strategy management. It bridges the gap between strategy formulation and implementation by supplementing the traditional financial measures with criteria that measure performance from three additional perspectives – those of customers, internal business process, and learning and growth. More importantly, it facilitates feedback to current strategies and provides opportunities for improvement. It is hoped that by introducing BSC to my workplace, there will be better alignment between the portfolio of nursing programs and projects with the new strategic plan.

References

  • Kaplan, R., & Norton, D. (2007). Using the Balanced Scorecard as a Strategic Management System. Harvard Business Review.
  • Kodukula, P. (2014). Organizational Project Portfolio Management: A Practitioner's Guide. J. Ross Publishing.
  • Marjan, M. (2009). Application of Balanced Scorecard in Strategy Formulation and Implementation at Telkom Kenya Limited. Retrieved 10 November 2019, from https://www.google.com/url?q=http://erepository.uonbi.ac.ke/bitstream/handle/11295/22976/Marjan_Application%2520of%2520balanced%2520scorecard%2520in%2520strategy%2520formulation%2520and%2520implementation.pdf?sequence%3D3%26isAllowed%3Dy&source=gmail&ust=1573409002489000&usg=AFQjCNGUcO0Cu
  • Toledo, R. (2011). From the balanced scorecard to the project portfolio. Paper presented at PM IGlobal Congress 2011—North America, Dallas, TX. Newtown Square, PA: Project Management Institute.

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