Competing in the New Economy and Knowledge Era
The new economy, characterized by the strategic use of information and communication technology in a globalized market, requires new capacities to achieve competitive success in both manufacturing and service companies. In this sense, a central theme in the new economy and the so-called era of knowledge is the development and deployment of the intangible assets that the company manages. These intangible assets include trained and motivated employees, reliable and efficient processes, satisfied and loyal customers, high-quality products and services. Said intangible assets enable the company to:
- Develop customer relationships that foster existing customer loyalty and attract new customers. Introduce innovative products and services desired by the target segments. Produce products and services tailored to the target segments, high quality, low cost and with fast delivery times. Mobilize staff skills and motivation for continuous process improvement, quality and speed of response. Leverage information technology for marketing management and operational excellence in business processes.
Under the new circumstances, the ability of companies to develop, mobilize and exploit their intangible assets has become more important than the management of their tangible assets (working capital and fixed assets). However, management measurement systems, particularly of an accounting and financial nature, designed at the beginning of the last century, focus exclusively on the quantification, use and administration of tangible assets. Financial performance indicators such as return on investment or economic value added (EVA) are used to measure the results of yesterday's business management and the current financial position. They say nothing about the company's ability to face future challenges successfully, which resides in intangible assets.
Faced with the need for a management control system that considered intangible assets within the performance equation, Professors Kaplan and Norton of Harvard University introduced in 1992 the balanced scorecard, also known as the scorecard. integral or the command board.
What is the Balanced Scorekeeper?
Initially, the balanced scorecard was viewed as a performance measurement and management control tool designed to describe the strategy and guide its execution toward future competitive success. To this end, the balanced scorecard translates the company's mission and strategy into a comprehensive set of performance objectives and indicators that is the cornerstone of the company's performance management system. The balanced scorer retains the emphasis on achieving financial goals and creating value for shareholders, but incorporates other nonfinancial indicators essential for executing the strategy and obtaining competitive advantage.
To judge the effectiveness of the balanced scorecard as a performance management tool, it is important to understand that there are two types of performance indicators in relation to their time: results indicators (“outcome / lagging indicators”) that show the results of the past actions, and indicators leading to future performance (“driver / leading indicators”), that is, indicators that measure the performance of activities aimed at achieving future success. Examples of performance indicators are return on investment, EVA, and market share. These indicators reflect how good the strategy has been in the past but do not explain what the strategy has been. They are also generic indicators in the sense that they are commonly used by companies when measuring their performance.In contrast, the indicators causing future performance explicitly reflect the strategy; good performance on these indicators is assumed to contribute to competitive success. These indicators are specific to the company's strategy.
The balanced scorecard measures the organization's performance from four perspectives: financial results, customers, internal processes, and development and learning. Thus, the balanced scorecard allows companies to control their financial results, simultaneously measuring their progress in capacity development and the acquisition of intangible assets (customer relationships, skills and motivation of collaborators, introduction of innovative products, etc.) required to compete successfully in the future. Figure 1 presents the basic schematic of the balanced scorer.
Figure 1. The Balanced Scorekeeper
The objectives and indicators within the four perspectives indicated represent a balanced or balanced approach between:
- External measures related to clients, investors and financial entities and internal performance measures, related to business processes and company resources. Measures that reflect the results of past efforts and indicators related to future performance. Quantitative indicators and qualitative measures.
Since its introduction, the balanced scorer has been increasingly accepted for its effectiveness in translating the strategy into operational terms and communicating it to the organization, as well as an instrument of strategic management and an organizational learning tool. For these reasons and the significant improvements in reported business results, Harvard Business Review selected this tool as one of the most influential management practices of the past 75 years.
Today, the balanced scorecard is viewed as a comprehensive, multidimensional tool for describing, implementing, and managing strategy execution at all levels of the organization. This is achieved through the determination and alignment of objectives, performance measures, goals and initiatives in the four dimensions mentioned above. These objectives, in turn, serve as a framework to establish objectives and initiatives in the different units of the organization.
One of the main functions of the balanced scorer is to describe, communicate and help understand the strategy, making its execution the work of everyone in the organization. To do this, the design of the balanced scorecard requires clarification of the strategy and its translation into the language of operations. To achieve the organization's commitment to the strategy, management and collaborators must clearly understand what it is and how it contributes to achieving business objectives. Thus, the balanced scorer becomes the engine of a "process of change" towards the new behaviors that the execution of the strategy demands.
A well-written balanced scorecard articulates the theory of the business: cause-and-effect relationships that represent the premises and assumptions of the business and its strategy. These cause-effect relationships can be explained by means of a map that describes how the company tries to achieve its strategic objectives. Figure 2 shows the generic elements of a strategic map that explains how economic value is created from a winning value proposition to the market, efficient processes in the delivery of this value, and motivated and competent collaborators, supported by technologies that enable to carry out these processes in the best way.The development of this cause-effect relationship map contributes to a holistic and systemic understanding of the strategy and is an indispensable step in the design of the balanced scorecard.
Figure 2. The Strategic Map: The Route to Value Creation
In summary, the balanced scorecard provides a comprehensive view of the organization's overall performance, becoming the heart of a strategic and operational management system as indicated in Figure 3.
Thus, the balanced scorer:
- Clarifies and translates the business vision and strategies in operational terms. Communicates the strategy to the entire organization and links vertically and horizontally, the strategic objectives and indicators in the different units and levels of the organization. Plans, establishes goals and aligns strategic initiatives in the four performance areas and links the results of the execution to the performance evaluation and rewards systems. It enriches the strategic feedback and stimulates the organizational learning, turning the balanced scorer into the topic of analysis of the managerial meetings and a formidable one tool to promote change in the organization.
Figure 3. The Balanced Scorecard as a Strategic Management System
Implementation of the Balanced Scorecard as a Strategic Management System
The implementation of a strategic management system based on the balanced scorer includes the following steps:
- Translate the business strategy into a set of objectives, gauges, goals and initiatives in the four dimensions of the balanced scorer. Communicate and educate the entire organization about the strategy and the balanced scorer. Align the objectives of the different business units within of the company - vertical and horizontal alignment. Focus the behavior of executives and collaborators towards the strategic objectives through feedback and performance management systems. Align the compensation, recognition and incentive systems with the performance in the execution of the Strategy: Align budget planning, execution, and analysis processes with the balanced scorecard, making it the focus of management meetings.
Balanced Scorer Benefits
Globally, the balanced scorer provides three enormous benefits that contribute to a high performance of the organization:
- Approach - Identification of the strategy and concentration of attention and efforts in achieving the strategic objectives Alignment - Harmony and mutual reinforcement of all the components of the organization towards the execution of the strategy Learning - Better understanding of the business, its strategy and cause-effect relationships to improve performance.
More specifically, the balanced scorer:
- Helps achieve consensus and commitment in the management team. Translates strategy into operational language and helps clarify strategy throughout the organization. Provides a methodology to align the goals and initiatives of the entire organization - vertical and horizontal alignment. strategic planning and execution processes. Serves as a framework for the design and implementation of performance-based compensation and personnel evaluation systems. Orients the resource and capital allocation processes. Provides information for strategic and operational control. Improves managerial effectiveness and decision making. Contributes to organizational learning.
An organization that achieves high levels of focus, alignment, and learning through a balanced scorecard becomes a strategy-focused organization - an organization prepared to compete in the new economy.
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