Mar 1, 2012

Balance Score Card

Balanced Scorecard is a performance management framework used by strategic decision makers to make the right decisions about their business. Balanced scorecard not only a set of strategic goals; it is also a method for monitoring progress toward organization's strategic goals.

The balanced scorecard method is a management technique designed to provide a view of an organization from both internal and external perspective. Before we get to the details, let us draw your attention to some other strategic management models, such as SWOT analysis, IFE matrix, EFE matrix, BCG matrix, and SPACE matrix.

Strategic management professionals often work also with the quite analytical model called QSPM model. Understanding the Product Life Cycle and Porter's Five-Forces model is also very important.
What is balanced scorecard and how does it work?

Balanced scorecard views organization from four perspectives:
Customer perspective,
Internal-business processes,
Learning and growth,


The first step in the balance scorecard framework is to analyze these four perspectives. However, balanced scorecard does not end there, it goes further. Balanced scorecard also develops metrics and methods for collecting data to calculate them. After data is collected and metrics calculated, each of the four perspectives can be analyzed relative to each other.

Balanced scorecard provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results.
Perspective 1: Customer

Customers are the ones who pay the bills; therefore, it is important to keep them satisfied so that they not only come back but also spread the word and bring new customers too. Every business should be constantly asking the question:

"How well are we meeting the needs of our customers, and how can we make them more satisfied?"

Balanced scorecard brings this question into action items. Balanced scorecard includes the question, methods for how we measure results, and an analysis of how our results meet our goals. This is an example of how the Customer perspective can be handled in the balance scorecard framework:

Metric: Overall satisfaction ratings measured via surveys and polls.
Target: At least 4.00 out of 5.0 from each of the major customer groups: youth, adult, elderly.
Method: Our business regularly conducts customer surveys. A final question in each survey asks the respondent to rate his or her overall satisfaction. Data for this metric is compiled monthly.
Perspective 2: Internal-business process

After defining our customer and knowing how to make him happy, we also need to focus on our processes that get us to the customer. We ask the question:

"How do our internal processes function to efficiently deliver products and services, and how can we improve our efficiency?"

Balanced scorecard can translate this into concrete targets, metrics, and methods. Below you can find an example of how balance scorecard addresses the Internal-business process perspective:

Metric: Servicing customer calls in our call center.
Target 1: Answer each incoming phone call from a customer within one minute.
Target 2: Decrease the number of dropped calls to less than 2%.
Method: This metric will measure the elapsed time from the moment when incoming phone call reaches our network to the time it is picked up by an operator. An automated phone auditing IT system will be implemented to track phone statistics.
Perspective 3: Learning and growth

Innovation and learning is the key ingredient needed for being ahead of the competition. Employees need to keep educating themselves and the company needs to provide them the right tools and motivation. Strategic planners need to ask the question:

"How well are we positioned to ensure that goals are met in the future?"

And again, balance scorecard can help translating this question into action steps. Below is an example of how balanced scorecard can handle the Learning and growth perspective.

Metric: Staff development.
Target: Each employee has to take training ABC by the end of March next year and succeed at least 80% score on a test.
Method: The company will offer training ABC that will be followed by a test.
Perspective 4: Finance

Everything is about the bottom line. A business needs to align its priorities with activities that bring in revenue, and it has to be done in an efficient way. Decision makers need to ask the question:

"How well are our finances managed to achieve our mission?"

And this can be translated into detailed action steps, measures, and goals in the balanced scorecard framework as well. Here is an example:

Metric: The Sales department expenditures as a proportion of company expenditures.
Target 1: The Sales department expenditures will be less than 20% of the total company expenditures.
Target 2: The Sales department expenditures will grow at the same or lower rate than revenues from sales.
Method: Total expenditures of company and revenues from sales figures will be obtained from the corporate accounting system. Expenditures for the Sales department will be obtained from intradepartmental book-keeping system. These two figures will be used to calculate the percent.
Why is the balanced scorecard method good?

The good aspect of the balanced scorecard method is that it is tactical and concrete. While strategic planning documents often tend to be passive, they only say what should be accomplished but do not say how and do not say how it will be measured, balanced scorecard attempts to be active.

The balanced scorecard method transforms an organization’s strategic plans and goals from mere statements into execution plans and "orders". This can be done at a very granular level if needed. Balanced scorecard provides a framework that not only provides performance measurements, but it also helps planners identify what should be done and how it should be measured. Balanced scorecard enables executives to truly execute their strategies.
How is balanced scorecard implemented in real business?

Major units throughout organizations often establish their own scorecard which is then integrated with the scorecards of other units to achieve the scorecard of the overall organization.

The balanced scorecard method today is often implemented as a full strategic planning and management system where data is fed directly from accounting and company IT systems into the model to calculate metrics and compare them with strategic goals and plans.
What is the history of the Balanced Scorecard method?

The balanced scorecard method was first published by Dr. Robert Kaplan and David Norton. They introduced the balance scorecard framework as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more balanced view of organizational performance.
How does balanced scorecard compare to other management methods?

The Michael Porter's Five Forces model analyzes company from outside. It analyzes its external position.

The SWOT analysis method and IFE/EFE matrix is one step closer to analyzing a business from inside.

Balanced scorecard is two steps closer, it focuses very much on internals but also deals with external factors.

IFE Matrix (Internal Factor Evaluation) and EFE Matrix (External Factor Evaluation)

Internal Factor Evaluation (IFE) matrix is a strategic management tool for auditing or evaluating major strengths and weaknesses in functional areas of a business.

IFE matrix also provides a basis for identifying and evaluating relationships among those areas. The Internal Factor Evaluation matrix or short IFE matrix is used in strategy formulation.

The IFE Matrix together with the EFE matrix is a strategy-formulation tool that can be utilized to evaluate how a company is performing in regards to identified internal strengths and weaknesses of a company. The IFE matrix method conceptually relates to the Balanced Scorecard method in some aspects.
How can I create the IFE matrix?

The IFE matrix can be created using the following five steps:

Key internal factors...

Conduct internal audit and identify both strengths and weaknesses in all your business areas. It is suggested you identify 10 to 20 internal factors, but the more you can provide for the IFE matrix, the better. The number of factors has no effect on the range of total weighted scores (discussed below) because the weights always sum to 1.0, but it helps to diminish estimate errors resulting from subjective ratings. First, list strengths and then weaknesses. It is wise to be as specific and objective as possible. You can for example use percentages, ratios, and comparative numbers.


Having identified strengths and weaknesses, the core of the IFE matrix, assign a weight that ranges from 0.00 to 1.00 to each factor. The weight assigned to a given factor indicates the relative importance of the factor. Zero means not important. One indicates very important. If you work with more than 10 factors in your IFE matrix, it can be easier to assign weights using the 0 to 100 scale instead of 0.00 to 1.00. Regardless of whether a key factor is an internal strength or weakness, factors with the greatest importance in your organizational performance should be assigned the highest weights. After you assign weight to individual factors, make sure the sum of all weights equals 1.00 (or 100 if using the 0 to 100 scale weights).

The weight assigned to a given factor indicates the relative importance of the factor to being successful in the firm's industry. Weights are industry based.


Assign a 1 to X rating to each factor. Your rating scale can be per your preference. Practitioners usually use rating on the scale from 1 to 4. Rating captures whether the factor represents a major weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a major strength (rating = 4). If you use the rating scale 1 to 4, then strengths must receive a 4 or 3 rating and weaknesses must receive a 1 or 2 rating.

Note, the weights determined in the previous step are industry based. Ratings are company based.


Now we can get to the IFE matrix math. Multiply each factor's weight by its rating. This will give you a weighted score for each factor.


The last step in constructing the IFE matrix is to sum the weighted scores for each factor. This provides the total weighted score for your business.
Example of IFE matrix

The following table provides an example of an IFE matrix.

Weights times ratings equal weighted score.
What values does the IFE matrix take?

Regardless of how many factors are included in an IFE Matrix, the total weighted score can range from a low of 1.0 to a high of 4.0 (assuming you used the 1 to 4 rating scale). The average score you can possibly get is 2.5.

Side note...

Why is the average 2.5 and not 2.0? Let's explain using an example. You have 4 factors, each has weight 0.25. Factors have the following rating: 1, 4, 1, 4. This will result in individual weighted scores 0.25, 1, 0.25, and 1 for factors 1 through 4. If you add them up, you will get total IFE matrix weighted score 2.5 which is also the average in this case.

Total weighted scores well below 2.5 point to internally weak business. Scores significantly above 2.5 indicate a strong internal position.
What if a key internal factor is both a strength and a weakness in IFE matrix?

When a key internal factor is both a strength and a weakness, then include the factor twice in the IFE Matrix. The same factor is treated as two independent factors in this case. Assign weight and also rating to both factors.
What are the benefits of the IFE matrix?

To explain the benefits, we have to start with talking about one disadvantage. IFE matrix or method is very much subjective; after all other methods such as the TOWS or SWOT matrix are subjective as well. IFE is trying to ease some of the subjectivity by introducing numbers into the concept.

Intuitive judgments are required in populating the IFE matrix with factors. But, having to assign weights and ratings to individual factors brings a bit of empirical nature into the model.
How does the IFE matrix differ from the SWOT matrix method?

More is better...

One difference is already obvious. It is the weights and ratings. This difference leads to another one. While it is suggested that the SWOT matrix is populated with only a handful of factors, the opposite is the case with the IFE matrix.

Populating each quadrant of the SWOT matrix with a large number of factors can lead to the point where we are over-analyzing the object of our analysis. This does not happen with IFE matrix. Including many factors into the IFE matrix leads to each factor having only a small weight. Therefore, if we are subjective and assign unrealistic rating to some factor, it will not matter very much because that particular factor has only a small weight (=small importance) in the whole matrix.

It is important to note that a thorough understanding of individual factors included in the IFE matrix is still more important than the actual numbers.
Are there other models I should know about?

The IFE matrix goes side by side with so-called EFE matrix which together lead into the IE matrix.

External Factor Evaluation (EFE) matrix method is a strategic-management tool often used for assessment of current business conditions. The EFE matrix is a good tool to visualize and prioritize the opportunities and threats that a business is facing.

The EFE matrix is very similar to the IFE matrix. The major difference between the EFE matrix and the IFE matrix is the type of factors that are included in the model. While the IFE matrix deals with internal factors, the EFE matrix is concerned solely with external factors.

External factors assessed in the EFE matrix are the ones that are subjected to the will of social, economic, political, legal, and other external forces.
How do I create the EFE matrix?

Developing an EFE matrix is an intuitive process which works conceptually very much the same way like creating the IFE matrix. The EFE matrix process uses the same five steps as the IFE matrix.

List factors: The first step is to gather a list of external factors. Divide factors into two groups: opportunities and threats.

Assign weights: Assign a weight to each factor. The value of each weight should be between 0 and 1 (or alternatively between 10 and 100 if you use the 10 to 100 scale). Zero means the factor is not important. One or hundred means that the factor is the most influential and critical one. The total value of all weights together should equal 1 or 100.

Rate factors: Assign a rating to each factor. Rating should be between 1 and 4. Rating indicates how effective the firm’s current strategies respond to the factor. 1 = the response is poor. 2 = the response is below average. 3 = above average. 4 = superior. Weights are industry-specific. Ratings are company-specific.

Multiply weights by ratings: Multiply each factor weight with its rating. This will calculate the weighted score for each factor.

Total all weighted scores: Add all weighted scores for each factor. This will calculate the total weighted score for the company.

You can find more details about this approach as well as about possible values that the EFE matrix can take on the IFE matrix page.
EFE matrix example

Total weighted score of 2.46 indicates that the business has slightly less than average ability to respond to external factors. (See the page on IFE matrix for an explanation of what category the 2.46 figure falls to.)
What should I include in the EFE matrix?

Now that we know how to construct or create the EFE matrix, let's focus on factors. External factors can be grouped into the following groups:
Social, cultural, demographic, and environmental variables:
Economic variables
Political, government, business trends, and legal variables

Below you can find examples of some factors that capture aspects external to your business. These factors may not all apply to your business, but you can use this listing as a starting point.

Social, cultural, demographic, and environmental factors...

- Aging population
- Percentage or one race to other races
- Per-capita income
- Number and type of special interest groups
- Widening gap between rich & poor
- Number of marriages and/or divorces
- Ethnic or racial minorities
- Education
- Trends in housing, shopping, careers, business
- Number of births and/or deaths
- Immigration & emigration rates

Economic factors...

- Growth of the economy
- Level of savings, investments, and capital spending
- Inflation
- Foreign exchange rates
- Stock market trends
- Level of disposable income
- Import and export factors and barriers
- Product life cycle (see the Product life cycle page)
- Government spending
- Industry properties
- Economies of scale
- Barriers to market entry
- Product differentiation
- Level of competitiveness (see the Michael Porter's Five Forces model)

Political, government, business trends & legal factors...

- Globalization trends
- Government regulations and policies
- Worldwide trend toward similar consumption patterns
- Internet and communication technologies (e-commerce)
- Protection of rights (patents, trade marks, antitrust legislation)
- Level of government subsidies
- International trade regulations
- Taxation
- Terrorism
- Elections and political situation home and abroad
Are there other models I should know about?

The EFE matrix goes side by side with so-called IFE matrix. The EFE matrix together with the IFE matrix leads to the IE matrix. And, the IE matrix can be extended into so-called SPACE matrix.