First introduced in 1992 by Kaplan and Norton, the BSC model offers a balanced way to view business performance. The balance is achieved by considering the customer, internal business processes, and learning and growth perspectives over and above the financial perspective. In contrast to the BSC model is Sveiby's IAM model. While the BSC is presented as a complementary tool to the financial measurement system that acknowledges IC value, the IAM model shows a new way of doing business by focusing on the dynamics of IC development.
Sveiby identifies the outcomes that an IC management system should aim to achieve namely, efficiency, stability, and growth and thus focuses the use of indicators on monitoring these three dynamics under each form of IC. He both challenges the presupposed assumptions of the financial measurement system and applies these assumptions to IC.
Based on the BSC model, Skandia developed the Navigator measurement system. Unlike the BSC model, the Navigator has a separate focus area for employees, called the human focus. But the difference goes much deeper. Like the IAM model, the Navigator is designed and implemented inside Skandia as a robust model aimed at changing the way business is done and not merely to complement the financial measurement system. The Navigator is not only a measurement system but forms the core of Skandia's business model. Each of the measurement systems has a leading proposition that affects the way it is designed and used. Following is a critical examination of each system.
The Balanced Scorecard
The leading proposition of the BSC model is that to fly an airplane, one indicator is not enough-Pilots need a complete control panel with indicators that measure various aspects of flight, such as altitude, temperature, and speed, to provide them with critical information as to the airplane's situation and performance in flight. The same is true for strategic planning. Financial measures provide insight into the "economic consequences of past actions," but can hardly predict the organization's capability to perform in the future. Though important, they are not by themselves sufficient. Dependence on financial measures alone is as dangerous as flying a plane with only one gauge. The BSC model attempts to present a balanced view of organizational performance by focusing on nonfinancial measures of performance as well. These measures are intended to focus the attention of top management on business factors that are critical to the success of the business, and hence are indicators of future performance.
Under the BSC model, these factors fall under four perspectives: financial, customer, internal business process, and learning and growth. Each perspective presents an area where strategic focus should be directed. They all come together in the strategic planning phase in which an organization asks, 'According to our future vision, how must we differentiate to shareholders (financial perspective) and customers (customer perspective) with internal processes (internal business process perspective) and with our ability to grow (learning and growth perspective)?" Answers to this general question should lead to defining the critical success factors that will enable the organization to meet its strategic objectives under each of the perspectives by implementing various projects or initiatives. Indicators and measures are then created to monitor the progress of these initiatives to enable the organization to develop and implement its strategic plan by taking it to the operational level.
At the operational level, focus seems to fragment over individual programs and processes; nevertheless, the organization should attempt to maintain a full "balanced" view of their performance. This balanced view is maintained by looking at the perspectives as a whole, as in the airplane control panel analogy. "Like a flight simulator, the scorecard should incorporate the complex set of cause-and-effect relationships among the critical variables, including leads, lags, and feedback loops, that describe the trajectory, the flight plan, of the strategy." Two principles are incorporated in the BSC model that enable this holistic view, and the creation of a "connected BSC."
First, the BSC model incorporates measures that monitor cause-and-effect relationships between the various perspectives. Such measures try to monitor the effect that performance under one critical variable affects another variable in the same or another perspective, linking performance under all perspectives together. For example, improving employee satisfaction under the internal business perspective impacts customer satisfaction under the customer perspective, which in turn influences customer loyalty, which is eventually reflected in market share the financial perspective.
Second, the BSC model incorporates measures to monitor both outcomes (lagging indicators) and performance drivers (leading indicators). This is designed to assist management in focusing on both results of past action and drivers of future performance to have a more connected view.
Financial Perspective. In general, the strategic focus of the financial perspective is to determine how the organization should appear to its shareholders in order to achieve financial success. The strategic objectives are to increase profitability and generate cash flow. The main goal of measurement is to focus on measuring the contribution of the business strategy to the bottom line. Under this perspective, typical indicators include operating income, return on capital (asset or equity), and economic value added. This is the least controversial of all perspectives as it relates to measures and indicators that have been designed long ago or are based on them. The only difference is that now they are linked to other perspectives.
Customer Perspective. The strategic focus of the customer perspective is to determine how the organization should appear to its customers in order to achieve its vision. The strategic objectives are to identify the customer and market segments the business will compete in and the value propositions a business proposes to deliver. This defines the scope of measurement. What are needed here are measures that evaluate performance in the identified segments by reference to the value propositions that a business makes. Under this perspective, the typical indicators include customer satisfaction, retention rate, new customer acquisition, and market share in identified segments.
The definition of customer in the BSC model is much narrower than that developed by the IC concept, and excludes distributors, partners, and suppliers. In that respect, it does not accommodate the need, in the knowledge economy, to expand the definition of customers to include the various networks that an organization needs to achieve market success. The BSC customer perspective is limiting, despite the fact that it purports to measure the same indicators as the other systems.