Businesses Need a Score Card Too

You turn on the television, it's somewhere in the fifth inning, the first question that comes to mind is what's the score. How interesting would a ball game be if we didn't keep score? Neither team would know if they were losing or winning and would not know how hard they would have to work to keep their lead or to gain the lead. The same holds true for business. What gets measured gets done. When a company implements a game plan to achieve a specific goal in a reasonable period of time and defines the necessary steps needed to achieve this goal they have a greater chance of achieving success. We all know that if we do not have specific goals and write them down they won't be accomplished.

Old way of measuring success

In the past a company would measure its success based on net income. If a year was profitable, the business would declare that it had a successful year and vice versa. While this form of measurement might have worked fine in the past, companies in today's competitive market MUST do more than be profitable to remain successful.

Problems of only measuring profit

As an example, let's look back at the early 1900's at two fictitious buggy whip manufacturers. Let's call the first company "profitable" and the other "on the cutting edge." Both companies had a profitable year. "Profitable" declares a successful year and distributes all the profit to the shareholders, while "on the cutting edge" realizes that with the increased use of automobiles as a means of transportation, the market demand for buggy whips would decrease. "On the cutting edge" always reinvests some of its profit to stay abreast of changing times. It decides that since it has good leather skills, it will start manufacturing belts. The new machinery and training will cut into their profit but "on the cutting edge" does not want to be left selling a product whose demand is decreasing. The above scenario goes on for a few years until finally the demand for buggy whips is almost nonexistent. "Profitable" finds that their sales are at an all-time low, while "on the cutting edge" has made quite a reputation selling belts and finds that the profit level has not changed and, if anything, have risen.

What should you measure?

A business needs to define the key success factors to remain profitable over the long term. Once these factors have been determined the company must then define the performance measures necessary to lead to those success factors. The four areas that a business needs to consider when determining performance measures are:

Financial Perspective - How do we look to the owners and investors?
Internal Business Perspective - What must we excel at?
Customer Perspective - How do our customers perceive us?
Innovating and Learning Perspective - Will we continue to improve and create value?

Long-term success requires balancing these four areas. If a company were to concentrate solely on ways to maximize its profits, customer service and its innovating capabilities would surely suffer. Balancing these four performance factors does not imply that each goal should be equal in value, rather that management must customize the balance by looking at their internal resources and the opportunities that are available in the marketplace.

So what should a company measure? Two identical looking stores across the street from each other will have some performance measures that are the same but will also have many that are different due to the different resources and skills that each has. Company A is cash rich and can operate differently than Company B, who is always in overdraft at the bank. Company B however, has an owner who works daily in the store and has a good understanding of the market while Company A hires sales people because the owner is not involved with the daily operations of the business. On the outside these two businesses look identical, but internally they are considerably different, and therefor position themselves in the marketplace accordingly.

The following is an example of a balanced scorecard for a fictitious business.

Financial Perspective - How do we look to the owners and investors?

Internal Business Perspective - What must we excel at?

Customer Perspective - How do our customers see us?

Innovating and Learning Perspective - Can we continue to improve and create value?

Once the goals and measurements have been determined the business must set realistic target monthly performance levels for each measurement. For example, a company may decide that two customer complaints per month is an acceptable target. During the month the company keeps score of the different measurements and at the end of the month compares actual performance to budgeted performance. To remain successful, a company needs to measure this performance every month. It will do the company little good to prepare the scorecard six months later. The opportunities for changes that they could have made are now long gone!

Once budgeted versus actual performance levels are recorded the explanation for meeting or missing a performance measure must also be recorded. This enables the business to define what makes for a positive performance or what measures are necessary in order to obtain a positive performance. Let's look at this example: sales may have really dropped from what had been planed however during the month weather conditions limited the amount of people that shopped at your store. By recording this problem the owner can then develop a plan of action to take when a similar situation arises in the future.

Annually, the company should review goals, measurements, and budgeted performance levels to insure that they are still applicable. When looking at your marketplace think five years down the road. Doing so will give you the time to make the necessary changes to your business. Waiting until the last minute will guarantee that your competition is way ahead of you, just like the buggy whip manufacturer who did not see the effect the automobile industry would have on his product. Today a business has to be more than profitable. To be successful in the long run it is necessary to pick the right measurements from each of the previous four areas. One does not need a crystal ball to see what their future lies in the marketplace.