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Definition and Explanation of Balanced Scorecard:

A balanced scorecard consists of an integrated set of performance measures that are derived from the company's strategy and that support the company's strategy throughout the organization.

A strategy is essentially a theory about how to achieve the organization's goals. For example, Southwest Airlines' strategy is to offer passengers low prices and fun on short-haul jet service. The low prices result from the absence of costly frills such as meals, assigned seating, and interline baggage checking. The fun is provided by flight attendants who go out of their way to entertain passengers with their antics. This is an interesting strategy. Southwest Airlines consciously hires people who have a sense of humor and who enjoy their work. Hiring and retaining such employees probably costs no more—and may cost less—than retaining grumpy flight attendants who view their jobs as a chore. Southwest Airlines strategy is to build loyal customers through a combination of "fun"—which does not cost anything to provide—and low prices that are possible because of the lack of costly frills offered by competing airlines. The theory is that low prices and fun will lead to loyal customers, which, in combination with low costs, will lead to high profits. So far, this theory has worked.

Under the balanced scorecard approach, top management translates its strategy into performance measures that employees can understand and can do something about. For example, the amount of time passengers have to wait in line to have their baggage checked might be a performance measure for the supervisor in charge of the Southwest Airlines check-in counter at the Phoenix airport. This performance measure is easily understood by the supervisor, and can be improved by the supervisor's actions.

Real Business Example:

The Balanced Scorecard at the City of Charlotte:
Governmental and nonprofit organizations as well as businesses can use the balanced scorecard approach to performance measurement. The City of Charlotte, North Carolina, developed a balanced scorecard with four major goals: (1) increase perception of safety; (2) strengthen neighborhoods; (3) promote economic opportunity; and (4) improve service quality. To strengthen neighborhoods, the city's managers set goals to: (a) promote safe, decent housing; (b) increase home ownership; and (c) increase job placements. The corresponding performance measures are: (a) the number of code compliances in housing; (b) the number of assisted purchases of homes: and (c) the number of adult job placements.

Pam Syfert, Charlotte's City Manager, states: "The Scorecard is a communication, information, and learning system. Building a scorecard helps managers link today's actions with the achievement of today's priorities. It encourages accountability. And, today, we define accountability by results."

Source: Robert S Kaplan, City of Charlotte (A), Harvard Business School case 9-199-036, December 15, 1998.

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