The Use of a Balanced Scorecard for Shipyard Progres - Case Study Example

?Shipyard Progres: The Balanced Scorecard Executive Summary Shipyard Progres is a Netherland-based company that operates in the shipbuilding industryfor a long period of time. However, as the environment becomes more complicated and competitive, Progres needs to develop new strategies that would make them more sustainable. The purpose of this report is centered on the company’s plan to purchase an existing dry dock in another location, so that they could cater new customer requirements in terms of large-sized vessels. The plan would bring advantages to the company’s financial performance based on the monitoring of cash flows; however, the positive forecast is limited to the financial aspect. Hence, the scope of this report includes the use of a balanced scorecard (BSC) to have a balanced view on Progres’ financial and non-financial performance. Also, it is concluded that the company will require the support of customer, internal business process, and learning measures for a successful strategy implementation. 1.0 Introduction The Kaplan and Norton’s balanced scorecard (BSC) is a multidimensional model designed by Kaplan and Norton in the 1990s to determine the performance of an organisation, not just by looking on its financial aspects, but also on non-financials (Kaplan & Norton, 1994). The financial aspect has the capacity to forecast future performances; however, this ability is not any more applicable in today’s rapidly changing and highly competitive environment. Hence, to succeed in dealing with the confinement of the conventional approach to management by using financial performance measures is the primary purpose of Kaplan and Norton’s BSC model (Kaplan & Norton, 2001, p. 22). It has emphasised the use of non-financial performance measures, which are conducive in handling contemporary situation (Wu, et al., 2011, p.696). On the other hand, developers of the BSC perceived that contemporary organisations need modern approaches or up-to-date management systems to be competitive. Furthermore, they have highlighted that ‘A good level of financial measures does not guarantee the firm’s success...’ (Michalska, 2005, p.753). Nevertheless, this conventional scheme is not enough for firms to be at the top of the competition throughout the course of the information age because they need to learn in focusing different aspects and processing large information at the same time (Chavan, 2009, p.394). This is the primary reason why BSC is the integration of four perspectives including financial, customer, internal business process, and learning and growth (Kaplan & Norton, 1994, 1996, 2001, 2005). 2.0 Literature Review This literature explains the usefulness and relevance of the Kaplan and Norton’s BSC model, as well as its drawbacks. In today’s highly competitive and rapidly changing environment, organisations need to be proactive with their strategies and capabilities to remain competitive or sustainable. Also, they need to be concentrated on financial and non-financial indicators (i.e. human resource, customers, processes, etc.) to get a concrete set of information needed for management decisions, monitoring, and planning activities (Chavan, 2009, p.394; Figge, et al., 2002, p.269). The BSC, developed by Kaplan and Norton, is one of the widely used performance frameworks because it is an integration of qualitative and quantitative values, which are very relevant in today’s business landscape. The usefulness of this framework is already proven based on the increasing number of organisations that are now using non-financial measures as part of their measurement and management system (Gumbus & Lussier, 2006, p.407). Furthermore, several empirical studies have cited that the application of BSC could improve corporate performance and learning, create shareholders value, provide competitive advantage in difficult times, and many more (Creamer & Freund, 2010; Davis & Albright, 2004; Epstein & Manzoni, 1997; Crabtree & DeBusk, 2008; Chow, et al., 1997; Capelo & Dias, 2009). On the other hand, aside from being a performance measurement tool, the BSC is also regarded as a ‘strategic tool’ that provides considerable advantages to an organisation in terms of strategy implementation (Kaplan & Norton, 2001; Cheng & Humphreys, 2010; Ahn, 2001; Butler, et al., 1997). Based on the research conducted by Deloitte (2011), ‘90% of organisations fail at strategy execution, losing the competitive advantage identified during the strategic planning process.’ Organisations have cited various reasons on this outcome, but under BSC the failure is attributed to the lack of preparedness to unanticipated and realistic changes, as well as competent committees for the strategy execution (Gumbus & Lussier, 2006, p.407). In a centralised organisational structure, the front line or the line managers are given the duty to act as implementers considering that they have a constant communication with the external environment. However, the strategic failure is usually experienced because of the lack of support from the top management, inadequate training or experience, uncoordinated functions, ineffective communication flows, failure to adapt to changes, and many more (Kaplan & Norton, 2005; Epstein & Manzoni, 1997, p.14). Hence, the BSC is developed to prepare organisations for a successful implementation of plans and strategies through a strategy map. This strategy map would serve as a linkage between the interpretation of business strategies into operations and the role of employees as the performer of strategies (Kaplan & Norton, 1994; Pineno, 2012, p.22). In terms of limitation or weaknesses, this model did not give much importance on the level of competency and performance development of organisational members because it focused on competitiveness (Davis, 2008, p.42). Furthermore, BSC is not a fully integrated framework because it is highly contained on external performance measures by getting the attention of customers, but not to be efficient with organisational resources (Hoerle, 2009, p.21). Moreover, BSC’s pillars of high performance are the intangible elements, which are significant in most of today’s business landscape. However, these elements need to have an important role during the strategy implementation such as value creation and competitive variable; hence, they are used as peripheral aspects towards a favorable and realistic forecast of financial results. The movement of the process is in one direction; thus, failure of a single perspective to create or increase value would have a negative impact on the rest of the process (Veltri, 2011). 3.0 Method At present, Progres is facing major challenges that have an impact on their future performance including the changing customer’s needs and preferences, strong competition, limited resources, scarcity of skilled workers, etc. Thus, it is suggested that the company would use a BSC model as a monitoring mechanism. This model would require the company to develop specific goals or objectives, measures, targets, and other elements that would be included in the scorecard. Figure 1 below is a concrete BSC for Progres based on available data and reasonable assumptions. Figure 1: Shipyard Progres BSC 3.1 Shipyard Progres BSC: Goals and Indicators Relationships 3.1.1 Financial Progres’ primary objective is to improve revenue or sales growth through a diversification of product offering. Also, it is projected that the investment of dry dock would improve the cash flow position of the company, as well as the return of capital employed. Furthermore, the company aimed to reduce their production or operating costs by entering the untapped market of building large vessels, but they would still be supplying small ships to their loyal customers. 3.1.2 Customer Customer satisfaction is one of the ultimate drivers of Progres’ performance considering that this group is the end users. A constant meeting of customer’s needs and preferences such as the building of large ships is the primary objective of Progres because customers could place their orders to other international suppliers. Furthermore, the firm’s buyers are loyal; thus, it is vital to maintain the company’s ability in retaining and attracting customers, particularly those that are outside Europe through a loyalty program and on-time delivery scheme. 3.1.3 Internal Business Process One of the goals of Progres is to specialise in building a wider range of ships; hence, they need to develop an extra production site where they can build all types and designs of vessels. Also, the firm wanted to increase their production capacity from 5-7 ships to 8-12 ships within 3 years through an effective internal production and distribution system, which in turn could reduce the cycle time. 3.1.4 Learning and Growth Progres aimed to build high-quality vessels to be competitive; thus, they need to improve their employees’ expertise through learning programs. Another goal is to motivate the workforce and indicators to be used including constant communication, internal advancement, and incentive system. Also, they need to develop employees’ skills to maximise their value as the company operates in two separate locations. Overall, if Progres would pursue their plan to purchase an existing dry dock, they would be able to cater the customer’s new preference, which is the building of large ships. Also, this strategy would redeem the company from potential losses because having an offshore shipyard would increase the annual output. In addition, they would be able to increase their target market outside Europe by tapping in new types and designs of ships as defined by customers. However, they need to consider employees’ perceptions toward the plan because these are one of the essential factors needed to make the project successful. Hence, it is necessary for the company to motivate employees to support the action plan by giving them top-quality trainings and career growth opportunities to a gain competitive advantage. 4.0 Analysis In today’s business landscape, companies need to develop effective and proactive strategies to be sustainable. In the case of Shipyard Progres, the company planned to implement a diversification of offering and target market. However, they need to be resilient and used rolling forecasts considering that every now and then new risks and opportunities might exist. Moreover, to gain a competitive advantage, the company’s board has resulted to diversify through innovative offerings as defined by customers. Also, they give emphasis on the company’s intangible elements such as customer satisfaction, business processes, and innovation. These non-financial measures are valuable in the strategy implementation, which is the purchase of an existing dry dock to make large dimensions of ships. For instance, the company wanted to satisfy customers; hence, they planned to invest in an extra production site to conform to customer preferences of large vessels. Furthermore, this investment would enhance the company’s internal business process through an increase in annual output. Moreover, innovation would be achieved through the enhancement of employees’ skills and expertise in the shipbuilding business. These are courses of actions used to run the shipbuilding business of Progres, which are also conducive to the implementation of a BSC. On the other hand, once the company has purchased the existing dry dock, employees would be working in two production sites. Hence, the company could not expect the total commitment and support of employees because the strategy could have an impact on their daily activities. This change initiative, as forecasted, could improve the company’s cash inflows and sales growth; however, they need to consider the role of intangible assets against financial strategic goals. Progres should consider that employees have a significant role for the plan to be successful because they are the ones who build ships. Hence, the company should motivate employees to willingly accept changes brought by the strategy towards their jobs through the articulation of long-term goals. Also, it is necessary for change initiators to ask their feedback and develop constant communication because the process is not “going to happen overnight.” Thus, learning measures are necessary to improve skills and retention of employees, which in turn could make the internal business process more efficient. As a result, the company will be able to complete the production on time, and increase production capacity at a reduced cost while maintaining high-quality. The competency in the business process perspective would make the company attractive to potential and existing customers through sufficient orders of large ships. Thus, Progres would be able to improve its revenue or maximise return on investment because customer requirements are being met through the purchase of a new dry dock. 4.1 Levers of Control The levers of control framework put forward by Simons in the 1990s is used ‘to control business strategy’ (Hofmann, 2007, p.18). The framework is made up of four systems including belief, boundary, interactive control, and diagnostic control systems (Dugdale & Lyne, 2010, p.98). Just like the BSC, this framework is working on the basis that traditional management practices are not anymore valid nowadays because features are not reliable and conducive to present threats and opportunities. However, the implementation and utilisation of the BSC as performance measurement model is related to the diagnostic control and interactive control systems of Simons. In fact, it is noted that ‘controls and measures’ are interrelated; thus, a company could not devolve an authority unless these individuals have understood the responsibilities added to the given role (J. Hope & T. Hope, 1997, p.160). In terms of diagnostic control system, the implementation of the BSC by Progres is considered as satisfactory if objectives or goals laid out in the plan are fulfilled upon monitoring. For instance, Progres considered employees as one of their great strengths in building high-quality ships; hence, they need to use a reward or incentive system to motivate employees in achieving strategic goals. On the other hand, the use of the BSC relates to the interactive control system in terms of actions and decisions. For instance, for the company to motivate employees to work in two locations, line-managers should develop a constant interaction with the front-line people and make them participate in making the action plan. Through this system, line-managers would be able to control threats that may emerge during the implementation of strategies (Hofmann, 2007, p.21). 5.0 Conclusion & Recommendations As the future becomes more and more uncertain, Progres needs to monitor not just their monetary resources or tangible assets, but also the level of customer satisfaction, internal processes, and learning perspective to be sustainable. Hence, they need to develop a BSC as a strategic tool; this is to have a balanced view of their performance both on the financial and non-financial aspect once the purchase of a dry dock is pursued. The board’s proposal is a brilliant idea because it provides considerable benefits to the company; however, the following recommendations are highlighted when it comes to the utilisation of the BSC: 1. Invest in learning programs or training activities, so that employees will have a continuous knowledge when it comes to new techniques and skills needed in producing high-quality ships. 2. Build an open and regular communication such as one-one-discussions, group meetings, consultations, mentoring, etc., so that employees will be more committed to adapt to changing business landscapes of shipbuilding. 3. Implement a decentralised management structure or devolve authority to encourage employees’ involvement in the company’s operation; however, this measure should be aided with a control system for employees to look after all their chosen courses of actions and decisions. 6.0 References Ahn, H., 2001. Applying the balanced scorecard concept: an experience report. 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