The Internal and External Communications and Monitoring the Organizational Performance - Essay Example

Origin of the balanced scorecard The balance scorecard was developed by two men, Robert Kaplan, an accounting at Harvard and David Norton, a consultant from Boston area. In 1990 Kaplan and Norton conducted a research study on various companies exploring new methods of performance measurement. From that study the came to know that financial measures of performance were ineffective in the modern business. the financial performance of the company should be governed in such a way that a value is being created for the company as a whole. After discussion they settled an idea of scorecard featuring performance measuring activities through out the organization i.e. customer issues, internal business processes, employing activities and share holders concern. Kaplan and Norton labelled the new tool the balanced scorecard. Many organizations have started using balanced scorecard in order to attain efficiency in their processes. Since it considers all the major components in an organization a total efficiency management is possible in an organization. The four components of balanced scorecard are properly managed in order to create a total efficiency. Balanced Scorecard Balanced scorecard is a strategic planning and management system, which is extensively, used in business and industry, government, and non profit organizations for doing the business activities to the vision and strategy of the organization. Balanced scorecard is using for improving the internal and external communications and monitoring the organizational performance against the strategic goals of the organization. In earlier stage it was used for the measuring the simple performance of the organization to a full strategic planning and management. New card is focusing not only the performance measurement but also helping the managers what should be done and what should be measuring for attaining the organizational objectives in competitive basis. It informs the organization regarding the activity to be measured for balancing the financial perspectives. This makes the company to do well in improving the performance of that particular activity. "Balanced scorecard methodology is an analysis technique designed to translate an organization's mission statement and overall business strategy into specific, quantifiable goals and to monitor the organization's performance in terms of achieving these goals." (Balanced Scorecard Methodology, 2005). Competitive Advantage enables the company to operate in a more efficient manner and higher quality manner than the companies to compete with and which helping the company for getting higher more profit. "A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices." (Strategy -competitive advantage). Balance score card is focusing the strategy and its results and improving the organizational performance through measuring the measures in a competitive basis, Focusing on a basis of future performance and also which is used as prioritize projects and initiative basis. Kaplan and Norton described in the following manner, "The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation." (Gnanapoo, 2008). According to his perspective Balanced scorecard having the following areas, Learning and growth perspective Customer Perspective Financial Perspective International Business perspective (What is balanced scorecard 2007). The learning and growth perspective is related to the learning and development process that takes place in the organization. It refers to the skills and satisfaction of the employees. The employee retention is also considered. The international Business perspective says that by allowing the managers to know the running capacity of the business and conforming, whether the products are satisfying the customer's requirements and the shareholders satisfaction. Customer perspective is of knowing the customer requirements and doing the business accordingly. Financial perspective is focusing on the financial data. Managers need to provide adequate financial resources and need to include additional financial-related data, such as risk assessment and cost-benefit data. All perspectives are based upon the company vision and the strategy of the organization. Evaluation of balance scorecard to achieve the competitive advantage Companies are already using the financial and non financial measuring system but the balanced score card is providing balanced level of performance measurement .Balanced sore card is mainly based upon the company's vision and strategy it also compliments the financial and no financial items. It is focusing on the highlights performance of the customers and shareholders. Competitive advantage is focusing on company's computability with other companies. An effective balanced score card is focusing on the competitive advantage in the following manner: Achieving the maximum customer satisfaction leads to better compatibility of the business By way of understanding the customer requirements and needs, companies are getting more market opportunities for doing the business. This leads to the better compatibility of organizations. Building the effective communication Communication is the passing facts and messages from one place to another place, effective communication leads to the effective working of the organizations. Financial and non financial communication helps to better computability of the business. Both internal and external communication is helping to improve the business. Understanding the competitors Balanced scorecard is focusing on company's vision and strategy. A balanced scorecard helps to know the competitors growth, which will leads to measure the compatibility in business. Performance measures The balance scorecard allows an organization to translate its vision and strategies by providing a new framework. Scorecard retains financial measures with three distinct perspective customer(satisfaction ,retention, market and account share), Internal processes( quality ,response time, cost and new product introductions) and learning and growth( employee satisfaction and information system availability)and financial measures(return on investment economic value added) 1 Customer perspective As the name implies customer perspective is related to the customers of the organization, both existing and prospective. Most of the management practices in the present era are highly customer focused as the organizations think that customer focus is the sole factor that drives the company to success. This perspective is based on the fact that an unsatisfied customer will definitely choose the product of other suppliers. Customers look for the product that satisfies their actual needs. In this the satisfaction of the customers are measured. The expectations of prospective customers are also being examined under this perspective. 2 Internal process perspective In this perspective the basic thing is to identify the critical internal process in which organization will excel. This will enable the business unit to deliver the value proposition that attract and retain customer in the targeted market segment and satisfy the shareholders expectations of excellent financial return. The task in this is to identify the process and develop the possible measure to track the progress. In order to satisfy customer and shareholders expectation the relevant factor is to identify the new internal processes. The basic perspective in this is product development, production, manufacturing, delivery and post sale service. 3 Financial perspectives Financial measures are one of the important components in the balanced scorecard especially in the case of profit world. It helps to know whether company's strategy, implementation and execution are contributing for the improvement. The basic thing is to focus on improving customer satisfaction, quality, on time delivery or any number of things but it should not affect the organization's financial return. 4 Learning and growth perspective Learning and growth perspective of the balanced scorecard is the enabler of other three perspective i.e. internal processes, customer and financial. By identifying the measures and related initiatives in customer and internal process perspective, it is easy to identify the gaps between current organizational infrastructure of employee skills and information system and the level necessary to achieve the result. The measures taken in this perspective will help to overcome the gap and ensure sustainable performance for the future. This perspective is a mix of skills and satisfaction of employees and the information available. Easyjet Easy jet is a company which is focusing on the air line service, Sir Steles Haji-loannou and his family is the major shareholder of the easy jet PLC. Sir Steles separately owns easy Group IP licensing ltd the company owes the easy brand and licenses it to the airline but also other companies. Through elimination of the unnecessary expenses easy jet is keeping the low cost. Low cost can be through the following ways: 1. Distribution cost is decreasing by way of internet usage 2. Assets are utilizing in a good way 3. Wide coverage in operation Easy jet is having more competitors in its path. Other competitor's environment is creating challenge to the easy jet operation. Competition is taking place according to business positioning, service quality and brand image. Business positioning means that the diversification of business to the different areas, brand image is taking place by way of customer satisfaction and the goodwill of the firm. According to services giving by the industry, service quality is increasing. Service quality is mainly depends upon the after sale services and sales promotion measures. Development of costing techniques A better costing technique is very much essential for the profitability of the company. Cost management is a specialized activity and should be done by professionals in the field. Costing methods is very much related to the balanced scorecard. A balanced scorecard is the tool used to measure the performance of various functions in an organization. The balanced score card measures the performance of the organization from different perspectives. Cost management is related to balanced scorecard in the sense that cost management is also related to performance measurement in an organization. "An integral component of the Cost Management evolution is a focus on the importance of performance measurement." (Book corner, 2002). An effective cost management involves reducing the cost of production to the maximum extend possible and thus to earn a better profit margin. Reducing the cost of production will help the company to attain greater flexibility in the pricing strategy. The company can fix a better profit margin for their products. It can also pass on the benefits of lower cost to the ultimate consumers. This will help the company to grab more market for their products. Majority of the customers prefer low cost products when it is made available to them. The costing methods of any time must be focused on improving the quality of the product by incurring low cost. Job costing has been employed for the past 10 years. This method of costing accounts for the cost on the basis of the jobs that are involved. The cost units are associated with a particular job. The number of materials used and the man power involved for performing a particular job is considered in this costing method. The costs that are involved until the completion of a job are accounted totally. In this costing method the cost that is incurred for the job and the benefits that are reaped form it is compared with each other. In this method of costing each and every cost can be associated to a particular job. This costing method was good for the company due to many reasons. The advantages gained by the management for this costing method are as follows. 1) The management was able to identify every minute cost incurred for each jobs. The examinations of cost for the purpose of cost reduction were possible easily by this method. The reason for the occurrence of a particular cost was easily identifiable for the management team. This was helpful for the management team in rectifying any shortfalls in the cost occurrence. The cost are incurred and accounted while performing the job. The accounting persons are put at ease. 2) Wrong posting in the accounts can be easily identified. Since every expense is related to a particular job any wrong posting in the accounts can be easily identified. For this the nature of the expenses are compared with the particular job. Therefore job costing will help the company to improve the efficiency of the costing methods. Along with the advantages this method of costing also has certain disadvantages. Some of the major disadvantages of job costing methods are as follows. 1) The core focus of job costing is on the products. Very less attention is being paid for the activities of the departments. When the departmental activities are being paid less attention the contribution of each department for the whole job cannot be calculated. This can even result in demotivating a particular department. As a result further contribution from the concerned departments will be lower. 2) Under this system the overhead expenses are charged on the basis of rates. These rates are kept unchanged by the management for even a year. Therefore there are more chances of overvaluation and undervaluation of the overhead expenses. This will create problems in the costing process. The rate taken for consideration is based on standard costing and not on the basis of actual cost. The costing method is being changed from job costing to that of ABC Costing. Even though ABC costing is a costing method being adopted by manufacturing companies the method is also being widely used by service sectors. "Activity Based Costing (ABC) was first developed to cater to the needs of manufacturing industries but gradually it finds its application suitable in service sectors and in other non-business sectors as well." (Chakraborty, 2006, p. 248). This method is advantageous over the job costing method and other traditional methods of costing. The ABC costing method is able to analyze the true cost of a product or service in comparison to the traditional method. This costing system is based on the activity that is done in order to make the goods and services available to the customers. Under the job costing method the cost is reported on the basis of the job. The different cost elements are linked to the various jobs. Under the ABC costing method the cost is allocated to the process being carried out by the organization. The different process begins from procuring the raw materials to the marketing the goods. In the service sector the activities involve designing of the various services and making available those services to the ultimate consumer. Easyjet is a service sector company and here the different processes involve designing of the various services. The company is mainly focused on providing low cost flight services. Therefore ABC costing system is suitable for the company to make create efficiency in its costing methods. The ABC costing method is highly advantageous over other methods. The major advantage of this method is that it clearly examines the cost incurred for each activity based upon the resources use. This will help the company to fix accurate charges for the services. This method is highly useful for improving the process. The cost is incurred is easily identifiable. It will help the company to a great extend for planning the future operations. The method also has certain disadvantages. A drawback of this method is that it is difficult for an organization that uses traditional method to implement this method. This is also a bit time consuming method. But while comparing the advantages and disadvantages of all the methods the ABC method is more suitable for the organization. Bibliography Balanced Scorecard Methodology. (9 June 2005). [online]. Searchcio.com, Last accessed on 05 March 2008 at: http://searchcio.techtarget.com/sDefinition/0,,sid182_gci347160,00.html Book corner, Cost Management and Balanced Scorecard. (2002). [online]. Smart pros. Last accessed on 05 March 2008 at: http://www.pro2net.com/x33398.xml CHAKRABORTY, P. K. (September 2006). Cost Control to Result Control- The new Business Challenge for the 21st Century. [online]. Traditional costing vis--vis ABC system. The Chartered Accountant. Members in Industry. P. 248. Last accessed on 05 March 2008 at: http://www.icai.in/icairoot/publications/complimentary/cajournal_sep06/427-432.pdf GNANAPOO, J. Esther (2008). Balanced Scorecard-A Strategy Management Tool. [online]. fiber2fashion. Last accessed on 05 March 2008 at: http://www.fibre2fashion.com/industry-article/8/720/balanced-scorecard-a-strategy-management-tool1.asp Strategy -Competitive Advantage, Competitive Advantage-Definition. [online]. tutor2u. Last accessed on 05 March 2008 at: http://tutor2u.net/business/strategy/competitive_advantage.htm What is Balanced Scorecard (2007). [online]. Balanced score card institute. Last accessed on 05 March 2008 at: http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx Read More