The Importance of a Balanced Scorecard - Essay Example

An Over-View of What Is Discussed In The Memo: This is a memo that discusses the importance of a balanced score card, as a tool of measuring the performance of a business organization. This memo critically defines the notion of a balanced score card, and explains how this business tool is used in an organization. In analyzing how the balanced score card works, this paper identifies the four main perspectives that the score card uses in measuring the performance of a business organization. These perspectives are finance, internal business, development, and customer relations. This memo analyzes whether a balanced score card can be used by Sparkling Automotive Company. Sparkling automotive company began in 1930, and it is the business of supplying automotive spark plugs. Its target market is the automotive manufacturers. In analyzing its convenience for the company, this paper provides the advantages of the balanced score card, and its disadvantages. This is in relation to the application of the balanced score card tool in the business operation of Sparkling Automotive Company. This memo also analyzes the impact of applying the techniques in the operations of Sparkling Company, and the improvements expected when it is in use. This memo has a conclusion, which is an analysis of the steps a manager has to follow in designing a balanced score card. Definition of the Balanced Score Card: A balanced Score Card was invented by David Norton and Dr. Robert Kaplan as a tool for measuring the performance of a business organization, government institution or nonprofit making organizations (Kaplan and Norton, 2001). This approach, developed by Kaplan and Norton (2008) aligns itself with the mission and strategy of the organization under investigation. It is an example of a strategic management planning system, whose main aim is to improve the external and internal communicative performance of the organization, and to observe the performance of the business organization in relation to its attainment of the set strategic goals. Explanation of How a Balanced Score Card is used: In using a balanced score card, a manager analyzes the performance of a business organization through four perspectives, namely; 1. Finance 2. Development 3. Customer Relations 4. Internal Business Environment. It is from these four perspectives that decision makers within an organization will collect information, analyze the information collected, and thereby develop a decision based on the information at hand. On the financial perspectives, Kaplan and Norton (2001) denote that it is importance to prioritize accurate and timely provision of financial data (. In financial perspective, designers of the balanced score card must develop measures that will help in taking care of the interests of the shareholders. This perspective encourages an individual to identify important financial measures that affect the operations of the business, and the interests of shareholder. Such measures include the profitability of the business organization, the running costs of the organization, and the salaries of members of staff. In this category also, it is important for designers to develop risk assessment procedures, and a cost benefit data to help in improving the overall financial performance of the business organization. For easier analysis of the financial performance of a business organization, this perspective advocates for the centralization of all relevant and important financial data, and its automation. This will increase the efficiency and accuracy in which financial data is analyzed (Kaplan and Norton, 2001). In relation to development, designers of a business balance score card develop measures that tend to create and improve the value of their products. On this note, the development perspective of a balanced score card tends to address issues on employees development which includes training on current needs of the job market, encouraging innovation in relation to its products, and addressing issues that are most likely to create employee satisfaction. In taking care of the welfare of its employees, an organization will manage to motivate them, resulting to an increase in their efficiency. The main metrics in this perspective is learning technology is constantly changing. On this note therefore, there is a need for a continuous learning process amongst the employees of a business organization. In this perspective, designers of a balanced score card must put in place measures that will guide policy makers on looking for funds to carter for the training needs of its employees. The Customer relations perspective encourages the identification of issues that affect the relationship between the business organizations, with its customers. In this perspective, policy makers will analyze the performance of the business organization in regard to the quality of its product, their transport/delivery system, their lead times, etc. This perspective emphasizes on customer satisfaction, and an organization develops its products by focusing on the needs of customers (Kaplan and Norton, 2001). This is on the basis that, failure to satisfy the needs of customers will result to the loss of those customers to rival organization. In designing a balanced score card for customers relations, it is important for the designer to analyze the nature of its customers, and the process in which the business organization engages in satisfying the various needs of its customers. The Internal Development Perspective concerns itself with the internal processes of the business organization, and this includes the goals of the organization, the quality of its products, and employees, and the performance of the business organization in relation to meeting its objectives and mission. In developing a business score card for this metric, it is important to involve the members of the organization who are familiar with the goals and mission of the organization. This must be an individual who works within the organization at a senior level. Recommendation: As an expert in management, I would strong recommend for the adoption of a balanced score card tool as a means of measuring the performance of Sparkling Automotive Company. This is because it has the following advantages, 1. It enhances communication of the organizations goals, mission and strategy. For instance the goal of Sparkling Automotive Company is to sell spark plugs to automotive manufactures, and the automotive aftermarket. Adopting the use of a balanced score card; will enhance effective communication of this mission to employees of the organization, and its customers. 2. The Score card measures initiatives, and evaluates them in relation to the standards of the industry (Kaplan and Norton, 2008). For instance, the organization has just introduced a new spark plug that lasts up to 100, 000 miles. Using a balanced score card as a tool of measuring the performance of the organization will help in evaluating the quality of the spark plugs, in relation to the standards set forth by the authorities regulating the industry. 3. The score card will provide feedback from the organizations employees and customers in relation to its strategy. This will make policy holders to learn on the needs of their customers, and employees. For instance managers Sparkling Automotive Company will know of the needs of the automotive manufacturers who are their main customers. This is because of the feedbacks they receive from their customers concerning the quality of spark plugs. Despite these advantages, there are disadvantages that a balanced score card can hinder the application and use of a balanced score card in a business organization. These are (Kaplan and Norton, 2008), 1. The score card looks at the performance of the whole organization, and ignores the performance of an individual. This can lead to inefficiency from the individual employees affecting the operations of the organization. 2. It is time consuming and cumbersome to use the balanced score card as it analyzes a large quantity of a number of variables. For instance, the score card analyzes the financial perspective of a business organization, its development perspective, customer and its internal perspective. These are large number of variables, and it takes a long period of time to effectively, and efficiently analyze them. Potential Improvements for the Company: By using a balanced score card as a managerial tool of measuring performance, Sparkling Automotive Company gains the potential of increasing the sale of its spark plug. This is because the organization will improve the quality of its products by implementing the recommendations contained in the various feedbacks it receives from its customers. The company also gains the potential of improving its managerial capabilities, and the skills of its employees to meet the current standard of the market. This will likely lead to customer satisfaction, since the quality of its products will improve (Kaplan and Norton, 2001). The organization also gains the potential of developing better financial controls system that will safeguard the interest of its shareholders, resulting to payments of dividends. Conclusion: In conclusion, the main advantage of a balanced score card is that it provides a feedback on the external and internal operations of a business organization. It is impossible to develop a score card without integrating the mission and strategy of an organization in it. This is because, as a whole, a balanced score card is about measuring the mission and vision of an organization. On this note, it is essential to follow the following steps in designing a balanced score card. 1. Translation of the vision of an organization into its operational objectives. 2. Communication of the vision of the organization, and linking the vision to the performance of the individual employees of an organization. 3. Planning of the business organization, and setting its index. 4. Receiving feedbacks and adjusting the strategy of the organization in relation to the feedback received. References: Kaplan, R. S., & Norton, D. P. (2001). The strategy-focused organization: how balanced scorecard companies thrive in the new business environment. Boston, Mass.: Harvard Business School Press. Kaplan, R. S., & Norton, D. P. (2008). The execution premium: linking strategy to operations for competitive advantage. Boston, Mass.: Harvard Business Press. Read More