Managerial Accounting - Essay Example

? Managerial Accounting Table of Contents Balanced Scorecard 3 Balance Scorecard, a popular strategic management accounting tool 5 Weakness of balance scorecard methodology 8 Business cultures of China 9 References 11 Balanced Scorecard A performance measurement system enables an organisation in measuring, controlling and planning the performance of the organisation based on its pre-defined strategy. One of the tools for measurement of the performance of the organisation is the balanced scorecard method. In today’s complex system of business balanced scorecard is the most widely used performance measurement strategy. This measurement of performance strategy was initially developed by Dr. David Norton and Dr. Robert Kaplan in 1992. The balanced scorecard method comprises of four different perspectives like, customer perspectives, financial perspectives, innovation and learning perspective and lastly the internal business process perspective. By the implementation of these perspectives the balance scorecard captures the lagging and the leading indicators which gives a balanced notion over the performance of the organisation. The leading indicators of the organisation measure the development of a new product, timely delivery of the product, satisfaction of the customer, competency of the employee, etc. However, under the lagging indicator of the organisation comes the financial measure of the organisation related to the profitability and its revenue growth. Thus the adoption of the balanced scorecard method is widely accepted around the globe because this enables the organisation in aligning staffs of all the levels under a single strategy for its successful execution. The main benefits that can be drawn from the implementation of the balanced scorecard method are the translation of the strategy into more easily understandable operational goals and metrics, alignment of the organisation around a coherent, single strategy, increasing the feasibility of strategy making it an attainable task for both the superiors and the subordinates as well, making the development of the strategy of the organisation a continuous process and lastly mobilizing change through effective and strong leadership (Johnson, n.d., pp.1-5). The main aim of balanced scorecard is to make a contribution towards the change of the factors related to the intangible assets and the long-term financial which would otherwise be uncontrollable. This has become feasible through the implementation of the perspectives of balanced scorecard. The main four perspectives of balanced score card has been mentioned earlier. Out of which the financial perspective shows the transformation of the strategy that leads to the economic success. Thus a double role is performed by the financial measure of the balanced scorecard. In application of the financial perspective of the balance scorecard in government arena differs from the private sectors. The objectives set by the financials of the private sector sets clear targets for profit seeking organisation which operates under a purely commercial environment. However, the success for the public undertakings is different in the sense that it is completely based on its efficiency and effectiveness to meet the needs of the constituencies. Thus, the financial perspective emphasises on the cost efficiency of the organisation so as to enhance the ability to deliver maximum value to the customers. The customer perspective of the balance scorecard method indicates the market segment under which the business of the organisation is operating. By means of appropriate strategic objectives, targets, measures and initiatives, the value proposition of the customer is represented in the customer perspective through which the organisation wants to draw competitive advantage in the envisaged market segments. In other words it can be said that the ability of the organisation to provide enhanced quality of goods and services through effective delivery services to gain overall customer satisfaction and service. However, in a government model the performance is quite different from that of a private organisation. The fiduciary responsibility in case of a public organisation is more whereas the similar focus is given towards stakeholders and customers in case of private organisations (Procurement Executives Association, n.d., pp. 7-8). Through the internal process perspectives of balanced scorecard the internal business processes are identified so as to meet the expectation of the shareholders and the customers of the target market. The monitoring of this process is very essential to obtain the satisfactory outcome of the organisation. It is the mode of attaining the performance expectation of the organisation concerned. Finally, the last perspective of the balanced scorecard is the learning and growth perspective. It is through this perspective of the balanced scorecard that the necessary infrastructure required for the attainment of the other three perspective of the organisation obtained. The important credentials of this perspective are information system, qualification, goal orientation and motivation of employees (Figge, et al., 2002, pp.270-271). Thus the method of investigation associated with balanced scorecard employs the familiar methods of argumentation theory and stylistics text analysis. The balanced scorecard though based on the theory of rhetoric but does not contain any scientific justification behind it (Norreklit, 2003, p.593). Balance Scorecard, a popular strategic management accounting tool The strategic management accounting is very different from that of financial accounting of an organisation depending on the generation of information. This information include allocation of cost between inventories and the cost of goods sold for both external as well as internal profit reporting of the organisation, presenting and generating information to the management of the organisation for effective decision making and lastly generating information for controlling, planning and measurement of performance. However, the role of strategic management is not only in generating information related to the internal affairs of the organisation but also generate information in tandem with the external factors related to the competitive environment. The rationale behind the profitability of each product of the organisation is obtained through the process of strategic management accounting system. In the strategic management the sustainable competitive advantage is of paramount importance for an organisation. The most recent contribution of the strategic management accounting has emphasized on the role of management accounting in formulation and supporting the overall competitive strategy of the organisation. Thus the adoption of the balanced scorecard method took place. The balanced scorecard method is basically a management system that helps the organisation on clarifying the strategy and vision thereby translating the same into action. The balance scorecard provides feedback for both the external as well as the internal business processes so as to continuously improve the strategic results and performance. When the process of balanced scorecard is fully implemented it helps in transforming of the strategic planning from an academic enterprise to a nerve centre of an organisation. Thus the implementation of the balance scorecard method can turn out to be an important strategic accounting tool (Vechalekar, n.d., pp.1-8). The referential shown by the balanced scorecard is mainly for the purpose of communicating and describing the strategy in a coherent form with imagination. It will otherwise not be possible to implement the strategy without describing. The balanced scorecard method with portray the quantitative indicators but are non-financial in nature, helps in the measuring and the description of the process of value creation. The organisation generally focuses on the strategic demand so that all the employees of the organisation are able to easily understand and carry out their daily task so as to contribute to the success of the organisation as a whole. Since vertical communication is used for this purpose, hence the implementation of the balanced scorecard method is very essential so as to communicate the strategy and educate the organisation. The successful organisation that adopts the balanced scorecard method implemented a process of management strategy. Concerning the process that integrates the tactical management and the strategic management in a continuous and unique intermissive process. The initial balanced scorecard represent hypothesis on the strategy and are best of the approximation of the actions resulting in the financial even in a long-term (Scaramussa, Reisdorfer & Ribeiro, 2010, pp.5-9). To make balanced scorecard as the effective method of strategic management system the four main functions needs to be implemented, namely, support and commitment of the top management, determination of the critical success factors, translation of the critical success factors into proper metrics, linking of the performance thus measured to rewards, installation of a tracking system, linking and creating balanced scorecards at all levels of the organisation, to harness the advantages of the balanced scorecard the organisation has to set up a sound communication system and linking of the balanced scorecard with strategic planning and the process of budgeting for better allocation of resources (Pandey, 2005, p.51). However, from the above discussion it can be concluded that balanced scorecard though simple is a very powerful tool if implemented properly. It is necessary that unique strategy is created by managers by visualising it in a strategy map. They should also align the organisation and its processes so as to identify the objectives in the strategic map. The designing of the key performance indicators should be appropriate for the method of balanced scorecard to be implemented effectively. Lastly, the inference drawn from the balanced scorecard should be utilised to improve decision making and facilitate learning. Thus in the recent times the implementation of the balanced scorecard has become an important tool from the strategic management accounting aspect both quantitatively as well as qualitatively (Henry, 2011, p.6). Weakness of balance scorecard methodology Balanced scorecard method is based on the cause and effect which has been criticised on the basis of neo classical economic analysis. This will lead to a result showing a high level of customer satisfaction portraying absolute financial result; the indication of which will lead to optimal price not being optimal in nature because the price that is lower than the optimal price will yield higher returns than the latter (Norreklit, 2000, pp.80-84). Furthermore, the concept of balanced scorecard being based on the concept of cause and effect follows the rule that causal relationship exists between the profitability of the organisation and the loyalty of the customer. The satisfaction of a loyal is always considered to be higher than that of the less loyal customer. But it is statistically proven that it is difficult to derive conclusion from the co-variation that is held by a causal relation. The definite profitability derived from a loyal customer may not always be true. The profitability of an organisation is more dependent on the cost and revenue incurred for the product than the existence of a loyal customer. The whole concept is thus based on financial calculus and not causal relation. Hence the logical concept placed against the cause and effect relation of the balanced scorecard is nothing but a logical fallacy. The claim of balanced scorecard being a strategic control model that is able to handle the problem related to the strategic implementation has its shortcomings as well. The balanced scorecard model is incapable of monitoring technological developments or the competition related to the organisation. This indicated that the model of balanced scorecard does not take into consideration any strategic uncertainty in relation to the risk of the organisation which in turn may act as a threat thereby invalidating the strategy in action. Secondly, the top-down hierarchical measures are in tandem with individuals or teams distribution and measurement of breakdown of the organisation. On the other hand, concepts like organisational learning, interactive and employee empowerment are considered an unproblematic part of the balanced scorecard method. However, it is difficult validating the unproblematic nature of the balanced scorecard may be difficult in the control system of an organisation as it is based on the top-down hierarchical measurements. Thus it can be concluded that the controlling features of the balanced scorecard has been highly criticised for not being rooted in an organisation or in a dynamic environment (Norreklit, 2003, pp.616-617). The other weakness of balanced scorecard methodology is that it mainly comprises of the non-financial variables on the scorecard which are mistakenly identified as the primary key drivers for the satisfaction of the stakeholders in future. The metrics of the balanced scorecard are poorly defined. The goals based on the balanced scorecard are not based on the requirements of the stakeholders but rather negotiable. The balanced scorecard lacks the system of deployment responsible for breaking down high level goals to sub process level where the actual activities of improvement persist. The improvement system for state of art is not applied for balanced scorecard methodology. The link between the quantitative as well as qualitative along with the expected financial results is missing. Thus the weakness of balanced scorecard acts as a barrier in its successful implementation. However, if certain measures are taken to cover up for the shortcomings of the balanced scorecard; it can prove to be a very powerful tool of management. Business cultures of China The strategic thinking of China relates to their planning process taking both the external as well as the internal factors in the formulation of strategy which is ultimately implemented in the operation of an organisation. The business culture in China has a working environment wherein the ideas are readily challenged at any level with the organisation. The executives have a farsightedness regarding affecting trends as they are always informed with a wide range of sources. The business culture of China employs the personnel with adequate skills necessary to develop and execute plan required for the success of an organisation (Executive Learning Centre, n.d., p. 2). In China, the critical success factors are related to the managing of high rate of growth in the market and making the organisation ready in meeting with the ever increasing demands of the customers. One of the important elements of operating business in China is the ability to establish a link between the objectives of the individual employee and the initiatives to a balanced scorecard (Mooraj, Oyon & Hostettler, 1999, p.490). The concept of balanced scorecard was mainly focused by majority of the western companies whereas eastern organisations in Taiwan and China lacked its validation. It was the limitation related to the generalisation of the concept of balanced scorecard that led to uncertainty in eastern regions like China (Chi & Hung, 2010, p.237). Thus irrespective of the balanced scorecard being a popular management tool adopted by different business in China, yet it fails to achieve the set target because balanced scorecard is mainly dependent on assumption. Hence, a little turmoil in the economy of China leads to the failure of the balanced scorecard methodology thus adopted by the country. Since the business culture followed in China is completely based on the balanced scorecard methodology hence it can be inferred that it also carry forward the shortcomings associated with the balanced scorecard. References Chi D. J. & Hung H. F., 2010. Is the balanced scorecard really helpful for improving performance? Evidence from software companies in China and Taiwan. [Pdf]. Available at: . [Accessed on: 29 Oct. 2012]. Executive Learning Centre, n.d. Strategic Thinking Using Balanced Scorecard. [Pdf]. Available at: . [Accessed on: 29 Oct. 2012]. Figge F., et al., 2002. The Sustainability Balanced Scorecard – Linking Sustainability Management to Business Strategy. [Pdf]. Available at: . [Accessed on: 27 Oct. 2012]. Henry, 2011. Assessing Organizational Performance. [Pdf]. Available at: . [Accessed on: 29 Oct. 2012]. Johnson C. C., n.d. Introduction to the Balanced Scorecard and Performance Measurement Systems. [Pdf]. Available at: . [Accessed on: 27 Oct. 2012]. Mooraj S., Oyon D. & Hostettler D., 1999. The Balanced Scorecard: a Necessary Good or an Unnecessary Evil? [Pdf]. Available at: . [Accessed on: 29 Oct. 2012]. Norreklit H., 2000. The balance on the balanced scorecard—A critical analysis of some of its assumptions. [Pdf]. 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