Relationship between Customer, Financial and Internal Balanced Scorecard - Case Study Example

Program: May 16, Balanced scorecard- Case study Introduction and significance of the study The balanced scorecard is a system for performance evaluation that incorporate diversified aspects of a business organization. It focuses on four aspects of an organization. The first aspect is an organization’s financial performance and relates stakeholders’ opinion on an organization’s financial viability and ability to yield returns to investors. Customers’ utility is another aspect of the scorecard and defines customers’ opinion on an organization’s products and its relation with the customers. Internal process is another aspect of the scorecard and defines management’s potential to ensure effectiveness and efficiency in an organization. Lastly is the set of innovation and learning activities that defines an organization’s initiatives to develop and maintain its intellectual capacity (Fujii 12). The four perspectives are correlated and customer satisfaction has effects on attraction and retention of customers with a causal relation with financial performance whose key elements are growth, profitability, and revenues. High level of customer satisfaction, for example, translates to greater sales level that means higher revenues and profitability. The need to meet customers’ need also has causal relation with learning and growth whose key elements are talent, “information system,” “motivation,” and “empowerment” (Fujii 12). Motivation, empowerment, and talent are for example bases for creativity and innovation into meeting customers’ needs and thereby influencing financial aspects. The same elements have direct causal relations with internal processes as they can improve managerial efficiency and effectiveness and empowered management can facilitate both learning and growth perspectives and financial perspectives (Fujii 12). These therefore suggest correlation between the four perspectives and developing empirical evidence that supports the relationship is likely to improve application of the balanced scorecard in organizations. The desire to improve performance measurement and evaluation among organizations is the study’s motivation and aims at benefiting managers and their organization as well as adding to the literature on reliability and effectiveness of the scorecard as tool for measurement and performance management. Literature review Diversified empirical studies exist on application of the balanced scorecard in management. A study by Jordao and Novas investigated application of the strategy as a management tool in the Brazil’s mixed economy. The researchers used case study a company, designated as Omega Company, with focus on understanding the relationship between implementation of balanced scorecard and the organization’s management control system. Their qualitative approach has the benefits of developing comprehensive information for making reliable conclusions and for developing a theoretical perspective. One of the study’s findings is that the balanced scorecard has two effects when incorporated in a management control system. It facilitates improvements in process and its effects transmit to other levels of an organizational structure, a phenomenon that is consistent with the traditional correlation effects of different elements of the scorecard’s perspectives. Improved decisions on quality and cost management would for example have transferred effects to the sales department and affect the respective employee’s output and image to consumers. The investigated company also identified evaluation of just some of the aspects of the scorecard such as financial and output aspects. In addition, the organization applied the balanced scorecard in development and implementation of its strategies, an aspect that corresponds with the internal process perspective of the scorecard. Further, the researchers identified the role of the balanced scorecard in realization of an organization’s objectives through the four perspectives (Jordao and Novas 101- 104). The empirical approach and reliability of the applied research design establishes confidence and credibility of the findings. In addition to its role in performance measurement, the balanced scorecard has the advantage of minimizing effects of secondary factors to performance management such as stereotyping. This was the focus of the study by Branson, Steele, and Sung. The researchers used a case study design on graduate students in upper division in accountancy and business programs. One-hundred and seventy six students were used in the study that investigated effects of stereotyping on performance measurement. In a case, the balanced scorecard was used but not in another. Even though the study’s results identified effects of stereotyping on both measurement approaches, measurement with the balanced scorecard minimized effects of stereotyping. This means that organizations should incorporate the scorecard in the evaluation systems in order to attain accurate measures. This also ensures a reliable basis for decision-making and means that the transferred effects of decisions achieve targeted objectives in different perspectives of the balanced scorecard. A decision on an internal process perspective, such as on product quality, based on the balanced scorecard is therefore likely to have targeted effect on customer caption and retention. This means benefits of using the scorecard and that more organization should use it (Branson, Steele and Sung 67- 69). In another an independent study on benefits of the balanced scorecard, Shutibhinyo established that management’s support for application of balanced scorecard is a factor of attributes for which the scorecard is intended to measure. Perceived benefits of the balanced scorecard is also a factor of its attributes with “overall benefits, planning, control, and communication” as the attributes perceived to generate greatest benefits of the scorecard (1). However, not all organizations have incorporated application of the balanced scorecard and a study of small and medium sized enterprises in Portugal illustrates this. A study by Machado that used survey interviews established that only a few organization use the scorecard and in some organizations, managers are not even aware of the strategy’s existence (135- 140). Existing literature therefore identifies significance of the balanced scorecard in attaining accurate measures and in influencing organizations’ outcomes in different organizational outcomes and at different levels. Some organization have however not implemented the balanced scorecard in their systems, or only implemented some perspectives, while other are not informed of the tool’s existence. These suggest the need for more evidence based information on effects of the scorecard and benefits of its total implementation. This study seeks to bridge the gap by investigating relationships between different perspectives of the scorecard to establish the tool’s reliability in influencing different aspects of an organization. The information will benefit managers who are not aware of the balanced score card, those who have not applied it in their organizations, and those who have only applied some of its perspectives. The study seeks to investigate the following research question. Are the assumed causal relationships between different perspectives of the balanced scorecard valid? Hypothesis The study tests the following hypotheses. HO1: β= 0; no significant relationship between financial and internal BP HO2: β= 0; no significant relationship between financial and customer HO3: β= 0; no significant relationship between financial and learn and grow HO4: β= 0; no significant relationship between internal BP and customer HO5: β= 0; no significant relationship between internal BP and learn and grow HO6: β= 0; no significant relationship between customer and learn and grow Data analysis Data was collected on corresponding measures financial, internal BP, customer satisfaction and larn and growth. The following table summarizes correlation coefficient for the variables. Table 1: Correlation coefficient   financial internal BP customer satisfaction learn and growth financial 1 internal BP 0.645433 1 customer satisfaction 0.632986 0.605215 1 learn and growth 0.466153 0.524508 0.384266 1 The results show positive correlations between each of the pair of variables and therefore suggest significance of alternative hypotheses to the stipulated null hypotheses. The alternative hypothesis for the relationship between financials and internal BP is significant (F=284.189, p= 0.000< 0.05) and this implies a significant relationship between measures on financial and internal perspectives of the balanced scorecard. The model further explains 41.5 percent of the dependent variable and this is a sufficient proportion for concluding a significant relationship. A significant relationship also exist between financial perspective and customer satisfaction perspective (F= 210.306, p= 0.000). In addition, the tested model explains 39.9 percent of the data. Financial perspective is also has a significant relationship with learn and grow perspective (F= 110.495, p= 0.000), with the model explaining 21.5 percent of the data. The relationship between internalBP perspective and customer satisfaction is also significant (F= 230.043, p= 0.000) with the regression model explaining 36.5 percent of the data. The relationship between internalBP and learn and grow is also significant (F= 151.047, p= 0.000) with the model explaining 25.3 percent of the data. Similarly, the relationship between customer satisfaction perspective and learn and grow perspective is significant (F=68.95, p= 0.000) but the model only explains 14.6 of the data. Consequently, all the null hypotheses on the relationship between each pair of the scorecard’s perspective are rejected to the effect that variables in each pair have a significant relationship. The model however explains different proportion of data in each set. Conclusion The current study establishes significant relationships between each pair of the scorecard’s perspectives. Significance of the relationships, however, differ, as the percentage of data that each model explains shows. This observation is consistent with existing literature that even though the balanced scorecard has benefits to organization, its application is selective. Organizations that have applied the scorecard could have therefore noted the most significant perspectives that the scorecard explains and therefore specializes in these perspectives in the use of the scorecard. This study recommends application of the scorecard in measurement and evaluation of financial, internal, and customer perspectives because of the high proportion of their data sets that regression model explains. The study was however limited to a single environment and a cross sectional study is recommended for a more informed position on effectiveness of the model in measuring the four perspectives. Works cited Branson, Leonard, Steele, Nathan, and Sung, Chung-Hsien. “Categorically good: Can the balanced scorecard improve stereotype-based performance appraisal?” International Journal of Business & Public Administration 10.1. (2013): 62-74. Print Fujii, Tomohisa. Balanced scorecard strategy management super guide win gold partner as a intellectual skill for the working woman: The powerful tool which realizes the dream of your life. New York, NY: TOM PUBLISHING, 2014. Jordao, Ricardo, and Novas, Jorge. “A study on the use of the balanced scorecard for strategy implementation in a large Brazilian mixed economy company.” Journal of Technology Management & Innovation 8.3. (2013): 98-107. Print. Machado, Maria. “Balanced scorecard: An empirical study of small and medium size enterprises.” Review of Business Management 15.46. (2013): 129-148. Print Shutibhinyo, Wasatorn. “Balanced scorecard attributes: Key determinant and perceived benefits.” Global Journal of Business Research 7.2. (2013): 1-8. Print Read More