Balanced Scorecard and the Organizations Financial Performance - Example

Traditional models of performance evaluation have been critiqued by researchers for their lack of effectiveness and comprehensiveness in examining individual areas of business. This report examines critically examines the aspects that are linked with the adoption of BSC to promote organizational performance as per the analysis of specific measures and indicators of performance. Table of Contents Abstract 2 Introduction 4 Limitations of Traditional System 5 Balanced Scorecard Perspectives 7 Balanced Scorecard and the Organization’s Financial Performance 7 The Advantages and Limitations of Balanced Scorecard 8 Conclusion 9 References 10 Introduction The scope and capabilities of traditional measures of financial performance have been characterized by the application of conventional and often straightforward techniques which do not possess the comprehensive sensibilities that are required for truly gauging organizational performance in accordance with the outlined metrics. Given the evident limitations that are linked with the application of such particular mechanisms and frameworks, Kaplan and Norton (1996) highlight the significance of utilizing a balanced scorecard as the premium tool for performance evaluation on the level of senior management. The primary benefit that can be garnered through this technique is linked with the balanced scorecard’s potential as a systematic model that can work as a bridge between the organization’s existing goals and aims and the scope of possibilities that it wishes to attain in terms of future organizational objectives. The expansion of business prospects which have been spearheaded by globalization have triggered a change in the dynamics of opportunities that are available to a firm. This notion entails that while in the conventional sense of performance evaluation the application of related techniques was limited to the assessment of performance, the modern agenda transcends this view to develop a ‘balanced’ measure of for comprehensively understanding, examining and assessing performance (Poureisa and Efteghar, 2013). This report focuses on critically analyzing the aspects of balanced scorecard or BSC as a measure of strategic performance evaluation in comparison with traditional or conventional methodologies of examining organizational performance. The components which have been addressed in this report outline the limitations of adopting a traditional system, understanding the process of BSC design in an organizational environment and the examination of various perspectives on BSC. Moreover, the report also examines the notion whether the execution of BSC is conducive to the improvement of an organization’s financial performance while, underlining the disadvantages and limitations that are linked with this system of evaluation by applying the BSC to the scenario of an airline company. Limitations of Traditional System According to Ghalayini and Noble (1996) the notion of performance evaluation has experienced modifications because the attainment of objectives behind this framework has met with drastic changes in the external business environment. More importantly, this concept is attributable to the emerging information and communication requirements of the business setup which the conventional methodologies are no longer able to fulfill effectively and successfully (Neely, Gregory and Platts, 1995). From this consideration the idea of the changing foundations of business can emerge successfully because it allows to develop ideals regarding the future requirements of organizations with reference to the path of attainable business objectives. Apart from the absence of foundational or structural requirements the research of Hervani, Helms and Sarkis (2005) states that the lack of comprehensiveness of traditional performance evaluation systems implies that there effective application in several business areas is severely lacking. For example, with reference to the division of supply chain traditional frameworks for evaluating performance do not possess or identify techniques for ensuring effective product recovery which qualifies as a serious limitation of the same (Hervani, Helms and Sarkis, 2005). How Companies Design BSC According to Thakkar et al. (2006) the creation and development of a balanced scorecard is an integrated procedure. In the process of creating a balanced scorecard, the organization must comply with the understanding that the technique must account for all areas, divisions and sectors of the business. For example, in their research Thakkar et al. (2006) outline the development of a balanced scorecard for a company which produces organic food; in this case the researchers propose that four critical areas of consideration must be addressed to successfully implement the model with reference to the distinct requirements of the business. The recommendations of this particular method of BSC formulation can also be applied in case of an airline company. An effective balanced scorecard must comprise of the following tenets 1) the framework must comply with the demands and necessities for four distinct business areas namely a) financial b) customer demand and satisfaction c) internal operations and d) opportunity for growth, learning, training and development 2) the model must possess the ability to visibly explain the outlined frequency and associated measures for each of the evaluation criterions 3) the standard must also be such that it attaches a weightage for each respective consideration 4) the model must also provide the set standards or levels that are expected to be achieved in the future with reference to its application and execution (Thakkar et al., 1996). In his research regarding BSC development and application Brown (2007) identifies a specific set of best practices for effectively defining the standards of the performance evaluation strategy. The compliance with these measures is expected to grant the business with desired consequences and outcomes. However, the primary concern in this case remains the development of metrics and the company must strive to enhance and improve this area whenever possible. Balanced Scorecard Perspectives As highlighted previously, balanced scorecard perspectives comprise of the following components: 1) financial 2) customer 3) internal process and 4) organizational capacity (Perry, 2000; Norreklit, 2000; Kaplan, 2008; Huang, 2009). According to Rohm (2008) the presence of varying perspectives of the balanced scorecard allow the company to apply the provisions of differing points of views or outlooks to define the application and prospects of strategic development. In this case, the perspectives operate in an effective manner to allow the company to adhere to the requirements of each division and individually assist the enhancement of these aspects. Most importantly, the role of these perspectives is to guide strategic development by defining individual strategies as they demonstrate compliance with the individual objectives of each division so as to complement overall corporate objectives. Apart from the strategic element of the balanced scorecard it can be identified that the mechanism also lays the foundation for directing planning procedures. As noted by Ahn (2001) and Bukh and Malmi (2005) the causality of BSC perspectives is rooted in the fact that each individual component assists the enhancement of a business division. For example, the component which is marked by learning perspectives aids the enhancement of research and development outcomes while, the profitability of the company is measured by the financial aspect through the assessment of revenues, costs and other expenses (Bukh and Malmi, 2005). Balanced Scorecard and the Organization’s Financial Performance The true impact of the balanced scorecard on the company’s financial performance is a consideration which has remained a focal point of management and accounting researches on the framework of the BSC and how it operates to promote the attainment of strategic goals through strategy formulation. Nonetheless, the consequence of these studies and researches must be assessed and presented to develop conclusions regarding the financial impact of this model on a company. In this regard, Davis and Albright (2004) conducted a quasi-experimental research which specifically applied the framework on the banking sector. The eventual outcome of the study revealed that the execution of BSC reportedly improved the performance of each financial indicator for those branches of the banks which adopted BSC in comparison with those elements in the sample size where the model was not applied (Davis and Albright, 2004). A similar outcome has also been outlined under the study of Hopf et al. (2008). The Advantages and Limitations of Balanced Scorecard The balanced scorecard is a framework which demonstrates tremendous potential as it can be applied to a range of diverse industries and business sectors (Inamdar, Kaplan and Bower, 2001). Accordingly, it also possesses short term benefits which may greatly enhance the operational efficiency of a business while, improving the performance of strategic business units and processes (Moraj, Oyon and Hostettler, 1999; Kaplan and Norton, 2001). According to Rillo (2003) the certain major claims which have been made with regard to the balanced scorecard can be challenged and critiqued thereby, diminishing the potential effectiveness of this framework. Perhaps, the most significant critique in this case states that the claim regarding the establishment of causal associations between the technique’s fundamental perspectives is highly dubitable. In this regard the sequential element within the BSC remains challenged because it does not account for the significance of time as an element of consideration in strategy development (Norreklit, 2000). Commenting on the inconsistency and inadequacy of cause-and-effect measures with reference to balanced scorecard Young and Tu (2004) note that the fundamental flaw with this aspect is bound to mislead the execution of managerial decision making and misguide the true potential of the company’s strategic direction. Conclusion The balanced scorecard has surfaced as an effective and comprehensive tool of performance evaluation for rapidly expanding organizations that are faced with the challenges of globalization and find themselves engaged in complex communication networks. The adoption of this tool allows firms to benefit from financial and non-financial improvements to address individual areas of the business. References Ahn, H. (2001). Applying the balanced scorecard concept: an experience report.Long range planning, 34(4), 441-461. Brown, M. G. (2007). Beyond the balanced scorecard: Improving business intelligence with analytics. Productivity Press. Bukh, P. N., & Malmi, T. (2005). Re-examining the cause-and-effect principle of the balanced scorecard. Accounting in Scandinavia–The northern lights, 87-113. Davis, S., & Albright, T. (2004). An investigation of the effect of balanced scorecard implementation on financial performance. Management Accounting Research, 15(2), 135-153. Ghalayini, A. M., & Noble, J. S. (1996). The changing basis of performance measurement. International Journal of Operations & Production Management,16(8), 63-80. Hopf, R. H., Pratsch, L. W., Executive, P., Welch, R. A., Denett, P. A., Litman, D. J., ... & Tychan, T. J. (2008). Guide to a Balanced Scorecard Performance Management Methodology. Department of Energy, USA. Huang, H. C. (2009). Designing a knowledge-based system for strategic planning: A balanced scorecard perspective. Expert Systems with Applications,36(1), 209-218. Inamdar, N., Kaplan, R. S., & Bower, M. (2001). Applying the balanced scorecard in healthcare provider organizations. Journal of healthcare management/American College of Healthcare Executives, 47(3), 179-95. Kaplan, R. S. (2008). Conceptual foundations of the balanced scorecard.Handbooks of Management Accounting Research, 3, 1253-1269. Kaplan, R. S., & Norton, D. P. (1996). Using the balanced scorecard as a strategic management system. Harvard business review, 74(1), 75-85. Kaplan, R. S., & Norton, D. P. (2001). Transforming the balanced scorecard from performance measurement to strategic management: Part I. Accounting horizons, 15(1), 87-104. Mooraj, S., Oyon, D., & Hostettler, D. (1999). The balanced scorecard: a necessary good or an unnecessary evil?. European Management Journal, 17(5), 481-491. Neely, A., Gregory, M., & Platts, K. (1995). Performance measurement system design: a literature review and research agenda. International journal of operations & production management, 15(4), 80-116. Norreklit, H. (2000). The balance on the balanced scorecard a critical analysis of some of its assumptions. Management accounting research, 11(1), 65-88. Perry, G. S. (2000). Strategic Themes–How Are They Used and WHY?. Poureisa, A., & Efteghar, A. (2013). Balanced Scorecard: A New Tool for Performance Evaluation. Rillo, M. (2003). Limitations of Balanced Scorecard. Tallin Technical University. Rohm, H. (2008). Using the balanced scorecard to align your organization.Balanced Scorecard Institute, 1. Thakkar, J., Deshmukh, S. G., Gupta, A. D., & Shankar, R. (2006). Development of a balanced scorecard: an integrated approach of interpretive structural modeling (ISM) and analytic network process (ANP). International Journal of Productivity and Performance Management, 56(1), 25-59. Young, S. H., & Tu, C. K. (2004). Exploring some dynamically aligned principles of developing a balanced scorecard. In Proceeding of 2004 international system dynamics conference. Read More