The Development and Roles of the Balanced Scorecard - Term Paper Example

Development and Role of Balanced Scorecard in Production and Service Organizations Development and Role of Balanced Scorecard in Production and Service Organizations Abstract The balanced scorecard (BSC) is a concept that was developed by Robert S. Kaplan and David P. Norton in 1992. It assists firms, both service and production, to streamline their strategies and visions with their business activities. It also helps the company measure its actual performance against its set goals. The balanced scorecard measure is used to assess the customers’ relation, learning and growth functions in a business, financial processes and the firm’s internal businesses. The primary aim of this paper is to analyse the development and roles of the BSC in the production and service organizations. Introduction Balanced scorecard refers to carefully chosen set of measures that are derived from organizations strategy. It is used by firm’s management to communicate to its stakeholders the outcomes and performance drivers that the company aims to implement in order to achieve its objectives (Niven, 2006, p.12). A BSC is a concept that was developed by Robert S. Kaplan and David P. Norton. It was designed mainly to handle the limitations of the existing financial measurements as the measures of performance (Kaplan and Norton, 1996, p. 53). Traditionally financial measures were the only measures of performance. These measures only considered the performance in terms of creating value for the shareholders; that is, a profitable business is one whose profit exceeds its cost of capital. These measures were faced by many limitations including the fact that they were based on the firm’s past performance and they are not relevant to some levels of the department. Financial statements are prepared by a few departments in the company and hence do not involve the whole organization (Niven, 2006, p.6). Today reliance on the financial measures of performance is questionable especially due to their limitation in enabling the company predict and plan for their future. What companies need is a measure that balances the accuracy of historical financial measures with drivers of future performance. The Financial measures are hence suitable being viewed as essential for reporting purposes and not as measures of performance. As a result many companies have adopted the BSC as their principal measurement of performance mainly because they are able to balance their integrity and accuracy of financial measures with drivers of future performance (Niven, 2006, p.8). The BSC was first proposed in the Jan-Feb 1992 issue of the HBR. Kaplan and Norton had discovered that managers mainly recognized the impacts of measures on performance and failed to recognize measurement as an important strategy. Managers and company executives introduced new strategies but failed to develop new measures to monitor their new goals. The scorecard hence provides the managers and executives with a framework that enables them translate their firm’s strategic objectives to a consistent set of performance measures. It can also be viewed as a management system motivating breakthrough in firm’s critical areas like market development, production, customers and processing (Kaplan and Norton, 1993). The BSC has four major perspectives including customer, financial, learning and growth and internal business process. The balanced scorecard indicates the firm’s current performance and the drivers of its future performance (Kaplan and Norton, 1996, p. 53). Kaplan and Norton believed that managers needed to concentrate not only on the financial means of the company but also on the non-financial measures in decision making. They noted that most of the non-financial measures like employee attitude and customer satisfaction affected the business the same way as the financial measures (Kaplan and Norton, 1996, p. 55). The concept of BSC fundamentally relates to three main areas. The first is the balance between non-financial and financial indicator of success, this is based on the need to overcome the limitations of financial measures of performance. Secondly is the balance between external and internal constituents of the firm. Customers and the shareholders form the external constituent while the employees and reliable processes represent the internal of the firm. There is a need to balance the needs of the two groups in order to achieve success. Third is the balance between lead and lag indicators of performance. This involves the use of past performance and future performance drivers to ensure the firm’s success (Niven, 2006, p.22). Evolvement of the Balanced Scorecard The BSC is not a static tool and has been evolving since its establishment in 1992. Several changes have been made to ensure it meets the organizations changing goals; the initial BSC was viewed as just a performance measurement tool which included both the financial and non-financial measure. Strategically focused organizations have however transformed the BSC from being just a performance measure tool into a strategic tool. Some Organizations have since developed a fifth perspective, ‘people’. These organizations have alienated human resource from the learning and growth test where it initially belonged. Such organizations have done so after observation of the primary importance of human resource in the firm’s performance. The balanced scorecard has evolved into a comprehensive tool. It is now viewed as having three components that are; it is a measurement too, a communication tool and also a strategic management tool (Fibuch and Ahmed, 2013, p.38). In their later studies, Kaplan and Norton showed how the balanced scorecard could be transformed from an instrument of performance measure into a machine that created a strategy-driven performance management company. They proposed five major principles essential in this transformation (Kaplan and Norton, 2001, p.2). These principles are translating the strategy into operational terms, aligning the organization to the strategy and making the strategies everybody’s everyday job. They also include making the policies a continual process and mobilizing change through the execution of leadership. Putting the above principles into practice creates a stable strategy for the firm and provides its implementation. This gives the company a competitive advantage, eases communication and provides coordination in the organization. IT evolvement has played a significant role in the adoption and implementation of the BSC; companies can now operate globally, and they are all linked together by technology. Communication between the different levels and geographical department has also been made easier. As competition increases due to globalization firms have to seek ways to increase their competitive advantage and BSC measure is an important business performance. Importance and Roles of the Balanced Scorecard Both the production and service company’s managers and executives are aimed at ensuring the profitability and excellent performance of their firms. In this case financial and non-financial performances are of equal importance. Most companies have held to their traditional performance measures which were aimed at evaluating their financial performance ignoring other essential areas like the customers, learning and growth in the firm and the internal drivers of performance. Such firms hence fail to tackle major issues affecting their profitability. There is an apparent gap between organizations implementing the BSC and those that still hold to the traditional financial performance measures. Broccardo (2010) looks at the importance of constructing a strategy map which clarifies the organizations goals, cause and effect relationships, quantitative targets and its strategic direction. The map will enable the firm function towards a specific direction. Performance determinants are hence important factors to consider (85). With the development in technology, competition has increased, and the structure of farms has changed. Most organizations now operating globally; all the functions and department of any organization are based on technological systems and modes of operations. There is, therefore, need to incorporate technology in the firm’s strategy and not consider it as just a function. The BSC has successfully assisted firms incorporate IT in the development plan. BSC translates the organization’s visions and strategies into sets of performance, and IT assist in automating this measures and linking them to all levels of the organization (Edwards, 2001, p. 3). The scorecard is essential in that it complements the traditional economic indicators with measures of performance that keep into perspective the internal processes, customers, and improvement and innovation activities. The scorecard measures, unlike the operational and physical measures are based on the company’s competitive demand and strategic objectives. Managers are required to select a number of the critical indicators hence enabling them focus on the strategic vision (Kaplan and Norton, 1993). The traditional measures report past performance and fail to show how a manager can improve such performance. The scorecard acts as the firm’s cornerstone of current and future performance (Kaplan and Norton, 1993). BSC is a flexible tool; it is capable of adapting to the different needs of organizations and enabling them implement their strategies and achieve set goals. The BSC also act as a guiding tool in the process of reporting (Broccardo, 2010, p.90). The balanced scorecard plays three major roles; that is, as a communication tool, strategic management tool and as a measurement tool. i) Balanced Scorecard as a Measurement Tool Traditional performance measures were based on lag indicators; that is, past information. The BSC complements the lag measures with lead indicators that are the drivers of future performance. For a business to succeed, it should be able to align its employees and other stakeholders to its strategies. The firm has first to choose measures for its customer’s perspective. Its aim is to satisfy their customers need and hence it should develop measure for customer satisfaction, market share, customer loyalty and customer acquisition among others (Niven, 2006, p.13). Regarding its internal process perspective the company needs to identify the critical processes it needs to excel in to ensure value addition to its customers and shareholders. The firm has to develop new processes in order to satisfy their shareholders and customers expectations. In developing new methods to improve performance, the company is faced by the task of developing measures that will measure its progress (Niven, 2006, p.15). Financial measure especially on the firm’s financial returns is also part of the scorecard measurement. Lag indicators are essential in future planning and determining the effectiveness of policies put in place. Scorecard measures are also implemented in the learning and growth perspective to ensure employee’s skills are enhanced, there is availability of information, and the employees are contented (Niven, 2006, p.16). ii) Balanced Scorecard as a communication tool The BSC well-expresses the firm’s strategy and clearly defines terms of the vision that were earlier deemed vague and imprecise. Scorecard results are in most cases communicated throughout the company giving the employees the chance to discuss the underlying strategy; they also learn of any unexpected outcomes and can exchange ideas on necessary future modifications. Understanding of the firm’s strategies enables the employees know where the company is headed and what is their role in achieving this direction. iii) Balanced Scorecard as a strategic management tool Most organizations have transformed the BSC from a mere measure of performance into a strategic management system. Initially, the scorecard measure was developed to link the financial measures with drivers of future performance but in the process of implementation most companies have discovered that it is essential in aligning their short term actions with their strategy. The scorecard measure has hence enabled such firms overcome the vision barriers. The terms of the firm’s vision statement become apparent to both the employees and the executive team, and all efforts are concentrated towards achieving the firms stated direction (Niven, 2006, p.17). BSC has also been essential in overcoming the people barrier by giving all the employees an opportunity to show how their activities contribute to the firm’s overall success. The BSC moves away from the traditional practice where employees were rewarded for achievement of short-term financial goals. In this measure, rewards are tied to individual’s contributions, and this motivates them to focus on the drivers of future performance that are important in achieving the firm’s set objectives (Niven, 2006, p.18). Most companies separate their strategic planning and budgeting processes hence creating the resource barrier. Use of the BSC ties the two processes hence enable the company overcome this barrier (Niven, 2006, p.18). With the rapid changing environment, most managers tend to spend most of their time looking at the variances in performance and trying to correct failures. Balanced scorecard provides managers with a platform to shift to new models with changing circumstances. The balanced scorecard hence enables the company tackle the management barrier (Niven, 2006, p.19). Practical applications The balanced scorecard has, since its introduction in 1992, been applied successfully in both production and service industries. Most firms initially adopted the BSC as a measurement tool but have since discovered its other purposes hence converted it to cover other areas like communication and as a strategic management system. There are so many success stories from the service and manufacturing sectors, from private and public organizations on the impacts of the BSC. The balanced scorecard institute (2014) reports indicating that by 2004 57% of the global companies had adopted the BSC measures. Gumbus and Lyons report that Philips electronics adopted the balanced scorecard with an aim of improving performance. The company has since benefited from the BSC by making it easy to manage its more than 250,000 employees who are located in over 150 countries. The company has used BSC to show the employees on their role in the organization, align the company’s vision and educate employees on what drive the firm. The company put in place the four BSC perspectives as their four critical success factors (p.47). At the Philips Medical Systems North America (PMSNA) BSC was implemented to increase accountability and make the firm a $1 billion company by 2001. The firm aimed at producing cards within their divisions for planning and tracking records. The BSC was used to replace their monthly accountability call to their field officers. BSC helped in automating the collection of customer service and satisfaction reports (Gumbus and Lyons, 2002, p.48). Philips has since its application of BSC benefited from its strategies of improving performance, enhancing company culture and the ability to align their business to their strategic intent (Gumbus and Lyons, 2002, p.49). Omolo the CFO and strategy champion of Kenya Red Cross (2010) explains how they have benefited from the adoption of a balanced scorecard measures. Unlike their traditional strategies, the BSC is more involving, ensuring all the employees participate fully. The team is supposed first to understand the purpose of the organization before determining what to do to achieve this. Omolo noted that the use of the four perspectives enabled the company gain more clarity on strategic thinking and intent of the business. He adds that with the BSC the Kenya Red Cross can run projects in different parts of the country with the aim of attaining the firm’s strategic objectives. He concludes by saying that the balanced scorecard has improved conversations, made a presentation of policy easy, and it has increased the firms focus on monitoring of the plan. It is therefore evident that firms in both the production and service sectors like Red Cross and Philips electronics as shown above. Most firms today celebrate of the success from utilization of the BSC measure. In sell the BSC was introduce in 1996 and the measure has grown to a framework forming the basis of the firm’s employee appraisal. Employees are paid 30% salary of their salary as bonus based on score card results (CIMA, 2005, p.11). Firms using the scorecard measure have successfully been able to improve performance due to customer and employee satisfaction. The BSC has enabled the managers to determine areas of weaknesses and unsuccessful strategies and hence abolish them for the betterment of the company. Pitfalls in use of the balanced scorecard management system Most companies enjoy the benefits arising from the application of the BSC management system. Implementation failures however still occur in this form especially from the firms internal factors. In 2002, for example, a Hotel Company called Plava Laguna J.S.C unsuccessfully adopted the BSC measure. Analysis however shoes that this failure was a result of poor implementation of the strategy (Pujas, 2010, p.75). According to Kaplan and Norton failures are either design failures or process failures (2001, p.8). Design failures result from the firm’s construction of weak balanced score cards. That is, the firm my fail to obtain a balanced scorecard when they use few means, others may use too many measures hence fail to attain the required outcomes. Some organization’s BSC contains metrics lacking validity. Some companies fail to validate whether their measures lead to achievement of the firms goals and objectives (De Koning, 2004, p.3) For the BSC to be successful, it has to be aligned to the firm’s overall strategy, and all units in the firm have to coordinate. Failure to do this, results to the ineffective application of the BSC management system (Kaplan and Norton, 2001, p.8) Process failure results from the firm’s inadequate process. This is mainly caused by lack of the senior management commitment, only a few individuals being committed and keeping the scorecard at the top management ignoring other players. The failure may also result from hiring consultants who are inexperienced and treating the scorecard as a system project. Some firms introduced the scorecard in their management for compensation while others take it as an overlong development process (Kaplan and Norton, 2001, p.8). Conclusion The balanced scorecard is an essential performance measurement tool since it can complement the traditional financial measure with drivers of future performance. It can be viewed as a universal management approach since it integrates the firm’s strategic objectives with the four perspectives. It is clear that the adoption of the BSC measure has brought tremendous change to firms in both the production and service industry. However, there are limitations of adopting this standard but as stated the adverse effects are as a result of poor implementation. As noted by Niven (2006) adoption of the balanced scorecard has tremendous results but to achieve such results, the company should first overcome the major pitfalls. Broccardo (2010) also notes that effective implementation of the BSC will require a revision of the entire organizations structure (p. 90). Companies planning to adopt the BSC should hence ensure coordination between all levels of management and also ensure they consult skilled personnel. In conclusion, for the BSC to be successful the organizations should ensure that the BSC meet the following need. It should provide linkage from corporate visions to the strategic objectives and the key performance measures. It must recognize the linkage between personal and the organization’s scorecards. It should support both the qualitative and quantitative information of the organization. It must allow communication and be easy to set up and maintain. It should be available to all the levels of management and should also be IT enabled. Firms should also consider constructing a strategy map in their preparatory stage since it will act as their guideline in strategy implementation. Recommendation Lord Kelvin once said “When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind” (Niven, 2006, p.4). From this quote, it is evident that the measurement and in this case performance measurement is of great significance in any firm despite their type of output, that is, whether services or products. The balanced scorecard is the new measurement method that enables the company measures its performance as a whole. I, therefore, recommend that all firms should adopt this analysis method in order to benefit from its wide range of advantages. References Balanced Scorecard Institute, 2014, ‘The Balanced Scorecard - Whos Doing It?’ [Online] Available from http://balancedscorecard.org/Resources/Examples-Success-Stories [Accessed: 15th Nov 2014]. Broccardo, L 2010, An empirical study of the Balanced Scorecard as a flexible strategic management and reporting tool, Economia Aziendale Online 2000 Web, 2, pp. 81-91 CIMA, 2005, Effective Performance Management with the Balanced Scorecard, Technical Report. De Koning, GJ 2004, Making the Balanced Scorecard Work (Part 1), Gallup Management Journal Online, pp. 1-4. Edwards, JB 2001, ERP, Balanced Scorecard, and IT: How Do They Fit Together?’ Journal of Corporate Accounting & Finance (Wiley), 12, 5, pp. 3-12. Fibuch, E, & Ahmed, A 2013, Indexing Performance Measures, Physician Executive, 39, 6, pp. 38-43. Gumbus, A, & Lyons, B 2002, The Balanced Scorecard at Philips Electronics, Strategic Finance, 84, 5, pp. 45-49. Kaplan, R 2010, ‘Conceptual Foundations of the Balanced Scorecard’, Working Paper 10-074. Kaplan, R, & Norton, D 1992, ‘The Balanced Scorecard: Measures that Drive Performance’, Harvard Business Review, (January-February): 71-79. Kaplan, R, & Norton, D 1993, ‘Putting the Balanced Scorecard to Work’, [Online] Available from https://hbr.org/1993/09/putting-the-balanced-scorecard-to-work [Accessed: 15th Nov 2014]. Kaplan, R, & Norton, D 1996, Linking the Balanced Scorecard to Strategy, California Management Review, 39, 1, pp. 53-79. Kaplan, R, & Norton, D. 2001, Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part I, Accounting Horizons, 15, 1, pp. 87-104. Kaplan, R, & Norton, D 2001, ‘The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment’. Boston: Harvard Business School Press. Niven, PR 2006, ‘Balanced Scorecard Step-by-step: Maximizing Performance and Maintaining Results’, Hoboken, New Jersey: John Wiley & Sons Inc., p. xii Omolo, A, 2010, Our Experience with the Balanced Scorecard Strategy Development Process, Kenya Red Cross Report. Available from http://balancedscorecard.org/Resources/Examples-Success-Stories [Accessed: 15th Nov 2014]. Pujas, D, 2010, Barriers to the Successful Implementation of the Balanced Scorecard - the Case of Plavab Laguna J.S.C. Read More