Balanced Scorecard in Practice - Term Paper Example

Balanced Scorecard in Practice With a view to measuring a firm’s activities in terms of its vision and strategies and to give the manager’s a comprehensive view of the performance of a business, a concept which is described as Balanced Scorecard was introduced by Robert S. Kaplan and David Norton in the year 1992. There have been several studies conducted on the subject of Balanced Scorecard to develop the concept adaptable to the changing circumstances and needs of the organizations. This paper presents some of the facets of balanced score card and an account of the approach in practice. Introduction It becomes critically important for the managements of the business and service organizations to implement systems which enable them to have a first hand knowledge of the relative strengths and weaknesses of the organisation. For this purpose the management needs to develop frameworks that transform their visions and goals to tangible and measurable objectives. The purpose of these frameworks is to enable the members of the organizations to identify and understand the broad objectives of the organisation, the relationship among them, and the means of achieving them effectively. By adopting this practice the management is able to engage the available resources of the organisation in a most efficient way to maximize the earnings and revenue of the organisation. They are also able to arrive at realistic business plans. Over the years several research studies have been conducted in this field of the management science, and models like Balanced Scorecard has been developed which are basically designed for helping the organizations in their drive towards being more competitive in achieving their goals... Definition and Perspectives of Balanced Scorecard “The Balanced Scorecard method of Kaplan and Norton is a strategic approach and performance management system that enables the organizations to translate a company’s vision and strategy into implementation working from four perspectives.” (12 Manage) The balanced scorecard approach can be represented in the following diagram. The different perspectives of balanced scorecard approach are: 1. Financial perspective encompasses the implementation of a corporate database for processing the information in a centralized and automated way. Under this perspective the management should strive to understand how the shareholders view the firm and decide on the financial goals which are desired from the perspective of the shareholders. For instance the revenue growth, profitability, and cost leadership are some of the objectives that may find favor with the organizations as financial perspective objectives. 2. Customer perspective focuses on customer needs and customer satisfaction. This perspective addresses the question of how the firm is viewed by its customers and how well the firm is serving its targeted customers in order to meet its financial objectives. One of the objectives that may be developed under this perspective is to identify and introduce new products and the measure for this objective may be fixed as the percentage of sales from the new products. 3. Internal Business process perspectives concentrate on the developing different metrics that can be used in analyzing the performance of the organisation. The measurements cover the areas of strategic management process which encompass the analysis of definition and scope of mission of the organisation and a review of all the supporting activities. These are the processes in which the firm must concentrate its efforts to excel in its performance. For example, increasing engineering efficiency to improve design productivity may be one of the objectives under this perspective (NetMBA). 4. Learning and growth perspective includes the internal development of the employee strengths and organizational culture. It may be noted that such improvements are looked at both the individual employee and corporate self improvement perspectives. (Kaplan & Norton 1996) This perspective addresses the question of how the firm must learn, improve, and innovate in order to meet the organizational objectives. For instance the learning in manufacturing may be aimed at identifying and measuring the time involved to attain new process maturity. Benefits of Balanced Score card Kaplan and Norton have indicated the following benefits accruing to the organisation by using the Balanced Scorecard model: The balanced scorecard approach enables the firm to focus on the activities of the organization as a whole to concentrate on a few key attributes that are required to create enhance the organizational performance Under the balanced score card approach a complete integration of various corporate programmes is attempted. Such programmes include the improvements in quality control measures, factory, and process reengineering and most importantly the customer service initiatives. The unique feature of the balanced scorecard approach is that it breaks down the strategic measures to the levels of adoption at strategic business units. This enables the unit managers, workers, and other members of the organisation to understand the accomplishments expected at their levels so that an overall excellent performance of the organisation can be achieved. Disadvantages of Balanced Scorecard The balanced scorecard approach since focuses the attention on certain key points it will be the natural tendency of the people to concentrate on achieving those targets which have been fixed explicitly. For instance forcing the accomplishment of the traditional financial measures may make the people work with short term strategies. In order to achieve the scorecard goals people are likely to ignore other important issues of the organisation which do not appear in the balanced scorecard. Further if the scorecards are refreshed often enough the desired results from the approach may not be accomplished. For instance some of the goals which looked important in the month of January may not carry the same intensity in June. Hence if timely updates are not undertaken the model is sure to fail. (Six Sigma) Implementation of Balanced Scorecard While there are a number of ways in which the balanced scorecard may be implemented Kaplan and Norton have evolved an approach involving the following logical steps: Defining the Objectives The overall objectives of the organization need to be studied and properly scored. The objectives may relate to the profitability, marketing, or capacity utilization etc. Identifying the Measures Once the objectives are established the next logical step is to identify the proper tools and parameters and define them to measure the organizational performance towards achieving these objectives. For example the growth in the net margin or the sales in a particular region may well act as the measurement parameters. Fixing Targets When the measurement parameters are established suitable targets need to be evolved to transform the organizational objectives into reality. Achieving a reduction in the manufacturing cost to the extent of 5% annually may be fixed as a target. Developing the Implementation Plan Proper initiatives in the form of projects of programmes need to be developed as a support for achieving the set targets. If the targets are supported by initiatives, it may not be possible for the organization to achieve its goals. Balanced Scorecard in Practice The balanced scorecard approach was developed as a performance measurement model to translate the overall strategic goals of an organisation in to financial and non-financial objectives and performance measures (Kaplan and Norton, 1993) The balanced score cared can be considered as an innovative management tool as it encourages business units to design scorecards which are customized to meet their unique situations but limiting their scope within the overall organizational strategy. Based on this concept Kaplan and Norton (2001) have provided various descriptive examples of organizations that have successfully implemented customized divisional scorecards. However Lipe and Salterio (2000) out of their studies found that the divisional performance evaluations reflect information contained in the measures which are identified to be common among various divisions the performance of which are measured. This aspect of the balance scorecard tends to ignore the information contained in the unique performance measures. The authors attribute the happening of this phenomenon to the common measures bias. It is argued that if relevant divisional measures are ignored in the performance evaluation of the divisions, it is quite unlikely that the measures will be considered in the decision making process of the individual divisions are concerned (Holmstrom and Milgrom 1991; McNamara and Fisch 1964) In this way it is quite possible that the firm may lose a significant benefit of the balanced scorecard approach in that the managerial performance-relevant information contained in the unique scorecard measures would be left out of active consideration. Although the balanced scorecard model aims to adopt an efficient and effective approach to supplement the strategic planning and performance evaluation, the model has been criticized on several grounds. Gumbus (2005) observe that most of the people out of almost 64 percent of the organizations in the United States who have adopted the balanced scorecard approach, believe that the model can not be sustained for any long term use. Some of them still believe that the balanced scorecard is a management fad that will be replaced easily by the bottom line financial performance measures especially when the firm is traversing through difficult economic conditions. At that point of time only financial measures would be of relevance and the non-financial measures may not matter much. A part of this belief might have stemmed from the fact that the balanced scorecard approach often finds itself lacking in proper implementation with some companies adopting crude versions of non-financial performances (Maiga and Jacobs 2003; McLean and Mahaffey 2000; Ittner and Larcker 2003). Future of Balanced Scorecard The balanced scorecard has not earned the same level of recognition as some of the other performance evaluation models. Yet the model persists in some of the organizations. The model can be adapted for use in the public sector utility undertakings and for not-for profit organizations. “The Balanced Scorecard approach will continue to play a significant role in the Information Technology area although it is unlikely to challenge the other big hitters for prominence” (Political Information). Conclusion Thus the Balanced Scorecard model enables the firm to improve their working by translating the vision and goals of the organisation into tangible and measurable objectives. The Balanced score card practice has been able to help the managers to take the advantage of metrics- based organization demonstrating alignment to the community they serve as well as the ability to better communicate organisational values. Based on the feedbacks organizations clarify current and future needs of customers and customer groups and develops services accordingly. Organisations follow the satisfaction of the customers and try to forecast the changes. This model along with many other tools and models developed as a result of various research studies have helped the public sector organizations as well to strengthen their efforts towards achieving the organisational goals of excellence and result in an enhanced organizational performance. Bibliography 12 Manage ‘Balanced Scorecard: Management Methods, Models, and Theory’ available online at Accessed on 10th April 2008 Gumbus, A. (2005) "Introducing the Balanced Scorecard: Creating Metrics to Measure Performance." Journal of Management Education Vol. 29 No. 4 pp 617-30 Holmstrom, B., and P. Milgrom (1991) Multitask principal-agent analyses: Incentive contracts, asset ownership, and job design. Journal of Law, Economics, and Organization 7: 24-52. Ittner, C., and D. Larcker (2003) "Coming Up Short on Nonfinancial Performance Measurement." Harvard Business Review Vol. 81 No.11 pp 88 Kaplan, R. and D. Norton. 1993. Putting the balanced scorecard to work Harvard Business Review (Sept-Oct): pp 134-147. Kaplan, R. and D. Norton (2001) The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Boston, MA: Harvard Business School Press Lipe, M. G. and S. E. Salterio (2000) The balanced scorecard: Judgmental effects of common and unique performance measures The Accounting Review Vol. 75 Issue 3 pp 283-298. Maiga, A., and F. Jacobs (2003) "Balanced Scorecard, Activity-Based Costing and Company Performance: An Empirical Analysis." Journal of Managerial Issues Vol. 15 No. 3 pp 283-301 McLean, S., and S. Mahaffey (2000) "Implementing a Surgical Balanced Scorecard." Surgical Services Management (January): pp 48-52 McNamara, H., and R. Fisch (1964) Effect of high and low motivation on two aspects of attention. Perceptual and Motor Skills vol. 19: pp 571-578. NetMBA ‘The Balanced Scorecard’ available online at Retrieved on 11th April 2008 Political Information ‘IT Governance and the Balanced Scorecard’ available on line at Retrieved on 11th April 2008 Six Sigma ‘Balanced Scorecard’ available online at Accessed on 10th April 2008 Read More