Critical Evaluation of Development - Essay Example

CRITICAL EVALUATION OF DEVELOPMENT AND ROLE OF BALANCED SCORECARD IN PRODUCTION AND SERVICE ORGANIZATIONS TABLE OF CONTENTS TABLE OF CONTENTS 2 Introduction: 4 2. Challenges of measure service quality: 4 3. Development of Balanced score card: 5 4. Overview of the Balanced Scorecard (BSC): 6 Financial perspectives – 6 Customer’s perspectives – 6 Internal business process – 7 Learning and Growth perspectives – 7 5. Importance of Performance measurement and management: 7 6. Performance management and balanced scorecard: 8 7. Balance score card in production/ manufacturing sector: 8 Role of BSC in retail sector – 9 Role of BSC in automobile sector – 10 8. Balance score card in service sector: 10 Role of BSC in banking sector – 11 Role of BSC in hospitality and tourism industry – 12 9. Critical evaluation of the role of Balanced Scorecard in production and service organizations: 13 10. Conclusion: 14 Reference List 16 Appendix: 18 1. Introduction: According to Lawrence and Sharma (2002), Balance Scorecard (BSC) is a systematic approach of performance management that has been effectively approved by companies in different sectors to translate their strategic approach into a reality and gain sustainable competitive edge. The purpose of performance measurement is not only to measure how a business is performing, but also includes the implementation of the performance measurement system in a manner such that the organisation might have better customer experience, employee engagement and stakeholders commitment. The current essay sought to provide a brief overview of BSC and its responsibility to measure overall performance of the firms in production and service sector. In addition to that, it also provides a critical reflection about the various roles played by BSC in service and production sectors. 2. Challenges of measure service quality: In today’s business environment, customer’s satisfaction has become one of the vital concerns for organizations and companies to improve product or service quality. Studies have noted that it is very problematic to measure performance of the service quality especially for the intangible goods. The accurate prediction of service quality is very complicated and there are numerous evidences that supports to that companies have failed to attempt the actual dimensional structure of service quality. Simons (2000) describes that, measuring and evaluating service quality generally uses a basic theory approach. He concluded that, it is very difficult to understand views of the different customers towards quality level of a particular product or service outcome. Thus, the mangers need to consider perception of the service process, service input and the overall supportive framework. 3. Development of Balanced score card: The acceptance of globalization in the international market place has brought significant changes in the production and service sector, in terms of the level of competition, cost structure, production environment that led to rapid development in the advancement of technology. Majority of the companies in the global market were compelled to adopt contemporary business management techniques to ensure long-term business survival and to maintain competitive advantage (Kaynak, 2003). Performance management has evolved to be considered as an integral part of management accounting system. In this context, a large number of performance measures have been reported by the financial institutions to pursue cost of the organization’s long-term objectives. However, most of them have failed to provide positive net result. Kumari (2011) found that the traditional views of financial measures, for instance, return on capital employed, return on assets and return on sale are not effective enough to control non-financial and forward looking behaviour of the firms. Thus, it has become essential to implement a measure that includes both financial and non-financial earning forecast appraisal for assessing firm’s performance. Kaplan (2008) developed an innovative and multidimensional performance management scorecard that is known as “Balanced Scorecard”. It helps an organization to select multiple key as a performance indicator that supplements the traditional measures of performance measurement by including internal business growth, customer satisfaction and learning growth activities. It basically translates organizational strategy into a set of key performance indicators and helps the management team to anticipate business performance from actual scenario. However, McDevitt et al. (2008) criticised the BSC model by explaining that, the application of BSC model is quite rigid and static and relevant in only extremely company specific cases. 4. Overview of the Balanced Scorecard (BSC): The balanced score card is a semi-structure report that is generally used by the companies as a tool of performance management. This instrument is supported by automated design and tool methods that managers can use to keep track of their employee’s performance and examine the consequence. According to the report “Annual Survey 2010”, several numbers of companies including Bain & Co., Tesco, Sainsbury, General Motor etc. have undertaken this tool as the most effective strategic performance management technique (Kaynak, 2003). The original model of BSC proposed by Kaplan and Norton (1996) includes four different perspectives to verify organizational performance, namely, customer’s perspectives, financial perspectives, internal business process and internal growth. Financial perspectives – Long term business objective of an organization depends on its financial condition. Defining organizational performance in terms of financial measure indicates how well the execution of organizational strategy leads to improvement of its bottom line performance. A well designed financial control system results in improved cost structure and increase assets utilization. It also expands revenue opportunity growth through implementing revenue growth strategy. Customer’s perspectives – The customer’s perspective matrix captures capability of the organization to manufacture high quality goods and services to satisfy its customer’s demand. In this perspective, BSC demands that the managers should translate their organizational mission statement on enhancing customer satisfaction to reflect that they really value customer’s preference. Satisfied customers will preferably buy products from the company and pay less attention to other brands. Suggested by the management philosophies of the contemporary scenario an increased focus on customer satisfaction can be observed (Broccardo, 2010). Internal business process – As emphasised by Kaplan and Norton (1993), the internal operations management process of a company should also consider improvements in their work structure which can result in reduced expenses and higher customer satisfaction. Monitoring the internal business process always ensures satisfactory outcome and efficiencies in the overall management. It provides more emphasis on the customer-based measure and suggests that the organization must give attention to its internal process to meet the expectation of the customers. Learning and Growth perspectives – According to Kaplan and Norton (1996), this perspective forms the backbone of BSC as it relies on improving skill and ability of the employees to carry out their duties. However, growth perspective can include several issues, including aligning employee’s skills with the job responsibilities, employee’s satisfaction, hours of employees training and so forth. Based on the desired and actual skill level, some organization change the job description, design training and development program and reallocate employees to other department (Hoque and James, 2000). 5. Importance of Performance measurement and management: As suggested by Kassahun (2010), performance management is a process to achieve pre-determined objectives and goals in a company. It involves information on process and techniques that transforms organizational resources into final outcome, the quality of goods and services and effectiveness of the organizational activities to create value for its employees and customers. The performance management process has been developed as a means of measuring and monitoring organizational control and pursues strategy that may leads to achievement of organizational goal. In this context, Hoque et al. James (2000) noted that implementation of performance management approach ensures efficacy and efficiency of operations. 6. Performance management and balanced scorecard: As observed by Kaplan (2008), employees fails to understand the organizational strategy properly and consequently their personal role in accomplishing organizational strategy. In addition to that, employees pursue more importance on their personal rather than the organizational goal. It may result from mismatch between employees and organizational strategy. Watchtel et al. (1999) suggested that, BSC could act as a solution to this situation as it requires organizations to engage in various beneficial activities. Performance measure generally incorporates non-financial measures, for instance, employee satisfaction and commitment. The balance scorecard helps in translating organisational vision and strategy into an effective scale of performance measurement that helps in developing the basic layout for effective management designs. The four perspectives of BSC (as mentioned earlier) secure a balance between short term and long-term organizational objectives and between desire and actual outcome. A properly constructed BSC is a widely accepted parameter for defining business objectives and communicating it to its various departments. 7. Balance score card in production/ manufacturing sector: In the modern economy, production and manufacturing industries plays an important role in defining features of the economic development (Thomas et al. 1999). The impacts of manufacturing sector are continuously increasing on the economic growth. However, manufacturing industry faces numerous challenges in the global economy, including intense global competition, handling the cost pressure, delivering good quality products, identifying the skill gap of the staff and so on (Niven, 2002). Thus, most of the companies in production sector were compelled to adopt BSC as a contemporary performance management account technique to dominate their corporate performance. There has been a growing use of BSC by these companies to enhance customer satisfaction, on-time service delivery, financial measure and productivity. Role of BSC in retail sector – In order to sustain in the global market, majority of the retailers have sought to go beyond the traditional methods of performance management (Simons, 2000). The application of BSC offers highly flexible and individualised techniques for improving an overall performance of the retailers. Retail companies that have already implemented BSC to improve their organizational performance include Tesco, Pantaloon Retail Ltd., British Gas, ASDA and so on. These companies use the BSC model as a means to re-engineering their business process by focusing on several areas, for instance, customer satisfaction, improved product quality and cost reduction. One of the leading UK retail company, Tesco has implemented the BSC model for many years (Littler et al. 2009). The main objective of Tesco is to keep their customers satisfied with good product quality at low price while at the same time also focusing on customer retention. Execution of BSC has helped the company to increase skill and knowledge required by its employees (learning and growth) to perform organizational task and adopt right strategic efficiencies and capabilities (internal process) and deliver desired level of product quality to the market (customer) that eventually leads to enhance company’s growth level in terms of both, sales and profit level. Role of BSC in automobile sector – Like other industries, the use of BSC model has also extended in automobile industries during the last few years. Big automobile companies like, General Motor, Toyota, Suzuki, Nissan have already adopted BSC model to optimise shareholder’s value and improve their production efficiencies and stay competitive. In the car manufacturing segment there are several numbers of measures on the field to evaluate production efficiency of a firm (Niven, 2002). However, the BSC parameter provides best strategies for investigating and foresting internal resource and capabilities to enhance company’s competitive advantage in the market. The execution of BSC model has successfully aligned strategic communication, planning, customer satisfaction, product quality and financial and non-financial measure from the four vital perspectives of BSC model. As a result, for the first time in history, the automotive industries have seen a record sales volume. However, dynamic nature of automobile industry sometime makes it difficult to execute the basic fundamentals of BSC. 8. Balance score card in service sector: As described by Kaplan (2008), service sector in an economy has been started to strengthen industrial revolution. The use of BSC was initiated primarily by the European countries, which was later followed by other nations of the world. Service sector is one of highest contributors of GDP of many nations. In the beginning of twentieth century, service sector had become the largest sector of economic activities, especially in the US and other Middle East countries (McDevitt et al. 2008). The importances of service sectors are continuously growing in the competitive business environment, and as a result managers in this sector are forced to adopt strategies to compete in the dynamic atmosphere. These strategies must be developed on the basis of requirements of the employees, needs of the customer, market condition and expectation of the shareholders. In this context, performance management plays an essential role to provide feedback and control a particular problem. The service sector contains a wide category, such as hospitality industry, financial service, communication and health care. In the service sector, majority of the outcomes are intangible and heterogeneous. So, measurements of the organizational outcome in service sector are problematic and thereby application of traditional success measures is inappropriate. Meanwhile, standard measure for heterogeneous products demands for high labour content (Lawrence and Sharma, 2002). Thus, management in any service organization are forced to modify their performance management approach that helps them to retain their competitive advantage in the field they are operating. Role of BSC in banking sector – As most of the assets in service sector are intangible, the use of BSC has becomes a useful approach to measure the overall performance (Kaynak, 2003). Since the year 1996, the use of BSC has grown tremendously among the service industries. BSC has a significant impact on the banking sector. It seeks to measure performance of banks in various parameters, such as market share, loan advance, bank’s portfolio and operating assists. Kassahun (2010) noted that a large numbers of banks, including Barclays Bank, Chemical Bank, Natwest Bank, Eco Bank, Thai Bank and so on, have already adopted BSC model as a means to performance measurement technique. By conducting an extensive analysis on the Thai Banking industry, Broccardo (2010) reported that application of BSC can play a decisive role to reduce the impact of financial crisis irrespective of strategic orientation and firm’s ownership. The achievements of strategic objectives are highly driven by the improvement in the non-financial variable and suppress the financial variables. The managers of banking sector applied the BSC to develop an effective performance measure and management tool and measure the technological effectiveness in the commercial banks. Application of BSC has shown a strong performance in banking secretor in terms of internal business process and customer satisfaction management except innovativeness, loan processing and disbursement. Kumari (2011) has also supported the view by stating that, linking the BSC with the performance measurement has enhanced employees understanding of the business. In short, BSC improved the decision making performance of the bank’s mangers as well as the customers. Role of BSC in hospitality and tourism industry – BSC is a great way to improve performance of an organization through performance management. Several established hotels including Hilton, Marriott have successfully applied BSC to drive their business strategy and propel their business forward. In the hospitality sector, BSC allows hotel managers to measure the progress of the strategic adjectives in a well-rounded manner. The key scorecard categories provide management feedback to the hotel organizer to optimise their business operation. As suggested by McDevitt et al. (2008), the revenue per available room and revenue per guests are the common financial measures that are used in the hotel company. The BSC used in the hotel sector to monitor their data points, evaluate revenue properties and use the resources efficiently. The measure suggests that if the total amount of revenue is less than the total amount of room available, further adjustment is needed. Meanwhile, the matrix in the customer category focuses on the target market, customer retention rate, customer satisfaction and operational activities (Watchtel et al. 1999). If the customer’s complaints increase significantly, it signals to take actions to improve organizational activities. Maintenance costs of running a hotel are included in the internal business process category of BSC. If the rooms are in disarray and maintenance is required, BSC lets managers know that new capital investment is needed. Lastly, learning and growth segment of BSC includes the hours of training, employee turnover rate and growth matrix of the hotel operators. If the employees are dissatisfied, it might lead to poor customer experience. In this context, rise in employee’s turnover rate signals that more improvement is needed to ensure employee satisfaction and realise their actual revenue potential. 9. Critical evaluation of the role of Balanced Scorecard in production and service organizations: The fundamentals of BSC have been proved to be most useful and are a universal key of performance management of the companies in production and service sector. However, the BSC model has been criticised by the authors from various perspectives. One of the criticisms addressed by Kaplan and Norton (1996) is that implementation of the BSC model is costly and time consuming. Correct use of the model requires thorough understanding of the process and practical experience with it. However, companies in retail and service sector generally employ an outside consultant to execute the process. Thus, the use of BSC to manage the overall performance and track result from all needs becomes an elongated process. Further, Broccardo (2010) criticised the BSC model by stating that the model is over dependant on the four perspective of its measure. This is more evident in case of employee evaluation and performance appraisal. For example, in banking sector the performance of the branch managers are evaluated as ‘above par’, ‘at par’ and ‘below par’, even though bonuses totally depend on subjective judgement of management superior. Simons (2000) opined that, implementation of BSC in the financial institution might fail to retain talent of the employees. For example, branch managers in banking sector could not recognize how the performance of the employee would be evaluated through this model and thereby may have negative impact on employee satisfaction, loyalty, morale. The complexity of BSC is another critical disadvantage. In comparison to other performance measurement models, the complexities and difficulties involved in BSC are very high. Hoque and James (2000) explained that the performance measure technique should be based on the reliable and consistent action of the unit. However, BSC model ensures that an optimistic mindset can be developed for achieving the short-term and long-term goals of an organisation (Kumari, 2011). From this, it can be infer that business should use BSC model as a guide for improving their organizational performance and not as a full-blown plan Further, Kaynak (2003) described that, many companies in production sector are using BSC matrix that are not appropriate in their own situation. Thus, before using the BSC model, companies must ensure that the information that is used to assess the actual needs of the employees, otherwise application of this matrix will be meaningless. 10. Conclusion: BSC has got a universal appeal as a most effective measure of organizational performance. It is an integrated framework for incorporating strategic objective of an organization across the four different perspectives. Even though, all other perspectives are same, the investigation reveals that companies in manufacturing/ production and service sector differ in terms of financial perspectives. Still, companies in both sectors incorporated the dimensions of BSC as a performance measurement tool and used as a strategy of performance improvement. However, there is not much difference in the use of BSC between production and service sector. It has changed the business perspective of these companies and improved organizational abilities in terms of business operation, customers and employee’s satisfaction and resource optimization. Nonetheless, to get maximum result, companies that have already adopted BSC, need to have support from every department to maximise their success. The optimum implementation of BSC model ensures business operations that are properly aligned with the overall goals. Reference List Broccardo, L., 2010. An empirical study of the Balanced Scorecard as a flexible strategic management and reporting tool. Economia Aziendale. 2, pp.81-91. Hoque, Z. and James, W., 2000. Linking Balanced Scorecard Measures to Size and Market Factors: Impact on Organizational Performance, Journal of Management Accounting Research, 12, pp.1-17. Kaplan, R., 2008. The Strategy-Focused Organisation: How Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business School Press: Boston Mass Kaplan, R. S. and Norton, D. P., 1993. Putting the Balanced Scorecard to Work. Harvard Business Review, Vol. 71 Issue 5, pp.134-147. Kaplan, R. S. and Norton, D. P., 1996. Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, 74(1).pp75-85. Kassahun, T., 2010. Rethinking institutional excellence in Ethiopia: adapting and adopting the balanced scorecard (BSC) model JBAS. 2(1).pp 22-53 Kaynak, H., 2003. The relationship between total quality management practices and their effects on firm performance, Journal of Operations Management, 21, pp.405- 435. Kumari, N., 2011. Balanced Scorecard for Superior Organizational Performance European. Journal of Business and Management. 3(5), pp.73-86 Lawrence, S. and Sharma, U., 2002. Commodification of education and academic labor- using balanced scorecard in a university setting, Critical Perspectives on Accounting, 13(5/6), pp.661- 677. Littler, K., Aisthrope, P., Hudson, R. and Keaysey, K., 2009. A new approach to linking strategy formulation and stratefy implementation: an example from the UK banking sector, International of Information Management, 20(6), pp.411- 428. McDevitt, R., Giapponi, C. and Solomon, N., 2008. Strategy revitalization in academe: a balanced scorecard approach, International Journal of Educational Management, 22(1), pp.32-47 Niven, P., 2002. Balanced scorecard step-by-step: Maximizing performance and maintaining results, John Wiley & Sons, Inc., New York. Simons, R., 2000. Performance Measurement & Control Systems for Implementing Strategy Upper Saddle River, NJ: Prentice Hall. Thomas, R., Gable, M. and Dickinson, R., 1999. An application of balanced scorecard in retailing, The International Review of Retail, Distribution and Consumer Research, 9(1), pp.41- 67. Watchtel, T.R., Hartford, C. E. and Hughes, J. A., 1999. Building a balanced scorecard for a burns center. Burns, 25(5), pp.431- 437 Appendix: Figure: BSC Perspectives Read More