Evaluation of Development and Role of Balanced Scorecard in Production and Service Organisation - Coursework Example

Critical evaluation of development and role of balanced scorecard in production and service organisation Contents Contents 2 Introduction 3 History of balanced scorecard 4 Linking of Balanced scorecard with international business 5 Point of favour for balanced scorecard 7 Failure of Balanced scorecard 8 Example of success and failure of balanced scorecard 9 Reflective opinion toward balanced scorecard 12 References 14 Introduction A Balanced Scorecard (BSC) is a strategic management tool which is used as an integrated management system throughout an organization with the aim of driving the improvement, modernization and transformation of business processes at all hierarchical levels so that the pre defined organizational strategies can be accomplished in an effective manner. Due to the strategic execution function of the tool, the balanced scorecard is also known as Strategy Execution System. The balanced scorecard is used to represent a framework used for strategic planning and implementation within an organization. Furthermore, this tool is a useful mechanism through which the different perspectives of an organization like financial perspectives, learning and growth perspectives, customer perspectives and internal business processes of an organization are streamlined and interlinked. The understanding of the strategies realest to different perspectives of an organization helps the employees to become directly and indirectly involved in the planning and implementation of strategies within an organization. This also helps the employees to improve and change the ways in which they perform their everyday job which ultimately adds value to the execution of the strategic plans of the organization at both the macro and micro levels. This report is prepared with the aim of understanding the balanced scorecard as an important management system sued by organizations across the globe. The report includes a discussion of the history of the evolution of the balanced scorecard. A section of the report is dedicated to the discussion of the use of balanced scorecard on the international business platform. The benefits and criticisms regarding the balanced scorecard are also explained followed by a section which includes the real life examples of success and failure of balance scorecard tool in different organizations like Bank of England, NHS Healthcare Foundation, and Nemours Children Health System etc. The report is concluded with a reflective opinion regarding the usefulness of balanced scorecard in the current business environment and the ways in which the design and implementation of the balanced scorecard can be made better. History of balanced scorecard Figure 1: Balanced scorecard framework (Source: Selto and Malina, 2001) The balanced scorecard concept was invented by Kaplan and Norton as a set of mechanisms and principles that can be used for measuring and evaluating the Key Performance Indicators (KPIs) and the strategic objectives of an organization. The first generation of the balanced scorecard was invented in the year 1992 following which two more generations of balanced scorecard were launched as the improved versions of the original balanced scorecard tool (Moller, 2009). Today, a company named The Palladium Group which is based in Massachusetts is the owner of the concept of the balanced scorecard. Many companies have tried to replicate the concept of this management tool. However, till date no organization has been able to adapt this strategic management approach in a way better than the original owner, the palladium Group managed by Kaplan and Norton. The balanced scorecard is used in today’s business organizations as a way of integrating and aligning the management systems (Banker and Chang, 2004). This tool is also used by thousands of companies of various sizes and operating in various industries across all geographical locations in the globe. Linking of Balanced scorecard with international business The balanced scorecard is significant in the international business perspectives because the purpose of using a balanced scorecard is not only to measure performance but also find strategic ways to improve the individual and organizational performances of a company. In its simplest form, a balanced scorecard approach is cantered on four major performance perspectives or metrics. These are customers, internal business processes, and financial perspective and learning and growth opportunities. Each of these perspectives of a balanced scorecard can be further segregated into subparts like objectives, measures, metrics, targets and initiatives. If a balanced scorecard is properly implemented in a business, it is likely to add value to the competitiveness and effectiveness of the business through the achievement of the pre defined goals and vision of the company. The role of a balanced scorecard as a strategic management tool has become crucial since its inception (Niven, 2010). More and more companies have started adopting the balanced scorecard technique to achieve a number of corporate and strategic objectives in their businesses. The balanced scorecard not only works as a communication tool but also it performs the role of a strategic management system and a measurement and performance evaluation system in different kinds of businesses (Kaplan and Norton, 2006). The companies operating in the current global business environment have found multiple uses of a balanced scorecard. The balanced scorecard is used by the senior management of domestic as well as international organizations to set up new agenda for the management, developing new directions and leadership for the business, prepare the organization for business crises and also to implement the new strategies formulated at various phases of the business (Nair, 2004). The other functions of a balanced scorecard approach may include the alignment of the organizational objectives with the employee goals, the prioritization of initiatives in the business, the development of new strategies for the organization and supporting the development of communication within the organization (Merl, 2007). Many multinational companies have also started using modified versions of the balanced scorecard in doer to include dimensions which are important from the perspective of their individual businesses. For example, Tesco Plc. has implemented a new form of balanced scorecard which is known as the steering wheel for the company. The steering wheel of Tesco is an extended version of the original balanced scorecard technique and includes five dimensions which are people, finance, community, customer and operations. Figure 2: Modified Balanced scorecard of Tesco Plc. (Source: PricewaterhouseCoopers, 2012) Similarly, many other companies operating in the international business environment have started using the original version of the three generations of the balanced scorecard as well as the modified versions of the balanced scorecard in order to meet their individual strategic management requirements. Point of favour for balanced scorecard The balanced scorecard was originally formulated as a tool for performance evaluation and measurement in an organization. However, over years, the technique has evolved significantly and has started encompassing added functionalities and objectives. The balanced scorecard has become a technique for the implementation of new strategies in a company as well as for the deployment of various value-driving mechanisms in the company (Campbell, 2008). It has been identified that companies which use the balanced scorecard approach have gained a strategically advantageous position within the industries in which they operate. The benefits that can be derived from a balanced scorecard are largely dependent on the design of the framework, the purpose of its use and the method of application and implementation of the framework within the existing constructs of a business. This tool is most commonly used for achieving operational excellence and higher levels of customer satisfaction. The benefits that can be gained from the balanced scorecard in the operational domain are the increased awareness, alignment and understanding of the operations and operational control factors throughout the management teams, increased level of implementation and monitoring of the business initiatives related to performance improvement and improved understanding of the various linkages between target setting and target achievement and the alignment of the operational objectives with the mission and vision of the organization. The objectives of using a balanced scorecard in a company include the translation of organizational vision into the corporate goals, the communication of the company vision to all the entities of the company and the linking of the vision with the individual performances of the employees, business planning, developing index settings, constructing learning and feedback systems and preparing the business and corporate strategies so as to meet the needs of the company accordingly. Failure of Balanced scorecard Though the balanced scorecard system has been reviewed and revised again and again to make it more efficient yet there still remains certain loopholes associated with the tool which makes it less proficient than as expected by the industry experts (Crawford, 2008). The first reason for the failure of the balanced scorecard tool is that this framework is devoid of an adequately coded mechanism that can make the framework sufficient by itself for enabling the management to take critical decisions regarding the sustainability conditions and other emerging issues of the business. Since, the design of the balanced scorecard does not include the factor of sustainability, it is found to be majorly lacking in effectiveness in the modern business environment in which sustainability has emerged as the buzzword for success and competitive advantage (Hoque, 2012). The balanced scorecard is much criticized because of its empirical nature and the inherent technical flaws associated with the tool. Also, the balanced scorecard is criticized by many academicians and scholars because of the lack of a bottom line score in the design which makes it difficult for the management using the technique to develop a unified view underpinning clear communications (Boddy, 2005). Many times, the balanced scorecard is said to be a simple set of metrics which is not sufficient to develop corporate strategies. It is also argued that the balanced scorecard fails to meet the essential need of value creation for the stakeholders of a company. Often a balanced scorecard is said to be biased towards the financial stakeholder groups of a company. The fact that the balanced scorecard framework is developed with more focus given towards the financial perspective often acts as a constraint for the use of the framework on an international platform (Collier, 2009). Example of success and failure of balanced scorecard The Balanced Scorecard as developed by Kaplan and Norton in 1992 the years has emerged as one of the most commonly used strategic management tools among both the private and public sector organizations (Hill and Jones, 2007). The balanced scorecard technique has been implemented in many domestic and multinational organizations like Scandia, Tesco, Halifax, Nike, ABB, Cigna etc. to name a few. According to a recent study more than 35% of the United States corporations have successfully sued the balanced scorecard to measure and improve their overall organizational performances. Also, the balanced scorecard has found its importance in both large scale and small and medium scale enterprises across different geographical regions and sectors (Banker, Chang and Pizzini, 2004). The balanced scorecard is commonly implemented in service industries like education industry, healthcare industry, aviation industry etc. the use of balanced scorecard in the healthcare companies is very common. Companies like Nemour Children Health System have been using this tool successfully through years. Nemours is a non-profit based organization which is dedicated to the medical welfare and treatment of children. The company is a pioneer in the domain of paediatric healthcare in the United States of America. Nemours was inducted to the Balanced Scorecard Hall of Fame in the year 2007 following its continuous use of this technique to improve the performances and performance measurement system of different verticals of the organization. The organization has successfully developed a strategy map through the use of the balanced scorecard which has equipped it to perform remarkably and create a leadership position for itself in the United States healthcare industry. The strategy map for the Nemours children health System as developed through the balanced scorecard tool is given below (Figure 3). Figure 3: Nemours Children’s Health System Strategy Map (high level) (Source: Norton, 2006) Other renowned companions which have implemented the balanced scorecard technique successfully are Microsoft Corporation, Philips Electronics, Tesco Plc. etc. (PricewaterhouseCoopers, 2012) In manufacturing companions like Philips Electronics, the balanced scorecard has been successfully used for reviewing and improving the operating cycles, the post sales cycles, risk assessment, inventory volumes, customer satisfaction, overall production and service delivery (Person, 2010). The use of the balanced scorecard is also seen among the financial service providers. One example of the use of this tool in the financial services industry is the adoption of this strategy tool in the Bank of England. The Bank of England has used the balanced scorecard technique to measure and improve the customer service dimension of the bank through the improvement of the learning and growth scopes for the internal entities of the organization. The balanced scorecard is also used in the information technology companies like Cisco, Microsoft Corporation, Google Inc. etc. The balanced scorecard has been successfully implemented in Cisco since 1999. The service delivery and the operations of the multinational company have improved substantially after the adoption of this framework in its strategic management function. The diagrammatic representation of a balanced scorecard used in a general information technology company is given in Figure 4. Figure 4: The Balanced scorecard example of a shared service based Information Technology Company (Source: Johnson, Scholes and Whittington, 2007) The balanced scorecard has also found widespread application in the hotel industry. Hotel industry is a service industry which is highly driven by operational excellence and service performances. Thus, the learning and growth perspectives of the balanced scorecard are used as an important measurement for evaluating the performances of the front office as well as the back office executives who work in this sector. The big hotel chains like JW Marriott have been using the balanced scorecard as a means to assess their progress towards the achievement of the strategic objectives of the business. Bothe the financial and non financial metrics are used to gauge the performances of these companies in terms of service provision. All the four perspectives of the balanced scorecard are used by hoteliers to evaluate the overall performance levels of the organizations. An example of the failure of the balanced scorecard implementation in the practical world is that of the NHS Healthcare foundation based in the United Kingdom. The healthcare organization had adopted the balanced scorecard tool as a technique for improving its operational and service delivery processes. However, the management of the organization failed to assess the exact requirements of the organization from this strategic tool (Bocij, Greasley and Hickie, 2008). Reflective opinion toward balanced scorecard The balanced scorecard is a necessary strategic management tool that can be used for strategic management and planning within a business. In my opinion, the balanced scorecard is important for adoption in any kind of business, irrespective of whether it operates on a domestic or a multinational platform. The balanced scorecard approach can help a company to measure the performances, map these performances against the business objectives and keep a track on the degree to which the objectives and goals of a business are attained within a specific period of time. This can also help the management to review and reformulate the business and corporate strategies used in the company. As per my opinion, the balanced scorecard, if used effectively and efficiently may lead to high value creation for the company as well as its stakeholder groups. However, the management of a company can appropriable evaluates the exact requirements of the balanced scorecard approach in the business and should identify the critical areas in which the balanced scorecard can be used to improve the performance levels. In the production and services industries, operating efficiency and customer value creation are the two most significant objectives. Since the balanced scorecard helps a business to identify the targets and methods to achieve these targets and helps to set and evaluate the key performance indicators in a business, therefore, in my view, the balanced scorecard should be used as a basic strategic management tool by the companies operating in the production and service industries. However, in order to use the balanced scorecard in the most value adding manner in an organization, the most suitable steps should be taken to assess the needs of the different verticals of the organization and the design of the balanced scorecard should be done after analyzing and assessing the major changes and the various external and internal factors that are likely to affect the functioning and performance of the organization. The management of a company should properly evaluate the key challenges in the external environment of the business, the impacts of these challenges on the performances of the business and also map the progress of the business as per the key strategic objectives and Key Performance Indicators (KPIs) of the business. As per my understanding, the creation of an effective and useful scorecard can be done through the proper identification of the performance based requirements of the particular organization and through the development of the appropriate metrics which can be used to measure processes, performances and results in the company. This would help the company to develop a balanced scorecard that would not only help in strategic planning but would also help the management to identify the strategic oversight gaps prevailing in the business. References Banker, R. D. & Chang, H. 2004. A balanced scorecard analysis of performance metrics. European Journal of Operational Research. Vol. 15 (2), pp. 423–436. Banker, R. D., Chang, H. & Pizzini, M. 2004. The Balanced Scorecard: Judgmental Effects of Performance Measures Linked to Strategy. The Accounting Review. Vol.79 (1), pp.49-60. Bocij, P., Greasley, A. & Hickie, S. 2008. Business Information Systems (4th Ed.). Harlow: FT/Prentice Hall. Boddy, D. 2005. Management: An Introduction, (3rd Ed). Harlow: Pearson Education Limited. Campbell, D. 2008. Testing Strategy with Multiple Performance Measures: Evidence from a Balanced Scorecard. Journal of Accounting Research. Vol. 4(2), pp.31-36. Collier, P. M. 2009. Accounting for Managers: Interpreting Accounting Information for Decision Making. (3rd Ed). Chichester: Wiley. Crawford, D. 2008. The Balanced Scorecard and Corporate Social Responsibility: Aligning Values for Profit. Stamford: Cengage learning. Hill, C. W. L. & Jones, G. R. 2007. Strategic Management Theory: An Integrated Approach. Boston: Houghton Mifflin. Hoque, Z. 2012. Celebrating 20 years of the Balanced Scorecard: relevance lost or relevance gained and sustained? [Pdf]. Available at http://www.uow.edu.au/content/groups/public/@web/@commerce/documents/doc/uow124719.pdf. [Accessed on 3 December 2014]. Johnson, G., Scholes, K. & Whittington, R. 2007. Exploring Corporate Strategy. (8th Ed). Harlow: FT/Prentice Hall, Kaplan, R. S. & Norton, D. P. 2006. The Balanced Scorecard: translating Strategy into Action. Boston: Harvard Business Press. Merl, A. 2007. Analysis of the Balanced Scorecard as a strategic controlling instrument. Stamford: Cengage learning. Moller, A. 2009. The Sustainability Balanced Scorecard as a Framework for Eco-efficiency Analysis. Journal of Industrial Ecology. Vol. 9(4), pp.74-78. Nair, M. 2004. Essentials of Balanced Scorecard. New Jersey: John Wiley & Sons. Niven, P. L. 2010. Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results. New Jersey: John Wiley & Sons. Norton, D. P. 2006. Alignment: Using the Balanced Scorecard to Create Corporate Synergies. Boston: Harvard Business School Press. Person, R. 2010. Balanced Scorecards and Operational Dashboards. New Jersey: John Wiley & Sons. PricewaterhouseCoopers. 2012. Driving operational and financial improvements using balanced scorecards. [Pdf]. Available at http://www.pwc.com/ca/en/mining/publications/pwc-2012-04-05-driving-operational-and-financial-improvements-using-balanced-scorecards-en.pdf. [Accessed on 3 December, 2014]. Selto, F. & Malina, F. 2001. Communicating Strategy: An Empirical Study of the Effectiveness of the Balanced Scorecard. Journal of Management Accounting Research. Vol. 13(1), pp. 47-90. Read More