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Balanced Scorecard in Management

Info: 2725 words (11 pages) Dissertation
Published: 10th Dec 2019

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Tagged: AccountingManagement

The accounting system is one of the traditional methods to measure companies’ success (Kaplan & Norton 1996). However, critics have indicated few inadequate points from financial measures. It is that accounting figures has limitation to emphasize the aspects that will bring good or poor financial consequences. Although the approach have strong advantage to show the footage of past events, but the weakness is about the upcoming investment (Nerreklit 2000). For that reason, experts invented varied tools for management. Over the several decades, the worldwide business environment and competitiveness of the market have considered how performance measurement is important. The methods of performance measurement were selected variously for many industry fields and they have gradually been spotlighted (Niven 2002). One of them is the balanced scorecard. Around three decades ago, Robert Kaplan and David Norton established new approach to strategic management. They called the system “Balanced scorecard”. To get handle on the unclearness and weakness of traditional management approaches, the new strategy provides clear definition for about what business organisations ought to measure in order to balance the financial aspect. Although the balanced scorecard bring large-scale organisational change and improvement, it requires a degree of expertise in its implementation (Pitt & Tucker 2008). The balanced scorecard is not just a performance measurement system but it is also a management system which encourages organisations to be able to translate their vision and strategy crystal clearly and translate them into action. It presents feedback on internal business processes and external performance to continually improve strategic outcomes and results. Once it has been fully set up, the balanced scorecard transforms strategic planning from the day-to-day work into the strategic direction of the organization (Gawankar et al. 2015). In order to let companies achieve their long-term development, four managing strategic processes were suggested. Translating the vision, Communicating and linking, Business planning, Feedback and learning stages are expressed as an integrated set of business long-term success. While companies using balanced scorecard, they can monitor short-term result as checking the list of four perspectives: Financial, Customer, Learning and Growth and Internal business process. These segmental steps can supply solid framework for performance measures (Kaplan & Norton 1996). Then, is the balanced scorecard suitable for managing companies and creating future value? This writing will address that how well this method is using as efficient tool for information age business as a performance measurement system and management system.

One of the problems with accounting figures is that the financial consequences of incomplete events exceed the measurement time. For example, performance measures in accounting systems ignore the financial value of company’s intangible assets such as ongoing research, human resources and goodwill. The situation may even be aggravated if a company is forced to invest short-term financial results rather than a long-term goal. Administrators can also refuse to invest in growth and innovation potential. Although possibly improving short-term profitability, only focusing on short-term interest can lead to a loss of efficiency, customer loyalty, and dissatisfaction, making the company vulnerable to competitors. These features shows that the accounting system s are not sufficient decision-making and assessment tool (Nerreklit 2000). The balanced scorecard is a performance measurement system for overcoming limitations from the traditional performance measurement system which relied solely on financial measures.

To solve these problems, balanced scorecard introduced three more measurement categories that cover non-financial aspects. The outcome of balanced scorecard is that translate the vision and strategy of a company into objectives and it need to measure four different areas. The financial perspective is about how the company wishes to be considered by its shareholders. The customer perspective determines how the company wishes to be viewed by customers. The internal business process perspective describes in which process the company must boost in order to satisfy its shareholders and customers. The organisational learning and growth perspective identifies which changes and improvements the company have to realize if it is to make its vision come true (Kaplan & Norton 1996; Nerreklit 2000). Hence, the ‘balance’ of the balanced scorecard is reflected in its combination of financial and non-financial measures and lagging and leading indicators (Akkermans & Oorschot 2005).

The idea of the balanced scorecard is originated from the United State of America. It has been applied successfully around many industries and even in the public services. It also has been introduced to an international audience and on a multi-disciplinary front (Hepworth 1998). For example, in Finland, it was appealed because of its logical function (Malmi 2001). In Scotland, it also applied to a police force (Wisniewski & Dickson 2001). To be more specifically, the balanced scorecard model has been used by successful organisations as a core point for all key management processes, from planning and budgeting to resource allocation, and the reporting systems of corporate performance (Punniyamoorthy & Murali 2008). The balanced scorecard model plays a role as a way to communicate the organisational mission, vision, strategies and so on. Also it promotes to create a focus on critical points relating to the balance between the short-term and long-term (Olve et al. 1999).

On the other hand, some researchers said the success of the balanced scorecard is possibly explained by good timing and marketing. When Johnson and Kaplan introduced BSC in articles in the Harvard Business Review, managers were frustrated with traditional measurement system. Yet, apart from the timing, another key strength of the balanced scorecard is that its formula is so simple. It proposes that with only a few well-balanced numbers can guide the performance of a whole company system (Akkermans & Oorschot 2005).

However, unfortunately, the balanced scorecard model may not work perfectly for everywhere. Some part of challenges and limitations are related with the balanced scorecard model’s conceptualisation and assumptions (Khomba 2012). Firstly, the balanced scorecard model is considered as being overly simplified. The BSC model claims that this tool is to cover the internal and external performances. However, the both side systems from different interested parties are interconnected in a highly complex manner (Khomba 2011). The balanced scorecard which is greatly simplified is hardly represent the complex interdependent between and organisation and the great number of activities that the internal and external stakeholders engage in (Khomba 2012).

Secondly, the BSC model can not be used as a general purpose model because its conceptual limitation. To apply the BSC model as an effective strategy management tool, the scorecard should be applied to the management practices of all individual organizations (Norreklit 2000).This is useless in other societies because it is not universally applicable. For example, the model is still unacceptable in France due to its conceptual shortcomings (Bourguignon et al. 2004). The BSC model is not suitable for business in France. The mechanical top-down deployment of this approach ignores the gradual and collective composition of business strategies in France. Another ideological discrepancy arises from the fact that, unlike in the United States, there is no long-term tradition of performance-based compensation systems, such as those spread in the BSC model in France. Hence, the balanced scorecard model is strict and systematic because it adapts a top-down approach. Strategies developed at a higher level are subordinate to the lower levels of the organization. The BSC model does not recognize that the performance measurement system can be a bidirectional process (Hudson et al. 2001). As a result, the model does not conceptually integrate top-level strategic scorecards with operational-level performance measures.

Another drawback of the balanced scorecard is that the BSC system is too much focused on shareholder’s interests. The balanced scorecard is based on the theory that a profit-seeking company has one main long-term purpose of raising the profits of its investors and is assumed to be based on the causal relationship of the theory. However, the goal of maximizing profits may not apply to public and non-governmental organizations like the balanced scorecard was originally intended. Organizations, especially those in the public area, are characterized by the need to be given a number of qualitative goals rather than the quantitative aspects mentioned above. Thus, with a simply designed balanced scorecard, it can be difficult to integrate a clear causal relationship between goals and processes within these complex organizational settings. In the end, meaningful performance measures are found over time in many stages throughout this complex organization.(Khomba 2012).

In fact, it also has been pointed out that the BSC does not exactly notice the interests of other important stakeholders. This model does not emphasize any stakeholder-focused approach to performing the management. The balanced scorecard is based largely on the assumption that an organization has one long-term goal that is to maximize shareholder wealth in profit-seeking organizations. According to that point, except shareholders’, other critical stakeholders’ interests are sacrificed to satisfy only the shareholders. Therefore, the absence of multi-stakeholder approach, it is not considered as regarding the other key stakeholders, such as the community and the natural environment (Khomba 2012). Even these are critically important considerations in current days.

Moreover, the balanced scorecard does not take an environmental perspective and not take care of the connection between the environment and organisational operations. Because they do not have any mention about it, many companies do not take the appropriate steps to quantify the risk of cares to the environment. Additionally, companies do not have any responsible to disclosure environmental and societal matters (Khomba 2012).

As researching features revealed from tons of studies about the balanced scorecard, the conclusion of this writing is that the balanced scorecard is not perfectly adequate tool for contemporary business management. Although it covered the drawbacks of sole usage of financial measures for guiding companies, but it has crucial shortcoming to apply it (Kaplan & Norton 1996).

The balanced scorecard consists of several conceptual estimations that include the prescription of the four perspectives. This is designed to clarify and updated company’s strategy, communicate strategy throughout the company, align group and individual’s goal with the strategy, connect strategic targets to long-term plan and annual budgets, Identify and coordinate strategic initiatives and learn and improve strategies through regular performance reviews. (Kaplan & Norton 1996). Successful application of the balanced scorecard system entails the translating the clear vision and aligning company’s vision and action. However, there are some critical points that can be barriers to apply the balanced scorecard to every area. First, because it is overly simplified, it is difficult to represent internal and external interests effectively (Khomba 2011). The composition of business become very complicated, the BSC can not cover whole interests. Also it has limitations at conceptual point as well. For instance, a culture where the concept which aimed by the BSC model does not exist, the balanced scorecard is hardly acceptable. If we consider nowadays, all the countries are globally connected each other and business should be extremely free from cultural limitation. According to this periodic feature, its concept can be not universally applicable. Furthermore, the balanced scorecard overemphasizes the shareholders’ interests and it can not provide a solution to satisfy complex components. It could drive the limit when the public sector organizations desire to apply this model to measure their system or performance, because it needs to find out the way to reduce the gap between multiple goals and simplified process indicators. Moreover, it does not cover stakeholders’ interest, so it is difficult to be regarded as providing a healthy way of tool for management (Khomba 2012). By the same token, the scorecard lacks of stages for considering the environment or social problem (Khomba 2012). Nevertheless environment and social activities are considering as the most important duty for companies recently, the balanced scorecard fail to motivate the executives to write report about preservation. It is considered as it is behind the time and responsibility.

References

Akkermans, H & Oorschot, Kv 2005, ‘Relevance assumed: a case study of balanced scorecard development using system dynamics’, Operational Resarch Society, no. 56, pp. 931-41.

Bourguignon, A, Malleret, V & Nørreklit, H 2004, ‘The American balanced scorecard versus the French tableau de bord: the ideological dimension’, Management Accounting Research, vol. 15, no. 2, pp. 107-34.

Gawankar, S, Kamble, SS & Raut, R 2015, ‘Performance Measurement Using Balance Score

Card and its Applications: A Review’, Journal of Supply Chain Management Systems.

Hepworth, P 1998, ‘Weighing it up ‐ a literature review for the balanced scorecard’, ournal of Management Development, vol. 17, no. 8, pp. 559-63.

Hudson, M, Smart, A & Bourne, M 2001, ‘Theory and practice in SME performance measurement systems’, International journal of operations & production management, vol. 21, no. 8, pp. 1096-115.

Kaplan, RS & Norton, DP 1996, ‘Using the Balanced Scorecard as a Strategic Management System’, Harvard Business Review, vol. 74, no. 1, pp. 75-85.

Khomba, JK 2011, ‘Redesigning the Balanced Scorecard model: an African perspective’, University of Pretoria.

Khomba, JK 2012, ‘Conceptualisation of the Balanced Scorecard (BSC) model: A critical review on its validity in Africa’, International Journal of Commerce and Management, vol. 25, no. 4, pp. 424-41.

Malmi, T 2001, ‘Balanced scorecards in Finnish companies: a research note’, Management Accounting Research, vol. 12, no. 2, pp. 207-20.

Nerreklit, H 2000, ‘The balance on the balanced scorecarda critical analysis of some of its assumptions’, Management Accounting Research, vol. 11, pp. 65-88.

Niven, PR 2002, Balanced scorecard step by step : : maximizing performance and maintaining results, Wiley, New York

Norreklit, H 2000, ‘The balance on the balanced scorecard a critical analysis of some of its assumptions’, Management Accounting Research, vol. 11, no. 1, pp. 65-88.

Olve, N-Gr, Roy, J & Wetter, M 1999, Performance drivers : a practical guide to using the balanced scorecard, J. Wiley.

Pitt, M & Tucker, M 2008, ‘Performance measurement

in facilities management: Driving innovation?’, Property management, vol. 26, no. 4, pp. 241-54.

Punniyamoorthy, M & Murali, R 2008, ‘Balanced score for the balanced scorecard: a benchmarking tool’, Benchmarking: An International Journal,, vol. 15, no. 4, pp. 420-43.

Wisniewski, M & Dickson, A 2001, ‘Measuring Performance in Dumfries and Galloway Constabulary with the Balanced Scorecard’, The Journal of the Operational Research Society, vol. 52, no. 10, pp. 1057-66.

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