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In 1992, Kaplan and Norton first published a paper about the Balanced Scorecardï¼ˆBSCï¼‰. It was a huge success and BSC soon became very popular all over the world. Before BSC emerged, organizations usually use traditional methods of performance evaluation focused mainly on financial measures such as ROCE, sales and profits. BSC translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system. The scorecard measures organizational performance across four linked perspectives: financial, customer, internal business process, and learning and growth (Kaplan and Norton, 1996).
In recent years, a number of multi-national organizations have introduced BSC as part of their management control systems. The purpose of this paper is to give a critical evaluation of the BSC as a performance management tool in multi-national organizations.
The paper is structured as follows: the next part gives some reasons of multi-national organizations using BSC and the advantages of using it. The second is about some limitations of using BSC and the reason why it is not suitable for some organizations. One specific example is given for both parts. The last part is the conclusion of this paper.
BSC has been widely used in multi-national organizations in the past 15 years. It obviously has some benefits to these organizations. Here are some of the advantages of BSC and they are also reasons that make so many organizations adopt BSC.
Firstly, each perspective of BSC requires the identification of a number of goals, and suitable measures. This means that BSC can provide strong support to the decision making of the organization. In the world which is full of competition, it's very important for an organization to identify what is most important. Each goal and each measure of the BSC is closely related to the strategic target of the organization. The organization can make strategic decisions based on the BSC. Multi-national organizations are often very large, they need simplified and concentrated target for the whole organization to keep themselves competitive. Otherwise, the connection between different departments will become weak and the organization will finally fall apart.
Secondly, BSC guards against sub-optimisation, so that improvement in one area is not achieved at the expense of another. Teamwork is a very important part of corporate culture. BSC combines different elements of an organization and that enables managers to consider what different departments' functions are. In traditional methods of performance evaluation, managers only focus on financial figures. This can lead to decisions that make one department improve its performance on the expense of another. This is quite important to multi-national organizations. A multi-national organization has many departments and one of the managers' tasks is to coordinate these departments and make the most use of each department. If one department improve its performance on the expense of another, there will be serious problems for the organization.
Thirdly, BSC brings together many of the different elements of a company's business and strategy into a single report. This can make decision making process more efficient. All of the four perspectives of BSC are key elements to the success of an organization. BSC provides a report of the combination of the four perspectives and it can save time for managers who are making decisions. It also enables managers to minimise information overload by limiting the number of measures used. Nowadays, organizations seldom get bothered because of lack of information, on the contrary, they often have to deal with more information than what they really need. This happens more often on multi-national organizations. Many multi-national organizations hire professionals as consultants and when these consultants provide suggestions, there will usually be an increase in the sources of information. This will thereby increase the pressure of dealing with information. BSC can help managers concentrate on only a few key factors, so that they can minimise information overload and make the right decision at the same time.
Fourthly, BSC challenges managers to look at organizations in new ways and to talk to stakeholders about the issues which really matter. It can also inspire employees to work harder. Traditional methods of performance evaluation stress what managers want employees do and then evaluate the result. They're about the control of results. BSC, on the other hand, stresses target management. It encourages employees to reach the target creatively. Top managers don't know everything themselves. The BSC lets people who know the area best make the best decision and the task for top managers is to combine all these together and set a target for the organization as a whole. Managers don't have to look at the detailed information, they just need to set targets and make decisions for the organization as a whole. This can be quite important to multi-national organizations because they usually have departments all over the world, it's impossible for top managers to look into every detail in every department and shareholders need the most important information to make decisions. So BSC turns out to be a very good tool for multi-national organizations.
However, BSC is not suitable for every organization in the world. It also has some limitations.
Firstly, BSC is to complicated for some organizations. Organizations have to increase the number and breadth of performance measures when the adopt BSC. Many organizations find it complex for evaluating business units' performance because BSC has large number of performance measures across several perspectives. (Kraus, K. and Lind, J., 2010) If an organization wants to adopt BSC, it has to establish clear and real cause-and-effect relationships between different measures. It's much easier than done in reality, even Kaplan and Norton admitted it (Kaplan and Norton, 1996). This process of establishing relationships may take years to complete. Therefore, many organizations find it hard to adopt BSC. And some organizations which do adopt BSC just simplify it by reducing measures and some even focus on financial measures only, just like what they do in traditional methods.
Secondly, BSC may result in employees paying attention to the areas measured. Since BSC outlines what the organization's strategy and all the areas that will be measured, employees will start paying attention to these areas so that they can get high reward through good performance in these areas. They'll ignore areas that won't be assessed because they won't get reward from these areas. And this can become a weak point of the organization. The use of BSC requires a change in the orientation of the employees. Managers have to think about customers, internal business process and learning and growth as well as financial perspective, which means managers have to know more than just financial figures. Other employees, at the same time, are also forced to look at the organization's goal instead of their own production or sales goals. This requires that all of the employees must have a higher education than they had in traditional methods.
Thirdly, BSC may be too restrictive and also may not be able to cope with a fast changing business environment. The market is changing rapidly nowadays and it takes time to construct a BSC system in the organization. Important elements for an organization change everyday. And new elements arise everyday. It's quite possible that one element is very important when the organizations decides to adopt BSC and becomes not important at all when BSC is finally established.
Fourthly, some organizations may face capital market pressure. Most organizations, especially multi-national organizations, raise fund from the capital market. Capital market influence managers' decisions a lot. Managers know what they say and do may affect the stock price and they know that usually analysts are only interested in financial measures. This leads to organizations' focus on income and revenues because this is what they're measured on externally (Kraus, K. and Lind, J., 2010).
Finally, BSC may have a high cost. BSC requires an organization to think from and set target in financial perspective, customer perspective, business process and learning and growth perspective. This require not only deep understanding of the overall strategy of the organization, but also the separation of the strategy into different departments. The organization needs to set proper goals and measures for each department. And employees need to learn about BSC to make sure the system will work. Information of each department and each perspective of the BSC needs to be collected. Establishing BSC consumes a lot of time and resources. Even established, BSC can cost a lot. It needs continuous collection of information. And there is a learning and growth perspective in BSC, which can be quite expensive. So many organizations may abandon BSC just because of the high cost.
Let's take Coca-Cola, the famous multi-national company based in America, as an example. Coca-Cola Beverage Company in Sweden (CCBS) adopts BSC in the company. CCBS took the advice of Kaplan and Norton. It decided to measure its performance from financial perspective, customers, internal business process, and learning and growth. The top managers had a three-day meeting to discuss about it. They set a long-term target for the company (about 3 years). They also described the market conditions at that time. Then they decided an overall target for the company and set measures for different systems and programs.
The top managers tried to keep each perspective of the BSC balanced. In order to do that, CCBS used a step-by-step way. First of all, the managers set some financial measures related to the overall strategy, set financial targets on these measures and then reached these targets in a proper way. The second step was to repeat the same process in the customers perspective. The question was" how our customers will respond if we plan to reach our financial target." The third step was to identify the internal business process. The managers asked themselves some questions: do we have enough creativity? Are we willing to change ourselves in order to make the company change in a proper way? After this process, CCBS was able to make sure that each perspective was balanced and all the measures would lead the company to the same direction. But they did think that it was necessary to repeat these steps several times before they became totally balanced.
CCBS didn't put emphasis on business plans or budgets. It didn't see BSC as something can be unchanged. On the contrary, it considered every problem in a changeable way and made modifications every year. This may be the main reason that made BSC adoption in CCBS such a success.
Some other subsidiaries of Coca-Cola are also establishing BSC in recent years. However, Coca-Cola didn't ask all of its subsidiaries to adopt BSC as a tool of performance measurement. Different companies may have different conditions and different management. Since all the laws and economic environment in different countries are distinct and the adoption of BSC requires good management, BSC may not be suitable for some companies.
Take companies in China as an example. The stock market in China is not as mature as it is in European countries. Many investors in the stock market don't have enough economic background and they usually rely on analysts. However, analysts only care about financial figures. This leads to some companies consider BSC as useless. And in some companies which do use BSC, managers often ignore the real core of BSC. They usually use BSC to measure performance of employees and decide their wages only and they don't realize that BSC is actually about the company's overall strategy. So BSC is not suitable for most companies in China right now. BSC adoption needs a more mature market and managers who really understand what BSC is.
In conclusion, BSC has many benefits and it can help organizations become more competitive. But it also has some limitations and it doesn't work in some countries and in some businesses. It is not suitable for every organization.