This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
This report mainly discusses a performance measurement tool called the Balanced Scorecard (BSC). BSC approach has been found by Kaplan and Norton, and they define BSC as a tool which translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for implementing its strategy (Kaplan and Norton, 1996a, cited Horngren et al 1999). In addition, it measures and concerns both qualitative and quantitative issue in an organization which in return to manage its short-term activities to long-term financial goal. There are commonly other performance measurements available just like ratio analysis, total quality management (TQM), just in time (JIT) and economic value added (EVA). Unfortunately, these performance measurements merely focus based on financial performance only that is to come out ideal financial report based on historical data and it is less significant compared to BSC approach. The major different of these performance measurements is that financial performance is just concerned with the outcome of the financial report, but is not concerned with the value created whilst BSC approach concerned both financial and non-financial performance in order to provide better performance in single report by evaluating both short-term and long-term activities. Horngren et al (1999) mentioned that BSC measures an organization's performance from four key perspectives: (1) Financial, (2) Customer, (3) Internal business process, and (4) Learning and growth. However, each of these four key perspectives has its own characteristic in measuring performance efficiently and will be illustrate more specific with a diagram to show how these four key perspectives work simultaneously in an organization.
2.0 Balanced Scorecard
Balanced Scorecard (BSC) approach to performance measurement comprises a set of financial and non-financial measures that relate to the entire strategy of the organization. Moreover, BSC integrates financial and non-financial performance measures and helps to keep management focused on all of a company's critical success factors, not just its financial ones. Also, BSC helps to keep short-term operating performance in line with long-term strategy (Jackson et al, 2008). Guan et al (2009) argued that BSC permits an organization to create a strategic focus by translating an organization's strategy into operational objectives and performance measures for four different perspectives: financial perspective, customer perspective, the internal business process perspective, and the learning and growth perspective.
At the mean time, Kaplan and Norton created the BSC mechanism to establish organizational performance system and link organization strategy to measures. Both of them have argued that traditional financial measurement like ROI offer a limited and incomplete picture of business performance, and that will hinder the creation of future business value. Therefore, they shout that financial measures should be supplemented with additional ones that reflect internal business processes, customer satisfaction, and the ability to learn and grow. (Kaplan and Norton 2001 & 2004, cited Huang et al 2006)
There are typically four key perspective of BSC introduced by Kaplan and Norton that is customer, financial, internal business processes, and learning and growth. The relationship between these four key perspectives is shown in Diagram 1 below. Brief illustration of each of these four key perspectives is provided in next page:
2.1 Customer Perspective
This perspective focuses on identifying customer value and market segments. It captures the ablity of the organizaion to provide quality goods and services, and overall customer service and satisfaction. According to (Kaplan and Norton 1992, cited Amaratunga 2001), core customer value consists of customer satisfaction, retention, customer profitability, and new customer acquisition which establish a sustainable long-term customer relationship.
2.2 Internal Business Processes Perspective
Internal business processes are the mechanisms through which expected performance targets are met. Several business improvement methodologies available for implementing these business processes such as total quality management (TQM), just-in-time (JIT), activity based costing and many others. Besides, internal business processes perspective aims on the internal business results that lead to financial success as well as customers' satisfaction (Kaplan and Norton 1992, cited Bose and Thomas, 2007).
2.3 Learning and Growth Perspective
With the aim to success, frequent changing is required for that organization make continual improvements to their existing products and processes and have the ability to introduce entirely new processes with expansion capabilities. In order to meet changing criteria and customer expectations, employees may be asked to take on new responsibilities, this may require capabilities, skills, technologies, and organizational designs that were not available before (Kaplan and Norton 1992, cited Amaratunga et al 2001).
2.4 Financial Perspective
Financial perspective provides managers with a clear picture of financial performance of an organization. Bose and Thomson (2007) provide that financial measures commonly used are return on capital employed (ROCE), return of investment (ROI) and operating income. Based on the opinion given by Kaplan and Norton (1992), financial perspective measures financial performance by determining whether or not the organization's strategy, execution, and implementation are contributing to bottom-line in order to enhance efficiency of the organization. However, the objectives and measurement of the other perspectives must be linked to financial perspective. There are commonly three strategic themes of financial perspective itself: Revenue Growth, Cost Reduction and Asset Utilization.
3.0 Benefits of implementing BSC
There are numbers of benefits of implementing BSC in an organization. Firstly, managers can get unexpected ideas and increase creativity through the feedback made from various levels within organization, and it aligns key performance measures with strategy at all levels of an organization. Secondly, BSC provides management with a comprehensive picture of business operations and it facilitates communication and understanding of strategies and business goals at all levels of an organization. Thirdly, all levels of an organization may experience maximized cooperation as they are focused on helping one another succeed. For instance, all levels of organization must be give full cooperation to each other and united into one single entity in order to meet certain requirements. As such, an increase in productivity is attainable as the cooperation is there, and the financial performance of the organization will eventually improve. Fourthly, an organization that implements BSC could avoid some unnecessary occasions such as conflict, misunderstanding between different levels, language barriers and culture barriers. Next, the concept of BSC is linked both financial and non-financial aspects into one entity and it facilitates managers in planning, monitoring and controlling long-term strategies so as to come out better and right decisions. Finally, Kaplan and Norton (1992) provided one of the BSC benefits is to integrate four key perspectives and act as an umbrella for a variety of often disconnected corporate program such as re-engineering, quality, process redesign, and customer service. For example, organizations that adopt BSC can just integrate four perspectives into an umbrella, and they can enhance on both financial and non-financial performance by focusing on the particular umbrella and then settle the case.
4.0 Pitfalls of implementing BSC
In general, there are several pitfalls of implementing BSC such as barriers among all level management in term of culture, language, thought, and so on. In some circumstances where there are barriers among all levels of organization, the financial objective of organization will be misunderstood by lower level employees as their knowledge are not very well compared to middle and top levels. Besides, language barrier has become one of the serious factors, for example, if the organization is communicated in English, definitely some of the lower level employees do not understand the purpose and meaning given by top management. Moreover, time lag has become one of the serious factors as well due to things are deal with uncertainty and ambiguous. Therefore, the decision today may not be the same as the decision made one week ago because anything can happen and create big impact towards the decision at anytime. Next, where cause-and-effect relationships are recognized, they are mainly within individual perspectives, but not between the other perspectives. In relation to that, finality is more ambiguous as it involves uncertainty about both the means and the ends. For example, a student who studies for exam does not mean that he/she will eventually get good result, because it depends on how much effort that he/she put in exam and human behavior may be an impact as well. Finally, resistant to change is something which is very hard to measure as it involved human behavior. For example, when things that we get used to it, most probably we would not want to change a new one and this likelihood is applicable to organizational as well.
5.0 Other performance measurement
There is another performance measurement system called the business values scorecard (BVS), this particular performance measurement system is adopted by BAE Systems, an aerospace company in UK. Apparently, the BAE Systems does not follow exactly in term of the concept of BSC and they have created their own systems called BVS. For example, according to the article written by Jazayeri and Scapens (2008), the BVS intended to focus everyone within BAE on five key values that are (1) performance, (2) people, (3) partnership, (4) customer, (5) innovation and technology as shown in Diagram 2 below. Indeed, this cultural project included the development of the BVS to measure performance by adopting these five key values. In addition, BVS concerned that the different perspectives have to fit together in a coherent way so that the organization can coordinate the actions of the various functions and the activities of the business as a whole. Norreklit and Mitchell (2007) both have agreed that the coherence of BVS's five key values is necessary in order to coordinate and integrate the performance management system as a whole. However, BVS concept does not suitable for all the organization on the ground that every organization is very peculiar on its business objective. For example, there is no such thing that everybody like to wear jean, some people prefer cotton; and some people prefer short pants, it has to depend on suitability.
Business Value ScorecardDiagram 2(Source: Evans and Price, 1999, p.191, cited Jazayeri and Scapens, 2008, p.58)
Performance: Our key to Winning
1. Business unit 3 yrs cash flow
2. Business unit value - 10yr.
3. Growth in order book
4. Change in overall European Federation for Quantity Management (EFQM) score
5. Change in EFQM Business Result score
Partnership: Our future
1. Growth of supplier assessment rating
2. Sales delivery through partnership
3. Change in EFQM score on impact on society
4. Reduction in Supplier base
Customer: Our highest priority
1. Change in EFQM
2. Sales prospects conversion versus planned
3. Growth in customer satisfaction
People: Our greatest strength
1. Personal development plan (PDP) deployment
2. Change in EFQM and People satisfaction score
3. Opinion survey feedback
Innovation & Technology: Our competitive edge
1. Increase in nominee for Chairman award
2. R&D % of turnover
3. Number of best practice case studies
4. Value of new lines of business
5. Number of employees on intranet
With the existence of BSC approach, every organization should adopt this approach and modify it into own as what BAE Systems did rather than emphasize financial performance alone. In the circumstance where an organization manage its non-financial perspective (e.g. productivity, provide better and faster service, increase customers' satisfaction by receiving their feedbacks), the financial performance will increase automatically even without any enhancement about this aspect. As mentioned above, the four key perspectives play an important role in an organization as they guide managers on how to implement BSC within the organization.
On the other hand, Jazayeri and Scapens (2008) provides that BSC measures each perspective as individual part and it measures cause-and-effect relationship whereas BVS takes all its five key values and measures in a coherent way so as to integrate and coordinate the activities of the business as a whole. However, it depends on which type of performance measurement whether appropriate for organization or not because different types of performance measurements sometimes may not suitable to other organizations by various internal factors. By the way, it is very difficult to coordinate and control BVS approach as it requires frequent meetings, and it requires full co-operation between managers and workers from different management level.
To summarize, BSC enables organizations to handle both of their financial and non-financial measurements by determining the four key perspective in term of Customer, Internal Business Processes, Learning and Growth, and Financial perspective which are formally introduced by Kaplan and Norton (1992).