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The Balanced Scorecard is a management system that maps an organizations strategic objectives into performance metrics in four perspectives: financial, internal operations, customer satisfaction, and innovation and growth. The BSC framework provides a balanced perspective to a firm on how it looks to its shareholders (financial perspective), how do the customers see the firm (customer perspective), what the firm must excel in (internal business processes perspective), and can the firm continue to improve and create value (innovation and growth perspective). These perspectives provide relevant feedback as to how well the strategic plan is executing so that adjustments can be made as necessary. Inherent in the Balanced Scorecard model is that no perspective is innately more important than the others (Brewer and Speh 2000).
BSC as a Strategic Performance Measurement Model
Kaplan and Norton describe the innovation of the balanced scorecard as follows:
"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."
The BSC first started as a performance measurement system by Kaplan and Norton and it was later developed into a strategic control system to help organization implement their strategies. The balanced scorecard, it was argued, will assist top management to effectively communicate their vision and strategies to every member of the organization through the common metrics that is well understood by everyone in the organization. It therefore can be seen as an effective strategic information tool.
Performance measurement can be defined as the process of measuring efficiency, effectiveness and capability, of an action or a process or a system, against given norm or target. (Deborah Nightingale, 2005, p4)
The Balanced Scorecard has not only been hailed as being theoretically sound, it has produced results, as well. In a 2003 study of 35 organizations in the UK, found that best performance measurement initiatives were implemented by those companies that used a Balanced Scorecard approach to data measurement and whose initiatives had been led by an individual who was not involved in the financial performance measurement (Prickett: 4). The study further showed that these companies had successful measurements because, as is prescribed by the Balanced Scorecard model, they identified truly crucial indicators after consultation with every portion of the business' team, including in many cases the lower-level and front line employees. Finally, the study suggested that the return on investment for the research necessary to produce a Balanced Scorecard is well worth to the company (Ibid).
The vast majority of the literature on the Balanced Scorecard model, usually in the form academic and scholarly commentary, has consistently praised the Balanced Scorecard. The model promotes good "strategic health" of an organization (Hagood and Friedman 2002). The model has been held to have the properly flexibility to allow for relative importance of each area to be given by individual companies (Gadenne 2000). A final example of the positive feedback is the balance of the Balanced Feedback, in as much as it allows a company to measure its performance based on internal analysis and external analysis via the Customer perspective (Arora 2002).
Measuring and Assessing Performance
According to the Baldrige Criteria (1997) a major consideration in performance improvement involves the creation and use of performance measures or indicators. It further explains performance measures or indicators as measurable characteristics of products, services, processes, and operations the company uses to track and improve performance. It gave the criteria for selecting the measures or indicators as being the ones that best represent the factors that will lead to improved customer, operational, and financial performance. A comprehensive set of measures or indicators tied to customer and/or company performance requirements therefore represents a clear basis for aligning all activities with the company's goals.
Traditionally, performance measurement of businesses has usually been through the use of mainly financial indicators. But financial measures such as returns on investment and earnings per share are historical in nature and therefore have little predictive value to management of an organization. This therefore becomes insufficient for decision making regarding the future performance of the organization.
The goal of making measurements is to permit managers and other external actors to see a company more clearly - from many perspectives - and hence to make wiser and long-term decisions. The Baldrige Criteria (1997) booklet reiterates this concept of fact-based management as follows:
"Modern businesses depend upon measurement and analysis of performance. Measurements must derive from the company's strategy and provide critical data and information about key processes, outputs and results. Data and information needed for performance measurement and improvement are of many types, including: customer, product and service performance, operations, market, competitive comparisons, supplier, employee-related, and cost and financial. Analysis entails using data to determine trends, projections, and cause and effect - that might not be evident without analysis."
One model that can be used to assess and manage corporate performance is the Performance Management Model (PMM).It incorporates economic, financial and operational performance indicators that are applicable at all levels of the organization. The above indicators are measured and evaluated in order to obtain a complete critical analysis of a business's overall performance. According to Malina & Selto (2003, 2004 and 2005), PMMs with valid cause-and-effect relations between indicators are more important to organizations since they integrate into organizational objectives. PMMs, namely, the balanced scorecard (Kaplan & Norton, 1992), seek to integrate both strategic and financial measures in a cause-and-effect relation where the action on non-financial measures influences the financial measures.
Criticisms of the BSC approach
One of the criticisms leveled against the BSC model is its over reliance on measures. This is even more evident in cases where measures are tied to employee evaluation and bonuses. A particular case in point is where bonuses for branch managers of Citibank branches in California were tied to BSC measures. The performance of each branch manager was evaluated as "below par," "par" or "above par," even though it is clearly stated in the company manual that lacking an objective indicator for people performance, evaluation and bonuses will be based on the subjective judgment of the branch manager's superior.
Pfeffer and Sutton (2000) warn against such practices, citing a similar BSC implementation at a financial institution where the superior's evaluation of branch managers was conducted through quarterly meetings where they merely sat down and talked for half an hour. A branch manager who did train his team members and helped them move up was evaluated as "par" because he failed to retain talent in his team. That branch manager was frustrated by the evaluation and could not understand how his performance could be evaluated as "par" when he indeed was developing talent in the division as a whole. Such use of measurement may have an adverse effect on employee morale, satisfaction, and loyalty.
Furthermore, over reliance on measures of any type may hamper the application of tacit knowledge and wisdom. With heavily regulated measures, management is restricted in its use of tacit knowledge, as it must justify its decisions by reference to measures. These problems can be avoided simply by not tying measures to performance, and by using measures as a guide rather than a straitjacket. However, problems with the BSC model go deeper.
Another criticism of the BSC model is its complexity, the time and cost required for its implementation compared to its "low ease of use." The complexity and difficulty lie in the choice of effective measures. Roos et al. (1997) explain that for performance measures to be effective they have to be reliable and consistent with the actions of the unit, and with the short- and long-term goals of the whole organization. Finding measures that are specific to the unit, yet general enough to reflect the strategy of the organization, and that incorporate long- and short-term views seems to be too optimistic. Consider the example of the branch manager discussed earlier; although he was losing talent on his team, he was developing human capital for other divisions, units, and the organization as a whole. This may be the reason the BSC model's authors stress the need to apply the model as a guide, not a full-blown plan.
In conclusion, chapter two provided a brief review of literature related to our research questions (RQ1 - RQ3). This brief chapter also provided a conceptualized frame of reference for the study. The aim of this chapter was to select relevant theories and concepts that will be used in the research.
To assess the impact of financial and non-financial perspectives on performance, the approach here is to look at the flow in terms of the cause-and-effect framework. That is, an organization with proper learning and growth structures is able to empower its employees to deliver efficient services, which in term create satisfied customers, which will result into strong financial performance. This can be summarized below as:
1. knowledge & skills of employees is the foundation of all innovation and improvements;
2. skilled and empowered employees will improve the ways they work;
3. improved work processes will lead to increased customer satisfaction; and
4. increased customer satisfaction will lead to better financial results.