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The most significant management contribution in the 21 st century must be to improve productivity of the employees' knowledge (Peter Drucker). Drucker also cites that all companies and organizations should be targeted to their definitions of performance that influence organizational strategies. Companies should estimate performance in the context of persistent fluctuation, structural changes, social, political and technological alternation of the global knowledge based economy. This is done throughout changes in the perception of strategic management practice. The balanced scorecard is accepted as a powerful management tool for strategy performance (Mark L. Frigo).
Balanced scorecard (BSC)
According to introduced explanation by Kaplan and Norton (1996) the balanced scorecard (BSC) is a management system which facilitates companies to define the vision and strategy and interpret them into execution. (BSC Institute, 2006a)
Nowadays, the companies all over the world have become competitive on the basis of information and their awareness of to use invisible assets become far from conclusive than their ability to invest in control physical assets (R.Kaplan and D.Norton). Kaplan and Norton approved, that the balanced scorecard has become more than a way to estimate financial execution. Moreover, the balanced scorecard is the center of a new strategic management system of organization that finds out the weaknesses of old systems that do not appropriate with the knowledge economy.
It is a method for managing strategy and creating a new organizational form, the strategy-focused organization. Arguably, in most occasions when realization of strategy does not bring expected results, the reason of the failure can be not the quality of strategy but its weak performance, this means that in most companies has a gap between strategy formulation and strategy execution. On average, 95% of a company's staff are don't know or do not understand, its strategy. If employees are unaware of the strategy, they obviously cannot help the organization implement it effectively. Robert Kaplan and David Norton (The Balanced Scorecard: Translating Strategy Into Action, Harvard Business School Press, 1996).
The Balanced Scorecard (BSC) framework gives companies an opportunity to define their performance from four perspectives: (1) financial: 'How does the companies' staff should look to the shareholders?'; (2) customers: 'How do the companies customers approach the company?'; (3) innovation and improvement: 'How the company's employees can continue to improve their
process?'; and (4) internal processes: 'How the company can excel in?' (Parker, 2000). The BSC framework provides a balance between economic and operating performance (Amaratunga 2001), financial and customer results, and short- and long-term goals of an organization. The BSC also provides leading and lagging indicators to estimate correspondence between the execution of an organization and its strategic goals (Kagioglou 2001) and results in a better indication of an organization's performance than only financial measures (Hepworth, 1998). Moreover, BSC also supports strategic planning, transforms the strategic plan for the organization on a daily basis, provides performance measurements, assists planners recognize what should be measured and enables execute organizational strategies (BSC Institute, 2006b).
A key to successfully designing and accomplishing a balanced scorecard system is adjustment with the strategic plan. The development of the scorecard should be seen as part of the strategic planning process, focusing on the full range of market, financial and human resource issues acquisitioning the organization. When linked to a performance management system, the scorecard enables the organization to associate business activities with strategy, while impacting priorities and execution of staff. It also simplifies future planning. Finally, the Institute of Management Accountants (IMA) research found that balanced scorecard systems had better results than older approaches to strategy implementation.
Strategic planning is a management process for evaluating of current business, determining the strategic direction, and road mapping the strategic plan in practical actions. A strategic plan explains why an organization exists, what it is trying to accomplish, and the tactics it will take to achieve its goals and objectives. Using a variety of facilitation techniques, our consultants help organizations assess their business strategy and communicate it clearly.
1.2 Research Objectives, Questions and Hypothesis.
The main purpose of this research is to identify influencing factors of BSC that may help to understand weather the organizational strategy can be a crucial way on a decision making process.
Therefore, this research was illustrated with following objectives, questions and purposes to test consequent hypothesis:
To identify BSC approaches those are relevant to successfully implemented strategy.
To Study the factors which increase overall knowledge of employees under effective BSC strategy.
Based on the above objectives, the following research questions are raised:
How to identify BSC approaches those are relevant to successfully implemented strategy?
What are the crucial factors, which may help to improve awareness of employees towards their strategies?
Following research hypotheses are developed:
BSC enables organizations to successfully complete strategy throughout improvement employee incentive system.
There exist factors increasing project success within a balanced scorecard (BSC) perspective.
1.3 Research scope
This research will try to evaluate of a balanced scorecard effects which uses and serves as a part of a measurement-based strategic management and system that promotes the organization's ability to reach its strategic objectives. Moreover in this report revealed the use of balanced scorecards as a management tool for strategy evaluation and refinement. There related experiences of companies that use balanced scorecards and examines some of the cause-and-effect linkages observed by companies using them. Overall this research will try to give an explanation about balanced scorecards which allow companies to examine the relationship between strategy and the profitability of a final goal. This makes scorecards a valuable management tool for strategy evaluation.
2.1 Literature review of the balanced scorecard and organizational strategy
Chapter illustrates literature appraisal of Balanced Scorecard (BSC) execution and management philosophy, along with current using strategic practices, models and motivational approaches. This section of research will identify key factors of the Balanced Scorecard and organizational strategy involving necessary outcomes of employee labor effectiveness and their loyalty. Additionally in this chapter will be discussed the goals of corporate-level business and organizational strategy that will transformed into objectives, measures, targets, and balanced scorecards. Finally, in this unit will be demonstrated the ideas and best practices of companies that are succeeded throughout having essential effect of strategic planning.
2.1 Interpretation of definition of the balanced scorecard.
The balanced scorecard supplemented traditional financial measures with criteria that measured performance from three additional perspectives - those are
internal business processes
Learning and growth.
Kaplan and Norton mentioned that since 1996 many companies around the world have improved their performance by adopting construct of the balanced scorecard. The companies and organizations included large and small, manufacturing, service, rapid growth, public, private and nonprofit enterprises. According to Kaplan and Norton the balanced scorecard was firstly developed to overcome restrictions of importance on lagging indicators of historical accomplishment. The framework and method was developed to measure foretellers of future achievements. It included four perspectives of measurement: financial, customer, internal business processes, and learning and growth.
Financial includes growth, profitability, and risk measures from the shareholder's expectations.
Customer focuses on creating value and differentiation from the customer viewpoint.
Internal business processes reflects strategies that create customer and shareholder satisfaction.
Learning and growth measures choices that led to a climate of change, innovation, and future growth. by Robert S. Kaplan and David P. Norton
Managers following the balanced scorecard strategy shouldn't rely on short-term financial measures as the sole indicators of the company's performance. The scorecard provides managers and introduces four new management processes that, separately and in combination, contribute to linking long-term strategic objectives with short-term actions. See the exhibit "Managing Strategy: Four Processes."
Vision and Strategy: Four Perspectives
Figure 2.1: Vision and Strategy: Four Perspectives
Source: Managerial Accounting; Hilton (2009) Eighth edition p.430
Translating the vision process - assists managers build an agreement around the organization's vision and strategy. For people to act on the words in vision and strategy statements, those statements must be stated as an integrated set of objectives and measures, agreed upon by all senior executives, that describe the long-term drivers of success.
Communicating and linking process - This gives managers opportunity to communicate their strategy up and down the organization and link it to departmental and individual objectives. Traditionally, departments are estimated by their financial performance, and individual motives are bound to short-term financial goals. The scorecard provides managers with a path assuring that all levels of the organization understand the long-term strategy and that both departmental and individual objectives are associated with it.
Business planning process - permits companies to integrate their business and financial plans. Almost all organizations today are accomplishing a variety of change programs, each with its own champions, consultants, and each competing for senior executives' time, energy, and resources. Managers find it difficult to integrate those diverse initiatives to achieve their strategic goals - a situation that leads to frequent disappointments with the programs' results. But when managers use the ambitious goals set for balanced scorecard measures as the basis
for allocating resources and setting priorities, they can undertake and coordinate only those initiatives that move them toward their long-term strategic objectives.
Feedback and learning process - gives companies the capacity for strategic learning. Existing
feedback and review processes focus on whether the company, its departments, or its individual employees have met their budgeted financial goals. With the balanced scorecard at the center of its management systems, a company can monitor short-term results from the three additional perspectives - customers, internal business processes, and learning and growth - and evaluate strategy in the light of recent performance. Therefore the scorecard enables companies to modify strategies to reflect real-time learning. Robert S. Kaplan and David P. Norton (1996)
VISION AND STRATEGY
Many companies have experience on this field, and results come from many studies on the effectiveness of balanced scorecard. One study showed a strong impact of measurement systems on the alignment of strategy in organizations. Balanced measurement companies had significantly higher scores than non balanced measurement companies on the following measures: agreement among senior management on strategy, good compensation and teamwork among management, open sharing and communication, effective interaction of strategy, and higher levels of self-supervision by employees. Another study, conducted by the Conference Board, reported that firms that linked performance management systems to their strategy outperformed their competitors. Finally, Kaplan and Norton cited the Institute of Management Accountants (IMA) research found that balanced scorecard systems have better results than older approaches to strategy implementation.
Following information provided by Dell Inc. This feedback shows how Dell Inc. links the balanced Scorecard to organizational strategy.
According to Dell successfully using of the balanced scorecard (BSC) depends on linking the scorecards lead and lag measures to the organizational strategy. Dell Inc. set its own strategy that is "to be the most successful computer company in the world at delivering the best customer experience in markets they serve. Strategic finance "Putting Strategy into the balanced Scorecard" (2002).
Following diagram displays, Dell's strategy of using its direct sales model to provide unparalleled customer service perspectives including a balanced scorecard.
for the company as measured in financial terms
Higher customer satisfaction
Learning and growth initiatives such as employee training
Improved internal processes and operations
Dell's strategy of success
Through customer service
Figure 2.2: Linking the balanced scorecard to organizational strategy. Case Dell Inc.
Source: Managerial accounting (2009) Hilton.
The given balanced scorecard presents relevancy of Dell Inc. to successfully performance of its strategy. Dell's strategy and its balanced scorecard measures are dominated by its customer-focused-sales business model.
DELL'S VISION AND STRATEGY
Figure 2.3: Dell's vision and strategy
Source: The strategy focused organization: R.S. Kaplan and D.P. Norton (Boston: Harvard business school Press, 2001)
Communicating and Linking
The balanced scorecard indicates to everyone what the organization is trying to achieve for shareholders and customers alike. But to align employees' individual performances with the overall strategy, scorecard users generally attract three activities: communicating and educating, setting goals, and linking rewards to performance measures.
Communicating and educating. The personal scorecard helps to communicate corporate and unit objectives to the people and teams performing the work. Kaplan and Norton (Linking the BSC to Strategy).
Performance of a strategy begins from educating those who is able to execute it. Since some organizations choose to hold their strategy close to the vest, most believe that they should disseminate
it from top to bottom. Communicating the balanced scorecard promotes commitment and accountability to the business's long-term strategy. Kaplan and Norton (Linking the BSC to Strategy).p.154
After long research Kaplan and Norton come to the idea that simply awareness of corporate goals is not sufficient to change many people's behavior. Therefore, the organization's advanced strategic objectives and measures should be translated into objectives and measures for operating units and individuals.
Thus Kaplan and Norton found out that three levels of information can be helpful to determine corporate and individual goals. The first level presents corporate objectives, measures, and targets. The can be seen translating corporate targets into targets for each business unit. For the third level, the company requires both individuals and teams to explain which of their own objectives would be compatible with the business unit and corporate objectives, as well as what initiatives they would take to achieve their objectives.
So, the personal scorecard helps to communicate corporate and business unit objectives to the
people and teams performing the work, enabling them to translate the objectives into significant tasks and targets for themselves.
Linking rewards to performance measures
Kaplan and Norton provide determination of how to link rewards to performance measures, whether compensation systems should be linked to balanced scorecard measures or not. In keeping with research results, some companies, believing that restricting financial compensation to performance is a powerful lever, have moved quickly to establish such a linkage. As example they provided an oil company using scorecard as the single basis for computing incentive compensation. The company bound 60% of its executives' bonuses to their achievement of ambitious targets for a weighted average of four financial indicators: return on capital, profitability, cash flow, and operating cost. It bases the remaining 40% on indicators of customer satisfaction, dealer satisfaction, employee satisfaction, and environmental responsibility.
Additionally, companies usually handle multiple objectives in a compensation formula by assigning weights to each objective and calculate incentive compensation by the extent to which each weighted objective was achieved. This practice allows substantial incentive compensation to be paid if the business unit overachieves on a few objectives even if it falls far short on others. A better approach would be to establish minimum threshold levels for a critical subset of the strategic measures. Individuals would earn no incentive compensation if performance in a given period fell short of any threshold. This requirement should motivate people to achieve a more balanced performance across short- and long-term objectives. The balanced scorecard has a role to play in the determination of incentive compensation is not in doubt. Precisely what that role should be will become clearer as more companies experiment with linking rewards to scorecard measures.