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Robert Kaplan and Norton came up with balance scorecard in 1990s.The balanced scorecard consists strategically oriented set of goals which are grouped into four different perspectives which includes financial, internal processes, customer, learning and growth. It is known to be a framework for performance measurement that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance. (Balance scorecard insititute)
The BSC is a model that integrates financial and non-financial strategic measures. Being a high profile model BSC has attracted attention from practitioners and academics. BSC relies on the strategy concept developed by Porter where he argues regarding the essence of formulating a competitive strategy lies in relating a company to the various competitive forces in the industry. Kaplan and Norton emphasize that non-financial strategic objectives should not consist of an random collection of measures but they should comprise balanced representation of both financial and non-financial information. (The Economist)
Advantages of balanced scorecard
Improved creativity along with unpredicted Ideas.
It also helps align key performance measures with strategy at different levels of an organisation and provides the management a comprehensive picture of the business operations.
Balanced scorecard facilitates effective communication and understanding of business goals and strategies of an organisation.
Transformation of strategy into action.
This concept provides strategic feedback and learning.
Reduced time-frame and improved competitive advantage
Improved decision, processes and better solutions.
Initiatives are frequently measured and evaluated against the industry standards. (Balance scorecard Australia)
The empirical study conducted by Sun din, Granlund and Brown(2010) concluded that the balance scorecard is eligible to create a balance in multiple objectives and the study highlighted to have balanced both in terms of process and outcomes.
In case of Philips Medical Systems North American (PMSNA) the company used balanced scorecard in order to upturn accountability for results. Through the implementation of worldwide scorecard system Philips has realized its significant benefits and has also succeeded in focusing the company on diverse set of business measures. (SCRC articles)
Disadvantages of balance scorecard
It is simply considered as a list of metrics which does not provide bottom line score with clear recommendations.
The scores obtained are not based on any financial or economic theory in other words the process is subjective.
Critics have also claimed that the positive feedback from the balance scorecard users may be due to the placebo effect as there is are no observed studies related to the use of balance scorecard to improved decision making or better financial performance of companies.
Resistance towards balance scorecard from employees or even higher level managers.
It is time consuming to adapt to balanced scorecard strategic system.
High implementation cost is involved at the initial stage. (Vector study)
Criticisms and alternatives of BSC
Many alternatives have emerged to balance scorecard such as performance prism, results Based Management and Applied Information Economics. In 2000, the Federal CIO Council commissioned a study to compare the two methods AIE and BSC by funding studies in side-by-side projects in two different agencies. The Dept. of Veterans Affairs used AIE and the US Dept. of Agriculture used Balanced Scorecards. The result in report revealed that while AIE was much more sophisticated , AIE actually took slightly less time to utilize. AIE was also more likely to generate findings that were newsworthy to the organization, while the users of balance scorecard felt it simply documented their inputs and presented no other specific insight.
Neely (2002) argued that the most challenging problem of balance scorecard is that it lacks numerous important interest groups in its structure such as suppliers, co-operation partners and close neighbours. Neely also recommends that it would be feasible to use a performance prism method as a possible source for adding new interest groups to the framework of balance scorecard whereas Simons mentions that it might be sensible to add a detailed feature where specific task force or a certain person will be assigned in every organisation who is directly responsible for collecting information about external opportunities and threats.
Pandey (2005) after critically analysing the balance scorecard argued that he had no doubt regarding the performance improvement process being a critical part of strategic planning but he raised a question that whether the balance scorecard linked with the strategy leads to better performance and communication as claimed by the proponents.
In 2008 Othman suggested that there must be a link in the balance scorecard and scenario planning referring to the strategic planning that is robust to different external conditions and this will assure that balance scorecard is not just representation of present situation. Kaplan, Norton and Rugelsjeon (2010) answered to the criticism regarding the external orientation. They answered how the organisations can be saved from failures of alliance problems and the authors claimed that the alliances can be better managed through balanced scorecard due to its strategic orientation. (World applied science journal )
Many international research reports have revealed that the balance scorecard concept is a highly widespread tool around the world. Despite numerous success stories there have been also several criticisms and cases where the implementation failed. The 2005 survey conducted by Brains and company shows that 57% of the worldâ€™s firms use balanced scorecard as their performance management system. A survey conducted by the 2GC in 2011 the survey results show that the primary role of the Balanced scorecard is still strategic management. The number of participants who view the Balanced Scorecard as a very or extremely valuable management tool consist of 75%. From the above statistics we can conclude that wide number of organisations using balance scorecard to improve their organisational performance. (2GC active management )
It can be concluded that balance scorecard is an effective performance tool but the suggested improvements have to be undertaken in order to increase positive results.
Some of the recommendations can be given in order to improve the balance scorecard performance measurement:
The focus should be future oriented not merely consist of the past and current situation prevailing in the organisation.
Common measures of balance scorecard should be adopted by all SBUâ€™s in order to ensure uniformity in performance evaluation.
Supportive culture should be prevailing in the organisation in order to ensure successful implementation of balance scorecard.
Balance scorecard should not only be utilised for high performance but also organisational innovation and product development.
Responsiveness to different external situations in the business environment.