In such a strong competing business world today, every company's objective is to maximize profits while minimize costs of expenses. Therefore, to evaluate performance from time to time, there are several financial measurement tools available for companies to measure such as Return on Investment (ROI), Residual Income (RI), Economic Value Added (EVA) and many others. However, these financial measurements are merely evaluating financial perspective which generated the final outcome of the company's performance. In addition, a company is doing well in its financial performance does not mean that the company has achieved high satisfactory from its customers and suppliers. So, what if the company itself faced shortage of employees? Does it create serious impact towards the productivity and the income of organization? Well, we all know that these financial measurement tools are mainly focus about organization's growth regardless of the process from responsibility centre such as production cost centre, revenue centre, profit centre, investment centre as well.
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Hence, to embark on both financial and non-financial measurements, the company has to implement another performance measurement tool called Balance Scorecard (BSC), this tool was introduced by Robert. S. Kaplan and David P. Norton in 1992 (Punniyamoorthy and Murali 2008). BSC consists of four main key perspectives (as shown in Figure 1): (1) Financial perspective, (2) Internal perspective, (3) Customer perspective, and (4) Innovation & Growth perspective. Subsequently, the author will elaborate more on BSC approach and its effectiveness towards performance evaluation as well as the comparison between BSC approach with the Business Value Scorecard (BVC) approach and finally conclusion will be provided based on these two approaches.
2.0 Balanced Scorecard
Horngren et al (2008) defined BSC as a performance measurement and reporting system that strikes between financial and non-financial measures, links performance to rewards, and gives explicit recognition to the diversity of organizational goals. Besides, Hanson et al (2008) also provided that BSC is a framework that firms can use to evaluate whether or not they have implemented both financial and strategic controls to assess their performance, and BSC approach can also apply to corporate-level strategies. For instance, the four main key perspectives of BSC framework: (1) financial (concerned with profitability, and risk), (2) customer (concerned with the amount of value customers perceive was created by the firm's products); (3) internal business processes (focuses on the priorities for various business processes that create customer and shareholder satisfaction), and (4) innovation and growth (emphasized with the firm's effort to create a climate that supports change, innovation and growth).
Besides, BSC framework provides a balanced perspective to firm on how it looks to shareholders (financial perspective), how do customers see the firm (customer perspective), what the firm must excel in (internal business processes perspective), and can the firm continues to improve and creates value (innovation and growth perspective). For example, customers who enter a restaurant, obviously they are not interested to know how well the restaurant's profitability performance is, but likely to emphasize the taste of the foods and the environment of the restaurant. BSC is an ideal framework which concerns both factors in the example that maintain or enhance profitability performance while served impressive foods in a comfortable environment and gain customers' satisfaction (Hanson et al, 2008).
*Figure 1, extracted from (Garrison et al, 2008, page 440)
"Has our financial performance
What customers do we want to serve and how are we going to win and retain them?
"Do customers recognize that we
are delivering more value?"
What internal business processes are critical to providing value to customers?
Internal Business Processes
"Have we improved key business processes so that we can deliver more value to customers?"
Innovation and Growth
"Are we maintaining our ability to change and improve?"
3.0 Effectiveness of BSC approach
2.1 Four key perspective of BSC
On the other hand, in order to produce a 'balanced performance' of an organization, Kaplan and Norton introduced four key perspective of BSC to resolve such circumstance as shown in Figure 1. Subsequently, the characteristic about the four key perspectives will be illustrated in detail below:
2.1.1 Financial Perspective
Always on Time
Marked to Standard
Financial perspective measure financial performance point out whether the organization's strategy, execution, and implementation are contributing to bottom-line improvement. Periodic financial statements give an alert to managers that enhance quality, productivity, response time and innovative products benefit the organization when they result in improved sales, increase market share, or higher asset turnover (Jr. et al, 2009)
2.1.2 Customer Perspective
Undoubtedly, all sales and revenue are attributable from customers; therefore, customer perspective is a top priority for management. Hence, the BSC requires that managers translate their general mission statements on customer service into specific measures that resolve the factors which is really matter to customers. Managers must articulate goals for another four key categories of customer concerns about which are time, quality, performance, and service and cost (Jr. et al, 2009).
2.1.3 Internal Business Processes Perspective
Hilton (2009) discussed that excellent customer performance results from internal business decision, processes, and actions throughout organizations in a coordinated fashion, and managers must emphasize on those critical internal operations that enable them to satisfy customer needs. Nevertheless, these internal operations include factors that affect cycle time, productivity, employee skills and quality as well. In a nutshell, organization must always identify and measures key resource capabilities as to ensure continued strategy success.
2.1.4 Innovation and growth
Knowing that the rapid changes of technologies, rate of markets, and global competition; the criteria for success are constantly changing. So, managers must make frequent changes to existing products and services and also introduce a brand new product with expanded capabilities. An organization's ability to do better from an innovation and learning perspective is more dependent on its intangible assets: human capital (knowledge, skill and talent), information capital (networks and information systems), as well as organization capital (culture, and leadership). Furthermore, Hilton (2009) suggested that new product must be introduced and developed to replace those products that become obsolete and these processes must continually be developed to improve the efficiency of the production. Most importantly, one thing that is most constant is change especially in a world-class manufacturer or service firm. For example, recruit a well-trained team specially focus and come out new concept, new product with innovative design and pattern in order to sustain the company's product and profitability.
3.0 BSC versus BVS
According to Kaplan and Norton (1996a), they assume that a casual relationship between both financial outcomes and non-financial measures. As such, the assumption of a cause-and-effect relationship is crucial because non-financial measures allowed to be used to predict future financial performance of an organization. Recent academic research has suggested that there are many ways in which the BSC can be used. For example, Malmi distinguished companies which use the BSC in a system of management by objectives and, on the other, companies which use the BSC merely as an information system. Nothing worth in this point that, in Malmi's study, he also noticed that most of the BSC users tend to direct their attention to each perspective of BSC, rather than exploring the cause-and-effect relationships between the different perspectives as suggested by Malmi 2001, cited Jazayeri and Scapens 2008.
On the other hand, BVS has five perspectives which link to the five key values in the culture change project: (1) performance, (2) partnership, (3) customer, (4) people and (5) innovation and technology. For instance, the BVS is evolved out of its previous system called 'traffic light' reporting. To maximize the usefulness of BVS, what was important was ensuring that all measures fitted together in a coherent way and the different perspectives were all pursued simultaneously. For example, the different perspectives have to fit together in a coherent way in order to coordinate and integrate the actions of the various activities and functions of the business as a whole, and each perspective has to be monitored and action taken as necessary, and yet they have to be seen as an entity, rather than as individual parts. (Jazayeri and Scapens, 2008, pg.62)
According to NÇ¾rreklit and Mitchell (2007), they argued that Kaplan and Norton confuse cause-and-effect relationships with both logical relationships and means-ends, which is also called 'finality' relationships (NÇ¾rreklit and Mitchell 2007, cited Jazayeri and Scapens 2008). As mentioned above, the five perspectives of BVS have to implement in a coherent way and are interconnected with each other. For instance, people measures are related to innovation and technology, which are directly related to the customer and partnership, which in turn are related to financial performance. There is, on the other hand, similar to Kaplan and Norton's (1996a) idea of a chain running through their BSC approach whereby well-trained employees lead to better business processes, which attributable to more satisfied customers and then to improve financial performance of an organization.
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However, this top-down approach and the aim on cause-and-effect relationship is slightly different from the way in which strategy evolved and the BVS was used to allow strategy to emerge at various levels in the organization as well as within the individual business whilst the BVS was part of a complex process through in which strategy implement through time as part of the culture change project, in particular, it was a tool which handle both strategy formulation and strategic management.
As a result, both performance measures are of similar approach but they have got different way in term of their implementations respectively. The only different thing between both financial measures is that the BSC aims to solve problems one by one whereas BVS aims to aggregate all the problems and solve it in a coherent way.
By comparing performance measurement tools (i.e. BSC and BVS) as mentioned above, they both have a wide range of different uses and it can mean many different things to different people. However, Kaplan and Norton's BSC approach implements strategy that is set by top-level managers; it could facilitate strategic development and enable strategy to emerge within the organization rather than to implement those five key values of BVS simultaneously. Although BSC aim to improve four key perspectives and segregated into four individual entity, it shows that BSC able to manage and control well on each perspective one followed by the others. For example, by referring to Figure 1, an organization is initially consider innovation and growth perspective, at this particular moment, the top managers are brain-storming and come out a final decision about any innovation and growth against products and services of the organization. After the first perspective being finalize and they will consider on the second perspective, internal business processes, and focus solely on this particular perspective, and the same rotation for the other two perspectives.
Moreover, the BVS aims to reinforce a cultural change project. Nothing to worth at this point where cultural change project is not part of the issue of what an organization is considering. By the way, it is very difficult to implement all five key values of BVS in a coherent way. For example, the top and bottom management level may have several barriers such as communication, knowledge, and language. However, implementation of BVS seems efficiency but it does not consider the factor of step-by-step because things get worse when a lot of interrelated things are messed up and it tends to create time consuming to resolve the unwanted matters that happened within an organization.
Thus, it is vital to implement cause-and-effect measures using BSC approach which is introduced by Kaplan and Norton (1992) in order to produce better financial performance of an organization even though it takes time to focus on four key perspectives one by one. Finally, the best way to achieve ideal financial performance is to focus the same thing and work in a coherent way, but not to focus everything in a coherent way.
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