A report on different financial measurements in modern business

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Traditionally, Kotelnikov (2001) said most companies tend to evaluate their performance using financial metrics has gradually shown it weaknesses since the information are formulated based on previous results. With rapidly changing market and the advancement of technology, the financial measurement alone is an inadequate measure as some other factors could also be a major influence in a companies' performance. As a result, companies have started to use non financial performance measures to evaluate their performance in today modern business environment. Basically, non-financial measures is not a new phenomenon as it was adopted as early in the 1950 by General Electric firm in the United Stated (Anthony & Bedford 2006) and by today, there are many types of non-financial or performance measurement systems had been use in companies. Nevertheless, as stated by Johnson (2010), the balance scorecard is the most well-known system of non-financial measures today.

2.0 Balanced Scorecard

Based on Atkinson et al (2007), balanced scorecard was introduced by Kaplan and Norton in 1992 as a performance measurement system to measures an organization performance with a comprehensive set of four different but linked perspectives that derived from organization's vision and strategy. Basically, balanced scorecard does not solely emphasize on financial objectives but also non-financial objectives because Kaplan and Norton believe by achieving these non-financial objectives will eventually meets its financial objectives. Thus, as stated above, balanced scorecard measures performance from four perspectives which are financial, customer, internal business process and, learning and growth (Horngren et al, 2005). Mentioned by Hilton (2008), financial perspective genuinely measures the profitability of the strategy that has been imposed by company. As for the customer perspective, manager should identify the targeted market segments in which the company needs to compete and attract. In term of internal business process perspective, Kaplan & Atkinson (1998) said, top level management should point out critical internal operations that significantly creating the most value for customer and also increasing the shareholder wealth, in order attention will be given on these aspects for improvement. Of course with these three perspectives are definitely inadequate because the businesses now are moving forward with rivals' competition and technology advance, hence Rajan (2010) said learning and growth perspective is there on the balanced scorecard for a company to identify the infrastructure and programming that can keep the company growth in the long-run and up-to-date. The framework of the four key perspectives of a balanced scorecard is portrayed in figure 2.0 below.

Furthermore, the four perspectives in the balanced scorecard will form a chain-and-effect relationship as compared to other systems. In such, Kaplan & Atkinson (1998) said cause-and-effect relationship is a set of hypotheses whereby managers will implement their strategy as test to see the effectiveness of the strategy in the company performance. For example, a rise in learning and growth will definitely improve business operation. Consequently, customers tend to feel satisfied with the services of the company which resulted higher profitably in the financial perspectives.

However, it is not an easy task in implementing a strategy because it could also face failure if considerations have not taken properly by the top level management. For instance, managers implement a strategy by giving an infinite preference on colour choice for car will increase customer likenesses to purchase the car. If there were positive feedback from customers, sales volume will of course rise and hence the production productivity needs to be improved. Thus, incentives or extra course in training workers to become skilled in the spray profession will definitely able to achieve the higher volume of production. As a result, profit will increase which benefits the shareholders as in the financial perspective. On the other hand, as mentioned earlier, cause-and affect relationships is a hypotheses theory, and perhaps the availability of colours may not be favourable to customers. Thus, the strategy impose is a failure as it did not rise the production volume.

Therefore, managers should carefully define strategy and objectives for each perspective and later provide potential measures for the objectives identified. (Horngren et al, 2005). But, stated by Jazayeri & Scapens (2007), balanced scorecard performance measures consist of two types which are leading and lagging indicators. According to Hilton (2008), leading indicators guide management to make decisions that will result a positive effects in future performance such as customer satisfaction and on time delivery, whereas lagging indicators are final outcomes of financial measures resulted from earlier action taken by the company, for instance, cash flow and profit. As explained by Hilton (2008), leading indicators is used to evaluate current actions that will eventually improve important lagging measures in the future. As such, senior executives should have properly identifies lagging and leading measures for forming a successful balanced scorecard. Besides that, Horngren et al (2005) further mentioned, target must also be set for each measure so the company may evaluate the effectiveness of the measures and lastly, initiatives of achieving targets are necessary for promoting the people to move towards the targets.

2.1 Benefits of Balanced Scorecard

Combination of both financial and non-financial aspects in a balanced scorecard did bring many benefits in an organization. Based on Kaplan and Atkinson (1998), balanced scorecard used by managers in implementing strategy that create value for current and future customers and also enhance other necessary areas to improve further is beneficial for company future performance. In addition, Yu et al (2008) state another benefits from balanced scorecard is that the approach that translating strategy goals into measureable parameters can actually help company to evaluate their performance. Besides that, Drury (2004) further elaborate managers can also identify which operational measures needed to be improvised by looking at the balanced scorecard. Another benefit is that balanced scorecard can enhance communication level within organization.

2.2 Limitation of Balanced Scorecard

Although balanced scorecard portrayed to be positively effective in today modern business management, quite a numbers of negative criticisms have seem appeared towards the whole idea of balance scorecards. Based on Drury (2004), balanced scorecard that assumes cause-and-effect relationships to be linear is too ambiguous and lack of evidence because these relationships are merely hypotheses. For instance, a good performance by employees does not necessary brings a higher profit. Thus, this has shown there is no linear relationship between improvements in a perspective will carry on the next perspective to excel as well. Another factor that criticized badly on this model is the time lag (Jazayeri & Scapens, 2007). Time lag between a cause-and effect could distort the effectiveness of balanced scorecard, for example, training given to employees will not immediately result an increasing in productivity level. Sometimes, a cause of an action needs a much longer period to see the effect and hence there is no coherence between the perspectives. Basically, it is not simple to implement an effective cause-and-effect linkage in an organization, as statistics shown only 23% out of 157 companies keep consistently verified their hypotheses and other companies do not verify cause-and-effect will not bring any values to the balanced scorecard (Garrison et al, 2008). For example, a fast-food chain managers will assume the employees turnover will obviously resulted higher profits, but it turn out that the supervisors turnovers is the factor that will have impact on profit because employees turnover did not help explains the difference across the restaurants.

Besides that, model of balanced scorecard which lay on a top to down approach create a barrier to it as Atkinson et al (2007) said senior executives that only understand the strategy or objectives implemented is insufficient because the whole organization should have working towards the objectives. Thus, those middle and lower level of employees should have acknowledgement on it or else the balanced scorecard strategy map impose by top level management will be wasted. Nevertheless, senior management should also put commitment to it and actively involved for assurance of effective balanced scorecard has put up. A part from that, another limitation to the balanced scorecard is time consuming in term of brainstorming strategy map to impose by a group of senior executives and also expensive to implement because sometimes company hire consultants from outside to give opinions (Drury, 2004).

3.0 Business Value Scorecard

Due to many negative critiques on the balanced scorecard, a new performance measurement system has started to develop, for instance business value scorecard. Business value scorecard is different as compared to balanced scorecard, and it is used within the BAE Systems of British Aerospace (Jazayeri & Scapens, 2007). As mentioned by Jazayeri & Scapens (2007), BAE systems is second largest defence contractor and their business was booming for the first three years but since the fall of Berlin Wall, the company was doing bad as the share price drop tremendously. Therefore, management had started to change business approach to overcome the situation by moving to privatization. However, a significant change in the culture of the organization will have to done for the employees to accept changes that happening in the organization.

Consequently, chief executives implement business value scorecard that focuses on five key values which are performance, people, customers, partnership and, innovation and technology to serve the changes. Basically, in performance key value is to set best possible targets so people are also driven to keep continuously challenge for improvement. On the other hand, people key value is not to treat employees as extension of machine because the company actually does have highly talented skilled people working for the company. As for customers aspect is of course treat them as the highest priority by providing good services before and after sales. Besides that, chief executive also stresses out the needs to understand and exceeding the customers' expectations for the improvement in company performance. A part from that, he also did realize that partnership with others is beneficial for the company when come the areas that they not use to operate, and as such, engaging partners on long-term basis did favours the company in the future. For example, Perodua is a joint venture between Malaysia and Japanese partners, Daihatsu will eventually help Perodua in the future because partnership between both enterprises can exchange knowledge for better improvement. Technologies have continually changing and so does the business environment, therefore, innovation and technology key value is necessary, so the business can stay ahead.

After that, the five key values were further reinforced by developing five 'Value Teams' in which each team is lead by the senior line manager which has the power to bring changes of an organization. As explained by Kotter (1996), groups without strong leader will not possess the power required to change even with the availability of capable and dedicated staffs. Hence, each team should have strong and capable leader to guide the team towards the changes. Nevertheless, a changing in a culture of an organization surely deals with some barriers such as resistance to change from employees. As stated in the article by Jazayeri & Scapens (2007), approximately 30% of management in BAE cannot handle the changes and thus leaving the organization. Consequently, managers should make the people feel the engagement towards the culture change and understand the impact of the objectives measures towards the performance, if not they will lose their confident soon which will result them to leave (Evan & Price, 1999). A part from resistance, tension flare between headquarters and business units is also another obstacle for the business value scorecard. Hence, top management level should ease the tension between them, so all the people will be working together on this approach.

According to Jazayeri & Scapens (2007), business value scorecard is evolved from the previous system which is known as traffic light. Traffic light is a powerful tool and it is attractive with many colours such as green will indicate everything on target, amber means minor bumps, red colour represent major problem that needed to take immediate action. On top of that, there are still other colours, blue for instance, indicate it is completed, black means no report or white if there are nothing to measures. Generally, business value scorecard that applied traffic light is useful indication as it pulls the colours measures in a scorecard can alert the senior managers a clear picture of the company situation and later will lead the managers to realize other measures that should also have in the company.

3.1 Differences between Balanced Scorecard and Business Value Scorecard

As compared to balanced scorecard, business value scorecard is different as it is emerged within organization and it is not a top down approach as mentioned by Atkinson et al (2007). Genuinely, this approach that emerged within organization is to enhance communication and the barriers between headquarters and business units. Of course the tension will rise on both parties when discussed on the strategy but the good thing is there are communication from both parties which objectives measures impose is agreeable by headquarters and business units, so they are more motivated to achieve the target set. Unlike the balanced scorecard, the communication is a one way down approach, and so the objectives implement to the lower level management will not be effective because the employees may not accept the strategy imposed by the seniors.

Furthermore, the business value scorecard is not focusing on cause-and-effect relationship as in balanced scorecard but the coherence of the various perspectives. Jazayeri & Scapens (2007) said the different perspectives have to be coherent and fit together so senior managers can coordinate the functions and activities of the business as whole rather than individual parts as in balanced scorecard. In other words, BAE Systems look at the inter-relationship in the various measures but not the casual relationships as stated by Drury (2004). In addition, business value scorecard can be also used as management control system of the organization.

Conclusively, business value scorecard adopted by BAE Systems is not simply designed as it evolves over a long period of time. Of course the cultural change surely received some resistance but subsequently, managers of BAE seem to respond quite positively towards the business value scorecard. The employees also quite accept the business value scorecard and working together to achieve the strategy set by top managers which lead to the success of this approach.

4.0 Conclusion

In conclusion, the balanced scorecard did prove to be useful but it does subject to limitation especially on the cause-and-effect relationship hypotheses. Thus, the evolution of business value scorecard has developed in the BAE Systems. Nevertheless, companies should not simply implement a performance measurement system because it has to depend on the suitability and types of business operating. For instance, manufacturing factory will use activity-based management (Johnson, 2010). Therefore, company should properly consider the right performance measurement system for evaluating the company' performance.

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