Kaplan and Norton: Presenting the BSC concept


Kaplan and Norton have presented the BSC concept in a series of articles published in the Harvard Business Review. According to them Senior executives or decision makers of an organization understand that traditional financial measures like payback period, return on investment (ROI), net present value (NPV) and earnings per share EPS) etc. give an incomplete picture of organizational performance and may give misleading signals for continuous improvement and innovation. So a new strategic performance tool was devised by Kaplan and Norton named as 'Balanced Scorecard'. Balanced Scorecard harmonize financial measures with operational measures on customer satisfaction, internal processes and the organizational improvement activities for its growth-operational measures that are drivers of future financial performance.BSC brings together many of the company's elements in a single management report (Kaplan and Norton, 1992). The BSC contains a large number of performance measures of an organization under only four categories. The framework of balanced scorecard includes several organizational indicators grouped into four perspectives:

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Financial-profitability growth strategy and risk viewed from the perspective of the shareholder.

Customer--the strategy of business from the perspective of the customer.

Internal Business Processes-- focuses on the internal processes e.g product design, product development, quality etc. that will have the greatest impact on customer satisfaction and organization's financial objectives.

Learning and Growth--priorities to create an atmosphere that supports organizational change, innovation, and growth.

Traditional financial measures of a company demonstrate the past and current performance of an organization without indicating how the performance can be improved in future. In such a case BSC may provide a cornerstone for current and future success of the business.BSC is not a general template that can be applied to any industry or business in fact different BSC can be applied to different market situations and product strategies (Kaplan and Norton, 1993). Decision makers or executives may follow 'divide and conquer' strategy (Shanteau, 1988) that is assess all measure of a category individually and then the four assessments can be combined so that they can be easily implemented. Judgments made with BSC (i.e all performance measures categorized in four groups) and without BSC (i.e uncategorized measurements) of an organization will differ. BSC make performance measures easy and convenient for managers to understand, implement and follow (Marlys Gascho Lipe, Steven Salterio;2002).The balanced scorecard (BSC) is a strategic performance management and measurement tool by proven design methods and automation tools that can be used by managers to keep track of the execution of activities by staff within their control and monitor the consequences arising from these actions.

Implementing a strategy actually begins with educating those (managers and employees) who have to execute it. The purpose of the BSC is to demonstrate the bond between performance measures and a company's strategic vision. In short, a scorecard is used to facilitate the translation of strategy into action.

The BSC introduce managers to four management processes that binds long term strategic objectives with short term activities (Kaplan and Norton, 1996a). These four processes are

Translating the vision-facilitate managers build a consensus around vision and strategy of an organization.

Communicating and linking-let mangers communicate their strategy within organization and help in linking and aligning it to departmental and individual's objectives.

Business planning-enables companies to integrate their strategic business planning and financial plans.

Feedback and learning-Feedback provides a view at any point whether the implemented strategy is useful or not and adjusting the strategy accordingly.

The above mentioned three processes Translating the vision, Communicating and linking and Business planning provide a single loop learning process which is not sufficient. In this unpredictable world threats and opportunities arise constantly so companies must be capable of what Chris Argyris calls double loop learning, learning that produces a change in people's assumptions and theories about cause-effect relationships. (Teaching smart people how to learn, HBR May-June, 1991) and that double loop learning will be done by getting feedback of the implemented strategy and learning how to improve it.

The Balanced Scorecard put emphasis on the linkage of measurement to strategy (Kaplan and Norton 1993) and the cause-and-effect linkages that describe the hypotheses of the strategy (Kaplan and Norton 1996b). Kaplan and Norton defined the BSC as a multidimensional framework for implementing and managing operational strategy at all levels of an enterprise by linking to an organization's strategy (Kaplan and Norton, 1996c).

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The Balanced Scorecard (BSC) is one of the latest innovations in the field of management. After the development of BSC it was adopted by many public,for profit and non-profit sector organizations including educational institutions, health care centres and IT institutes and in many industries as well and they have been able to implement new strategies rapidly, leading to dramatic performance improvement. Research have proved that large firms make more use of BSC based on a reasoning that small companies frequently do not require elaborating their performance strategies as strategy setters usually owners are close to it and large firms have a greater demand for internal communication than small firms.BSC satisfies many of the organization's internal communication needs that is strategy and its implementation among the sub components of an organization.(Zahirul Hoque and Wendy James;2000).

The subject of performance measurement for non-profit organizations is extensive but generally inconclusive (Forbes, 1998). Forbes noted that non-profit organizations lack the simple elegance of a financial measure that is used by for profit organizations to assess their performance. The difficulty of clearly defining the metrics for organizational effectiveness, however, is not confined to non-profit organizations (Goodman and Pennings, 1977; Cameron and Whetten, 1983). In their final book chapter, Cameron and Whitten (1983) offer two conclusions about organizational effectiveness: (1) "There cannot be one universal model of organizational effectiveness" (pp. 262-267); and (2) "It is more worthwhile to develop frameworks for assessing effectiveness than to try to develop theories of effectiveness" (pp. 267-269). The managers and constituents of nonprofits are increasingly concerned about measuring and managing organizational performance