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This Report focuses on a relevant research methodology for the research topic -The Balanced Scorecard (BSC) and Organizational Strategy, on the basis of the theories of Managerial Accounting.
The outline of the report is as follows:
Chapter one: Introduction. It involves the background of the topic, research objectives, questions, hypotheses and scope.
Chapter two: literature review. There are given a number of current knowledge which encourages the research topic.
Chapter three: Methodology and Data Collection
Chapter 1: introductionâ€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦4
Objectives, research questions and research hypothesesâ€¦â€¦â€¦6
Chapter 2: Literature Reviewâ€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦...7
Literature review of the balanced scorecard and organizational strategy...7
Perspectives of measurementâ€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦..9
Chapter 3: Methodology and Data Collectionâ€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦.17
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 building strategic map of 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.
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
2.2 Perspectives of measurement
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 synthesize their business and financial plans. Nowadays a lot of companies fulfilling different change programs, each has own champions, consultants, and each competing for senior executives' time, energy, and resources. For managers it is considerably difficult to integrate those diverse initiatives to reach their strategic goals - a position 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 attempt and correlate only those initiatives that move them toward their long-term strategic objectives.
Feedback and learning process - gives companies the capacity for strategic learning. Existing information and survey 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 management systems, a company can monitor short-term results from the three additional perspectives - customers, internal business processes, and learning and growth - and estimate 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)
Choosing Strategic Measures for the four perspectives:
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.
Each measure of the balanced scorecard becomes embedded in a chain of cause-and-effect logic that connects the desired outcomes from the strategy with the drivers that will lead to the strategic outcomes. In developing strategy maps, the overarching mission of the organization provides the starting point. The organization's mission and core values remain fairly stable over time. The vision paints a picture of the future that clarifies the direction of the organization. The vision also is the springboard to strategy, bridging the gap between the more stable mission and core values and the organization's preferred future (vision). Michael Porter describes the foundation of strategy maps as those activities in which the organization elects to excel. The essence of strategy is to develop cause-and-effect activities that create a unique value-added or market niche for the services offered by the organization, moving the organization from its present position closer to its vision. Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Boston: Harvard Business School Press, 2004.
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 serviceFigure 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 what the organization is going to achieve for shareholders and customers alike. But to adjustment employees' individual jobs with the overall strategy, BSC users mainly attract following activities: communicating and educating, setting goals, and linking rewards to performance measures.
Communicating and educating. The personal scorecard sustains lead corporate and unit objectives to the individuals 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 keep their strategy close to the vest, believing to that they should disseminate
it from top to bottom. Communicating the BSC promotes responsibility and accountability to the business's long-term strategy. Kaplan and Norton (Linking the BSC to Strategy).p.154
Figure 2.4: Managing strategy: Processes
Source: Using the Balanced Scorecard as a Strategic Management System; Harvard Business Review
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 transferred into objectives and measures for using 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 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 ideas they would obtain to achieve their objectives.
Linking rewards to performance measures
Kaplan and Norton provide determination of how to link rewards to performance measures, whether compensation systems should be connected to BSC measures or not. In keeping with research results, some companies, believing that restricting financial compensation to execution is powerful levers, that 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 bounds more than half its executives' bonuses to their accomplishment of ambitious targets for the four financial indicators: return on capital, profitability, cash flow, and operating cost. It consists the remaining 40% on indicators of customer satisfaction, dealer satisfaction, employee satisfaction, and environmental responsibility.
Additionally, companies usually command multiple objectives in a compensation formula by appointing weights to each objective and evaluate incentive compensation by the range of to which each weighted objective was reached. This practice allows strong incentive compensation to be paid if the business unit overachieves on a few objectives even if it fails far short on others. A better approach would be to establish minimum outset levels for a critical subset of the strategic measurements. People would earn no incentive compensation if performance in a given period fell short of any threshold. This demand should motivate individuals to achieve a more balanced performance across short- and long-term objectives. The balanced scorecard plays a role in the definition of incentive compensation is not in doubt. Exactly what this role should be will become clearer as more companies experiment with linking
rewards to scorecard measures.
Implementation of this plan a balanced scorecard makes companies to provide equal access to their strategic planning and budgeting processes, thus it assists to ensure that their budgets support their strategies. Firstly the Scorecard should be chosen to measure of progress from four scorecard perspectives and set targets for each of them. Then the determination of actions will assist to reach toward targets, identification the measures will be applied to the four perspectives, and establish the short term stages that will mark the progress along the strategic paths that have selected. Thus Building a scorecard allows a company to connect its financial budgets with its strategic goals.
Outcomes and Performance drivers
The process of designing a balanced scorecard, it is explaining the strategic objectives and then finding the few crucial drivers that develop a framework for controlling an organization's various change programs. These ideas - reengineering, employee empowerment, time-based management, and total quality management, among others - gives opportunity to provide results but also compete with another scarce resource, including the insufficient resource of all: senior managers' time and attention. Strategic Management, Mark L. Frigo. After the strategy is determined and the drivers are found, the scorecard will affect managers to concentrate on increasing or reengineering those processes most crucial to the organization's strategic success. That is how the scorecard most clearly links and adjustment action with strategy. The final step in linking strategy to actions is to establish specific short term targets, for the balanced scorecard measures. Milestones are clear expressions of managers' beliefs about when and to what degree their current programs will affect those measures. Robert Kaplan and David Norton (The Balanced Scorecard: Translating Strategy into Action).
In creating milestones, managers of company should enlarge traditional budgeting process to incorporate strategic as well as financial goals. Separated financial planning are important, but financial goals should be taken by themselves to neglect the three other balanced scorecard perspectives. In an integrated planning and budgeting process, executives continue budgeting for short-term financial
performance, but they should present short-term targets for measures in the customer, internal-business-process, and learning-and-growth perspectives. With established milestones managers will be able continually examine both the theory underlying the strategy and the strategy's fulfillment
At the end of the business-planning process, managers should establish targets for the long-term objectives. They should recognize the strategic ideas required and allocated the necessary resources to those initiatives; and they should have established milestones for the measures that mark progress toward achieving their strategic goals.
Feedback and Learning.
As can be seen from above provided literature review first three management processes- translating the vision, communicating and connecting, and business planning - are significant for implementing strategy, but they are not enough in observing organizational strategy. Preformed these processes are important single-loop-learning process - single-loop in the sense. This single-loop process does not require or even facilitate reexamination of either the strategy or the techniques used to implement it in light of current conditions.
Recent studies showed that most companies today operate in a fluctuated environment with complex strategies that, though valid when they were released, may lose their validity as business circumstances change. In this kind of environment, where new threats and opportunities arise constantly, companies must become capable of what Chris Argyris calls double loop learning - learning that produces a change in people's assumptions and theories about cause-and-effect relationships.
Financially based and budget management tools shouldn't be involved first in double-loop learning
because these tools direct performance from only one perspective, and second, because they don't involve strategic learning. Strategic learning consists of collecting feedback, testing the hypotheses on which strategy was based, and making the necessary adjustments. Robert Kaplan and David Norton
There are exist three main elements that are important to strategic learning. First, it links the company's shared vision, defining in clear and operational terms the results that the company, as a team, is trying to reach. The scorecard communicates integral model that links individual efforts and accomplishments to business unit objectives.
On next, the scorecard supplies the essential strategic feedback system. A strategic feedback system should be able to test, validate, and modify the hypotheses embedded in a business unit's strategy. By establishing short-term goals, or milestones, within the business-planning process, executives are forecasting the relationship between changes in performance drivers and the associated changes in one or more specified goals.
Methodology and data collection
Methodology of the BSC is an analysis technique illustrated to interpret company's mission statement and overall business strategy into specific, quantifiable goals and to display the company's execution in terms of achieving the goals. The balanced scorecard methodology is a comprehensive approach that analyzes an organization's overall performance in four ways, based on the idea that assessing performance through financial returns only provides information about how well the organization did prior to the assessment, so that future performance can be predicted and proper actions taken to create the desired future.
The methodology investigates performance in four areas: financial analysis, the most traditionally used performance indicator, includes valuation of measures such as operating costs and return-on-investment; ccustomer analysis looks at customer satisfaction and retention; internal analysis looks at production and innovation, measuring performance in terms of maximizing profit from current products and following indicators for future productivity and finally, learning and growth analysis explores the effectiveness of management in terms of measures of employee satisfaction and retention and information system performance.
The structure of the balanced scorecard methodology separates broad goals successively into vision, strategies, tactical activities, and metrics. As an example of how the methodology might work, an organization might include in its mission statement a goal of maintaining employee satisfaction. This would be the organization's vision. Strategies for achieving that vision might include approaches such as increasing employee-management communication. Tactical activities undertaken to implement the strategy could include, arranged meetings with employees.
According to Yin (2003) mentioned in Sandim et al (2005), the research can be classified into three purposes: exploratory, descriptive and explanatory. In consideration with the stated research problem, the particular study describes how factors indicate companies to use The BSC system and to involve necessary approach and how to use it in organizational targeting goals. The study is descriptive because the research deals with the already existing information. Since, there is no similar research was done in Uzbekistan, which gave an opportunity for researcher to find out new theories, which were outcomes of the results of the research that are applicable only to the cultural or Uzbek model approach.
In fact that secondary data contains by quantitative and qualitative data and due to purpose of the study the researchers can use either raw or complied data (Kervin 1999). On the whole, three types of secondary data can be employed in the research, such as documentary secondary data, survey-based secondary data and multiple source secondary data. Thus, the documentary secondary data will be applied based on the written materials (for instance, annual and financial reports of the companies, records of meetings, notices and public records, web data bases) this form of secondary data will implemented for the research, because the figures of variables which are have an effect on the market share and competitiveness levels are mainly taken from the web sources of Dell Company. If the analysis of researchers is established by other's surveys, then the researchers tend to collect survey-based secondary data. As Saunders, Lewis and Thornhill (2007) indicated that multiple source secondary data can be explored by using only documentary or survey-based secondary data or there can be a combination of both types of data
In this study, secondary is used to make the analysis more reliable and remarkable. It is not only the method to collect data (the company information) but also the standard to make comparison (the relationships of employees and staff incentive system).