The Balanced Scorecard In Management System Accounting Essay

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This report introduces the use of the Balanced Scorecard is an important role for business management accounting in todays world. The Balanced Scorecard has developed from its beginning that was a simple performance measurement framework.

In the 1950, "General Electric" has exploited a Balanced Scorecard type system that intended to be worked in a performance management system. (Hendricks, 2004) The subject groups suggested eight methods of measurements to measure General Electric's performance: "markets share, Profitability, public responsibility, employee attitudes, product leadership, personnel development and balance between short-range and long- range objectives" (Kaplan, 2010).

In the 1954, Peter Drucker recommended the concept of management by objectives.

In the mid1960s, Robert Antony devised a framework for planning and control system which is used in recognition three kinds of systems: 'strategic planning, management control and operational control' (Kaplan, 2010).

In the 1980s, Management accounting control system tended towards to concentrate on the financial performance measurement. Many motivated leaders have focused on the reduction cost and ignore other significant variables which were important to compete in the global competitive environment. The quality of product, delivery, reliability, after-sales services and customer satisfaction were key competitive variables. But the traditional management accounting performance measurement did not give enough importance measured.

The Balanced Scorecard was first introduced in 1992 Harvard Business article by Kaplan and Norton. After publication, several companies like AT&T, KPMG, Bank of Montreal, Tenneco, Mobil and Citicorp, have adopted a Balanced Scorecard. It could be a chance to improve and give deeper and broader insight into the Balanced Scorecard (Zimmerman, 2011).

During the next 15 years, more and more firms, thousands of private, public and nonprofits enterprises around the world have adopted Balanced Scorecard. In the mean time, Kaplan and Norton extended and broadened the construct into a management tools for describing, communicating and implementing strategy (Kaplan, 2010).

2.2 The concept of Balanced Scorecard

An important contributing to strategic management accounting that emphasises the part of management accounting in formulating and supporting the overall competitive strategy of an organisation is the balanced scorecard. And also, the balanced scorecard is a strategic management technique for communicating and assessing the achievement of the mission and strategic of the organization. As a result, the balanced scorecard supports behaviour which is same as a companies' strategy. It involve of on an integrated framework of performance measurement that aim to illustrate, communicate and manage strategy implementation (Colin Drury, 2008).

The following definitions of the Balanced Scorecard describe the benefits from variety angles:

The balanced scorecard reserves old financial measures. In the past, financial measures were not inadequate, because industrial age firms for which investments in long-term ability and customer relationships were not success. However, the information age firms should create future value through in customers, supplies, employee, processes, technology and innovation (Kaplan and Norton, 1992).

According to the Balanced Scorecard (1996), the aims of balanced scorecard are providing leaders with the instrumentation they have to get success for future competitive. Moreover, the Balanced Scorecard translates a group's mission and strategy into an integrated set of performance measurement that offers the framework for a strategic management and measurement system. Additionally, the Balanced Scorecard keeps a point on achieving financial objectives, and also including the performance drivers of these financial objectives. The Balanced Scorecard enables firms to trail financial results while synchronously monitoring progress in building the abilities and attaining the intangible assets for future growth.

The Balanced Scorecard is a strategic planning and management system which is used widely in business and industry, government and nonprofits companies to align business activities to the envision and strategy of the organization, 'improve internal and external communications and monitor organization performance against strategic goals' (Balanced Scorecard, 2010).

The Balanced Scorecard has variety meanings. The original meaning that Balanced Scorecard was a method for creating a performance report when it was first popularized in 1992, the most normally using in 'financial, customer, internal processed and innovation and learning'. Gradually, the management tool evolved to become the performance management system that operational and individual performance plans as the basis for a communicating, monitoring and improving system performance (ead group, 2010).

2.3 Choosing strategic measures for the four perspectives

Figure1. Translating vision and strategy: four perspectives

balanced scorecard(Kaplan and Norton, 1996)

The figure1 shows that these four perspectives provide the framework for the Balanced Scorecard: 'Financial perspectives, customer perspectives, internal business processes perspectives and learning and growth perspectives'.

The four important perspectives of the Balanced Scorecard allow a balance between long-term and short-term objectives, the performance drives of those outcomes and desired outcomes, and hard objectives measures and softer, more subjective measures.

2.3.1 Financial Perspectives

The financial performance measures state the long-run financial objectives of the business unit. However, many companies has focused on the profitability objectives, other financial objectives are also possible. Business with many products in the early stage emphasizes rapid growth objectives, and mature companies may emphasize maximizing cash flow. For the purpose, there are three different stages that could identify:

Rapid Growth



Firstly, rapid Growth business may have to make big investments to exploit and improve new outcome and services; to construct and expand production facilities and build operating abilities; to invest in system or infrastructure; to allocation networks for supporting global relationships and to encourage and develop client relationships (Kaplan and Norton, 1996).

Secondly, the vast of majority of firms probably be in the sustain stage. The business still attracts investment and reinvestment, but is required to acquire remarkable returns on their invested capital. These firms hope sustain their existing market share. Investment items will be more directed to reduce bottlenecks, extending capacity and focusing continuous improvement, rather than the long payback and growth option investments that were made during the growth stage (Kaplan and Norton, 1996).

Thirdly, other companies have got a mature stage that is harvest. Any investment project should have really sure and short payback periods. The main aim is to maximize cash flow back to establishment (Kaplan and Norton, 1996).

The financial objectives for business in each stage are different. First of all, financial objectives in the growth stage have focused on the sales growth, systems, employee abilities and distribution channels. In addition, financial objectives in the sustain stage is focusing on traditional financial measurement, like return on capital employed, operating income and gross profit. On top of that, the financial objectives in the harvest stage emphasize on cash flow (Kaplan and Norton, 1996).

Figure.2 Measuring strategic financial themes

C:\Users\think\AppData\Roaming\Tencent\Users\275173515\QQ\WinTemp\RichOle\[email protected]@SG6O1H[DCH$6CME8Q.jpg(Kaplan and Norton, 1996)

As figure.2 shows that firms use three financial themes to accomplish their business strategies:

'Revenue Growth and Mix'

'Cost Reduction or Productivity Improvement'

'Asset Utilization'

Revenue growth and mix relate to extending manufacture and service offerings, attaining new clients and markets, changing the manufacture and 'service mix towards higher- value- added offerings' or 're-pricing products and services'. The term cost reduction has come to be used to refer to trials to reduce the direct costs of manufacture and decrease the indirect costs, share ordinary resources. In the asset utilization, leader purpose to shorten the "working and physical levels required to encourage a given volume and mix of business" (Kaplan and Norton, 1996).

Usually, these three financial themes could be used with three common companies strategies of growth, sustain and harvest. Also, in the figure.2, the example shows how the Balanced Scorecard is able to make clear the financial strategy and how customize financial objectives and measures to business strategy (Kaplan and Norton, 1996).

2.3.2 Customer Perspective

Figure.3 Core outcomes measures

C:\Users\think\AppData\Roaming\Tencent\Users\275173515\QQ\WinTemp\RichOle\XO1(WT3[($USU5XL$AD6LBU.jpg(Kaplan and Norton, Harvard Business School Press, 1996)

In the customer perspective of the Balanced Scorecard, Prahalad and Hamel (1990) have suggested that administrator confirm the customer and market in the business may compete and measure the business performance in customer perspective segments. The customer perspective is including some common measures of the successful product from a 'well-formulated' and applied strategy. Figure.3 described that the common outcomes measures involve 'customer satisfaction, customer retention, new customer acquisition, customer profitability or market and account share in targeted segments'. Frequently, these measures might occur to be common across any organizations.

Market share disclose about a company penetrating a desired market. For instance, a firm probably is meeting sales growth objectives by keeping client in non-targeted parts, while not rise its share in targeted parts. The companies can apply an additional market-share type measures: the account share of those client, when firms have targeted special customers or market parts. The account and market share based on business that could be influenced by the total number of firms are lending in a given period (Kaplan and Norton, 1996).

According to Harvard business review (2008), customer retention is satisfying method for increasing market share in targeted customer parts. The importance of customer retention has been demonstrated by the survey on the service profit chain. Normally, firms could be easily to confirm their customer from period to period, such as industrial firms, newspaper or magazine publishers, banks and mobile phone suppliers. Beyond retaining clients, the vast majority companies expect to measure customer being honest.

Companies seeking to grow their business will usually have an objective to raise their customer base in targeted parts. The customer acquisition which is like tracks can be measures by either the amount of new clients or the whole sales to new customers in these segments.

Both customer retention and customer acquisition are controlled from meeting customers' requires. Customer satisfaction provides feedback on how well the firms are doing. The importance of customer satisfaction presumably will not be over-emphasized. Recently, the research demonstrates that enough scoring on customer satisfaction is not adequately for accomplishing high degrees of loyalty, retention and profitability (Kaplan and Norton, 1996).

It is not guarantee that the company has useful customers succeeding in the core outcomes measures of account share, customer retention, acquisition and satisfaction. The one way for customer satisfaction and high market is achieving high financial returns. The most companies expect to measure not only the extent of business with customers. Besides that, 'Activity-based cost system' allows firm to measure personal and collect 'customer profitability'. Every company ought to find customer who is pleased and beneficial. It is useful that a good financial measure could hold becoming 'customer-obsessed' to 'customer-focused' (Kaplan and Norton, 1996).

2.3.3 Internal business process perspective

The internal business perspective claims that managers identify the decisive internal processes for which the organization should note in enforcement. Kaplan and Norton (1996) argue that the internal business is able the business unit to:

'Deliver on the value propositions of customers in targeted market segments and satisfy shareholder expectations of excellent financial returns'.

The measures of internal business may have significant effect on customer satisfaction and achieving the company's financial objectives. Drury (2008) believes that the process value chain consists of three processes: the innovation, operations and 'post-sales process'. Firstly, in the innovation process, managers create the products and services for customer requires. It means the 'long wave' of worth creation in which firms identify the new customer and markets. Then those companies project and exploit the new outcomes. Obviously, the innovation process is adding the number of new products, also developing new markets and reducing the time taken to develop new products. Secondly, the operations process that explains the 'short wave of value creation' related to creating and announcing actual products to customer. Thirdly, the post-sales service process centralizes the after-sale services, such as most companies provide the warranty and repair activities (Colin Drury, 2008).

2.3.4 Learning and growth process perspectives

3.1Using the Balanced Scorecard in management system

The weakness of Balanced Scorecard was difficultly to link a firm's action between long-term and short-term. More recently, the numbers of companies are creating a new management system which based on the early vision. Obviously, it could be a great improvement to decrease the traditional disadvantage (Kaplan and Norton, 2007).

Figure.4 Managing strategy


According to Kaplan and Norton (2007), from the separately and combination, the updated Balanced Scorecard is able to contribute to link shore term actions and long term strategic by through four management processes.

Translating the vision

Communicating and liking

Business planning

Feedback and learning

Firstly, 'translating the vision' gives help to manager create a consensus about the group's vision and strategy. Many good managers want to do the best, but it is hard to turn into the operation terms that offer the beneficial guides to working. Many managers have accepted that 'people to act on the words' in vision and strategy statements which should be shown as a comprehensive objectives and measures. Secondly, 'communicating and liking' helps executives to convey their strategy to another person and connect strategy to departmental. The Balanced Scorecard let leaders know that all employees in company understand the long-term strategy. Thirdly,