This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
"Performance management systems, which tend to be taken for granted by organizations, consist of several interrelated but often loosely coupled parts. The design of these separate parts is often the responsibility of different business functions, such as management information system, operations management, human resource and finance" (Otley D, 2005, p.79). It means that performance management system used to evaluate and improve the efficiency and effectiveness of an organisation and its processes. Traditionally, management accounting measures mainly focused on financial measures of performance. Advancement in financial measures has been economic value measures. In more detail, it mainly focused on comparing actual results against planned performance (budgeting activities) and adjusts the variance (Chenhall RH, 2005). These measures has been criticised that these measures tell us lot about company's past action but not about its future awareness or alertness (Merchant, 1985; Chakravarthy, 1986; Schoenfeld, 1986; Dearden, 1987; AICPA, 1994; Kaplan and Norton, 1996 cited in Norreklit, 2000, pp65). In recent years strategic measurement system including both financial and non-financial measures have gained noticeable importance in academic literature. The Balanced scorecard is one of that approaches. It was purposed in early 1990's by Kaplan and Norton. A survey estimates that 60 percent of the fortune 1000 firms have tested with the balanced scorecard (Silk, 1998). Adopter of balanced scorecard includes KPMG Peat Marwick, Allstate Insurance, and AT&T (Chow et al., 1997). The balanced scorecard (Kaplan and Norton, 1996a, 1996b) is different than other strategic measurement models. It linked the financial perspective with the non-financial perspectives in a cause-and-effect relationship (Kaplan and Norton, 1996a, p.31; Kaplan and Norton, 1996b, p.53). However, it has been heavily criticised because of its cause-and effect relationships among the measures and its implementation problems (Ahn, 2001; Kasurinen T, 2002; Norreklit H, 2000; Norreklit H et al., 2007). The aim of this project is to evaluate the balanced scorecard then implement it using a cause study of JJB Sports, justify the balanced scorecard and its likely effects on organization. The project then presents the criticism on balanced scorecard's key assumptions. Finally, it thrashes out some suggestion for improvement in balanced scorecard.
The literature review reveals the balanced scorecard description, structure and its general criticisms. The reminder of the paper is as follows. The company review will discuss the company strategy, vision and its core business. The following section will propose the balanced scorecard of the company and justification of that scorecard. The final section will discuss the suggestions and conclusion.
The Balanced scorecard is a performance management tool which provides executives with a comprehensive structure that translates company's vision and strategy into measurable objectives. The balanced scorecard is an integrated set of performance measures that design to follow the company's strategy. The BSC was developed by Kaplan and Norton (1992) and refined in later publications (Kaplan and Norton 1993, 1996, 2000, 2007, 2008). BSC structure allows executives to look at the business from four significant angles. It links the financial performance with the three non-financial perspectives (customer perspective, internal business perspective and innovation and learning perspective). The balanced scorecard argues that we can improve our financial performance through these non-financial performance indicators (Kaplan and Norton (1992, p.71, 72)).
Financial perspective is the main focus for other scorecard perspective because it explains the company's long-term objectives. As Kaplan and Norton (1992, p.77) so aptly phrased that "financial performance measures indicate whether the company's strategy, implementation, and execution are contributing to bottom-line improvement". Typical financial objective must focus on profitability measures (e.g. operating income, return-on-capital employed), growth and shareholder value (Kaplan and Norton (1996, p.306)).
Customer perspective assists to achieve the revenue objectives set in financial perspective. Kaplan and Norton (1992, p.73-74) highlighted some customer value propositions which tends to fall into four classes; time, quality, performance and service, and cost. Companies should articulate goals for these customer value propositions and then translate these goals into suitable measures. Moreover, it states that by focusing on these value propositions, we can have a good impact on the stated financial objectives. As according to Kaplan and Norton (1996, p.26, 306), this perspective includes some typical core objectives such as increasing market share, increasing customer retention, increasing customer acquisition, increasing customer satisfaction and increasing customer profitability.
Internal business processes are necessary to implementation of the company's strategy. These key processes are basically required to achieve the organizational customer satisfaction and financial objectives (Drury (2009, p.387-389)). The third non-financial perspective of balanced scorecard is Learning and growth; it includes the long-term growth and improvement. As Kaplan and Norton (1996, p.26-27) state that this perspective is necessary for the continuous improvement and value for the customer and shareholders. Learning and growth includes three core bases: people, system, and organizational procedures. This perspective facilitates the financial, customer and internal business perspective through focusing on employees capabilities, enhancing information technology and system, and aligning organizational procedures and routines. The financial, customer and internal business perspective disclose gaps between existing and required capabilities of employee. Learning and growth perspective tries to close this gap.
Source:http://www2.fcsh.unl.pt/apsociedade/Organizações%20e%20liderança/Balanced%20Scorecard_ficheiros/figure_bsc.jpg or Kaplan and Norton (1992)
Balanced scorecard assumes that each performance measure is a part of cause-and-effect relationships linking from strategy formulation to financial result. As Drury (2009, p.391) explains the cause-and-effect relationships that to achieve the measures of learning and growth are supposed that it would improve internal business processes. The measure of these processes would help to achieve the customer perspective that ultimately would achieve the financial perspective. This cause-and-effect relationships assumption linked the non-financial perspectives with the financial perspective. For example Kaplan and Norton (1996b, p.30-31) explain that, return-on-capital employed may be a scorecard measure in financial perspective. We can achieve this measure through expansion in sale and the sale could only be expended with high degree of customer loyalty. Analysis of customer preference may reveal that on time delivery is highly valued for customer and could be the achieved through high quality process and short cycle time. These measures are linked with employee skills and by training and improvement of employee skills; we would achieve the overall financial objectives.
Source: http://www.duncanwil.co.uk/jpg%20files/Div1.jpg Or Kaplan and Norton (1996b, p.31)
Thus, a properly good constructed balanced scorecard should explain the story of organizational strategy. It should clearly classify the sequence of cause-and-effect relationships between financial (lag indicators) and non-financial (lead indicators) objectives. Every building block of BSC should be in cause-and-effect relationships and should communicate the meaning of organizational strategy. A true balanced scorecard without these quality features could not exist (Kaplan and Norton, 1996a, p.30).
Advancement in balanced scorecard:
Kaplan and Norton (2007, p.152) identify four major steps in implementing a BSC: (1) explaining and translating the vision and mission statement (2) communicating and linking (3) business planning (4) feedback and learning. Furthermore, Kaplan and Norton (2008, p.64, 66) has added one new step called develop the company strategy. In this publication Kaplan and Norton state that executives of the business have to reconsider its business fundamental idea that what business are we in and why we are in this business. They also have to think about the core issues of the business which they are facing and how can we best compete with our competitors. This activity could only be done with the help of top executives.
Once the strategy has been formulated, according to Kaplan and Norton (2008, p.68) managers need to translate and clarifying the strategy and vision to all units and employees. The purpose of this stage is to build a strategic map which provides the chain of cause-and-effect relationship among strategic objectives. The chain starts from the company's financial perspective and link down to non-financial perspectives. In doing so, management develop the set of performance indicators that follows the company's strategy. This will become the organization's BSC.
According to Kaplan and Norton (2007, pp152) after the development of BSC, managers communicate their company's strategy with everybody up and down and link it to departmental objectives. This stage gives assurance to managers that long-term and short-term objectives are aligned with the strategy.
In the business planning stage, each division manager develops the divisional scorecard, while higher management grant the approval of the scorecard and use them for evaluation. In the remaining steps, managers set the targets (stage three) and after a period of time, receive feedback on the strategy of the business unit (stage four) whether the company, its employees or its departments have accomplished their financial goals (Kaplan and Norton (2007, p.152-157). I will not discuss these activities because these are non-BSC activities. However, balanced scorecard has been in numerous criticisms which are discussed below.
Criticism on balanced scorecard:
BSC has also been criticised because of number of reasons. Firstly, the cause-and-effect relationships of the balanced scorecard is too ambiguous and lack of empirical evidence of its existence cited in Norreklit (2000, p.70) that "Kaplan and Norton (1996a) do not define the cause-and-effect relationship as they use it". The empirical studies that have been carried out have failed to prove any relation between non-financial data and future financial performance (American Accounting Association Financial Accounting Standards Committee, 2002). Moreover, Norreklit (2000) claims that relationship among measures are not casual but rather a logical. He claims that customer satisfaction doesn't often mean to produce desirable financial results. To judge the financial effect of increased satisfaction level of customer requires a financial calculus and need lots of interrelated actions to achieve high level of customer value at low cost directs to good financial results. So, his claim is that the relationship is not a casual but a logical (Norreklit 2000, p82). In the same manner, Otley (2003) argued at the balanced scorecard cause-and-effect relationships. Kaplan and Norton take the assumption that is based on "you get what you measure" and it assumes that people act in a same direction. However, Otley argued that even preparer of performance measure do not fully predict the future response of those being controlled to such system. He explained this through his experience and said what gets measured gets done and what is not measured may be neglected. He gave the example of supermarket fast check-out may ignore the customer service aspect, baggage handling at airport that how much time the first baggage take from aircraft to conveyor belt and bonus relate with time. Report of increase in damage of baggage has been increased due to this measure (Otley D, 2003, p 316-319). Furthermore, Neely (2003) gave the example of Channel ferry operator who set a target to satisfy the customer within five days. Employee achieved this target by refunding too many customers the cost of their tickets (Neely, 2003 cited in Ahrens T and Chapman CS, 2005). So, this is unrealistic assumption, you cannot predict the ways to achieve those measures.
Secondly, balanced scorecard has been criticised because of its implementation problems. Kasurinen (2002) found barriers in balanced scorecard implementation and divide them into three categories: confusers, frustrators and delayers. His analysis of confusers disclosed the complexity of the project environment means gap between the divisional level goals and business unit strategy could create confusion. So, this could be a barrier in implementation. Moreover, the investigation of frustrators revealed the importance of culture differentiation between the systems. Finally, the study of delayers exposed the complexity in indentifying the business unit strategy. So, it means that implement of balanced scorecard is not simple; it has so many hurdles in implementation.
Finally, balanced scorecard has also been criticised on exclusion of important longer-term perspectives such as environmental impact on society perspective and employee perspective. As according to Otley (2003, p316) balanced scorecard adopts the stakeholder perspective on the business. The shareholder and customer are clearly identified but the employee features are not clearly identify, employees feature put sometime in internal business perspective sometimes in learning and growth perspective. Balanced scorecard should have fifth box called "corporate social responsibility" which could cover other stakeholder perspective such as employees, supplier, local communities, government and environmental lobbies (Otley D, 2005, p88; Otley D, 2003, p316). In addition to that, it doesn't have any metric to measure the performance of executives that how well they doing their job. Moreover, balanced scorecard has nothing to deal with motivation of staffs in monetary terms on achieving targets. However, Kaplan and Norton presented the four perspectives as a suggested framework; companies could add other perspectives according to their business requirement. But they must avoid excitement of building too many perspectives (Kaplan and Norton, 1992, 1996). Now I will briefly explain about my selected company and then implement the balanced scorecard on the company.
JJB Sports plc is the UK's leading quoted sports retailer; principal aims of JJB are:
To supply high quality, branded sports and leisure clothing, footwear and accessories at competitive prices; and
To expand our chain of successful health clubs and stores which offer a wide range of facilities at value-for-money prices (Annual report, 2008).
In 1971, JJB was formed to acquire a single sports store in Wigan during the early 1900s. The store portfolio grew to 120 stores in 1994, at which point the Company was floated on the London Stock Exchange. In 1998, JJB Sports acquired the business of Sports Division, which was JJB's largest competitor at the time. The acquisition then made JJB the largest sports retailer in the UK at that time. At January 2010, JJB now runs a portfolio of some 250 stores in England and Republic of Ireland (reference 3).
JJB's key strategy is to emphasis "Serious about Sport" image and to supply high quality, branded sports and leisure products to its customers at competitive price. Recently, JJB introduce the policies aimed at re-energising the retail sports chain through Introduction of product ranges from new own brands, roll out of refits to existing stores, increased incentives for retail staff and creation of training academy. Long term objectives of JJB sports are to expand our chain of successful stores and health clubs which offer a wide range of facilities at value-for-money prices. JJB achieved strong results from and expansion of the Leisure Division which currently comprises 55 fitness clubs, almost all of which incorporate retail stores and over 229,321 fitness club members at 25 January 2009.The concept of a health club is one that differentiates JJB from all other retailers (Annual report, 2008; Annual report, 2009). Basic product ranges include leisure clothing, footwear, replica shirts, equipment, accessories, cycles and golfing products. The main competitors of company are Sports Direct and JD sports (reference 3).
JJB monitor its performance by reference to a number of key performance indicators ("KPIs"). Financial KPIs include change in like-for-like revenue, change in gross margin and change in net debt. Non-financial KPIs include retail selling space (sq ft), number of fitness clubs and number of fitness club members (annual report 2009, p.05).
JJB recognises that it has a duty to make sure that its business is performing in a socially responsible way and ensuring a high standard of both social and environmental activities. JJB is pleased to be associated with number of charity organisations such as Macmillan Cancer Relief, Breakthrough Breast Cancer, The British Heart Foundation and the Variety Club Sunshine Coaches. Furthermore, JJB efficiently exercise the waste management system strategy which minimises waste arising and maximises waste recovery whilst ensuring responsible disposal methods. During the 2008/09 JJB recycled plastic totalling 265 tonnes and recycling of cardboard decreased to 3,091 tonnes as compared to 3781 tonnes in 2007/08. This reduction shows the reduced usage of packaging by JJB Sports. Moreover, JJB continues to be selected for inclusion in the FTSE4 Good Index which is designed to measure the performance of companiesÂ thatÂ meetÂ globally recognisedÂ corporateÂ social responsibilityÂ standards andÂ toÂ facilitate investment inÂ those companies. To achieve these standards JJB keeps trying to reduce the unpleasant environmental impacts arising from its operations and ensuring effective and efficient use of materials and energy (reference 4).
28th of January, 2010, JJB's chairman Sir David Jones' decided to step down from his post due to ongoing health reason. He was diagnosed with perkiness's disease. The new chief executive, Keith has started his work from March 2010. Mr Keith Jones is group retail director at DSG, owner of the Currys and PC World store chains and the Dixons.co.uk website. He has also worked for Virgin and B&Q. This appointment will give considerable advantage to company (reference 5). After the announcement of new C.E.O, positive abnormal return in the share price has been noticed.
JJB SPORTS BALANCED SCORECARD
JJB Sports is currently not making the balanced scorecard for performance measurement but I will design the balanced scorecard of JJB sports to focus the attention of its top executives on a short list of critical indicators of current and future performance.
"Serious about Sports"
High quality products at competitive price
High quality unique products
Value for money
Good customer service
Justification/Critique of my balanced scorecard:
The mission of JJB sports is "SERIOUS ABOUT SPORTS" and its strategy to offer high quality products at competitive price. Long-term objectives are to expand the chain of successful health clubs and stores which offer a wide range of facilities at value-for-money prices. It's mean that JJB wanted to become a leader in the field of sports. So, I divided these long-term objectives into financial objectives to achieve those long-term objectives through non-financial objectives which are as follows.
Financial perspective has been discussed above accordingly to Kaplan and Norton in literature review. According to Kaplan and Norton (1992) "Typical financial goals have to do with profitability, growth and shareholder value."
So, I decided the financial objectives of JJB are to growth in revenue, penetration (expand into new geographical areas), expand into new markets, improve asset utilization and reduction in cost of operations or improve profit margins. We can measure these objectives from change in like-for-like sales or through income statement, percentage of revenue from new store, percentage of revenue from new customers/markets, return-on-investment, change in gross margin respectively. Through achieving these objectives, we would achieve the company's mission. However, it could be argued that the revenue growth doesn't necessarily mean that profit would also increase; revenue could be increased because of increase in cost of sales. So, this objective might not be helpful for the achievement of company's mission.
Customer perspective has been discussed above in literature review section. Kaplan and Norton (1992) phrased that customer perspective means "how do customer see us?" The first objective is to achieve customer satisfaction with quality products, value-for-money and on-time delivery. I decided to measure this objective through customer ranking survey compared to competitors in respect of quality, price and on-time delivery. I found some evidence of customer satisfaction with product, price and on-time delivery through my field observation. I ask the questionnaire from ten people and got that 50% people are satisfied with the quality, price and on-time delivery, 20% are not sure. However, 30% people are dissatisfied with the quality, price and on-time delivery. Moreover, other objectives are to retain a satisfied customer; we need to offer them high quality products at competitive price. We can measure the customer retention objective through Percentage of purchases from existing customers through loyalty card. We can measure the product quality through Percentage of faulty product refunds by customer. The competitive price objective could measure through price match survey for like-for-like products compared with competitors. I personally did the price match survey and found most of JJB's similar products are highly priced than its competitor Sports direct. For example one product called (Umbro England Away Shirt 2010-2012) just £35 at Sports direct and £39.99 at JJB sports (reference1; reference2). However, this could be argued that the sports direct following the discounting strategy and JJB following the focusing strategy and it has some after sale service facilities which others don't have. But JJB advocate in its strategy that to offer high quality product at competitive price but here they charging high prices as compared to their competitors. So, by using this performance measurement tool; we link all the objectives with company goals and can achieve the final objectives.
I also have some doubts about customer satisfaction and retention that may not lead to achieve financial objective. As Norreklit (2000) claimed above that customer satisfaction doesn't necessarily mean to produce desirable financial results. He further explain in Norreklit (2008, p.66) that customer satisfaction is consider to lead indicator of the financial objectives. This is not so. A highly profitable customer is a lead indicator if it is satisfied and retained. For example a sales manager may offer a heavy discount (which customer thinks, its value-for-money) or extended credit period to satisfy the customer. As a result the customer may be satisfied but the financial objectives will be worse. On the other hand the most profitable customers may not be happy, because they end up paying high prices for their supplies.
According to Kaplan and Norton, internal-business perspective has been discussed above in the literature review. The objectives of this stage are efficient staff performance, business operating efficiency, increase in stock level, and improve relationship with suppliers. I realized the performance and efficiency of the staff through mystery shopping. I visited the four different stores of JJB (Reading, Slough, Stains and Hayes) as a mystery shopper and found a mix attitude of staff performance and their efficiency. The staffs of Reading and Slough were found careless and less motivated than the staff from stores located in London. Moreover, business operating efficiency according to on-time delivery could be measured through customer survey. I found the through my field survey that 50% people are satisfied with business on-time delivery, 20% are not sure. However, 30% people are dissatisfied with the on-time delivery. On the other hand, I suspect that this business operating efficiency could not enough to achieve the customer satisfaction. Only this objective may take years to yield a satisfied customer.
I set the objective to increase in stock level because as according to the company's trading update reports (2010) "the lack of new stock has damaged sales". On the other hand it could increase the holding cost but my suggestion is to improve the stock level at that point which would not damage the sales.
The next objective is to improve relationship with supplier and we can measure it through average score awarded us from supplier. Supplier survey could include that how we treat them, are we professional or not, and are we reliable at paying on time. This good relation with supplier could help to increase our profit margin by getting the products on heavy discounted price, which would help us to attract new customers because of competitive price and ultimately increase our revenue. Furthermore, right time to launch the product is so important in retailer like JJB and also the right product at right time like summer or winter products should launch at right season. So, the improvement in these areas could give considerable advantage and help to achieve organizational strategy.
Learning and growth:
Literature review of learning and growth has been discussed above in literature review of balanced scorecard. As Kaplan and Norton (1992) explain learning and growth and aptly phrased in small sentence "can we continue to improve and create value?" to justify this, I set the objectives to improve the employee capabilities, employee satisfaction, and for growth, improvement in internet sale capabilities and right time of the product to market. The objectives and measures are given in the table above. We need to enhance the skills and capabilities of the employees through training and need to find new ways to generate revenue such as improvement in internet sale or increase the number of fitness clubs.
The figure below demonstrate the strategic map (according to Kaplan and Norton) of the company explain the cause-and-effect relationships and align all the objectives to organizational strategy. Revenue growth (financial perspective) could only be achieved if there would be a loyal and satisfied customer. Customer could be loyal and satisfied if there would be a high-quality internal business process which would enhance the efficiency of the staff and operating process. Learning and growth are supposed to the drivers of these perspectives and through improvement of employee capabilities and skills; we can achieve all these perspectives and ultimately can achieve the long-term objectives of the company. However, it has been argued above that there is no such cause-and-effect relationship among the measures. As according to Norreklit it's a logical relationship. Moreover, customer satisfaction doesn't necessarily mean that it would achieve the financial objectives.
Balanced scorecard has a weak control system. It should improve its control system such as Simon (1995) suggested. Simon (1995) argued the traditional control system and suggested that contemporary control system must find a way to join elements of control with elements of empowerment. He suggested four separate but interrelated ways of control system: belief, boundary, diagnostic, and interactive. The analysis of belief system reveals the commitment to achieve goals, and motivation and empowerment of employees. The analysis of boundary system brought forward the idea to set the boundaries of trade and set the limits of certain kind of moral and strategic activities. Moreover, diagnostic system means the appropriate action to a gap between the actual and desired performance is to bring back the performance on track. Finally, interactive system brings together senior and operational management to discuss the future plans of organization and challenges facing an organization. His framework set out a model of control system (Simon, 1995 cited in Ahrens T and Chapman CS, 2005). Balanced scorecard should have a control system like this to become more realistic.
After a profound study of performance management system, in my own point of view, should: be linked to business strategy, include external and internal measures, include financial as well as non-financial measures, include all important easily as well as hardly measurable factors. But not to forget the motivation part and give considerable attention to how these measures will motivate employees to achieve the business strategy. Employees won't work well to achieve the organizational strategy under the threat of losing their jobs. This is temporary solution to take a work from staff under pressure. If you would like to be achieved your organizational goal and would like to achieve long-term objectives, then you should seriously think about employee motivation in monetary terms. After a detailed analysis of JJB's working style, I decided to make a separate employee perspective which divided the employees according to their department and set measures for their performance evaluation. Employees of each department will be assessed according to their key performance indicators. The key point to make these indicators that employee could not achieve these indicators according to targets without serving a customer in a good manner. I assume that good customer service would create a loyal customer and through this company could achieve its financial objectives. But before implementing this, don't forget the employee monetary motivation and empowerment aspect. It's hard to achieve company objectives without attaching any suitable reward with it. Balanced scorecard is a nice idea but it has nothing to do with employee motivation, and retail companies like JJB really need employee motivation in monetary terms to achieve their long-term goals.
Staff working on tills
KPI: Percentage of socks sold against shoes sales comparison with other JJB stores
Staff working on shope floor
KPI: Number of ball sold per day compared with other JJB stores
Staff working in footware department
KPI: Number of shoe care sold against shoes comparison with other JJB stores
Staff working in equipment and bike department
KPI: Number of bike and equipement sold (percentage of sale)
The project aimed to elucidate the balanced scorecard in the light of academic literature and then implement it in practise using a case study of JJB sports. JJB Sports is seeking to re-position itself within the market and refocus on its "Serious about Sport" image offering quality products at competitive prices to its customers. The balanced scorecard is found as a strategic measurement tool, which aims to reduce the problem faced by traditional measurement tools. Balanced scorecard interrelate the financial measures with non-financial measures and linked together in a cause-and-effect relationships. It also helps to improve communication within the company and help to translate the company's lofty mission statements (Serious about sports) into achievable objectives. Moreover, it is not just a strategic measurement tool but a strategic control tool (Kaplan and Norton, 1996a). However, it has been criticised above by Norreklit and Otley because of its key assumptions and cause-and-effect relationships. It has also been criticised by Kasurinen (2000) because of it implementation problem and weak control system. Although I have expressed a strong view that if the balanced scorecard is to become more realistic, then its control system needs to be improve such as Simon (1995) suggested a control system.