This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
The balanced scorecard which is originated by Drs. Robert Kaplan and David Norton in the early 1990s, is a new management concept which helps managers at all levels monitor results in their key areas. Ia used worldwide in business and industry, government, and non profit organization. as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance.Â
An article by the founder, Robert Kaplan and David Norton entitled "The Balanced Scorecard - Measures that Drive Performance" in the Harvard Business Review in 1992 sparked interest in the method, and led to their business bestseller, "The Balanced Scorecard: Translating Strategy into Action", published in 1996. Kaplan and Norton describe the innovation of the balanced scorecard as follows: "The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."
The balanced scorecard is a management system that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. The "new" balanced scorecard transforms an organization's strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. It provides a framework that not only provides performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies. The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system.
History of the Balanced Scorecard
a) Early History
The Balanced Scorecard was first put forth as an effective model for widespread application by Kaplan and Norman in 1992. The actual genesis of the Balanced Scorecard lay in the post-industrial era of the early Cold War period when measurement based management techniques were first developed and popularized by W. Edwards Deming.
Measurement based management stresses "the value of their employees as untapped sources of company knowledge and ideas for improving quality" and the identification of the causes of product defects and variances (Arveson 1998). While the Kaplan and Norman are generally considered to have developed the model, it was they who developed the model and popularized it, though they did not invent it. It is contended that the first Balanced Scorecard was used by Analog Devices (ADI), a mid-sized company that built semi-conductors.
b) First Generation
The first generation model was what is now described as a rather primitive "4 box" method of performance measurement (Kaplan and Gordon 1992). This early methodology offered little insight into the actual improvement of business strategy and seemed rather to only illustrate the importance of vision and strategy in the measurement process (Ibid).
Initially, the First generation Scorecards were used for management control purposes only. This was probably because the limited nature of the "4 box" model was used as the basis for most of the early academic essays and articles. The popularity and relative ease of use caused the First generation models to sustain popularity several years after Second and Third generation Scorecards had been developed (Cobbold and Lawrie 2002: 2).
c) Second Generation
The subsequent generations of the Balanced Scorecard have gained sustained notoriety as a result of the study by Cobbold and Lawrie, which was first published in 2002 (Clarifying and Communicating). The different generations are a function of the differences in the intended use of the Scorecard. The Second generation model is designed for strategic control. It called for a vision statement and a destination statement to be used in determining which factors were to be measured in the Scorecard (Cobbold and Lawrie 2002: 2).
The Second Generation Balanced Scorecard also incorporated the concept of causality. After some firms attempted to indicate a link between the actual measures, "it became clear that measure based linkages provided a richer model of causality than before" (Cobbold and Lawrie 2002: 3). As the complexity of the Scorecard increased at about the same time personal computer software was becoming more affordable, many software packages available for developing the Scorecard electronically. As of the year 2000, there were already well over one hundred different software options for users who need help in creating their Scorecard (Gardenne 2000).
d) Third Generation
Improvements to the Second Generation Balanced Scorecard have resulted in a Third Generation Scorecard which has greater functionality and places even more emphasis on the strategic development role of the scorecard than the Second Generation did (Cobbold and Lawrie 2002: 4). Third Generation Scorecards also make even greater use of the Destination Statements. For the Third Generation of the Scorecards, it was determined that Destination Statement best served as starting point because it greatly facilitated selecting strategic objectives and "the articulation of the hypothesis of casualty" (Cobbold and Lawrie 2002: 5).
Third Generation Balanced Scorecard was even more significant in the long lasting ongoing impact on the use of Balanced Scorecards where it allows companies to use multiple Balanced Scorecards and to effectively take into account the information asymmetry that is prevalent in modern business. Further, the Third Generation allows for the involvement of a wide range of managers in the strategic management process, "provides boundaries of control but is not prescriptive or stifling and most importantly removes the separation between formulation and implementation of strategy" (Cobbold and Lawrie 2002: 6).
Balance Scorecard Implementation and Performance In Organizations
The Balanced Scorecard was first designed by Harvard business professor Robert Kaplan and David P. Norton in 1992. Kaplan and Norton "began with the premise that an exclusive reliance on financial measures in a management system is insufficient" and that "Exclusive reliance on financial indicators could promote behavior that sacrifices long-term value creation for short-term performance" (Kaplan and Norton 2001: 87). The collaborators stress that the widespread popularity of the Balanced Scorecard is predicated on the linkage of "measurement to strategy" which rely on the non-financial factors as not just an "operational checklist" but "a comprehensive system for strategy implementation" (Ibid: 88, citing to Kaplan and Norton 1996).
Over the decades, hundreds of organizations have implemented the BSC concept in one-way or another. The Balanced Scorecard (BSC) philosophy has spread rapidly throughout the worldwide business community (Shneiderman, 1999). Over the last couple of decades, investors, board members, analysts, and stakeholders have focused almost exclusively on a company's financial figures as the key to its overall health. According to Hickm Gray, R. (2002) an (2004), most American businesses, for the greater part of the 20th century, were answered on a single measure of performancein their finances.
Kaplan and Norton (1996) have argued that the BSC should align the performance reporting measures with the strategic goals. The performance reporting measures would then act as a control system for the achievement of strategic goals, and would motivate employees in that direction. Consequently, such a process should have a positive effect on organisational performance.
However, Kaplan and Norton (1996) have found in their case studies that many corporations do not align their performance reporting with their strategic goals. In these situations the positive effect of the alignment on performance should not be achieved and performance would suffer. It has been offered by its inventors, Kaplan and Norton (1996) as the cornerstone of a new strategic management control system which positively links an organization's long-term strategic intentions with its short-term operational actions.
According to Bourguignon (2004), organizations have implemented the Balanced Scorecard (BSC) concept in one-way or another over the decades. The Balanced Scorecard (BSC), although deficient in empirical testing of its benefits is arguably the dominant framework in performance management (Marr and Schiuma, 2003; Smith, 2005). The Balanced Scorecard (BSC) is a business measurement process which requires companies to consider additional factors besides financial results in order to sustain success. A useful scorecard is derived from the accurate and precise measurements of a variety of internal processes of the company.
Types Of Scorecard
Kaplan and Norton (2001) outline three types of BSC which, to an extent, reflect the development of their own thinking over time. First is a key performance indicator (KPI) scorecard, where sets of measures are developed under the desired perspectives which have some reflection of strategy set at a higher level in the organisation (Kaplan and Norton, 1992).
Second is a strategy scorecard where the strategy of the organisation is mapped through a BSC and the sets of measures in each perspective are linked in causal logical architecture reflecting this strategy (Kaplan and Norton, 1996).
Finally are stakeholder scorecards where the major stakeholders of the organisation are identified, and measures and targets are built to reflect their interests and it may operate as a signalling device (only) for the stakeholders (Kaplan and Norton, 2001).
Balances Scorecard (BSC) Perspectives
Part of the Balances Scorecard (BSC) includes the concept of the four perspectives: Financial, Customer, Internal and Learning perspectives. The four perspectives allow a business to develop an integrative and forward thinking strategy that will balance maximizing present profitability with ensuring future growth and viability (Kaplan and Norton 1996: 56).
Inherent in the Balances Scorecard model is that no perspective is innately more important than the others (Brewer and Speh 2000). It is, of course, the Financial perspective which most businesses are drawn to. This is the perspective which defines long run monetary objectives of a company, including a profit model. But it is important to note that a properly measured Financial perspective encompasses more than just profit projections .
The primary purpose of the scorecard is to assist in the business' decision making process, especially in the areas of leadership and organization. (Ziegel 1998). The second perspective, the Customer perspective is also a traditionally vital part of business strategy. This perspective measure customer will typically include customer satisfaction, customer retention, new customer acquisition, customer profitability, and market and account share in targeted segments. This is the perspective where the company must understand who and where it consumer base is and how that base is best marketed to.
Within the Internal perspective, the company executives identify the "critical internal processes which the business must excel". Unlike the traditional approaches to business performance measurement, which only measure existing internal business procedures, the Balanced Scorecard model is designed to identify new internal processes in which the company must excel in order to achieve and sustain growth and success (Ibid: 63).
The last perspectives, the Learning perspective, centers on using people, systems and procedures to ensure that they are technologically capable of meeting their own internal processes and the meeting customers' long term needs for tomorrow. This perspective identifies in what infrastructure the company must invest in today to be prepared to compete globally in the future (Ibid: 64).
Balanced Scorecard Performance Measurement
The Balanced Scorecard has not only been hailed as being theoretically sound, it has produced results, as well. In a 2003 study of 35 organizations in the UK, found that best performance measurement initiatives were implemented by those companies that used a Balanced Scorecard approach to data measurement and whose initiatives had been led by an individual who was not involved in the financial performance measurement (Prickett: 4). The study further showed that these companies had successful measurements because, as is prescribed by the Balanced Scorecard model, they identified truly crucial indicators after consultation with every portion of the business' team, including in many cases the lower-level and front line employees. Finally, the study suggested that the return on investment for the research necessary to produce a Balanced Scorecard is well worth to the company (Ibid).
The vast majority of the literature on the Balanced Scorecard model, usually in the form academic and scholarly commentary, has consistently praised the Balanced Scorecard. The model promotes good "strategic health" of an organization (Hagood and Friedman 2002). The model has been held to have the properly flexibility to allow for relative importance of each area to be given by individual companies (Gadenne 2000). A final example of the positive feedback is the balance of the Balanced Feedback, in as much as it allows a company to measure its performance based on internal analysis and external analysis via the Customer perspective (Arora 2002).
Overall, the review of the literatures above supports the notion that organizational learning and growth activities drive to improve internal business processes and appear to be directly related in contributing to greater customer value. Nonetheless, it is worth to highlight that as the findings are from small-scale and limited scope case studies, it does signify the causal relations of productive employees will increase the level of innovativeness, customer service and process improvement.
BALANCED SCORECARD PERSPECTIVES AND BENEFITS
Balance Scorecard Perspectives
Figure 2: Four Perspectives Of Balanced Scorecard (BSC
There are four perspectives of Balanced Scorecard (BSC). The four perspectives of BSC refer to the learning and growth, internal business process, customer value and the financial performance perspective. Organisational Strategy The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives.
They are The Learning and Growth Perspective
The Business Process Perspective
The Financial Perspective
The Customer Perspectives
3.1.1 The Learning and Growth Perspective
The Learning and Growth Perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people who is the only repository of knowledge and they are the main resource in a organization. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode.
Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization. Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools, what the Baldrige criteria call 'high performance work systems'.
3.1.2 The Business Process Perspective
The Business Process Perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running and whether its products and services conform to customer requirements or the mission. These metrics have to be carefully designed by those who know these processes most intimately. It's a unique missions because these are not something that can be developed by outside consultants.
3.1.3 The Customer Perspective
Recent management philosophy have shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators that if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even if the current financial picture looks good. In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which a product or service to those customer groups is provided.
3.1.4 The Financial Perspective
Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority with managers doing everything necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. However, the point is that, the current emphasis on financial leads to the 'unbalanced' situation with regard to other perspectives. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category shown in Figure 3.
The Balanced Scorecard goes beyond standard financial measures to include the following :
Figure 2: Balanced scorecard according to Kaplan/Norton with 4 future perspectives
3.2 Scorecard Benefits
The Forward thinking of the organizations are realizing them the significance and potential of the Balanced Scorecard (BSC). Many Companies in worldwide now are already embarking on Balanced Scorecard and are achieving outstanding results in the strategic directions of their business. Balanced Scorecard assist companies to implement Key Performance Indicators (KPI), realize business strategies and initiatives and achieve higher performance and global competitiveness. Strategy-focused organizations are using the Balanced Scorecard as a strategic tool to:
a) improve financial results through better use of Resources and cost savings
b) achieve organizational performance excellence by ensuring focus on the key
c) enhance corporate governance & accountability to stakeholders
d) achieve clarity on organization strategic direction
e) drive business results through human capital
f) improve customer service and satisfaction
g) improve organizational alignment
h) achieve inter departmental synergy
i) provide fact-based management by delivering a Concrete base for planning,
monitoring and control
j) motivate employees by linking reward
The Balance Scorecard tools that listed above very useful for performance by implementing performance-linked Compensation (plc) The balanced scorecard is a powerful framework to help Organizations rapidly implement strategy by translating The vision and strategy into a set of operational Objectives that can drive behavior, and therefore, Performance. Balanced scorecard strengthens an organization internal And external accountability by improving its internal Processes, stakeholders-value creation, quality, Organizational learning, and community relations. It Encourages organizations to focus on setting measurable And to report on their success in achieving those
BALANCED SCORECARD AS PERFORMANCE MEASUREMENT
Although the balanced scorecard is considered as an effective performance management tool, there are disadvantages to using this. Research and practice in the 1990s have been very much engaged in improving measurable performance in order to optimize operational efficiency. The balanced scorecard follows this logic of seeking efficiency and enables organizations to react to changes by aligning business processes to a defined strategy. However, the balanced scorecard in the innovation company causes a tyrannical impact on the firm and its stakeholders. The specific disadvantages of the balanced scorecard can be identified that endanger the survival of the firm in the innovation economy, and five major problem categories arise:
The balanced scorecard is a measurement tool that is relatively rigid. The balanced scorecard creates a statism that tends to struggle with the challenges of a highly competitive and changing business world The external innovative connectivity of an organization is hampered by the balanced scorecard Â Â Â Â Balanced scorecard is ineffective in dealing with knowledge creation, learning and growth Â The balanced scorecard is grounded in a mechanistic mindset
Recently, many companies have practiced the balance scorecard to improve an organization's performance for the goal of Total Quality Management. The balance scorecard has been frequently used by manufacturers to measure and raise their operation effects. It not only evaluates performance toward financial perspective but also integrates three other perspectives: customer, internal, and learning and growth. It matches the concept of total quality management of continuous improvement toward whole business, and becomes a useful tool to evaluate an enterprise's total operation performance.
In the marketing function, the balance scorecard is applied to evaluate the performance of marketing strategies. Whereas cause-related marketing (CRM) programs are created to raise incremental funds for the non-profit's cause and to promote the image and products of the business sponsor (File & Prince, 1995), the performance of the results in practicing cause-related marketing is a significant issue for enterprises. Cause-related marketing (CRM) has been highly regarded and recommended by various types of industry in recent years. (Ittner and Larcker, 1998).
Nowadays organizations are more focusing on the management of non financial or intangible assets like customer's link, services, quality and performance, not on the assets which are financial in nature (Kaplan and Norton, 2001). So there is a need for proper performance measurement system to measure and evaluate the performance of employee either financial or non financial. Strategic performance measurement system (SPMS) is a new approach to measure the performance rather than traditionally.
Chenhall (2005), said that the SPMS provide a way to translate and measure the both financial and non financial performance. He also suggests that it is the incorporative nature of this measurement technique; provide the potential to increase
the strategic competitiveness of the organization. As similar with Chenhall (2005), Vein, Burns and McKinnon (1993), was agreed that the use of multiple performance measures consist on financial and non financial is generally most good for owner and management, which is helpful to enhance protection towards the uncontrollable events outside the organizations.
THE IMPACT AND CHALLANGES OF THE BALANCED
SCORECARD FACED BY ORGANISATION
Traditional financial measures do not cover these intangible assets. Balanced scorecard is a management system that enables organizations to translate the vision and strategy into action. This system provides feedback on internal business processes and external outcomes to continually improve organizational performance
Organizations and managers are willing to get employees commitment, which leads to improve the productivity. Management would like to introduce employee with norm, values and objectives of the organization which is importance to understand the organizational culture. It is the responsibility of the management to introduce the organizational culture to its employees that will assist the employees to get familiar with the system of organization. Management must try to always keep learning environment in the organization. Proper understanding of organizational
culture should leads towards improvement of employee's performance. As per organizational development is concerned, employees performance consider as a back bone for the industry. So organization's wants to get the loyalty of their employees towards organization.
Organizations and managers are willing to get employees commitment, which leads to improve the productivity. Management would like to introduce employee with norm, values and objectives of the organization which is importance to understand the organizational culture. It is the responsibility of the management to introduce the organizational culture to its employees that will assist the employees to get familiar with the system of organization. Management must try to always keep learning environment in the organization.
Proper understanding of organizational culture should leads towards improvement of employee's performance. As per organizational development is concerned, employees performance consider as a back bone for the industry. So organization's wants to get the loyalty of their employees towards organization.
The transformation of the commercial environment from industrial to information age is triggered by the globalization and liberalization of markets. Companies in Malaysia also strive to cope with the rapid changes in the business dynamics. In recognition of the increasingly sophisticated management control practices, several performance measurement frameworks have been introduced, widely debated and are evolved to fill the gap between operational budgeting and strategic planning in Malaysia. Malaysia had replaced the traditional financial to the multidimensional performances metrics. The new multidimensional Performance more oriented metrics with non-financial measures with the aims of a more effective focus on the new managerial imperatives.
Many organizations in Malaysia are in serious intention to achieve their vision to become a world-class organization. "WE need to put in place a management system that will help us clearly translate our vision and strategy into achievable and measurable objectives. "Only when we are clear of our strategic direction and objectives, will we be in a better position to put in place plans and mechanisms that address our long term goals"
-- Datuk Azlan Zainol, CEO, EPF Malaysia, Source: the
Star 26, July 2004
"The Balanced Scorecard gave us focus. The BSC helped Defense Logistics Agency (DLA) define its strategy, restructure the organization, focus on customers as well as target the internal capabilities (processes and people) needed to deliver its promise -"Right Item, Right Time, Right Place, Right Price, Every Timeâ€¦.Best Value Solution for America's Warfighter. The bottom line results are beginning to come in. In FY 2002 DLA achieved $130Million in savings while processing $2.2Billion more in requisitions for its customers."
-- Retired Admiral Ray Archer, Vice Commander,
Defense Logistics Agency (DLA) Malaysia
The balanced scorecard helps everyone in an organization understand and work towards a shared vision. A completed scorecard system aligns the organization's picture of the future (shared vision), with business strategy, desired employee behavior and day-to-day operations. Strategic performance measures are used to better inform decision-making and show progress toward desired results. The organization can then focus on the most important things that are needed to achieve its vision and satisfy customers, stakeholders, and employees. Other benefits include measuring what matters, identifying more efficient processes focused on customer needs, improving prioritization of initiatives, improving internal and external communications, improving alignment of strategy and day-to-day operations and linking budgeting and cost control processes to strategy.
In comparison with the results of Othman (2006) in his study of BSC causal
model development among the Malaysian companies, 52.9 percent of the companies that responded developed a causal model in their strategy formulation and implementation. In his finding, it is also reported that the presence of a causal model of the organization strategy may lead organizations to develop performance measures with unseen strategic issues of encountering a lack of enthusiasm among the employees in developing an action plan.
As a concluding remark, the overall findings verify that most of the BSC perspectives are correlated with each other at a statistically significant level in a sequential manner. The evidence found generally supports the theoretical foundations of BSC that there is a sequential dependency among the four BSC perspectives. In addition, the findings have shown that the respondents who participated in the survey have at least responded positively to BSC measures. More significantly, they believe that the cause-and-effect relationship of BSC will lead them to improved business efficiency and profitability.
The positive perception of the respondent reflects that they react favorably to the BSC as appropriate benchmarks for performance appraisal and useful for implementing changes as well as guiding for improvements in corporations. Therefore, conclusion can be drawn that those BSC believers and adopters are generally more performance driven and results oriented in nature.
The findings also revealed that the comprehensive framework of BSC provides a broader view of how an organization will convert its initiatives and resources, including intangible assets such as corporate culture and employees' skills and knowledge into tangible and predictable outcomes when the cause-and-effect links take place. The results of this study have also proven that the template of BSC articulated by Kaplan and Norton (1996) provides a common language and a generally accepted structure which can be used by managers for describing the corporate strategies.
Therefore, it can be concluded that without a Balanced Scorecard, organizations will not be able to achieve internal consistency of vision and action in their attempts to implement changes and introduce new strategies and processes. The Balanced Scorecard provides a framework for managers in managing the implementation of strategy. It also, on the other hand, allows the corporate strategies to evolve in response to changes in the company's operating environment. Despite the fact that the findings reported to be consistent with the academic literature, nonetheless, the relatively recent adoption of BSC among Malaysian companies limits the number of responses within the network of the researchers. Therefore, the finding of this study should be considered as indicative of the experience of the respondents only.
Harvard professors Robert Kaplan and David Norton developed the balanced scorecard to help translate vision and strategy into action. This technique can make strategic planning a core part of any business. The balanced scorecard uses a more holistic approach to analyzing how information is gathered and used to deal with investment decisions and other issues. In addition, it acknowledges the importance of input from customers, suppliers, and staff; as well as data concerning processes, technology, and innovation, to help organizations create a desired future.
The balanced scorecard is a system of combining financial and non-financial measures of performance in one single scorecard. The popular form of this card includes performance measures from four perspectives: financial, customer, internal business processes, and learning and growth (innovation). It focuses on the link between business processes and decisions and results.
Hence, the proponents of the balanced scorecard claim that it is a device to guide strategy formulation, implementation, and communication (Kaplan and Norton, 1996a). It also helps in tracking the performance and providing quick feedback for control and evaluation. A good aspect of the balanced scorecard is that it is a simple, systematic, and easy-to-understand approach for performance measurement, review, and evaluation.
It is also a convenient mechanism to communicate strategy and strategic objectives to all levels of management. The success of the balanced scorecard or a similar device will depend on the clear identification of non-financial and financial variables and their accurate and objective measurement and linking the performance
to rewards and penalties. The proponents of the balanced scorecard assume (perhaps implicitly) that it aligns with strategy leading to better communication and motivation which causes better performance.