This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
Historically, financial measures such as earnings per share (EPS), return on assets (ROA), return on investments (ROI), and many others were used in numerous organisations as their performance measurement system. However, these financial measures have been criticised as it is said that it only reflects the past data, encourages short-termism and may motivate manipulation of results. Besides that, financial measures also do not take into account the other critical areas such as quality, flexibility and other areas that the company needs to excel in order to survive in the current competitive market.
In recent years, many management frameworks have been introduced such as Lynch and Cross (1991) "performance pyramid", Fitzgerald & Moon (1996) "building blocks of performance measurement system"; Neely et al., (2002) "performance prism"; Kaplan and Norton's (1992) "balanced scorecard" framework;, "six sigma" and "value for money" the to have a wider view on the company's needs to compete in the market.
Balanced Scorecard (hereafter known as BSC) is a framework that has been introduced to overcome the weaknesses of the traditional performance measurement systems. The BSC was created in 1987 at Analog Devices (Schneiderman, 1999). BSC became a popular strategic management tool after a work by Robert S. Kaplan & David P. Norton was published in the Harvard Business Review paper in 1992.
Kaplan and Norton (2001) states that the BSC reflects the changes in technology and competitive advantage in the 20th century where intangible assets became more important as it became the major source of competitive advantage of the company. According to the Business Dictionary (online) intangible assets are long term resources of an organisation but they have no physical existence. This includes brand, intellectual capital such as knowledge and know how, reputation and customer loyalty. Managers would have to learn on how to manage these intangible assets which includes customer relationship, employee training, high quality products and many more. Therefore, it is critical that these intangible assets are measured as "If you can't measure it, you can't manage it" - Peter Drucker.
Activity-based costing (ABC) is said to be the original thinking that led to the BSC framework (Johnson & Kaplan, 1987; Kaplan & Bruns, 1987). ABC is a costing model that assigns cost to each of the activities in the organisation. This model is based on a theory that activity consumes resources and therefore costs should be allocated to the activities based on the resources consumed.
According to Zelman et al., (2003), there has been an increasing trend on the implementation of the BSC as a performance measurement system. Examples of the adopters of the balanced scorecard are KPMG Peat Marwick, Allstate Insurance, and AT&T (Chow et al., 1997). According to The Advanced Performance Institute (API), about half of major companies in the US, Europe and Asia are users of the BSC framework. According to Bain and Company, there were about 57% of global companies that have already adopted the balance scorecard.
Before looking in to the review of the BSC literature, it is important to understand the term of balanced scorecard. "Balanced" is defined by The Free Dictionary (online) as to bring into or keep in equal or satisfying proportion or harmony. Scorecard is a card which is usually used in games. It is used to record the performance and progress of the players.
BSC is a strategic management tool which aims to translate the organisation's vision and strategy into specific quantifiable objectives that can be measured. The objectives are measured using these four perspectives which are the financial perspective, customer perspective, learning and growth perspective and internal business processes perspective (Kaplan and Norton, 1992).
Company's goals are broken down into specific business unit's goals which are in line with the company's overall strategy. Specific objectives are then set for each of these perspective and measures for measuring the achievement of these objectives are then determined. These objectives and measures have to be thought thoroughly to ensure that neither area is overemphasised nor underemphasised.
Financial measures are known as lag indicators as they represent historical performance while lead indicators are performance drivers (Kaplan and Norton 1992, 1996). Traditional performance measurement systems focuses solely on financial measures and this deals only with lag indicators that only reflects the past and is also not linked to the organisational strategy.
A good balanced scorecard should contain a mix of lag indicators and lead indicators in the four perspectives. By including leading indicators into the company's performance measurement system, it helps managers to overcome the problem of short-termism, forces them to think about the future and not only focus on the past. Thus, the BSC is a performance measurement system that balances between financial and non-financial measures as well as lags and lead indicators.
This financial perspective deals with how the company look to the shareholders (Kaplan and Norton, 1992). It emphasises more on shareholder's satisfaction. The typical financial goals are the profitability, revenue, cash flows, return on assets, growth and maximising shareholder's value. Historically, performance measurement has been focusing on these financial measures. However, in the current era, managers recognise that over focusing on the financial measures is inappropriate as these financial measures reflect the past and not the future. Exclusive reliance on financial measures may motivate managers to make decisions that sacrifice long term value creation for the benefit of short term performance (Porter, 1994)
This perspective deals with how the customers see the company (Kaplan and Norton, 1992). Customer's loyalty and satisfaction is always linked to the long term growth and survival of the company. Belilos (1997) states that by looking at the company by a customer's point of view, it will lay the course for a successful business and it also helps in the planning of the company.
Measures selected for this perspective should measure the value delivered to the customers. Companies have to differentiate itself from competitors by ensuring that they meet customer demands and needs. Quality, reliability and customer service has to be good enough to maintain a good relationship with the customers. This will attract new customers and also retain the old ones.
Learning and Growth Perspective
Learning and growth perspective is about the capability of the company to continue to grow, improve and create value (Kaplan and Norton, 1992). According to Herbold (n.d.), companies that turn their previous successes into legacy practices that they follow repetitively are risking themselves by putting the company in a very disadvantageous position. He also said that companies need to constantly move, evolve, improve and innovate. This is very true as advancement in technologies have made customer's preferences change rapidly. Products become obsolete very quick. Customers are also more aware of the choices they have and best products in the market because of the availability of information on the internet.
Therefore, in order to survive in the intensely competitive market, companies have to constantly learn and improve for growth and survival.
Internal Business Processes Perspective
This looks into the area of internal business processes that the company must excel at in order to survive (Kaplan and Norton, 1992). Companies will have to focus and excel in the internal business processes that enable the company to meet the customer's need. This includes creating value adding products, improving resource utilisation and asset management.
Cause and effect relationship
Kaplan and Norton (1996) claimed that there's cause and effect relationship between the measurements of the four perspectives in the balanced scorecard. Kaplan and Norton argued that learning, training and innovation (learning and growth perspectives) lead to better internal business processes (internal business processes perspectives) as employees would be able to perform better in their job.
By having good internal business processes, the company would be able to meet their customer's needs and this will improve customer's satisfaction and loyalty (customer perspectives). Higher customer's satisfaction and loyalty can help improve the company's financial performance as a returning customer is more probable (financial perspectives). Therefore, Kaplan and Norton (1992) believe that if the perspectives in the scorecard are excelled at, the company would have a better financial performance. However, there is not enough evidence and research to claim this claim of causality.
(Kaplan & Norton, 2004) came up with Strategy Maps: Converting Intangible Assets into Tangible Outcomes to provides detailed method on how to link the strategy of the company with the objectives. This strategy maps can be used to assist managers and consultants to develop their own BSC.
The BSC has received many compliments and also criticisms. Many case studies have been done in this area which includes implementations in private organizations (Yang et al., 2005), major public corporations (Niven, 2003), government agencies (Kirby & Smiesing, 2003), and large multinational corporations (Wonder, 2005) but there are only a few researches done to assess the impact of the implementation of BSC on the company's performance.
Ghosh and Mukherjee (2006) state that one of the difficulties in the BSC measurement system is that there is no weighting given to the measures of the BSC. It is suggested that weights should be assigned to each measures depending on their importance to the organisation. This is however, a complicated task.
The BSC is criticised by Atkinson et al. (1997), amongst others as they are in a view that the BSC does not adhere to the stakeholder approach to performance management as it fails to take into account of the issues relating to employees and suppliers.
There are also concerns on the cost for the implementation of such systems whether the benefit of implementation of such system outweigh the cost of implementing it. There are also questions on the successfulness of such implementation to achieving the intended goal.
Besides that, BSC is viewed as not more than a performance measurement system. Some companies think that they are a strategy-focused organisation by having adopted the BSC framework as their performance measurement system, developed their goals, objectives and measures. According to Kirby and Smiesing (2003)
. The Balanced
Scorecard is a performance planning and measurement framework, with
similar principles as Management by Objectives, which was publicized by
Robert S. Kaplan and David P. Norton in the early 1990s.
Implementing Balanced Scorecards typically includes four processes:
1. Translating the vision into operational goals;
2. Communicating the vision and link it to individual performance;
3. Business planning;
4. Feedback and learning, and adjusting the strategy accordingly.
The research methodology used and chosen is selected based on the aims and objectives of this study. The selection of the appropriate research methodology is crucial to ensure that aims are achieved and the correct line of research is pursued.
Sources of data
The sources of data can be broadly categorised into two categories namely primary source data and secondary source data. Primary data is the data collected first-hand whereas the secondary data is the data taken from other parties. The data used for this study would be a combination of both sources.
Primary source data will be data collected from the questionnaire sent to the companies regarding the adoption of the balanced scorecard. Secondary data used in this study will be the financial results of the company published on the internet.
Types of data
There are two main types of data which are quantitative data and qualitative data. Quantitative data are the data that is in numerical form whereas qualitative data are the data that are not numerical and expressed in other form. For the purpose of this study, quantitative data would be more heavily employed in the analysis of this study.
Criteria for selection of the companies
Samples would be non-random samples as companies that have adopted balanced scorecard would be selected from list of balanced scorecard adopters prepared by the Balanced Scorecard Institute. Companies which have not adopted the balanced scorecard framework would be selected based on their similar sizes and industry with the adopters from the list.
There will be forty to fifty United States companies selected for the purpose of this study. These companies will be from a few different industries.
Criteria and analysis procedure of data
The procedure and methodology for this study will be mostly based on the model specification from Lee (1987), Hashim M.K (2000) and Mok (2009).
The previous research reviews suggest that it is not possible to choose a single performance measures that is equally appropriate for all business firms. Based on the literature, this study concludes that in order to describe SMEs performance more fully, combination or multiple measures are needed so that they are able to provide more definitive answer on how efficiently and effectively SMEs is being managed.
In this study, performance is the dependent variable that is presented in the theoretical framework. This study measures business composite performance index (BPCI) as the performance measures as in Lee (1987)'s and Mok (2000)'s study. Sales, assets, gross profit, employment, equity, return on sales (ROS), return on investment (ROI), return on asset (ROA) are used to assess the SMEs' performance. The BPCI is developed from the mean values of ROS, ROI and ROA (BPCI = ROS + ROI + ROA/3). Data for this measure was collected for the years 2005 to 2009.
Statistical methods used
This study used statistical methods to test the hypotheses of the research model. The hypotheses were tested using the multiple regression analysis. The multiple regression is used to test hypothesis 1, 2 and 3. Furthermore, the multiple regression is used to test the significant mean differences between the SMEs finance and its effect on firm business performance.
The research questions are as follows:
Is there a relationship between the adoption of balanced scorecard framework and the financial performance of the companies?
Do companies which have adopted the balanced scorecard perform better in terms of financial performance than the companies that have not adopted the balanced scorecard by industry?
In the literature on marketing research the term success has many different interpretations. In the simplest definition success is equivalent to continued business operations and the opposite, failure, means going out of business. (Simpson et al., 2004.) Traditionally the concept of success is defined in terms of financial performance, such as growth, profit, turnover or return of investment, or number of employees (see Walker and Brown, 2004; Simpson et al., 2004; Paige and Littrell, 2002; Greenbank,2001).
Financial aspects of the concepts of success are compiled as below:
Financial measures E.g. growth, profit, turnover, ROI, increase in employees
Limitations of methodology proposed
There are a few limitations of the methodology proposed which includes:
There are many companies that are using balanced scorecard but the sample size of this study will only be a small portion of the whole figure.
Samples are not purely random samples as they are from a list published by the Balanced Scorecard Institute.
This study is also limited by its singular focus on balanced scorecard as the only independent variable and financial performance as the outcome variable. There are actually many other factors influencing the financial performance of a company. The adoption of the balanced scorecard is not the only factor that can influence the financial performance of a company.
Ethics is most commonly defined as the values relating to human conducts and rules governing it. Ethics deals with 'right or wrong'. Research ethics is the application these rules of conduct to a research. Ethics are taken into account in this research to ensure that every individual are respected and there is no misconduct.
Structure of the Study
Chapter 1 - Introduction
This chapter is the introduction of the study. This includes background of the performance measurement system in companies, aim, objectives, rationale and limitations of this study.
Chapter 2 - Literature review
This chapter documents the review of theoretical and empirical literature of the balanced scorecard and its effect on the company's performance in terms of financial performance.
Chapter 3 - Methodology
This chapter describes the research method and study design utilised in this dissertation. This includes the sampling method chosen, data collection method used, data analysis method used and the limitations of the research method chosen.
Chapter 4 - Analysis and interpretation
This chapter elaborates the way used to analyse the data, discussion of the results and implications of the study.
Chapter 5 - Conclusion
This chapter summarizes the findings of the study with recommendations for future studies.