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In 1990 an in-depth study of twelve companies was conducted in order to address the ever increasing performance measurement problem of that time. The Nolan, Norton Multi-company Research project developed a management tool that incorporates not only financial measurements, but also provides a holistic view of a company's business and performance measurement. In a summary of their findings, Dr David Norton and Prof. Robert S. Kaplan (1996) published a Harvard Business Review report introducing the Balanced Scorecard Approach.
Companies struggled to see the bigger picture, basing their business decisions solely on financial measurements, which gave them a look at where their business had come from and what it had been through, rather than where it is heading. This is, in effect, "like trying to drive your car by looking in the rear view mirror" (Hannabarger, Buchman & Economy 2007:10). The Balanced Scorecard was designed to rectify this, to link the finance to the performance and to increase the quality of the organisational performance. This management tool has now, eighteen years later, appealed to a considerable amount of organisations across all sectors, private, public and non-profit, especially in the United States.
The literature review will be exploring the implementation of the Balanced Scorecard on organisations, the perspectives which Norton and Kaplan (1996) developed as a performance measurement for organisation. The purpose of the study was to explore whether the Balanced Scorecard and its perspectives assist organisations in attaining their goals and whether organisations are still using the Balanced Scorecard as a performance measurement.
This approach attempts to incorporate certain different perspectives relevant to the business context, translating the visions and strategies set by senior management into objectives and measurements that employees can execute, channelling all energies in a company to achieve long-term goals. Being a full proof plan in theory, many companies that claim to apply the Balanced Scorecard approach find it difficult to implement successfully, which is usually due to the lack of understanding of the principal ideas and concepts behind the approach. This essay will begin by discussing the theory of the Balanced Scorecard, and then it will move on to the four perspectives that make up the approach. The third section of this essay will look at how it compares to other management tools, followed by how this strategy can be implemented effectively. A summary of the essay will then be given and a conclusion on the Balanced Scorecard Approach.
What is the Balanced Scorecard?
The Balanced Scorecard Approach
The Balanced Scorecard is a performance management system which relates a company's strategy to both financial and performance measures, various stakeholders' expectations and assessed performance. According to Daniels, Radebaugh and Sullivan (2009:757) almost fifty percent of North America's Fortune 1000 companies and forty percent of those in Europe use the Balanced Scorecard Approach, making it one of the most widely used and popular management strategies. The Approach is made up of the Strategy Map (refer to figure 1) and an accompanying Balanced Scorecard, which is there to support the Strategy Map by listing what targets the company has and what strategies they have put into place to reach these. The Strategy Map, usually drawn up by senior executives, is a literal map to how companies plan to implement their strategies, plans and projects. It breaks down the strategic objectives and places them in the respective Balanced Scorecard perspectives.
Figure 1: Strategy Map
Kaplan and Norton (1996:2) explain that they "developed the balanced scorecard which measures a company's performance from four major perspectives: financial, customer, internal process and learning and growth". These are the perspectives that Kaplan and Norton designed to form the legs of this performance measurement tool, which assists organisations in linking their long-term strategy to their desired goals, but they are not set in stone. Depending on a company's performance requirements and culture, they can choose to use three, five or even eight perspectives, but for the purpose of this essay we will be looking at the fundamental four.
Kaplan and Norton (1996:2) further elaborate that "balanced scorecards tell you the knowledge, skills and systems that your employees will need (their learning and growth) to innovate and build the right strategic capabilities and efficiencies (the internal process) that deliver specific value to the market (the customer), which will eventually lead to higher shareholder value (the financial)". In each of these perspectives organisations should translate their vision into a strategy by setting objectives, measures, targets and initiatives. Thus, being able to turn the concepts they have in mind into attainable goals.
The Four Balanced Scorecard Perspectives
The Financial Perspective
The financial perspective can be seen as one of the most important amongst the four perspectives because all companies generally want to perform very well financially and be solvent. According to Begg, Fischer and Dornbusch (2005: 423) being solvent is the ability an organisation has to have enough money to meet their debts and expenses. Companies seek to grow, be profitable and create surety for their shareholders. The question associated with the financial perspective is: how do the investors see the organisation? This question clarifies the financial perspective in terms of the organisation's needs to formulate a strategy which assures their shareholders that their investments are secure.
This means that because this factor is very important, companies tend to focus too much on the financial performance of the organisation. Hannabarger, Buchman and Economy (2007: 10) go on to reinforce the statement by explaining that the problem "in today's businesses was that many companies had the tendency to manage their businesses based solely upon financial measures".
In high school mathematics we are taught do on the one side what you do on the other. This can also be applied in this situation, but the problem is the failure to do so, which leaves other important aspects of running organisations to perform at their optimal levels unattended. Even though that is the case in most organisations, this perspective intends on improving performance in terms of revenue and profits. What managers need to know about financial scorecards are the following: financial ratios, market shares and the cost of goods being sold. These are just a few financial measures mentioned here. They have an enormous influence on the organisation. In the majority of organisations, the chief financial officer and other key executives decide on the financial measures they would like to focus on.
The imperative aspect of a company's financial measure is that it needs to be compiled from reliable data. This means that financial measures need to be associated with a company's direction strategy. Measuring a firm's financial wellbeing is essential due to the fact that it links to the Balanced Scorecard strategies, tactics and plans. The financial perspective assists organisations in reflecting on whether they are meeting their shareholders expectations, which boils down to making a profit so that shareholders can realise a return on their investment. Financial measures assist management in making correct and informed decisions on aspects such as budgets and expenditure. Figure one shows how this perspective broadens an organisation's revenue mix, improves returns and improves operating efficiency.
The Customer Perspective
It is well known that no company can be present without customers which is what the following section will be focusing on. It is the reason why companies attempt to produce and sell products and services to satisfy people's needs and wants. What every company needs to know is the position which the customers have within their organisation and how the company plans to measure what they desire and need. When organisations have this information they are able to construct a customer scorecard. These scorecards will be able to help an organisation constantly meet the customers' expectations.
The question which is associated with this perspective is: are we satisfying our customers and how do they see the company? And to answer this question they could consider the following: the knowledge they are in possession of about the fundamentals about their customers, whether they are utilizing customer information to produce suitable measures, if they are developing their customer strategies and whether the organisation is keeping in contact with the customer. With all this information at their disposal, the question they need be asking is: are they making changes to better delight their customer?
People are very difficult to understand which is why companies often mistake what it is that their customers want. In order for companies to understand what it is that their customers' desire they need to develop scorecards which addresses this and what strategies they plan to put in place to satisfy those needs. Customers need to be viewed as stakeholders. Barringer and Ireland (2010: 113) propose that these are people or groups with a direct involvement and interest in something or a business concern. This means that the objectives of the scorecard should be to increase customer satisfaction which Armstrong and Kotler (2005: 17) denote as a product or service with a supposed performance comparative to a shopper's expectations.
What organisations need to consider is how the success will be determined and tracked. This can be done by customer retention, meaning how the company keeps their customers. Performance expectations should be measured by targets which are set by management. The key performance outputs which are needed to attain objectives are initiatives which can be in the form of loyalty clubs which could offer discounts and special promotions to customers. In essence customers should be able to communicate to the company about how they feel about their products and services.
Things to be considered when developing the customer scorecard is the level of service which customers expect from the product or service, and what the company is willing to do to meet the customer's expectations, especially those who are frequent buyers. This can be referred to as a company's customer segment which, according to Armstrong and Kotler (2005: 310), is when companies divide a customer base into groups of individuals which have similar tastes and buying habits. It is a well known fact that customers who repeatedly come to purchase a product or service spend more money, so if an organisation plans to satisfy their loyal customers they should have a plan for retaining them because losing one loyal customer could be detrimental to the organisation in the long run, loyal customers being so rare. Customers like to feel that their desires and opinions mean something to the company, so companies need to get familiar with terms such as customer service, which Kotler and Keller (2005: 245) denote as a customer's whole experience with a product and company. These experiences can be broken down into five specific kinds of experiences which are 1) sense, 2) feel, 3) think, 4) act and 5) relate. This should, in turn, increase customer confidence in the company and increase customer satisfaction through excellent execution.
The internal perspective is one of the four perspectives which measures how value is added within a company's processes. This is a significant aspect to delight the organisation's customers. This perspective helps an organisation determine the position it plays in its industry and it also assists organisations in classifying the decisive measures needed in their Balanced Scorecards. Internal organisation processes are very important in that this perspective assists in structuring Balanced Scorecards, and giving an organisation a competitive advantage, which Kotler and Keller (2006: 150) explain as a company's capability to carry out their methods of producing or conducting a product or service in more than one way so that competitors are not able to contest process decisions.
Organisations need to make sure that they communicate to their managers that the role they play in the internal business processes is significant. Internal business processes include making sure that employees are performing at their best on their assigned duties. The internal business process perspective scorecard should be one at which organisations raise the question of which business processes should they excel at to please their customers and shareholders. It is imperative that companies focus on those operations which satisfy their customers. According to Alsyouf (2006), this perspective measures the internal processes with the purpose of having the most effect on employee's happiness while still attaining the company's financial goals. The problem facing most organisations is that their processes measures tend to leave out their customers. Managers need to realise that they have to fully make use of and value their employees or subordinates because when these people are happy at work they tend to perform better at their jobs.
Internal business measures should include productivity, which Johnson, Scholes and Whittington (2006: 100) describe as the pace at which a company turns out goods and services or the rate at which employees work, employee skills and labour turnover, just to name a few.
Learning and Growth Perspective
This perspective aims to improve the productivity of a company's employees so that it can guarantee the long term growth of the company. This is because, in this day and age, the world is evolving every day and there are new advances in the business world. In order for companies to stay current they need to learn and grow constantly. This can be due to technological advances and constant changes of customer demands. Hannabarger et al (2007: 258) state that "managers today need a deliberate, well-planned system to support their interests in new products and services; to satisfy and even delight customers with next-generation capabilities and new ways of doing things; and to push the ever-competitive envelope". This statement means that companies need to pinpoint which areas are influential to their industry so they can focus on them and steer their company or department in the right direction, but one crucial point managers need to bear in mind is that these areas need to be understood at a basic stage.
There are certain terms which managers need to familiarize themselves with in terms of the Balanced Scored, such as teamwork, leadership and innovation. Torrington et al (2005: 465) describe teamwork as a notion of independent working groups and go on further to state, "Teamworking aims to focus work activity among small groups of about a dozen members, who are mutually supportive and who operate with minimal supervision". This means that this perspective seeks to improve the way that employees in a company work together and to do it without being micro-managed. These are just a few of many terms associated with this perspective but they should give one an idea of what is significant about this perspective. Creelman and Makhijani (2005: 17) argue that "There are many soft areas that are difficult and maybe impossible to measure. Learning and growth is often a real problem here. This often results in somewhat fatuous measures being developed just to satisfy the need for a measure in each area". They argue that organisations tend to develop meaningless metrics just to have a measure in place because the learning and growth perspective can take on different meanings to different organisations because what works in one might not work in another.
Due to the flexibility and adaptability of the Balanced Scorecard concept, there are many ways to implement it. A scorecard developed for one organisation cannot be copied and applied to another. Trying to do this would ensure the failure of the strategy and in effect the business. Therefore, the Balanced Scorecard should be tailor made, fitted and adapted to the organisation in question. There are six steps in guaranteeing that these requirements are met and the scorecard is implemented effectively.
This is the first step to building and implementing the Balanced Scorecard concept. The key foundations should be analysed, along with the central beliefs, long term and shot term goals, financial situations and customer satisfaction. Environmental scans usually summarize all of these and are often completed even before this process is started, therefore it does not have to done again. If the information is still accurate and relevant, conducted within the past six months, it can be used to conclude this step, but the information is only the first part. Planning is a very essential part of this step as well; once all the information has been collected and analysed, a team should be chosen, resources made tenable and roll-out communication planned in order to build support for the new strategy.
Develop Business Strategy
According to Rohm (2009: 4) a strategy is a hypothesis of what we think will work and be successful. In this step, several strategic themes should be developed and particular business strategies looked at under these themes. The approach chosen should be described and those eliminated identified.
At this point the business strategy should be broken down into its key objectives. Companies are urged to select and only use those objectives which are critical to the implementation of strategy.
This is seen as the most important part of the Balanced Scorecard implementation process. Creelman and Makhijani (2005: 133) substantiate this statement when they say "it was really when executives began to visualize how objectives interrelate by laying the objectives out separately on a linkage model (that later became known as the Strategy Map) that the full power of the scorecard system truly emerged". In the organisation's strategy map, the objectives, which were defined in the previous step, are linked to and placed in the one of the four corresponding scorecard perspectives using the cause-effect linkage model. A strategic thread is then clearly defined, creating a path that shows management how to reach a desired outcome.
Development of Performance Measures
Measures are an intricate part of this concept; they are put into place to monitor the progress of both strategic and operational objectives which were laid out in the Strategy Map. Similar to the selection process of objectives in step four, measures should be thought of and selected meticulously. Only a critical few should be chosen and implemented to track progress. When a scorecard has too many measures, management may become obsessed with measuring, hoping that by overloading measures one of them will eventually stick. This could also lead to the tedious process of collecting unnecessary data with low informational value, which can be overwhelming. Rohm (n.d) advises that a meaningful performance measure should be developed for each objective, showing that about two metrics per objective should be sufficient. Rohm (n.d) continued to point out three models that can be used to find and define these critical measurers, namely, the Logic Model which allows one to logically examine the relationship of the of the different activities or measures and the good outcome they will produce, the Process Flow which works on a flow-chart system that points out the most important measures that will produce good results and the Casual Analysis which identifies the cause and effect of good outcomes. These models, if used effectively, can develop solid measures that an organisation can apply.
Development of New Initiatives
This is the final step in the building process of the Balanced Scorecard. Although the previous step was extremely intricate, this step is needed to make sure nothing has been left out. It ensures the success of the organisation's strategies due to the fact that it is considered at the end of the process making the whole process more strategic.
This is the process that needs to be followed (refer to figure 2) in order to create a Balanced Scorecard suitable for each individual organisation. The Balanced Scorecard can now be considered as built and organisations should work on sustaining it through its clear and simple explanation, building employee and customer support and constantly reviewing it and adapting it to meet new strategies.
Figure 2- The Balanced Scorecard Implementation Process
The Pitfalls of the Balanced Scorecard
The Balanced Scorecard approach, just like any other theory or approach of measuring performance, has its potential unanticipated difficulties even though it has the potential to bring considerable assistance to organisations. Creelman and Makhijani (2005: 17) propose that merely having a Balanced Scorecard will not guarantee an organisations success. The first mistake which many organisations may make is the mistake of thinking that simply having a Balanced Scorecard will deliver benefits to them but where most of them go wrong is in that it has to fit into the strategies of the organisation. The Balanced Scorecard is not there to repair a dysfunctional organisation. Organisations should not see the Balanced Scorecard as some quick fix because to implement and get the right scorecards for an organisation takes time and effort. The second point which is stressed is that a scorecard will not make a terrible management team an excellent one.
When organisations use the scorecard in an inconsistent way it can be hazardous to them because they lose sight of other important aspects of the performance of the organisation. Entrust responsibility without authority, as Hannabarger et al (2007: 333) suggest: "when you delegate responsibility for performance of key aspects of the Balanced Scorecard, you must trust and enable your managers and leaders to be personally and professionally responsible for performance to the scorecard". This suggestion states that organisations should mentor their managers so that they don't end up following the incorrect processes to do important activities. There should be some form of guidance so that managers can be confident when dealing with the Balanced Scorecard, because the problem which occurs in most cases is that managers don't often give their subordinates the authority they need to carry out the job they assigned them.
Organisations often overanalyze when it comes to setting up their Balanced Scorecards. The focal point should be on the important measures, which are the four perspectives: financial, customer, internal and learning and growth. Too much information in this case is not a good thing and it can make organisations lose focus on what they are doing.
The day and age that we live in has affected the way that all people live their lives and this has also had a great influence on how organisations operate and the strategies they have in place. By adopting the Balance Scorecard approach companies will be capable of increasing their focus on strategy and results as an alternative to tasks.
This approach can help organisations improve through recognizing and reacting to their customer needs, which is what is essential in any business which plans on retaining and keeping their customers happy. The Balanced Scorecard advances organizational performance by measuring what matters to the organisation. It assists managers in making better decisions based on leading performance indicators instead of lagging financial data, which is what most organisations tend to focus on. Managers will be able to plan time and resources more effectively by making use of the Balanced Scorecard. Many academics have come up with approaches of measuring the performance of organisations but the Balanced Scorecard is by far the most effective in today's world and has proven it by companies still using this approach.
According to Kaplan (2010), "â€¦while much has been learned over the past 15 years much interesting research can still be done. And with many private, public sector, and non-profit enterprises around the world implementing new strategy execution systems based on the Balanced Scorecard framework, the opportunities for informed empirical research are great". How can the Balanced Scorecard be implemented effectively? To answer the introductory question it can be concluded that the Balanced Scorecard can be implemented effectively when organisations have fortitude and do not expect that just by taking on a Balanced Scorecard approach they will have immediate success. There are procedures and processes which need to be followed in order to make the Balanced Scorecard approach work for an organisation.
The literature review found that Norton and Kaplan (1996) and their perspectives are indeed relevant to organisations as many are still using the Balanced Scorecard approach I agree with the findings of this study and the perspectives as performance measurement tool.