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During the 2012 Corporate Review, Tesco PLC was noted as one of the leading retailers in the corporate business world. Tesco PLC based in the United Kingdom is one of the largest retailers globally with huge revenues and profits acquired over the years. Their success, as was noted, is linked to their use of the balanced scorecard, abbreviated as BSC. Therefore, their success is probably a huge indicator that the balanced scorecard is a vital tool that needs to be considered by any player interested in having a proper and efficient management system for business.
However, it is not only the Tesco PLC that uses the balanced scorecard, many other significant companies and organizations across the United States, United Kingdom and even in the Asian Countries have admitted and linked their success of the efficient management with the integration and use of the balanced scorecard in their management system. According to a recent research The Annual Survey of Management Tools that was conducted globally by Bain & Company, it was found that almost half of all the major firms in the United States and other Western states use the balanced scorecard.
The critical question therefore is what is the Balanced Scorecard? What are its components, how does it work to bring the successful management of companies? And is it completely immune to failure and does using the BSC guarantee complete success with no weaknesses on its side? These are some of the issues that need to be addressed in an effort to understand how the BSC functions.
The Balanced Scorecard defined
The Balanced Scorecard is a management and planning system that is used by organizations to meet their visions and missions. Essentially, it works to assist in getting more practical with strategies and plans intended to meet goals. In their book, the Balanced Scorecard, in 1996, Robert Kaplan and David Norton described and introduced to the world the concept of The Balanced Scorecard Management Tool (Norreklit, 2003). In that book, they explained that The BSC was a framework put forth to act as a guide to organizations on how to well strategically conduct management (Norreklit, 2003). The BSC has been proven by design and automation tools as the best tool for managers to monitor and keep a close eye on how, for example, their staffs are handling and performing in their work.
Why it was formed
Initially, it was noted by Kaplan and David that many organizations were managing their businesses using only financial measures; most often they were never successful in their management strategies (Abernethy et al., 2005). And, as time passed and the world changed, it became even more significant that there needed to be a change in the management system of organizations to keep up with the pace and consider the more comprehensive aspects of management. The financial component of management, they noted, only assisted to indicate events that had already occurred since they were usually recorded (Abernethy, et al., 2005). With only knowledge of the past history of their organizations, the two realized that it will be hard to postulate future expectations and chart a path they expect to take to achieve their goals and plans.
Its components, characteristics and how it works
How the balanced scorecard came into existence has been established. It became a tool that had a proportional mixture of both the financial and non-financial aspects of management and hence the name' balanced'. Business managers were therefore provided with a better insight of how to deal better with the modern management issues for more informed decisions to meet the expectations they have for their organizations.
It is crucial that an organization has a well-defined mission statement and a strategic plan of management. These two act as the backbone of the Balanced Scorecard and a strategy through which the perspectives of the businesses are coined from (Abernethy, et al., 2005). After that, the financial and organizational structure of an organization similarly need consideration. It is only after these significant components are met that a company can approach the Balanced Scorecard Methodology. It will be much easier for them to have a reference point through which they are able to assess their success and monitor whether or not the path they are taking is the right one. Therefore, the Balanced Scorecard here acts a bridge between the strategies and plans that they have and the actions they intend to take (Abernethy, et al., 2005). It therefore allows the use past information which is the financial perspective to meet the possible future success that is composed of the non- financial components.
It is important to measure and have a clear record of the strategies and plans of the organizations; this is because it enables the confirmation of the causes and effects assumptions that were considered when the plan of the organization was being penned. This is a significant part of how the balanced Scorecard works. It is because most strategies organizations have are often what they believe influence the financial and non-financial perspectives the most. Therefore what the Balanced Scorecard offers is an opportunity for these organizations to keep track of their performance and focus on what is most important for the success of their management.
Since success is never a constant expectation; some strategies may go wrong, compromising the goals and objectives of an organization. In such cases therefore, the organization has to rewrite their strategies with clearer assumptions on the cause and effect of events to prevent damage in the management of the organization.
The Balanced Scorecard is therefore generally all about having objectives and targets. As a result, the design methods that are developed usually assist in the identification process of the goals of the organization, this is according to an article by Kaplan and Norton in the Harvard Business Review (20055) on the Balanced Scorecard.
The Four Perspectives of the Balanced Scorecard
The Balanced Scorecard offers a balanced approach in organizational management. Kaplan and Norton (2005) highlights that these are the customers, the learning and growth aspect and the internal business processes. It henceforth provides a clear definition of how the vision is to be met, through the actions to be taken. These four legs of the Balanced Scorecard are what are used to monitor and track the strategies that an organization has; they are very critical and essential for the implementation of previously set goals and targets.
The Financial Perspective
This generally involves areas such as return on capital or investments, revenues, earnings, cash flow and quarterly or yearly financial investments. The financial perspective allows for the identification and development of financial measures that are relevant as organizational strategies. It therefore covers financial objectives and is elemental in monitoring the shareholder value and financial success. It is critical that an organization is able to track their financial needs and requirements to make sure they are performing well. As a result, an organization will have a clear picture of the financial situation as a whole. However, the financial element alone cannot play the role of making sure that the organization is well prepared for the future therefore other significant components of management have to be considered as well (Bourne and Bourne, 2000).
The Customer Perspective
It is a component of the scorecard that involves the quality of delivery that is often offered to the customer; it is important that the customer is satisfied with the services offered by an organization. This in turn influences whether or not the customer will remain loyal to the brand, affecting the customer retention and satisfaction rate (Bourne and Bourne, 2000). In this area, organizations are also similarly keen to note the percentage of their customers in the market, which allows them to assess the quality of their services and check on how they can increase their clients if sales are low and customers are few. The image of the organization is often influenced by the performance of the customers as well, thus, it is clear that customers play a crucial role as well in determining the success of an organization.
The Internal Businesses Processes Perspective
Some of the examples in this leg of the Balanced Scorecard are: timelines of the organization, quality measures, and productivity rates; it also includes innovation, activities and processes within the organization. In this perspective, the company is able to assess how well they can meet their objectives and targets and also how to meet the needs of their customers (Hannabarger, 2007). It basically entails the consideration and a careful look at the processes that are necessary for an efficient organization as regards customer delivery.
The Learning and Growth Perspective
The employees and the employers are the main targets of this perspective of the balanced scorecard. Knowledge is crucial for the development and growth of the organization. Therefore how the staff is trained is a major concern together with how the managers acquire extra knowledge needed to deal with the competitive market. Focuses on how employees are educated, how to gain and capture knowledge, and how to use it to maintain a competitive edge within markets (Hannabarger, 2007). Here, the balanced scorecard makes sure that there is a certain level of expertise that is achieved within the organization. The employee turnover is similarly an important component of the learning and growth perspective.
At the moment, these four legs are however not presented in a four box model as was the case initially. Instead, this has been replaced by the strategy map to offer a more comprehensive outlook at the key players in the overall performance of an organization. Since it was later on discovered that the individual perspectives influenced each other, the strategy map was developed to show this relationship and how the different objectives of the scorecard were influencing the different outcomes (Cobbold and Lawrie, 2002)
The Steering Wheel of the Tesco PLC
From the article "Tesco PLC Annual Review and Summary Financial Statement 2012", Tesco PLC was initially just like other retailers during the 1970s. Although they had numerous other retail shops, their profits were not forthcoming. They focused more on the financial aspect of their business, the price; they failed to note that the quality of their products was not good. They were however able to notice that customer's looked forward more to luxury and quality than quantity. The Tesco PLC is a good example of an organization that has succeeded with the subsequent application of the Balanced Scorecard concept. This is because Tesco responded to the customer needs and closed down most of the retail shops and focused on quality delivery. Tesco therefore gained success and fame with their innovative new approach called 'the Tesco Way'. Here, they focused more on their customers and being distinct from their competitors.
Therefore in the 1990s, Tesco developed their mission statement and strategy. Using the Steering wheel, they were able to drive their employees to better performance. Their steering wheel is basically composed of five sub divisions: customer, community, operations, people and finance. The steering Wheel of the Tesco PLC is their balance scorecard that has assisted them to organize and monitor their future goals and expectations. Indicated in the steering wheel against each of the five components are the respective expectations, their plans that constantly remind them of the values, mission and objectives. Through this, the organization has gained profits and revenues that have put them in the map as one of the largest and most dynamic retailers globally.
Why is the Balanced Scorecard popular, what are its benefits and demerits?
Since the book by Kaplan and Norton The Balanced Scorecard: Translating Strategy into Action was released in 1996, the concept and use of the balanced scorecard gained popularity globally. More and more people in the business world have embraced this management tool that has proved successful over the years. This is because before its introduction, little credit to other measures not financial in organizations was considered; long-term goals and targets were therefore never met. With the introduction of the balanced scorecard implementation of strategies came to a realization to businesses across the globe.
Some of the benefits of the Balanced Scorecard
With the BSC, organizations have been able to view and review their strategies and objectives; this has consequently allowed them to update their objectives over time to suit their needs. The BSC has similarly acted as a bridge between long term targets and annual budgets. Close monitoring of the management system has furthermore been enabled. Critical areas like resource allocation within an organization have been strategized and monitored by the management system. The balanced scorecard, besides providing a host of other benefits to organizations has also facilitated major positive changes within numerous organizations. Once the performance of an organization has been improved and tracked down, it therefore becomes easy for them to compare themselves with other varied businesses that offer competition for their products and services. Different companies, organizations and businesses have therefore had the opportunity to understand their strategies, visions and missions and to work towards achieving success. Generally, there have been major improvements in businesses globally on the basis of performances due to the integration of the balanced scorecard concept (Abernethy, et al., 2005).
All of these changes in management have created improved processes within organizations; employees have found motivation and have also got more knowledge of what is expected of them. There has also been a much more enhanced information system that has created progress through close monitoring. Organizations that have used the balanced scorecard have similarly realized that a large percentage of their customers remain loyal to them.
Research has further more shown that organizations using the Balanced Scorecard as a management tool tend to register better improved performance when compared to other companies that choose a rather normal management system that fails to deliver the expected goals of the company (Abernethy, et al., 2005). These organizations have experienced a better planning system that is strategic, especially due to the fact that the use of the BSC involves application of strategy maps that give a clear communication on the relationships of the key measures that define the outcome of the organization's targets.
There has been a general improvement in the execution and communication of strategy; this is majorly because of the fact that the strategy of the company in the BSC approach is clearly stated and can easily be accessed and reviewed within and outside the company. The fact that an organization has a plan of their future readily accessible to them allows a much easier system of execution to meet the demands made. Research again has indicated that organizations using the Balanced Scorecard approach have a better system of managing their information. This is because these companies are able to monitor their performance and therefore are sure to track and measure issues that are primary to their strategy. Information is a critical component in the management of an organization (Cobbold and Lawrie, 2002).
The Weaknesses of the Balanced Scorecard
However much there has been a general consensus on the significance of the balanced scorecard, there has still been some details that are not clear in understanding how well this management tool operates and functions. To begin with, the postulated cause and effect relationship stated to exist in the strategy map does not really exist according to the article by Norreklit. Only some of the measurements have a logical interrelation; customers and financial prosperity are interrelated, for instance, loyal customers are bound to bring good profits for an organization. However in the long term, the same cannot be true, since these customers might end up being expensive and costly to the company, affecting the financial stability (Norreklit, 2003).
Academics on the other hand have attacked the work that Norton and Kaplan did in developing the idea of the balanced scorecard; they have claimed that there is a technical problem that was involved in the initial development of the balanced scorecard creating flaws in the design and method of the BSC. This is furthermore reinforced with the probability of it being designed on the basis and functionality of the first type of the Balanced Scorecard, the First Generation Scorecard, that was never a success in management (Norreklit, 2003).
It is also widely argued that the balanced scorecard is never really 'balanced' to begin with, unsatisfied clients of the management tool having complained that it does not cover critical issues like for instance how to develop strategies that have not proved successful (Norreklit, 2003). Such people argue that the balanced scorecard does not have any recommendations; they state that instead, it simply has initial guidelines with no options and follow ups in case of an unexpected failure.
There have been numerous and major studies that have tried to understand the significance of the balanced scorecard. These researches have linked the balanced scorecard to better sound decision making processes in companies, improved financial stability, customer loyalty, enhanced communication and handling of crucial information and even good relationships between employees and employers especially due to the motivation and extra knowledge that they acquire from using the balanced scorecard.
There is therefore a general consensus that the positive significance and impact of the balanced scorecard outweighs the weaknesses that have been highlighted by some criticism. The balanced scorecard is therefore a useful tool of management that plays the crucial role of realigning the strategies of organizations and making sure they are made through a proper monitoring system.
Though the approach is rather simple, it is powerful if execution is well administered. This is as long as the proper required procedures are followed and the managing system is respected by both the employers and the employees.