This report mainly discusses a performance measurement tool called the Balanced Scorecard (BSC). BSC approach has been found by Kaplan and Norton, and they define BSC as a tool which translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for implementing its strategy (Kaplan and Norton, 1996a, cited Horngren et al 1999). In addition, it measures and concerns both qualitative and quantitative issue in an organization which in return to manage its short-term activities to long-term financial goal. There are commonly other performance measurements available just like ratio analysis, total quality management (TQM), just in time (JIT) and economic value added (EVA). Unfortunately, these performance measurements merely focus based on financial performance only that is to come out ideal financial report based on historical data and it is less significant compared to BSC approach. The major different of these performance measurements is that financial performance is just concerned with the outcome of the financial report, but is not concerned with the value created whilst BSC approach concerned both financial and non-financial performance in order to provide better performance in single report by evaluating both short-term and long-term activities. Horngren et al (1999) mentioned that BSC measures an organization's performance from four key perspectives: (1) Financial, (2) Customer, (3) Internal business process, and (4) Learning and growth. However, each of these four key perspectives has its own characteristic in measuring performance efficiently and will be illustrate more specific with a diagram to show how these four key perspectives work simultaneously in an organization.
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Balanced Scorecard (BSC) approach to performance measurement comprises a set of financial and non-financial measures that relate to the entire strategy of the organization. Moreover, BSC integrates financial and non-financial performance measures and helps to keep management focused on all of a company's critical success factors, not just its financial ones. Also, BSC helps to keep short-term operating performance in line with long-term strategy (Jackson et al, 2008). Guan et al (2009) argued that BSC permits an organization to create a strategic focus by translating an organization's strategy into operational objectives and performance measures for four different perspectives: financial perspective, customer perspective, the internal business process perspective, and the learning and growth perspective.
At the mean time, Kaplan and Norton created the BSC mechanism to establish organizational performance system and link organization strategy to measures. Both of them have argued that traditional financial measurement like ROI offer a limited and incomplete picture of business performance, and that will hinder the creation of future business value. Therefore, they shout that financial measures should be supplemented with additional ones that reflect internal business processes, customer satisfaction, and the ability to learn and grow. (Kaplan and Norton 2001 & 2004, cited Huang et al 2006)
There are typically four key perspective of BSC introduced by Kaplan and Norton that is customer, financial, internal business processes, and learning and growth. The relationship between these four key perspectives is shown in Diagram 1 below.
This perspective focuses on identifying customer value and market segments. It captures the ablity of the organizaion to provide quality goods and services, and overall customer service and satisfaction. Currently, most of organizations have a mission emphasize on the customer and how an organization is implementing its customer perspective has become priority for top management. According to (Kaplan and Norton 1992, cited Amaratunga 2001), core customer value consists of customer satisfaction, retention, customer profitability, and new customer acquisition which establish a sustainable long-term customer relationship. Meanwhile, the market segments determine the best measures of the business performace based on targeted segments and core measures that anticipate successful outcomes of a well-formulated and implemented strategy.
Internal Business Processes Perspective
The primary objective of this perspectibe is an analysis of the organization's internal proesses. Internal business processes are the mechanisms through which expected performance targets are met. Several business improvement methodologies available for implementing these business processes such as total quality management (TQM), just-in-time (JIT), activity based costing and many others. Besides, internal business processes perspective aims on the internal business results that lead to financial success as well as customers' satisfaction. Hence, managers must focus on those critical internal operations that enable them to satisfy customers' needs. (Kaplan and Norton 1992, cited Bose and Thomas, 2007)
Learning and growth perspective
Always on Time
Marked to Standard
With the aim to success, frequent changing is required for that organization make continual improvements to their existing products and processes and have the ability to introduce entirely new processes with expansion capabilities. In order to meet changing criteria and customer expectations, employees may be asked to take on new responsibilities, this may require capabilities, skills, technologies, and organizational designs that were not available before. Therefore, the organization should consider not only what it must do to maintain and develop customer needs, but also know how it can sustain the necessary efficiency and productivity of the processes created for the customer. (Kaplan and Norton 1992, cited Amaratunga et al 2001)
Financial perspective provides managers with a clear picture of financial performance of an organization. Bose and Thomson (2007) provide that financial measures commonly used are return on capital employed (ROCE), return of investment (ROI) and operating income. Based on the opinion given by Kaplan and Norton (1992), financial perspective measures financial performance by determining whether or not the organization's strategy, execution, and implementation are contributing to bottom-line in order to enhance efficiency of the organization. However, the objectives and measurement of the other perspectives must be linked to financial perspective. There are commonly three strategic themes of financial perspective itself: Revenue Growth, Cost Reduction and Asset Utilization.
Value ScorecardDiagram 2 (Source: Jazayeri and Scapens, 2008, page 58)
Performance: Our key to Winning
1. Business unit 3 yrs cash flow
2. Business unit value - 10yr.
3. Growth in order book
4. Change in overall European Federation for Quantity Management (EFQM) score
5. Change in EFQM Business Result score
Partnership: Our future
1. Growth of supplier assessment rating
2. Sales delivery through partnership
3. Change in EFQM score on impact on society
4. Reduction in Supplier base
Customer: Our highest priority
1. Change in EFQM
2. Sales prospects conversion versus planned
3. Growth in customer satisfaction
People: Our greatest strength
1. Personal development plan (PDP) deployment
2. Change in EFQM and People satisfaction score
3. Opinion survey feedback
Innovation & Technology: Our competitive edge
1. Increase in nominee for Chairman award
2. R&D % of turnover
3. Number of best practice case studies
4. Value of new lines of business
5. Number of employees on intranet
Balanced Values Scorecard
Balanced values scorecard (BVS) is an alternative approach of performance management system, which used in order to develop strategy of an organization. According to the article written from Jazayeri and Scapens (2008), the culture change project intended to focus everyone within BAE on five key values that are performance, people, partnership, customer, innovation and technology. For instance, this cultural project included the development of the BVS to measure performance by adopting these five key values. Next, the author would like to provide the definition for five key values in which these explanations are taken from the comments of the culture change that provided by interviewees' own term during interviews (Jazayeri and Scapens, 2008):
"Basically our key value is performance, which is basically the key to winning and which means that we will set targets to be the best and to continually challenge the way we actually do things."
"People are our greatest strength and what happens is that we recognize the fact that we can no longer treat our people as being extensions of the machine and that we've actually got a large number of highly talented people and we want to get the best people to work here and actually enable them to work in the best possible way."
"Increasingly what happens is that we are moving into areas that we do not normally operate in, but other people do and therefore what we have to do is to engage partners on a long-term basis."
"Customers are our highest priority, both internal and external, by understanding and exceeding their expectations."
Innovation and technology:
"We have to continually change our business and the way we do business. So what we're actually trying to do is to preach stable values as well as change in the dynamic environment."
Comparison between BSC and BVS
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The BSC assists organization to manage four key perspectives individually based on cause-and-effect relationship rather than to do it in a coherent way like BVS emphasizes. In relation, this is because an organization that implements BSC can fully concentrate on these four key perspectives which consist of customer, internal business processes, learning and growth, and financial perspective respectively. For example, it is a top-down strategy in which long-term decision is made within top management and then pass instructions to down management to handle short-term activities based on the decision made from top management so as to fulfill long-term objectives of an organization. On the other hand, BVS concerned that the different perspectives have to fit together in a coherent way so that the organization can coordinate the actions of the various functions and the activities of the business as a whole. Norreklit and Mitchell (2007) both have agreed that the coherence of BVS's five key values is necessary in order to coordinate and integrate the performance management system as a whole.
As mentioned above, BSC is a top-down basis while BVS allows everyone within the organization to implement in a coherent way. For example, any meetings that related to BVS must involve top, middle, and bottom level managements to discuss the matters at the meeting. Indeed, this coherence is good to see, but not very effective due to there are some factors in which workers from different level may not understand matters that discussed during the meeting. These factors included barriers in term of language (jargon, slang), job position, knowledge, experience, culture and so on. In fact, these factors will definitely slow down the progress of BVS implementation of an organization. It is very peculiar that every employee of an organization is well-trained and rich in knowledge.
With the existence of BSC approach, every organization should adopt this approach rather than emphasize financial performance alone. In the circumstance where an organization manage its non-financial perspective (e.g. productivity, provide better and faster service, increase customers' satisfaction by receiving their feedbacks), the financial performance will increase automatically even without any enhancement about this aspect. As mentioned above, the four key perspectives play an important role in an organization as they guide managers on how to implement BSC within the organization.
On the other hand, Jazayeri and Scapens (2008) provides that BSC measures each perspective as individual part and it measures cause-and-effect relationship whereas BVS takes all its five key values and measures in a coherent way so as to integrate and coordinate the activities of the business as a whole. However, it depends on which type of performance measurement whether appropriate for organization or not because different types of performance measurements sometimes may not suitable to other organizations by various internal factors. By the way, it is very difficult to coordinate and control BVS approach as it requires frequent meetings, and it requires full co-operation between managers and workers from different management level.
To summarize, BSC enables organizations to handle both of their financial and non-financial measurements by determining the four key perspective in term of Customer, Internal Business Processes, Learning and Growth, and Financial perspective which are formally introduced by Kaplan and Norton (1992).