Abstract
A balanced scorecard refers to the management system and strategic planning tool used broadly in industry, government and nonprofit organizations across the globe. Its application seeks to better align operations to the specific strategy and vision of an organization, to improve both external and internal communications and to monitor an organization’s performance alongside those strategic objectives. The scorecard was first was introduced back in the early 1990s by Norton and Kaplan of Harvard School. More than half of the key companies in the US, Asia and Europe currently employ the scorecard approach, with its use on the rise in both the Middle East and Africa as well.
This approach has largely remained unchanged since its inception, incorporating both a fundamental strategic focus with a limited number of core measures that are grouped into clusters. It advocates that additional balance should be struck achieved between financial and non-financial metrics of performance, as well as between short and long run measures. Despite this, the scorecard approach has its limitations: not only has it been proven to ignore basic cause and effect relationships in the business, it tends to leave several interest groups and external environments out of the picture, while its hierarchical set up of top-down organizational structure often creates problems when it comes to implementation.
BSC origin and rise to prominence as a performance measure tool
A balanced scorecard refers to the management system for strategic planning that is used broadly in industry, government and nonprofit organizations across the globe. It is used to align operations with the specific strategy and vision of an organization, improving both external and internal communications, while monitoring and organizing performance alongside these strategic objectives. The Scorecard was first introduced in the Harvard School course work of Norton and Kaplan back in the early 1990s. The concept has since evolved and become a very popular tool whose different forms have been broadly adopted worldwide.
However, it should be noted that, at the offset, the scorecard's initial definition was quite sparse. It was also clear that the filtering and selection of those measures could in itself be a major task. In the past, organizations typically used to have access to numerous measures required to populate their Balanced Scorecard. Hence, they were forced to decide on the measures that should appear, as well as how these were clustered. Setting to improve on these ambiguities, Norton and Kaplan proposed that the measure selection ought to focus specifically on the information that is most relevant to the implementation of the strategic plans, as well as those questions of attitude most useful in determining the most appropriate distribution of the measures in each perspective (Robert & David 77). Although the Scorecard has essentially remained unchanged, its core limited number metrics have since been clustered into groups that are of a greater fundamental strategic focus. In addition to this, the present Scorecard designs also have some newer features that clearly differentiate it from earlier versions (Robert & David 74).
What has remained consistent throughout its short history, however, is its popularity. The Gartner Group claims that more than 50 percent of large firms in the US have already adopted use of the scorecard. In fact, over half of the key companies across the US, Asia and Europe currently apply the scorecard approach, with its use on the rise in both Africa and the Middle East. A very recent global study by Bain and Co ranked the balanced scorecard approach as fifth among the ten most extensively used management tools across the globe. This list also includes the top-ranked strategic planning, which remains closely related to the scorecard. The scorecard has further been chosen by editors of the Harvard review on Business as being amongst the most powerful business ideas to emerge over the last 75 years. (Citation?)Thus, it is evident that the scorecard has greatly evolved from its initial use as a simple measurement tool to become a complete management system that is key to strategic planning. The new BSC can transform any organization's strategic plan from an attractive passive document into marching orders for the firm's day-to-day operations. In this respect, it offers a framework that provides performance metrics that helps planners select both what needs to measured and done. In essence, it helps executives to effectively execute the strategies.This fresh approach to strategic management, it should be noted, was first outlined in a series of books and articles by Doctors Norton and Kaplan, who recognized some vagueness and weaknesses in existing management approaches. Their scorecard approach provides a clearer prescription of what organizations need to measure in order to more effectively balance their financial perspectives. Seen in this view, the BSC is a key management system and not just simply a useful measurement system. It helps organizations to clarify their strategy and vision and transform both into action. It also provides feedback concerning both external outcomes and internal business activities in order to enhance continuous strategic performance as well as results. Finally, when fully applied, balanced scorecards can actually transform strategic plans from a mere academic exercise into the practical nerve center of an enterprise (Marr & Neely 5).
In their explanation, Norton and Kaplan refer to the scorecard innovation as a tool thatretains both the traditional and customary financial measures. Although financial measures provide a window into a company's performance, the scorecard offers firms more regarding investments, long-run capabilities and customer relationships, all of which are critical to business success. These improvements were necessary, given that financial measures alone were inadequate when it came to both evaluating and guiding the journey firms must undertake to create future value by investing in suppliers, customers, employees, technology, processes, and innovation (Robert, Antonio, Robert 45).
BSC approach to performance measure and advantages
Before BSC, many organizations simply adopted the myopic short term, financially biased analysis view of performance, often summed up by more traditional performance measures such as Sales, Profit, Return on the Capital Employed, Residual Income, Return on the Investment, Gross Margin and Net Margin. However, while agreeing that a financial performance for an organization is a major consideration Norton and Kaplan argued that such a narrow performance assessment detracts from the long-term development of an organization (Robert & David 66). Thus, both advocated that additional balance ought to be achieved when considering both financial and non-financial metrics of performance, as well as short and long run measures (Bolton & Drew 380).
With the sole purpose of attaining such a balance in mind, Norton and Kaplan argued that performance should instead be addressed from four diverse perspectives, namely:
The customer: How an organization is carrying out its activities, as per the customers.
Learning and Innovation: Performance needed to ensure the long run development of an organization (Robert & David, 67).
Internal Processes of Business: The manner in which an organization is carrying out its daily processes must be both efficient and effective.
Shareholder: The Measures of Financial Performance (Aranda & Arellano 284).
In addition, the BSC’s implementation process was simplified to include:
Agreeing on a set of routine measures that are to be applied in every level and perspective of the business.
Agreeing on performance targets regarding each of these measures.
Ensuring recording of the actual performance of every performance measure.
Continuously reporting as well as acting on any deviation in performance (Andrew & Chris 32).
Regarding the importance of the BSC, Norton and Kaplan insisted that adopting the following approach in performance management might have the following benefits:
Creating a more long run strategic view for performance, rather than merely a myopic short-term view.
Broadening the view of divisional managers when it comes to assessing what represents a good performance, far from a solely financial view (Brewer 47).
Organizations creating performance measures that are ultimately more aligned explicitly to their basic corporate strategies.
Considering customer viewpoints that are critical to the business
Promoting accountability in all performance measures through responsibility of those nominated individuals.
Having an implementation that is relatively simple and understandable (Ahn 448).
Limitations and criticisms of BSC as a performance measure tool
How the cause and effect relations barely relate to reality
While Norton and Kaplan argue that more revenue is generated from customers who are both more satisfied and loyal, it’s uncertain whether casual the interrelations among the classical 'growth-learning-process-finance-client' perspective actually exist under all circumstances. In fact, several researchers would seem to disagree. Hanne (71) also did not agree that such a connection would be established by using this critical reasoning. Instead, the opposite claim was made, using a simple practical life example. When an organization is attempting to satisfy clients who are both very loyal and who possess very high-quality expectations, but who generally make very small purchases, doing so will often not generate any profit. Mainly, they are clients of moderate budget and higher age who demand very high quality. Likewise, there is the question of whether that linkage between client satisfaction and processes actually exists, as it may also be possible to show the exact opposite example.
Both external environment and several interest groups are excluded
Unlike several other management and strategy analysis techniques such as Benchmarking, SWOT, Porter and PEST analysis, the Scorecard approach fails to consider two important groups of interest, namely shareholders and clients. In addition to this, not much attention is paid to the daily activities of competitors. While Norton and Kaplan argue that an organization should use the double-loop process when learning how to initially establish the scorecard, they fail to take the rapidly changing working environment into consideration - resulting in a learning and application process that is often inadequate (Niven 46).
Studies have also determined that frequently scanning the external environment is equally important. In the public sector, for instance, measures significant to voters or other interest groups could be considered through a method proposed by Robert & David, (65), where the fifth additional perspective gets added into the traditional Balanced Scorecard framework.
That being said, perhaps the most challenging problem of the scorecard approach when it comes to the environment and interest groups is its lack of consideration for suppliers, close neighbors and cooperation partners. Given this, several researchers have recommended using the prism performance method to better integrate their interests and concerns into the scorecard (Ittner, Larcker & Meyer 742).
The hierarchical top-down set up creates problems for implementation
Several practical examples have confirmed that the top-down approach that is inherent in the BSC is not the best one for many reasons. For starters, research has shown that it’s not advisable for a company to set-up a hierarchic structure to pursue its strategic objectives. These approaches tend to concentrate efforts on the establishment that fail to consider people/employees’ internal needs, resulting in a centralized program that is only results-driven, where employees are expected to offer mere buy-in decisions that are devoid of personal contribution. Researchers have shown that in such cases, the final iterations of such businesses might face problems with motivation issues, impeding further improvement programs down the line - realities that have been made famous by Dilbert comics. Thus, considering the feasibility of using the bottom-top approach as a measure is necessary (Hanne 70).
Secondly, setting up hierarchical measures and objectives bring about potential future threats to the organization. This is because the build-up of work tends to come in the form of processes from only certain departments within that organization. This top-down hierarchy may lead to local optimums within these departments. If, as per the Constraints Theory suggests, attention is no longer paid to hierarchy but rather to the value chain elaboration, it might provide a solution to the problem. Research by Guidoum (25) has proposed a solution to better measure such performance dynamic systems, which acts as an alternative methodology for overcoming this difficulty.
Unsuitability to unhealthy or unique enterprises
The Norton and Kaplan methodology have been used in the description of every balanced scorecard consisting of the management meetings series, meeting with the groups for project management as well as establishing control systems. In many of these cases, the practice proved that such a methodology is viable for those large companies where enough human resources are available to carry out such large scales projects, but not for smaller organizations (Yngve 45).
Works cited
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Yngve Antonsen. (2014). The Downside Of The scorecard: A Case Study From Norway, Scandinavian Journal Of Management, 30.1 (March 2014): 40–50.
