Benefits
A balance scorecard has a number of benefits to companies depending on a number of factors. Key among these factors is the use to which the balance score card has been put. A balance score card can be used in operational control and strategic management among other functions.
Used in enhancing the operational control
When used in enhancing the operational control function, the balance score card has several benefits which include increasing the effectiveness with which performance improvement initiatives are monitored; improving understanding of the processes in order to spearhead the process of setting and achieving the organization’s goals. The balance scorecard is very effective in enhancing the effectiveness of the company’s operations by ensuring that all stakeholders are reading from the same line. This in Chavan’s (2009) opinion means that all employees of the organizations would be made to understand the operational goals of the company in order to know exactly which they can play in achieving such goals. Moreover, shareholders as crucial stakeholders would also be made to understand their role thus enabling them participate by providing financial resources necessary for achieving such goals as well as offering necessary support.
Enhance strategic management
According to Ashi (2010) the balance scorecard also benefits the company when used in the strategic management function. Firstly, it brings into focus all the parameters that should be assessed in order to design the best strategy for the company’s performance. In addition to this, in the strategic management function, balance scorecard enables managers to unify goals of all stakeholders in the company in order for the company to achieve its strategic goals and objectives. This is ensures that all employees of the organization are aware of its goals and are therefore made to understand that the only way to achieve these goals is to have a unity of purpose at the end of which all organizational goals will be achieved because all people would be contributing their achievement.
Limitations
Cause and effect relationship are not practical
One of the criticisms leveled at the balance scorecard is the fact that some of the cause and effect relationships proposed in the tool are not actually practical. For instance, it is proposed that more satisfied and loyal customers generate higher revenue and therefore one of the way through which a company can improve its financial performance is through putting in place measures that would improve this customer satisfaction. This is because there are customers in a company who would have been offered higher quality goods an satisfactory service but still fail to buy more products from the company and thus this relationship taints the validity of the balance scorecard. Consequently, basing on this weakness one would be compelled to conclude that the balance scorecard needs an improvement.
Overlooks external factors and other interest group
Another limitation of the balance scorecard is the fact that it overlooks external environment factors and other interest groups like competitors among others. The main focus of the balance scorecard is on shareholders and clients who may indeed significantly affect its performance but as much as what external environmental factors would do. This according to Rompho (2011) is because, in the measurement and management of performance using the balance scorecard, the management only focuses on what employees can do improve customers’ satisfaction which is believed to cause increased profitability thus benefiting shareholders. However, the management fails to understand that there are competitors in the market who would also be working to delight customers and therefore gain their loyalty and most importantly their business. If this factor is overlooked, chances are high that the company would implement strategic actions that would fail to bear fruits. It is therefore very important that external environmental factors are considered in the design and use of the balance scorecard in the measurement and management of performance in a company.
References
Ashi M., (2010) Balanced Scorecard, European Management Journal [online] Available at: http://www.google.co.ke/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&ved=0CGAQFjAG&url=http%3A%2F%2Fwww.slideshare.net%2FMurhafAshi%2Fbalance-scorecard-3506577&ei=UIktUYvhDMSGhQe3_4DQAQ&usg=AFQjCNGt3nEaQ9mFSu-1hcjLxfHKUBw5cw&bvm=bv.42965579,d.bGE [Accessed 27 February 2013]
Chavan, M., (2009) The balanced score card: a new challenge, Journal of Management Development [online] Available at:http://www.google.co.ke/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CDIQFjAA&url=http%3A%2F%2Fwww.emeraldinsight.com%2Fjournals.htm%3Farticleid%3D1789767&ei=UIktUYvhDMSGhQe3_4DQAQ&usg=AFQjCNH6YP2M121zUWcgVmr3n7zN3gw1cA&bvm=bv.42965579,d.bGE [Accessed 27 February 2013]
Rompho, N., (2011). Why the Balanced scorecard fails in SMEs: A Case Study, Internal Journal of Business and Management [online] Available at: http://www.google.co.ke/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CEcQFjAD&url=http%3A%2F%2Fccsenet.org%2Fjournal%2Findex.php%2Fijbm%2Farticle%2Fdownload%2F10247%2F8988&ei=UIktUYvhDMSGhQe3_4DQAQ&usg=AFQjCNHxunfapAV0DP1yt05ooYGFfkjMFw&bvm=bv.42965579,d.bGE [Accessed 27 February 2013]
