Abstract
A balanced scorecard refers to the management system and strategic planning tool used broadly in industry and business, government, as well as nonprofit organizations across the globe. Its application seeks to align operations to strategy and vision of an organization, improve external and internal communications, as well as monitor an organization’s performance alongside the strategic objectives. The scorecard was first was introduced back in early 1990s by Norton and Kaplan of Harvard School. Currently, over, half of the key companies in US, Asia and Europe apply the scorecard approach, with its use increasing in those regions and in Middle East as well as Africa.
The approach has remained unchanged with its core limited number of measures grouped into clusters in addition to its fundamental strategic focus. It advocates that additional balance ought to be achieved concerning how performance is viewed between financial as well as non-financial metrics and between long-run and the short-run measures. However, it has limitations including that the cause and the effect relations it claims barely relate in reality, it leaves several groups of interest and external environment out of the picture and the hierarchical set up of top-down structure creates problems for implementation.
BSC origin and rise to prominence as a performance measure tool
A balanced scorecard refers to the management system for strategic planning used broadly in industry and business, government, as well as nonprofit organizations across the globe. It is used to align operations to strategy and vision of an organization, improving external and internal communications, as well as monitoring and organizing performance alongside the strategic objectives. The Scorecard was introduced back in early 1990s in the course work of Norton and Kaplan of Harvard School. Ever since, the concept evolved becoming a well known tool, and its different forms broadly adopted worldwide.
However, the initial definition of the scorecard used to be sparse. In addition, from the beginning, it used to be clear that selection of the measures, in the regard to filtering could be a major task. That is because organizations typically used to have access to numerous measures required to populate this Balanced Scorecard, as well as clustering, hence had to decide on the measures that should appear at which perspectives. As an improvement, Norton and Kaplan proposed that the measure selection ought to focus on the information that is relevant to implementation of the strategic plans as well as the attitudinal question to be of use in determining the most appropriate distribution of the measures in each perspective (Robert & David 77).
Essentially, although the Scorecard remained unchanged, it has had its core limited number metrics clustered to groups and being more of a fundamental strategic focus. In addition, the present designs of the Scorecard also have some features, which differentiate it clearly from the earlier versions (Robert & David 74).
The Gartner Group claims that more than 50 percent of the US large firms already have adopted use of the scorecard. Also, over, half of the key companies across the US, Asia and Europe apply the scorecard approach, with the use increasing in those regions and in Africa and Middle East. A very recent global research by Bain and Co provided a list; ranking balanced scorecard as fifth among the ten most extensively used tools of management across the globe. The list includes the strategic planning that is closely-related to the scorecard as the number one. The scorecard has further been chosen by editors of the Harvard review on Business being among the most powerful business ideas for the last 75 years. Thus, scorecard has evolved a lot from its initial use as just a simple measurement tool to a complete management system and a key tool in strategic planning. The new BSC transforms any strategic plan of an organization from just an attractive passive document to marching orders of the firm on day by day basis. In that respect, it offers a framework that provides performance metrics while helping planners select what needs to done as well as measured. In summary, it helps executives to effectively execute the strategies.The fresh approach to the strategic management got first published in a chain of books and articles by Drs. Norton and Kaplan. Recognizing some vagueness and weaknesses of the previous approaches to management, the scorecard provides clear prescription to what organizations needs to measure for purpose of balancing their financial perspectives.
In that view, the BSC is a key management system and not just a useful measurement system. It helps organizations in clarifications concerning their strategy and vision and transforms them to action. This offers feedback around the external outcomes and internal business activities so as to enhance continuous strategic performance as well as results. Finally, when fully applied, balanced scorecard changes strategic plans from academic exercise to a nerve center for an enterprise (Marr & Neely 5).
In their explanation, Norton and Kaplan refer to the scorecard innovation as a tool thatretains the traditional as well as customary financial measures. Although financial measures give the story regarding the events, the scorecard offers more on firms regarding investments and long-run capabilities as well as customer relationships that are critical to a business success. The improvement was necessary given that the sole use of financial measures were inadequate for evaluating and guiding the journey the firms must undertake to create a 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 adopted the myopic short term as well as financially biased analysis of performance like summed up by the traditional performance measures such as the sales, the profit, the Return on the Capital Employed, Residual Income, Return on the Investment, Gross Margin and Net Margin. However, Norton and Kaplan while agreeing that a financial performance for an organization is a major consideration, they argued that such a narrow performance assessment detracts from long run development of an organization (Robert & David 66). Thus, they both advocated that additional balance ought to be achieved concerning the view of performance between the financial and the non-financial metrics as well as long-run and the short-run measures (Bolton & Drew 380).
For purpose of attaining such a balance, they further advocated that performance ought to 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 long run development of an organization (Robert & David, 67).
Internal Processes of Business: How an organization is carrying out the daily processes must be efficient and effective.
Shareholder: The Measures of Financial Performance (Aranda & Arellano 284).
Also, the BSC’s process of implementation is very simple as it consists of:
Agreeing on set of routine measures that are to be applied in every perspective of the business.
Agreeing on performance targets regarding each measure.
Ensuring recording of the actual performance of every performance measure.
Continuously reporting as well as acting on deviation in performance (Andrew & Chris 32).
Regarding its importance, adopting the approach in performance management might have the following benefits:
Creating long run strategic view for performance other than a mere myopic short run view.
Broadening the view for divisional managers concerning what represents a good performance far from the solely orientated financial view (Brewer 47).
Organizations creating performance measures which are aligned explicitly to corporate strategy.
Considering viewpoints of the customers that are critical to the business
Promoting accountability in all performance measures through responsibility of the nominated individuals.
Having an implementation that is relatively understandable and simple (Ahn 448).
Limitations and criticisms of BSC as a performance measure tool
Cause and the effect relations barely relate to reality
It’s uncertain whether casual interrelations among the perspectives which are classical of the growth- learning- process -finance –client, exist for all of the circumstances. On the other hand, Norton and Kaplan argue that more revenue is generated from customers who are more satisfied and loyal. Hanne (71) also did not agree that by using the critical reasoning that the connection would be established. Through an example in the practical life, an illustration was made for the opposite claim. When an organization is attempting to satisfy the clients who are very loyal and who possess very high-quality expectation, but makes purchases which are very small, it does not generate any profit. Mainly they are clients of moderate budget and higher age who demand very high quality. Likewise, there is a question whether that linkage is there between client satisfaction and processes as it may also be possible to show an opposite example. It was also demonstrated by examples of some Swedish companies in which the effect and cause relations failed.
External environment as well as several groups of interest are out of the picture
Different from several other management as well as strategy analysis techniques including the Benchmarking, SWOT analysis, Porter analysis and PEST analysis the Scorecard fails to consider the important groups of interest, but the shareholders and the clients. Further, there is no much attention to the competitors’ daily activities. Further, Norton and Kaplan discussed that an organization should use the double-loop process for learning for the establishment of the scorecard in the first place. However, taking into consideration the rapidly changing environment, the action is not enough (Niven 46).
It is also important to note that external environment must be scanned frequently. In public sector, for instance, measures significant to the voters or other interest groups could be considered through the method proposed by Robert & David, (65), where the fifth additional perspective gets added into the traditional Balanced Scorecard framework.
Finally, the most challenging problem of the scorecard regarding the environment and interest groups is its lack of consideration of several important groups such as the suppliers, close neighbors, and cooperation partners. Thus, it is recommended that it would instead be feasible using the prism performance method as possible and key source of new groups of interest into the scorecard (Ittner, Larcker & Meyer 742).
Hierarchical set up of top-down creates problems for implementation
Several examples that are practical have confirmed that the strategy that uses the approach of top-down, which is used by the scorecard, is not the best one for many reasons. It has also been noted that, firstly, it’s not advisable for a company to set-up a hierarchic structure for strategic objectives. That is because the effort will be concentrated on the establishing, which is not focused on the peoples/employees’ internal needs., hence building just a centralized program that is only result-driven, where the employees are expected to offer just decisions that are only buy-in and not much of their personal contribution. Final elaboration, therefore, might be faced by problems as a result of the motivation issues arising in the improvement programs of the organization, which have made famous the Dilbert. Thus, consideration of the feasibility of using the bottom-top approach as a measure and establishment during a phase is necessary (Hanne 70).
Secondly, the set-up in the form of hierarchic measures and objectives bring about potential threat to the organization. That is because of the build-up of work is in the form of a processes in some departments within that organization. The hierarchy which is from the top to down may lead to local optimums within these departments. If as per the constraints theory, no attention is paid to hierarchy in form of top-down but rather the value chain elaboration is the one followed then there might a solution to the problem. However, it has been provided by Guidoum (25) a solution of performance measurement’s dynamic system, which acts as an alternative methodology for overcoming this difficulty.
Unsuitability to unhealthy or unique enterprises
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 the cases, that practice proved that such kind of methodology is viable for the large companies where enough resources in term of human are available for carrying out such large scales projects, but not for the small organizations (Yngve 45).
Works cited
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