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The Development of the Balanced Scorecard
The intention of this essay is to analyse the ‘Balanced Scorecard’ and to review its effectiveness as a performance management tool. It will review briefly the short history of the ‘Balanced Scorecard’ and then analyse each of the different aspects of the management tool and describe how they link together.
History of the Balanced Scorecard
The notion of the ‘Balanced Scorecard’ first appeared in the Harvard Business Review in 1992 in an article titled “The Balanced Scorecard – Measures that Drive Performance,”authored by Robert Kaplan and David Norton (Kaplan and Norton 1992). They had conducted a year-long study with “12 companies at the leading edge of performance measurement, [and] devised a ‘balanced scorecard'”as a result of their research (Kaplan and Norton, 1992, p.71).
A ‘Balanced Scorecard’ is a “strategic planning and management system that is used to align business activities to the vision and strategy of the organisation, improve internal and external communications, and monitor organisation performance against strategic goals”(Balanced Scorecard Institute, Unknown). It was brought out of the necessity to include non-financial indicators to measure performance, where in the past businesses and managers focused primarily on financially-based indicators to measure performance. These financially-based performance measurement systems “worked well for the industrial era, but they are out of step with the skills and competencies companies are trying to master today”(Kaplan and Norton, 1992, p.71).
After spending a year with various companies, Norton and Kaplan realised that “Managers want a balanced presentation of both financial and operational measures”(Kaplan and Norton, 1992, p.71). The recognition of the importance of operational measures was a milestone in performance measurement systems, as financially-based measurements help indicate the final outcomes of actions and processes already set in place, whilst operational measures help aid the driving of future financial performance.
Since its inception in 1992 the ‘Balanced Scorecard’ is now “adopted by thousands of private, public, and non-profit enterprises around the world”(Kaplan, 2010, p. 2). Which provides testament to its importance and effectiveness as a performance management system, it is likely that businesses that have implemented the systems have seen profound impacts on their profit margins and the happiness and innovativeness’ of their workforce.
The Four Perspectives
The scorecard itself is made up of four different perspectives; Financial, Customer, Internal Business Processes, and Learning & Growth. By looking at these different perspectives the balanced scorecard “provide[s] answers to four basic questions; How do customers see us? What must we excel at? Can we continue to improve and create value? How do we look to shareholders?”(Kaplan and Norton, 1992, p.72) By providing senior managers with information from four important perspectives, another benefit of implementing a scorecard is that it minimises information over-load by “add[ing] value by providing both relevant and balanced information in a concise way for managers”(Mooraj, Oyon and Hostettler, 1999, p.489).
To understand more completely how the interaction of the phases helps an organisation create additional financial value whilst aiding in the learning and growth, internal business processes and customer satisfaction perspectives see the appendix for fig.1, and fig.2. The four different perspectives and the way they interconnect are an important issue, as such it is also important to analyse each of them on an individual basis; first it must be recognised that each of the perspectives is made up of Objectives, Measurements, Targets and finally Programmes.
Each of these areas within the perspective helps identify and measure a way in which a company can achieve its stated objective through the implementation of a programme. A basic example for customer perspective would be as follows;
|Reduce staff turnover||Staff turnover ratio||A ratio of less than 6 months||To implement staff feedback and satisfaction survey’s with the aim of creating an environment in which they feel productive and appreciated|
Learning & Growth Perspective
This perspective is the beginning of the scorecard and in conjunction with the cause and effect hypothesis (Fig.2), makes up arguably the most important aspect as its “intended to drive improvement in financial, customer and internal process performance”(Kaplan and Norton, 1993). This aspect focuses primarily on innovation and improvement of work level employees, essentially creating more efficiency within the internal business processes. However, in order to achieve required innovation and improvements in efficiency a motivated and empowered workforce is essential, one method of achieving this is to implement a “staff attitude survey, a metric for the number of employee suggestions measured whether or not such a climate was being created”(Kaplan and Norton, 1993). Other such methods which could be implemented are that of calculating revenue per employee, and as such it can then create a measurement which can be observed and recorded year on year to achieve a pre-set objective, thus fulfilling each of the required facets of the balanced scorecard in relation to this perspective.
By implementing a programme, in the form of a survey or other such measures “it [can] identify strategic initiatives and related measures, these gaps can then be addressed and closed by initiatives such as staff training and development”(Mooraj, Oyon and Hostettler, 1999, p. 483). Once work-force empowerment is achieved and employees are happy and informed about their roles and the overall strategic aim of the organisation and methods of observing, recording and measuring are in place it can now focus on the next stage of the balanced scorecard.
Internal Process Perspective
This perspective, once an empowered and informed work-force is achieved and employees are working to their full potential, focuses primarily on making business and/or manufacturing processes more efficient, creating more output for the input. In order to achieve these improvements a business may implement many changes that “may range from moderate and localized changes to wide-scale changes in business process, the elimination of paperwork and steps in processes, and introduction of automation and improved technology”(Balanced Scorecard Institute, 2002).
In order to achieve this increase in efficiency an organisation “managers must devise measures that are influenced by employees’ actions. Since much of the action takes place at the department and work-station levels, managers need to decompose overall cycle time, quality, product, and cost measures to local levels”(Kaplan and Norton, 1992, p.75). By devising measurements aimed at work-station levels, such as delivery time turnaround or decrease in waste produced, managers are able to observe and monitor increases or decreases in efficiency and also locate where these increases or decreases stem from. Once a suitable measurement system is in place, managers are able to create targets to achieve and finally programmes in which to implement in an attempt to meet the pre-set targets.
By implementing a programme which is easily communicated, achievable and produces results that can be monitored by all levels that are relevant to the process, it will find that employees will benefit from seeing the results they produce with the intention of further motivating the work-force to increase efficiency. Once efficiency within the internal business processes has been achieved and an objective, a measurement system, pre-set targets and a programme that is successfully implemented, it can focus on whether or not the increase in innovation and empowerment combined with efficiency has had its intended effect on the customer.
The next perspective is that of the customer perspective which could be argued to be one of, if not, the most important aspect as this is where an increase in sales revenue and thus an increase in income are generated. After creating an empowered, informed work-force and improving efficiency relating to business processes this should “lead to improved products and services”, (Balanced Scorecard Institute, 2002) which in turn should improve the quality of products and services and ideally, with reduced costs incurred from efficiency, lower the cost of products and services offered to customers.
In order to achieve this increase in customer satisfaction or market share a similar method is needed in which an organisation must first create an objective, such as increase market share by 10% or maintain or increase repeat purchases. Once an objective is set in place then the organisation must create a measurement system to implement, one which can be reviewed annually, monthly or even weekly, an example of this may include a % increase in customer loyalty cards or a % increase in sales revenue. Finally, a programme must be implemented in order to drive toward the objective; an example of this may be an increase in market research to explore the possibility of new market opportunities or perhaps an investment in a new marketing campaign and special offers directed at repeat customers.
The final perspective is that of the financial perspective, in the eyes of the shareholders this is by far the most important aspect and where the effort in the earlier facets of the balanced scorecards cumulates in an increase in profit margins and ratios such as Return on Investment (ROI). This perspective “included three measures of importance to the shareholder. Return-on-capital employed and cash flow reflected preferences for short-term results, while forecast reliability signalled the corporate parent’s desire to reduce the historical uncertainty cause by unexpected variations in performance”(Kaplan and Norton, 1993). The first two are self-evidently of importance to shareholders with a return generated for shareholders and cash flow results which result in larger profits, while reducing the risk of uncertainty caused by a variation in performance is of particular importance and is something that can only be achieved through getting every employee focused and aligned with the overall strategic aims of the company, through an informed, focused and appreciated workforce, an efficient internal business process, and a satisfied customer-base.
The Cause and Effect Relationship
It is clear that linkages are the most important aspect of the balanced scorecard and that the cause and effect relationship (fig.2) allows for strategic alignment throughout an organisation. This has been seen to be “the common thread to the successful implementation of the balanced scorecard,”(Murby and Gould, 2005, pp.10) another key element to the balanced scorecard is making sure “that all employees understand [the] strategy and conduct their business in a way that contributes to its mission and objectives”(Murby and Gould, 2005, pp.5).
The importance of the cause and effect relationship in conjunction with ensuring that each and every employee is aware of the overall company strategy allows and an organisation to create a foundation for success in that the learning & growth facet provides a company with informed, innovative and an enthusiastic work-force which allows the company to be in a position to progress into the future. A final key point would be allowing managers the ability to “introduce four new processes that help companies make [an] important link”(Kaplan and Norton, 2007). By being in a position to translate the vision, communicating the strategy and linking it to compartmental and individual goals, integrating business plans with financial goals and finally giving each employee the ability to provide feedback, a company has created an environment in which they can adjust and augment at each level should managers feel the need too.
In conclusion, the essay has covered the short history and fundamentals of the ‘Balanced Scorecard’ and has shown how it is made up of different perspectives which provides management with basic questions regarding important stakeholders. It also provides management which a detailed measurement system and an ability to observe progress, or regression, within each of the different perspectives via the inclusion of objectives, measurement tools and targets which are created by management themselves. This also allows management to make changes where necessary in order to ensure that the overall strategic vision of the company is still being pursued. The essay has also highlighted the importance of the cause and effect relationship and provides the “strategic-map”within the appendix which can help provide an illustrative view of how the “balanced scorecard”in conjunction with the cause and effect relationship can turn an empowered work-force into a long-term financially stable organisation. It also covers the importance of communication, something that most organisations overlook as can be seen by the removal of the work-level employee from the overall strategic vision, and something that most organisations only feel upper-level management should be informed of.
- Balanced Scorecard Institute, (2002). “The Balanced Scorecard and Knowledge Management.”Available at: //balancedscorecard.org/BSC-Knowledge-Management
- Balanced Scorecard Institute, (Unknown). “Balanced Scorecard Basics.”Available at: //balancedscorecard.org/Resources/About-the-Balanced-Scorecard
- Kaplan, R.K. (2010). “Conceptual Foundations of the Balanced Scorecard,”Harvard Business School, pp. 1-36 [Online]. //www.hbs.edu/faculty/Publication%20Files/10-074.pdf
- Kaplan, R.K. and Norton, D.N. (1993). Putting the Balanced Scorecard to Work. [Online] Available at: //hbr.org/1993/09/putting-the-balanced-scorecard-to-work
- Kaplan, R.T. and Norton, D.N. (1992). “The Balanced Scorecard – Measures that Drive Performance,”Harvard Business Review, pp.70-80 [Online]. Available at: www.alnap.org/pool/files/balanced-scorecard.pdf
- Kaplan, R.T. and Norton, D.N. (2007). Using the Balanced Scorecard as a Strategic Management System [Online]. Available at: //hbr.org/2007/07/using-the-balanced-scorecard-as-a-strategic-management-system
- Mooraj, S.T. Oyon, D.O. and Hostettler,D.H. (1999). “The Balanced Scorecard: a Necessary Good or an Unnecessary Evil?”European Management Journal, 17(5), pp.481-491. [Online]. Available at: //members.home.nl/j.s.sterk/AQM/The%20balanced%20scorecard%20a%20necessary%20good%20or%20an%20unnecessary%20evil.pdf
- Murby, L.M. and Gould, S.T. (2005). Effective Performance Management with the Balanced Scorecard – Technical Report, CIMA, pp.1-43 [Online]. Available at: //www.cimaglobal.com/Documents/ImportedDocuments/Tech_rept_Effective_Performance_Mgt_with_Balanced_Scd_July_2005.pdf
- Balanced Scorecard Institute, (2002). “Cause and Effect Hypothesis”. [Online] Available at: //balancedscorecard.org/BSC-Knowledge-Management
- Kaplan, R.S. (2010). “The Strategy Map links intangible assets and critical processes to the value proposition and customer and financial outcomes.”Page 23. [Online] Available at: //www.hbs.edu/faculty/Publication%20Files/10-074.pdf