Theoretical Debate On Balance Scorecard

Published Date: 02 Nov 2017

The first prospective is primarily short-term oriented and financial in nature, while the last three are prominent categories of nonfinancial leading indicators of future financial performance.

The central idea behind a balance scorecard-type measurement system is that if the organisation tracks the right set of leading indicators and gives them proper importance weightings, then profits will inevitably follow. Empirical evidence, particularly focused on customer satisfaction, appears to support the premise that some non financial measures are significantly associated with future financial performance and contain additional information not reflected in past financial measures. [1] 

I ii Theoretical debate on Balance Scorecard

Some people believe that the balance scorecard develops a balance among different strategic measures in an effort to achieve goal congruence, thus encouraging employees to act in the organisation’s best interest so it can be used as a tool that helps the company’s focus, improves communication, sets organisational objectives, and provides feedback on strategy.

Each measure on a balance scorecard represents an aspect of a company’s strategy. For example: In creating the balance scorecard, executives must choose a mix of measurements that

Accurately reflect the critical factors that will determine the success of the company’s strategy

Show the relationships among the individual measures in a cause-and-effect manner, indicating how non-financial measures affect long-term financial results;

Provide a broad-based view of the current status of the company [2] 

Enterprise, Board, and Executive Scorecards:

Board Balance Scorecard

Executive Balance Scorecard

Enterprise Scorecard

The above diagram shows that Board Balance Scorecard defines the strategic contribution of board and also is a tool to manage the performance of the board and its committees.

Enterprise Balanced Scorecard describes the enterprise strategy, measures, and targets and is a tool to manage the performance of the enterprise

Executive Balanced Scorecard describes the strategic contributions of an executive and is tool assess and reward the performance of executives.

On the other hand, some arguments against Balance Scorecard:

Some people believe that balance scorecard is that management are asked to meet so many different objectives (some of which might be conflicting) that they lose all perspective and different performance measures may become a risk which could result in forgetting the maximisation of shareholder wealth.

Some further believe that measures may give conflicting signals and confuse management. For instance, if customer satisfaction measure is at declining stage at the same time with one of the financial indicators e.g. profit, which one should we sacrifice? So this take the opposite approach that there is no clear relation between the balance scorecard and shareholder analysis.

Generally, there are different benefits and drawbacks which can be useful to know the importance of the BSC are:

The main benefits are as below

It can help stakeholders in evaluating the organisation if measures are communicated externally.

It avoids management reliance on short-term or incomplete financial measures

It can ensure that divisions develop success measures for their division that are related to the overall corporate goals of the organisation.

By identifying the non financial measures, managers may be able to identify problems earlier. For example, managers may be measuring customer satisfaction directly as part of the balance scorecard. If this canges, steps can be taken to improve it again before customer leave and it starts to impact on the company’s finances.

The main Drawbacks are as below

It often involves a substantial shift in corporate culture in order to implement it.

It does not provide a single overall view of performance. Measures like ROCE are popular because they conveniently summarise ‘how things are going’ into on convenient measure.

II Case Study

Critical Analysis of BSC of being used in different global organisations

Currently, the Balance Scorecard is being used to measure the performance of different global organisations. Traditionally performance was measure only in financial terms, but it is now recognised that financial measures alone are not enough, hence the development of the Balance Scorecard. Each of the perspectives of BSC represents a different viewpoint on operation of the organisation. Each of these contributes to the success of the organisation; in fact many argue that success in the non-financial perspectives lead to financial success. The Balance Scorecard develops strategies into operations.

According to my research the library’s success in terms of Customer Perspectives is due to the number of new items that had been added to the library within a specified time period and this shows that the customers are borrowing the latest books and DVDs from the library.

The above perspective is bringing the efficiency and customer satisfaction for my local library in Cumpsall, Manchester.

Many people are using the balance scorecard to measure its success in other areas of its business. For example service businesses such as school, colleges, solicitors and accountants are using BSC to understand the wants of their customers and thus measuring the customer perspective which is an important factor for their business. On the other hand nowadays the Colleges are discovering that particular types of courses are in demand by their customers (e.g. online classes by Kaplan Financial & BPP offered recently due to the demand of the students) and this may lead the college to develop new courses which can be measured using the innovation and learning perspective.

Airlines are operating in the number of new routes with a less price (for example Ryanair), this increases the number of customers that would consider that airline for their flights and hence covers the BSC perspective of innovation & learning perspective.

Most of call centres & insurance companies such as 3-mobile, HSBC bank call centre & orange mobile are measuring the performance of their internal process by measuring the time they are taking to answer the telephone at call centre department. This is a measure of the effectiveness of its internal business processes. The longer it takes to answer the call the more likely is it that potential customers will be lost because they do not want to wait. If waiting time is significant, the customer may also deter others from making such call thus losing insurance company even more business.

II i Financial Performance Important Only

Research continues to show that most companies tend to make decisions primarily on financial monitors of performance. Boards, financiers and investors place overwhelming reliance on financial indicators such as profit turnover, cash flow and return on capital. Managers tend to support the view that non financial performance information should only be used internally.

Survey Shows Mainly Financial Measures Were Important:

Following interviews with senior corporate managers in 15 of Sweden's largest multinational companies, 8 were found to adopt corporate balance scorecard (CBSC). However, CBSC had little impact on control at the corporate level. Corporate control was financially focused in all the companies: mainly financial measures were important, standards were only set for financial measures and rewards were largely based on financial performance measures. Top management's need for simplicity and comparability internally, and capital market pressures motivated the financial focus.

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II ii Strategy mapping-implementing the balance scorecard more effectively:

Strategy mapping was developed by Kaplan and Norton as an extension to the balance scorecard and to make implementation of the scorecard more successful.

The steps involved are: [4] 

The strategy map helps organisations to clarify, describe to communicate the strategy and objectives, both within the organisation and to external stakeholders, by presenting the key relationships between the overall objective and the supporting strategy and objectives in on diagram

II iii Problems:

Organisations have often found it difficult to translate the corporate vision into behaviour and actions which achieve the key corporate objectives.

In practice many employees do not understand the organisation’s strategy, and systems such as performance management and budgeting are not linked to the strategy.

Further Analysis:

Balance Scorecard

Total Quality Management

Link between BSC & TQM

BSC approach has four perspectives three of them are non-financial and a financial and total quality management (TQM) practices have been implemented by firms interested in enhancing their survival prospects by including quality and continuous improvement into their strategic priorities.

Part of TQM is not to consider the staff satisfaction in its search for continuous improvement (Kaizen) but the BSC considers employee satisfaction. Therefore, by adopting a BSC an organisation that has adopted TQM will overcome this oversight which will in turn increase staff satisfaction and subsequently organisation’s performance.

The below table shows the link between these two approaches [5] :

Key TQM-Related

Activities

TQM-Related

Performance Metrics

BSC Dimension

Executive commitment and management competence

Employee opinion survey

Employee satisfaction

New techniques introduction compare with competitors

Learning and growth

Internal business process

Customer relationships

Customer-satisfaction survey

Customer acquisition rate

Customer retention (or loyalty rate)

% of the industry market share

Number of customer complaints

Warranty repair cost

Customer

Financial (or shareholders)

Supplier relationships

Supplier-satisfaction survey

Supplier retention rate

Internal business processes

Benchmarking

Labour efficiency compared with competitors

Rework/scrap rate

Cost of Quality (% of sale)

Return on investment

Market share

Internal business processes

Financial (or shareholders)

Employee training

Employee-satisfaction survey

Employee capabilities

Spending levels in dollars for employee development and training

Learning and growth

Open, less bureaucratic culture and employee empowerment

Customer-satisfaction survey

Employee-satisfaction survey

The degree of decentralisation in corporate governance

Customer

Learning and growth

Monitoring quality programs (zero-defects culture)

Incidence of product defects

Material and labour efficiency variances

Percent shipments returned due to poor quality

Warranty repair cost

Internal business processes

Customer

Internal business process improvement and manufacturing innovation

Investment in high technology

Introduction of new management (e.g. JIT)

Sales growth

Internal business process

Financial (or shareholders)