Introduction to Strategic Performance
Balanced scorecard basically refers to as a strategic performance tool or strategic planning and management system which is extensively used by every business and non-business organization in order to align business activities with the vision and strategy of the organization. Balance scorecard plays a vital role in an organization as it helps in strategic management and it aids in aligning all the activities of an organization along with vision and strategy (Johanson and et.al., 2006). This report has been emphasized on the development and role of balance scorecard in a production as well as in service organization. Further, this report discuss the critical analysis and argument of role and development of balance scorecard.
Development of Balance Scorecard
Balance scorecard which was developed by Robert Kaplan and David Norton in order to deal with a problem, for instance, a firm reduce their customer service level so that current earnings can be boosted but in future earning might get reduce due to reduction in customer satisfaction. For that purpose, balance score card was developed. It is basically a strategic performance management tool which is used by managers in order to keep track of the execution of activities by employees and to monitor the consequences which will arise from their action (Chavan, 2009). It measures financial data, customer satisfaction, business process and learning measures. This translate the strategy of organization into four perspectives along with a balance between the internal and external measures; between objective and subjective measures and balance between performance results and the future results.
Balance scorecard is developed in a different manner in different organization depending upon the nature of a company. In production firm it is developed in accordance with a operations but it is altogether differently developed in a service sector company. Balance scorecard is developed by following few steps such as firstly company has to build their purpose statement which includes the information about how company will be different from its competitors and it also includes objectives of a firm plus advantage plus scope of a company (Gurd and Gao, 2008). It explains that what company is going to do, where the firm will win and where the organization is going to do it. Second step is the designing of change agenda which states that change is an ongoing process. This also states that what company needs so as to make it better for achieving the purpose of an organization. Thirdly, firm should make a map towards the destination in which lots of wrong turn should be included while on the way to strategy execution. Cause and effect should also be linked along with the strategic objective. Fourthly, after making a map the next step is of creating great measures (Soderberg and et. al., 2011). Measures are created for doing two things that is understanding what is not working in an organization and helps to motivate. Company has to choose that measure which helps in driving the strategy. Then last step is to set up some initiatives such as to focus on the strategy a company should stop doing certain things which is less important. This initiatives has to be taken by firm in order to excel. These were the few steps which is used in order to develop the balance scorecard.
The format of a BSC differs from company to company depending upon the data, nature of the company that is manufacturing or service industry. However, some organization uses spreadsheet and some uses a paragraph style in a word document. Many firms use a software for the purpose of BSC development (Niven, 2010). Typically, balance scorecard is being used by the company at the time of strategic planning and organizational change. Because this tool is used to evaluate the performance of a firm and it helps in assessing the opportunities and threats which is required to address while outlining the goals and objectives for the future.
Depth and coverage of practical issues and theory
BSC provides managers with a comprehensive framework which translates a strategic objectives of a company into a consistent set of performance measures. Balance scorecard is not only a management exercise but it is beyond it. It is a management system which can motivate for the improvements in a critical areas such as product, process, customer and market development. Many companies which desire to implement improvement programs such as process re-engineering, total quality management and employee empowerment which lack a sense of integration (Bischoff, 2013). At this time, BSC act as a focal point for the organization in defining and communicating priorities to managers, employees and investors and even customers. This scorecard is not a template which can be applied to all the businesses in general. Different market situations, product category, competitive environment need different scorecards. Every company devise customized scorecards in order to fit their mission, strategy, technology and culture.
In a company like Apple Computer, where BSC was developed for adjusting long-term performance. Apple Computer had developed the BSC for the senior management in order to focus on a strategy which would expand discussion beyond gross margin, return on equity and market share. Apple's executive management team took out the measures on four perspective that is for financial perspective, the company emphasized on shareholders value which was included for a performance indicator. In contrast, shareholder value metric measures the impact of proposed investments for business creation and development. This measure therefore, helps senior managers in each major business units and assess the impact of the activities on the entire organization's value. For customer perspective, it focused on market development and customer satisfaction, this metrics has been introduced to direct employees to become customer-driven company (FUJII, 2014). For the internal process, Apple concentrated on core competencies in which company wanted to have user-friendly interfaces, powerful software architectures, effective distribution system, etc. and lastly for the improvement and innovation perspective, it emphasized on employee attitude. To gain employee commitment and alignment company conducts a comprehensive employee survey so as to acquire knowledge that employees are understanding the company's strategy and whether they are asked to deliver results which are accordance with the strategy of a company. In market share metrics senior management wanted to capture the huge market share as well as wanted to attract and retain software developers within the company. At Apple Computers, BSC helped the senior management to focus on their strategy and it served as a planning device instead of a control device. These five performance indicators helped Apple in setting benchmark against best-in-class organization. In present, BSC is used to build business plans and these are incorporated into senior executives compensation plans.
Another practical example is of service sector, a Rockwater company which is a engineering and construction company has made BSC to respond towards a changing industry. The company sets the vision that their customer were seeking providers so Rockwater will become industry leader in order to provide highest standards of safety and quality to their clients. Along with that strategy was developed in order to implement the vision. The five elements were that company will provide such services which will surpass customer's expectations and needs; also high levels of customers satisfaction will be provided; firm will do continuous improvement in safety, equipment reliability, responsiveness and cost effectiveness. The company will acquire high-quality employees and along with that shareholder expectations will be meet out. Senior managers of this firm translated its vision and strategic objectives into four sets of performance measure in a balance scorecard.
The Rockwater team deliberately thought about the choice of metric for the identification stage. It also recognized that time spent with key prospects for discussing new work act as an input measure rather than an output measure. The management team wanted to develop a metric which can clearly communicate to all the employees of the organization about the importance of building relationships with and satisfying customers. The management team also believed that spending quality time with key customers was a prerequisite for influencing results. This input measure was chosen with a due care to educate employees about the importance of working closely which helps in identifying and satisfying customer needs.
Balance scorecard is also developed in Hotel industry, where it provides management with a useful feedback for optimizing their organizations (Asefeso, 2013). In financial metrics hotels include the revenue per guest and revenue per available room. These data are monitored and also the amount generation of revenue properties and efficient utilization of space. Other than these information, earning per share, net income and stock price are also listed in this metrics. In a customer satisfaction metrics hotel includes target customers, retention rates, complaints. In a hotel industry customer satisfaction is an important measure as it is a competitive advantage for them. In a column of internal business process, maintenance costs, accidents and quality measures are included. This metrics impact the net profit and earning per share of a hotel. A hotel should have efficient and effective internal process as it is very crucial for the competitive advantage. The last metrics of BSC includes the learning and growth of hotel staff through continuous training, skills levels attainment and personnel turnover. If there is personnel turnover than it shows that they are unhappy and through BSC this measure can be known.
Critical Analysis and Arguments
Balance scorecards play a major role in both production as well as service organizations. It not only measure the performance of financial aspect but also the non-financial aspects are also added. To get the broader picture of the organization's performance all factors have to be measured. Kalpan and Norton argued that the performance indicators should be chosen from four different dimensions that is financial, customers, internal process and growth & learning. They also said that company can stay focused and and at the same time it can see four different perspectives. In order to justify Kalpan and Norton explained that new performance measurement system is more active and empowering for the personnel because they will be less controlled by the financial measurement systems but in fact can freely take actions and decisions which help in fulfilling the strategic goals.
Kalpan and Norton developed the balance scorecard as a performance measurement but then Punniyamoorthy and Murali (2008) argued that it can also be used as strategic management systems. It is used to clarify the strategy to the organization as it translates the strategic objective into quantifiable measures so that management can understand the strategy. Secondly it helps in communicating the strategic objectives throughout the organization. It helps in translating higher level objectives into operational objectives. Thirdly, BSC aids in planning, setting achievable targets and initiatives are set to align efforts for reaching targets. And lastly, executives receives feedback about the proceedings of strategy implementation as per the plan and learning is developed about the success of the strategy.
However, Murby and Gould (2005) implies that BSC is also used for articulating the vision and strategy of businesses. It helps in establishing objectives which support the business's vision and objectives. Along with that, BSC helps in identifying the performance categories which links the vision and strategy of business organization with its results. This also take actions which help in closing unfavorable variations. Further, this helps in comparing the actual data with that of desired data by collecting and analyzing performance data.
Kalpan and Norton firstly developed the balance scorecard in 1992 which was known as 1st Generation Balance Scorecard which had some loopholes given by Perkins, Grey and Remmers (2014) Due to which initial design was discarded and authors recommended to bring improvements. After that Kalpan and Norton were came up with the 2nd Generation Balance Scorecard where two areas were focused that is filtering which means the process of choosing specific measures of reporting and clustering which involves the decision about group measures into perspectives. Many criticizer emphasized that BSC should have the linkage of cause-and-effect relationship. Later on, refinement was done in 2nd Generation BSC and the developers came up again with the 3rd Generation BSC so as to give more functionality and more strategic relevance and this was the final scorecard which is still being used by the company.
Balance Scorecard is extensively used in major companies, however, Murby and Gould (2005) argued that there are some organization which have become less successful while using a balance scorecard. The survey showed the reasons that 78% companies did not linked the strategic objectives along with the performance measures. 71% companies did not developed the value-driver map; 50% did not involve non-financial measures. Company has to take care about the following areas so as to avoid the mistakes in making balance scorecard. Although, balance scorecard has been supported by many philosophers and big companies but have been criticized by some commentators. As per the viewpoint of Greiling (2010) BSC lacks the rationality and logic in the original presentation. On the other hand, remarks have been made on the specific issues which may result into the failure of scorecard in order to live up to its perceived potential for implementation.
According to Perkins, Grey and Remmers (2014) the scorecard rely on performance measures which might not be rooted in the company but which might be distributed in hierarchical manner which reduce the likelihood of organizational buy-in. This model disregard the external competition and technological advancement which may involve uncertainty in term of risk and also it can threaten or discard the present strategy. However, critical analysis have also been done and it was found that in the study of Murby and Gould (2005) stated that although balance scorecard is widely used and accepted as a management tool but it has been challenged and there is a lack of cause-and-effect relationship and right choice of measurement cannot be assumed.
It is not necessary that balance scorecard will always lead and organization to gain success. Sometimes wrong interpretation and implementation of BSC leads to a devastating results which may impact the success of whole organization. For this purpose, company has to hire a expertise to develop the scorecard for the company for which complete internal and external analysis is being done. Company can use spreadsheet or word documents to make a scorecard but also they can use a software for developing effective scorecards. However, this involve heavy expenditure because company has to pay good remuneration to the expert and also has to pay big amount for purchasing a software which will be used for making balance scorecards. Punniyamoorthy and Murali (2008) stated that high risk is also involved as company has to provide complete information to the expert about the strategic objectives, financial data, employee performance, etc. which are confidential for the company and there are chances that expert can reveal it in the front of a competitors which become problematic for a company. A level of trust cannot be maintained.
According to Murby and Gould (2005) for developing an effective and efficient balance scorecard, company has to employ a lot of time in doing market research, strategic planning, target setting, doing surveys of employees. This is however, a time consuming process. On the other hand, Kalpan and Norton (2006) argued that until and unless good amount of time will not be spent, a successful and efficient balance scorecard cannot be developed. Company develops balance scorecard for a long term perspective so that company can chive its vision and strategy but at the time of sudden change existing scorecard remains of no use as the policies and strategy has to be changed on the spot. The cost and time which was involved while making the scorecard get wasted and company may face huge loss or lesser profitability. The existi9ng model of BSC lacks the time dimension which is a most fundamental area in any business organization and also it is not a valid model because it relies on few measure which makes BSC critical point. Similarly, BSC lack integration of top level and operational level measures which makes this model unsuccessful and unacceptable by some managers. And the most important factor that this model is not suitable in every business situations, company has to make different BSC in different situation due to which company resist this model for strategic management tool. On the other hand, Asefeso (2013) argued that it is not a template format which can be used in a same format in every organization, BSC in production organization differs from the BSC of service organization.
The existing Balance Scorecard is highly acceptable but still some company makes mistake in developing effective BSC. Also this model lacks cause-and-effect relationship. For this purpose, a new model should be developed which indicates that employee perspective should also be included as they can represent greatest sources of value and it is not necessary that every time quantitative detail should be included, the model should increase the flexibility so that somethings should be kept at bug picture level. New model should be aimed at leaving some aspects of performance open and it should allow creativity and innovations (FUJII, 2014).
After preparing this project report it can be concluded that Balance Scorecard is not only a performance measure tool but it is also has widespread use as strategic management tool. This is used extensively in almost all the organization but still many organization fails in getting success even after following the balance scorecard., this is due to the improper use of BSC. Some company does not include all the four perspective and sometimes include only financial ansd aspect and fails to include non-financial aspects which result in failure of organization. This report has focused on the implementation of BSC in many companies whether production or service sector. Both the sector have different set of balance scorecard and it is to be developed as per the situation and nature of the company. It is however costly, time consuming process but it can reflect effective results if used appropriately by an organization.
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