Balanced Scorecard

Introduction

The Balanced Scorecard was first introduced by Kaplan and Norton as a performancemanagement toolin early 1990s. Its aim is to present managementwith a concise summary of the key success factorsof a business, and to facilitate the alignment ofbusiness operations with the overall strategy (Mooraj, Oyon and Hostettler,1999). It‘…provides a medium to translate the vision into aclear set of objectives. These objectives are thenfurther translated into a system of performancemeasurements that effectivelycommunicate a powerful,forward-looking, strategic focus to the entireorganization’(Kaplan and Norton, 1989).

The Balanced Scorecard, which adds to the financial set the following components as modernorganizations must create future value through investment in customers, suppliers, employees, processes, technology, and innovation. The objectives and measures of Balanced Scorecard have to be derived from an organisation’s vision and strategy. And the objectives and measures view organisational performance from four perspectives: financial, customer, internal business process, and learning and growth. These four perspectives provide the framework for the Balanced Scorecard (see Figure 1 - The Main Framework of Balanced Scorecard).

From Balanced Scorecard, managers can measure how business units create value for current and future customers and how they must enhance internal capabilities and the investment in people, systems, and procedures necessary to improve the future performance.

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Figure 1 - The Main Framework of Balanced Scorecard[1]

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Critical Success Factors and Measures

The original Balanced Scorecard design identifiedfour perspectives which are the financial perspective;the customer perspective; the internal-business-processperspective; and the learning and growth perspective.The perspectives represent three of the major stakeholdersof the business (shareholders, customers andemployees),thereby ensuring that a over view ofthe organisation is used for strategic reflection andimplementation. The importance with each of theseperspectives (no matter how many are chosen to benecessary) is that the perspectives themselves and themeasures chosen are consistent with the corporatestrategy. Figure 1 shows how the Balanced Scorecardprovides a framework, through these four perspectives,for translating strategy into operational themesand thereby facilitating the role of management.

With Balanced Scorecard, stable financial performance in the medium to longer term can be expected by means of a thorough quantification of indicators showing the degree to which objectives for each organizational unit have been accomplished and effective communication established with the smallest units within the organization. In addition, this enables employees to recognize their objectives in relation to the accomplishment of the final financial performance , and allows them to indentify effective actions for increasing the corporate value (Morisawa, 2002).

Limitations

The Balanced Scorecard has been successfully implementedat hundreds of companies; however, the remainingmillions of businesses still need a practical measurementsystem that will enable them to improve profitability. AsKaplan and Norton state in The Strategy Focused Organization(2001), the execution of the measurement system is moreimportant than the measurement system itself. Accordingly,fewer than 10 percent of the strategies outlined on theBusiness Scorecard were successfully implemented.Thisimplies that the measurement strategy must be simplifiedfor a successful execution.

As said before, fewer than 10 percent of the strategies outlined on theBusiness Scorecard were successfully implemented. Neely and Bourne argue that there are two main reasons why measurement initiatives, like the Balanced Scorecard, fail.The first reason is that measurement systems are often poorly designed. The second is that they are difficult to implement (Neely, 2000).

Inappropriate Design of Measurement Systems

The key to designing a good measurement system is to start with the organisation’s success map. Thesuccess map is a cause and effect diagram that explains the organisation’s strategyand the manager’s theory about how the business operates. Too many organisations fail to understand the importance of the success map when developing their performance measurement systems and simply end up brainstormingwhat they should measure and then putting the resultant measures into some form ofperformance measurement framework. The result of this is that in many cases organisations do no more, than simply repackage their existing measures whenseeking to improve their measurement systems by implementing a BSC.

The scorecards introduced by organisations often do not reflect the organisation’s strategy. When other people see the measures on the scorecard they can not see rationale or logic for the measures. As a net result, the performance measurement system fails, simply because the new set of measures make no sense. They do not reflect the organisation’s strategy and do not help people to understand what the organisations priorities are.

Implementation Failure

Even when the organisation manages tosuccessful identify the rightset of measures, often the measurement initiative fails because ofdifficulties during the implementation phase. These difficulties can be categorized into three categories: political, infrastructural and focus.

The political challenges associated with measurement relate to the fact that many people feel threatened by measures. Infar too many organisations the measurement system is being used asa big stick. In such settings it’s essential to eliminate or reduce the opportunity for the measurement system to be used as a big stick.

The second reason why measurement systems fail in implementation is trough lack of infrastructure. The data to calculate performance measures exist in most businesses in different forms and is spread out throughout the organisation. It’s held in unrelated, unlinked databases, often in inconsistent formats. The management team may have developed a set of measures that really reflects the organisation’s strategy, but are frustrated by the fact that it takes so long to get access to the required data.

The time, effort and resource required is often the downfall of the measurementsystem and the cause of the third reason why implementations fail: lossof focus. It is important to understand that building a measurement system is a long and slow process. Therefore, there’s a real need in the organisation to boost energy levels regularly to ensure that the process continues. Without these energy boosts thefrustrations with developing the infrastructure, with accessing the data, with clarifyingdefinitions of measures and so on, mean that people get tired and boredwith the process.

Links between Balanced Scorecard and ISO 9000

ISO 9000 certification has been accepted worldwide as a useful first step towardsquality development and a number of organisational benefits have been identified which resultfrom the implementation of a quality systems standards approach. However, many companieswho have obtained certification to ISO 9000 eventually observe a diminishing business benefitand require further stimulus to their quality management efforts. After empirical study of 221 successful small to medium sized manufacturing enterprises of different industries in UK, Najmi and Kehoe(2001) examines the role of performance measurement systems in post-ISO9000 quality development and the research findings support the view identifiedin the literature that the performance measurement systems contributes a critical role. Of particular importance is the role of the performance measurement systems inindicating the change in performance between the development up to achievingISO 9000 and the benefits in moving beyond certification.As the most important model of performance measurement systems, the integration of balanced scorecard and ISO 9000 will have positive effects for quality management development.

Links between Balanced Scorecard and EFQM business excellence model

The Balanced Scorecard (BSC) and the EFQM Business Excellence Model (BEM) are tools that use measures of an organisation’s performance to drive organisational improvement. In recent years, both have been widely adopted and address similar issues (Andersen, 2000).

Using the BSC and BEM in combination

At conference organised by the EFQM, a large UK energy utility described how they are using the two models in combination (Welch, 2000)..

The BEM is being used at a passive level; as a checklist for structuring the values, vision and strategy of the organisation based on 9 criteria, and at an active level; providing a yearly “health check” on the company’s performance management and business planning systems, so that potential areas for change into the management and planning systems can be identified.

The BSC is used to support two-way communication of strategy and strategic results between the Group Management and the individual businesses. The BSC is used to set the strategic agenda for the monthly management meetings, ensuring management focus on core strategic priorities. Insights from the use of BSC feed back into the business plan indirectly feed back into the strategy formation process.

The figure below shows how this process works at the UK energy utility. The essence is, that BSC forms the strategy implementation tool and point of strategic reference necessary to evaluate and prioritise the strategic importance of the change identified by the findings of the BEM. The BEM is used to evaluate how well the organisation is using the BSC.

Figure ? – Business Excellence Assessment & the Scorecard, Presentation to “EFQM Common Interest Day”, 9th December 2000, by John Welch and Peter revel – Eastern Group

Reference:

  1. Andersen, Hendrik; Lawrie, Gavin; Shulver, Michael, The Balanced Scorecard vs. the EFQM Business Excellence Model, 2GC Working Paper,June 2000
  2. Morisawa, Turo, Building Performance Measurement with Balanced Scorecard Approach, NRI Papers, No.45 1 April 2002
  3. Mooraj, Stella; Oyon, Daniel and Hostettler, Didier, The Balanced Scorecard: a Necessary Good or an Unnecessary Evil? European Management Journal, Vol.17 No. 5 , pp 481-491,1999
  4. Najmi, Manoochehr and Kehoe, Dennis F., The role of performancemeasurement systems inpromoting qualitydevelopment beyond ISO 9000, International Journal of Operations &Production Management,Vol. 21 No. 1/2, 2001, pp. 159-172.
  5. Neely, Andy; Bourne, Mike, Why measurement initiatives fail, Cranfield School of Management, 2000.
  6. Kaplan, Robert S., Devising a Balanced Scorecard Matched to Business Strategy, Planning Review, Sept-Oct 1994.
  7. Kaplan, Robert S. and David P. Norton, Knowing the Score, Financial Executive, Nov-Dec 1996.
  8. Kaplan, Robert S. and David P. Norton, Putting the Balanced Scorecard to Work,
  9. Kaplan, Robert S. and David P. Norton, Translating Strategy into Action – The Balanced Scorecard (Boston: Harvard Business School Press, 1996).
  10. Kaplan, Robert S. and David P. Norton, Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, Jan-Feb 1996.
  11. Welch, John; Revel, Peter,Business Excellence Assessment & the Scorecard, Presentation to “EFQM Common Interest Day”,Eastern Group,9th December 2000

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[1] From: Kaplan, Robert S. and Norton, David P., Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, Jan-Feb 1996, p. 76.