ASSESSING THE FEASIBILITY OF THE BALANCED SCORECARD
The main aim of Balanced Scorecard implementation is to establish strategic links between financial performance and operational strategies of firms. The performance measures are also designed on basis of firms main goals and strategies and thereby, elevating the importance of Balance Scorecard as a key instrument in analyzing a firms performance.
As with any other management tool, implementation of Balanced Scorecard requires careful consideration of common threats and conflicts that might arise. If not strategically implemented, BSC approach can result in increased costs for the firm in terms of conflict between human resource and management of firm. The management needs to include all strategic factors and their weight-age accurately to obtain precise results. Such strategies can lead to formulation of appropriate strategic and policies that can help firm in long term.
Best Value PLC being one of the leading supermarket chains in US and UK, basis its performance in services and products on customer satisfaction and revenues generated. The management of Best Value PLC is considering implementation of Balance Scorecard approach to evaluate its strategies and performance, identify key improvement areas and formulate future strategies to overcome any weaknesses in process. Implementation of Balanced Scorecard provides a framework for management to follow an integrated approach towards achieving strategic goals through efficiency of non-financial means (Evans, 2002 Indu, 2006). The use of Balance Scorecard not only improves financial performance but involve human resource at each level to understand the strategic goals of firm and implement necessary actions to achieve those goals (Albright and Lam, 2006).
The management of Best Value PLC is particularly interested in the non-financial aspects of Balance Scorecard that are difficult to filter out in an organization but are of utter importance to strategic goals of a firm (Horngren, 2004). However, implementation of Balanced Scorecard requires certain considerations that are needed to be evaluated before execution of process.
There are certain elements related to Balance Scorecard which are evaluated in this study to provide an optimal solution for Best Value to integrate this approach into its system while avoiding any issues or conflicts. These issue and conflicts arise when erroneous inclusion or exclusion of factors like importance of each elements, its weightage and link to strategy occurs. The report analyzes restraints related to Balance Scorecard implementation and develops strategies and suggestions that can counter the negative prospects to provide feasibility plan for Best Value PLC.
History and Foundation of the BSC
The main aim for existence of corporations has always been considered to earn profits. This financial approach of firms started to change during recent years, when increase in customer awareness gave rise to importance of non-financial factors while keeping financial goals as one of primary goals (Drury, 2004). The changing dynamics of industries gave rise to need of integrating both financial and non-financial approaches towards strategic goals. The scenario of service oriented firms has changed the focus of firms from financial factors towards non-financial factors (Kaplan and Norton, 1992).
Balanced Scorecard was initially launched during early 1990s to cater to the need of management personnel in formulating strategies that integrate both financial and non-financial perspectives (Cobbold and Lawrie, 2002). The earlier model of Balanced Scorecard developed by Kaplan and Norton (1992) was limited to four approaches of performance measurements which was later improved to include several others aspects of performance measurement including six sigma and performance prism.
Issues of the Balanced Scorecard
Importance and Benefits of the Balanced Scorecard
The main purpose of a Balanced Scorecard is to analyze non-financial measures apart from financial measures and integrate the two approaches to establish relationship between firms strategy and its goals. However, like any other management approach, Balanced Scorecard has its own advantages and disadvantages.
Advantages of Balance Scorecard
Additional Measures
Apart from traditional performance measures, Balanced Scorecard uses a unique management approach which integrates elements like customer satisfaction and operational efficiency which provide additional effectiveness in model (Kaplan and Norton, 1992). Given below is the traditional Balanced Scorecard which depicts four major elements of BSC.
Useful for Managers
Balanced Scorecard is an extremely useful tool for managers since it provides a 360 degree performance measure view including four basic perspectives that are determinants of a firms performance (Kettunen, 2004). These perspectives, as shown in Fig 1, include Customers, Internal Process, Financial performance, and Learning and growth of firm. Analysis of these factors provides managers an overall view of firms operations and presents a clearer picture of gaps in profit margins and costs that have being incurred to achieve profits (Drury, 2004).
With its focus on major affecting elements, Balanced Scorecard provides ease of access to relevant information for managers rather than including irrelevant factors. This provides clarity of information for managers to analyze and formulate strategies accordingly (Kulatunga et al., 2007 Hubbard, 2007). Also Balanced Scorecard establishes clear link between each perspective of performance measure and analyze how significantly firms operations are linked with its strategy.
Strategic Planning
Managers use Balanced Scorecard to link the strategic performance factors with firms goals and objectives thereby, studying the efficiency of firm and future ways to initiate strategic planning that would align its operations with firms mission (Witcher and Chau, 2008).
Four Perspectives of the Balanced Scorecard
The analysis of Balanced Scorecard requires detailed study of its four perspectives and understanding the input of each factor in a firms performance. The four elements of Balanced Scorecard including Financial perspective, Customer related factors, Internal processes and Learning and Growth strategy each have their own importance and contribution towards financial performance of firm. It is therefore, important to study each element in detail and understand its importance and aim (Evans, 2002).
Aim of the Four Perspectives
In the initially designed model of Balanced Scorecard, there are four major research questions that were resolved using the scorecard. Firstly, the model looked at the stakeholders of the firm and particularly the shareholders that have invested in the firm. The model tries to understand what exactly the requirement of shareholders is and how a firm can fulfil it. Secondly, the most important element that generates income for the firm, customers, should be analyzed and their satisfaction level is measured. Thirdly, the firm looks at its operational efficiency to improve the internal processes to eliminate unnecessary costs and activities and thereby, increase profit margins. Lastly, The firm tries to establish a growth strategy that can lead the firm in future to create more value and continue to expand.
The four major perspectives in a firm are related to each other and therefore, through applying a Balanced Scorecard (Fig 1), managers establish relationship between the four elements and firms strategy and final outcome to understand and implement necessary changes.
Usefulness of Perspectives
The weightage or importance of different perspectives involved in Balanced Scorecard varies from firm to firm. For some firms and researchers Customer is the key to achievement in financial performance (while Callaghan et al., 2007) while others place high value on Internal process and learning and growth (Evans, 2002 Cobbold and Lawrie, 2002). The strong relationship between learning and growth and internal processes makes them superior perspective from others and a major input in firms performance.
The assessment and placement of these perspectives in order depends on each firms preference and structure. Ranking the perspectives holds high importance since placing high value on least important perspective can result in sunk cost for the firm. An example can be taken from leading firm Xerox where due to wrong assessment company spent huge amounts on surveys and interviews with customers. In later part of implementation of strategy it was found that customer satisfaction plays least role in generating profits for firm, thereby, costing company huge sum of money (Larcker, 2000). Such misleading concentrations can affect the performance of Balanced Scorecard tool (Kaplan, 2001).
3.3 Leading and Lagging Measures
Key Performance Indicators are the measurement tools that are used to evaluate and control performances of each firm and align them according to firms goals (Eckerson, 2006). The performance indicators are divided into two main types of indicators Leading Indicator and Lagging Indicator. The leading indicators are measures that evaluate the activities of a firm that have the potential to increase performance of a firm i.e. they evaluate the futuristic options for the firm while the lagging indicators identify previous activities and their output to determine yielding activities versus unyielding activities.
Criticisms
Johnson and Kaplan (1987) identified several issues linked with leading and lagging measures. One of the major issues identified was focus on financial factors instead of non-financial aspects. The leading measure tries to establish link between the non-financial aspects and the financial aspects i.e. financial performance which are the lagging measures. This relationship is referred to as effect and cause relationship by Horngren (2004).
Analysis of factors that cause changes, whether positive or negative, in firms performance assist the management in formulating future strategies. Mostly, lagging measures work with Customer perspective and match it with the financial perspective since it is the non-financial measure. On the other hand, leading measures evaluate the Growth and Learning perspective which are more quantitative factors (Evans, 2002).
The main criticism towards leading and lagging measures has been pointed out by several researchers that claim the confusion between definition of leading and lagging measures (Hall, 2008). The criticism is drawn from the fact that where costs are supposed to be leading factor, it is taken as a lagging factor in the Internal Process. Also customer satisfaction though is a non-financial factor but is considered as a leading measure. The classification of leading and lagging factors often faces criticism
3.4 Strategy Maps for The Balanced Scorecard
Strategy maps are an important tool used by managers to analyze how the value chain works in an organization (Balancescorecard.org, 2010). As indicated by the name, strategy map is a diagram that shows how each perspective of organization give its input in value creation process through a step by step approach. The map also indicates how each activity affects the other activity in a strategic way to achieve goals. Strategy maps are a useful tool used by managers to implement different strategies. Given below is a strategic map which shows relationship between different perspectives of a firm.
Exhibit 3 Harich (2004)
Functions of Strategy Maps
The use of Strategy maps is mostly applied during implementation of Balanced Scorecard since it provides an efficient system to form strategies and present to employees visually the system that is to be implemented. As with any other strategic tool, Strategy maps also require careful consideration to be implemented and communicated successfully.
Uses of Strategy Maps
The main purpose of Strategy Maps is to create a visual map that would outline the main strategies and action plan that the management is planning to implement (Antola et al., 2006). Strategy maps are used to convince employees regarding the betterment of firm in adoption of new strategies and present their link with mission of firm that will motivate the employees adopt the new model (Kaplan and Norton, 2004).
Strategy map is another step towards establishment of Balanced Scorecard which is created by managers to review the link between new strategy and companys goals. This map is then utilized to communicate with the employees and thus, is used during implementation process (Lagace, 2004). However, use of Strategy maps is a time consuming job since after formulation of strategy which itself takes a lot of time, making of strategy maps can be considered as costly in terms of cost and time (Witzel, 2008).
Differentiation of Terms
Strategy maps have been identified as maps while in some literature they have been referred to as success maps (Neely and Bourne, 2000 Antola et al., 2006). The term success map is still synonymous with strategy maps since they both lead the firm on success road through establishment of necessary outline to follow. Both terms have similar mission to establish relationship between companys goals and its strategies and create steps that lead to companys main goal.
3.5 Limitations of The Balanced Scorecard
Balanced Scorecard measures the strategic factors that contribute towards companys performance and consider financial as well as non-financial perspectives. Where Balanced Scorecard provides an efficient system for management, it has been criticised to have certain attributes that affect its objectivity and usefulness for managers.
Cause-and-Effect Relationship
The main logic behind formation of Balanced Scorecard matrix is to establish relationship between different perspectives of organization and deduce the cause and effect phenomenon from them. This cause and effect relationship makes managers formulate a strategy where the factors that can cause positive effect on performance of firm are utilized efficiently to obtain results. However, the effect of each perspective is interpreted based on historic results and is might be applicable under new circumstances (Drury and Shishini, 2005). This approach by managers is often criticized by researchers since adopting such strategy does not promise future performance according to strategy and is more based on hypothesis. Suppose a marketing campaign initiated last year generated huge profits. However, the same strategy might fail in current year due to changed perceptions of audience. Therefore, this will affect the over all strategy and performance of firm.
Impact of External and Internal Environment
Another problem with Balanced Scorecard approach is that it does not incorporate elements of external environment which include competitive forces, suppliers and environmental forces (Kulatunga et al., 2007). As pointed out earlier, it is very important for managers to consider implications of such strategies on internal environment of firm which mainly includes human resource that is affected in long term (Drury and Shishini, 2005). Several firms adopt Balanced Scorecard and make changes in the standard perspectives as they deem necessary. This leads to alterations that might change the results of matrix. Such alterations can affect the objectivity of results as well since Balanced Scorecard is mainly constructed for limited perspectives (Drury, 2004).
BSC Measures
The perspectives included in Balanced Scorecard matrix are then evaluated using certain measures for each perspective. These measures are required to be directly linked with firms performance and any change in these measures should be made only to enhance that performance. The effectiveness of new measures that firms include in the matrix is often questioned by researchers (Horngren, 2004). The researchers call for careful sort out of perspectives and measures associate with each perspective (Cobbold and Lawrie, 2002). Issues with inclusion and exclusion of certain elements are expected to affect the performance of firms.
Customer Perspective
One of the main issues with firms in todays scenario is that of its customers as revealed by a survey by US Financial Services Companies where 72 responses claimed customer service to be the main driver of financial performance whereas rest claimed short term financial performance to be the key driver for success of firm (Ittner and Larcker, 2000).
The importance of customer service makes its important for firms to carefully include customer satisfaction perspective in the Balanced Scorecard matrix otherwise the firm can incur high costs (SunMicrosystems.com, 2008). The Balanced Scorecard measures the satisfaction level of customers through surveys where attitude of customers were analyzed. However, researchers claim that the matrix should actually measure the buying behaviour of customer to obtain more relevant data (Drury, 2004).
Key Performance Indicators
The Key Performance Indicators as mentioned before are used to create a relationship between firms mission and goals and its strategies. These indicators are often labelled by researchers as irrelevant measures to analyze and plan firms strategies (Kaplan and Norton, 2000). This ambiguity in usefulness of Key Performance Indicators is often criticised to create delays in implementation of Balanced Scorecard strategy.
Along with Key Performance Indicators, the critics of Balanced Scorecard also lay emphasis on puzzling performance measures of leading and lagging. The lagging measures are often criticized to be focused on end results since they measure non-financial aspects of performance indicators (Kanji and Moura, 2002).
Relevance and Reliability of Surveys
The surveys included in the report are US and UK based which are synonymous with environment of Best Value PLC which is a US and UK based company. The main considerations of culture, environment and regulations are similar for both surveyed firms and Best Value and therefore, provide relevant and reliable information. However, the surveys are conducted in each type of firm giving a wide range of services which might not match with Best Values product line. Also the time frame is quite old as the surveys are included from 2000 and might not be relevant for current scenario.
Relevance and Reliability of Journal Articles
The journal articles taken in this research are from well known published journals and peer reviewed research papers which provided reliable sources of information. The industries included in the research are both related and non-related to Best Value PLC and therefore, provide an overall review of strategies followed worldwide. The articles used in the research have a long list of authentic references that provide an indirect sourcing for this study.
The articles used highlight issues related to Balanced Scorecard, Key Performance Indicators, Strategy Maps and other factors that affect the implementation of Balanced Scorecard. The article highlights issues related to BSC and provides solutions for firms that are planning to implement BSC.
Relevance and Reliability of Books
The lists of books included in this study are from authentic authors like Drury and Shishini and Kaplan and Norton who have established their position as great researchers and article writers and therefore, provide extremely reliable and relevant information for this study. The year of publications of these books is also from a relevant time period i.e. 2004 and 2005 which supports the research topic in this study. These publications include supports as well as certain criticisms on the implementation of BSC which provides a fair valuation of the model.
3.6 Balanced Scorecard Implementation Failures
The benefits of Balanced Scorecard does not guarantee successful implementation of the model in any organization and rather demand for careful consideration for certain factors that might lead to failure of the matrix. Among many reasons for such failures, some of the reasons are mentioned in this study.
Firstly, apart from the top level management that is responsible for creating the strategic plan, rest of the firm might not be properly communicated with to explain the new strategies that management is planning to implement.
Secondly, strategic planning is not done properly or in accordance with organizations goals and mission which is the primary objective of implementing Balanced Scorecard.
Thirdly, the financial department or the budgetary committee does not allocate required resources for the implementation of BSC which is an essential input in this process.
Lastly, lack of focus on achievement of strategic goals can result in failure of implementation of BSC since deviations can be made in process due to inclusion of various short term strategies.
Failure of Strategy Maps
Strategy maps which are used as an important tool in implementation of BSC are often regarded as a distraction from the long term goal of firms (Legace, 2004). Initially designed for support in process of implementation of BSC, strategy maps can consume longer time of management which can result in deviation from main goal (Witzel, 2008).
Opinion about Implementation Failures
Implementation of Balanced Scorecard is a subjective issue that lacks specific direction (Barr, 2007). The model is adopted by various firms in different ways that has increased the ambiguity regarding an objective approach for applying the model. Examples of failure in implementation of BSC can be found from a number of firms like Tesco which shows that 80 of the firms suggest that the model failures occurs in final stages of implementation while 50 claim it to be management issue during planning stages (Wheatcroft, 2004). Overall, the surveys depict that the failure rate for BSCs implementation is around 70.
Top-down or Bottom-up Strategy
The selection of direction for implementation of strategy also varies from firm to firm where some organizations has top to bottom structures while others have bottom top approach. Researchers like Calhoun (2004) suggest adopting a top down approach for implementation of BSC since it requires planning and strategy formulation on upper level while rest of the organization is advised regarding the plan through strategy maps and other modes of communication. However, this type of approach does not suit organizations that have a decentralized structure and a bottom up approach where employees have more authority and thus Balanced Scorecard should be applied from bottom top (Molleman (2007). Application of BSC planning is an important step that should be implemented keeping in mind the structure type of firm to avoid any failures.
Tesco Case-study and its Relevance and Reliability
There are several case studies regarding companies that have successfully implemented Balanced Scorecard and that too with certain amendments. As mentioned earlier, the Balanced Scorecard model has flexibility to include certain perspectives that may be essential to performance of an organization but have not been included in the BSC matrix.
Tesco introduced a modified version of BSC in form of Steering Wheel. The steering wheel consisted of five perspectives with addition of community perspective as a new perspective (Witcher and Chau, 2008). The successful implementation of BSC at Tesco is an example for managers of other companies that wish to include related factors into their BSC matrix.
Tescos Steering Wheel
Since Best Value PLC is a consumer goods and financial services organization, therefore the case study included in this report revolves around UK based Tesco which can be easily related to Best Value. The approach of case study used in this report is a useful input for understanding and developing feasibility of Balanced Scorecard at Best Value since it presents real life situations of firms that have adopted a similar strategy. Witcher and Chau (2008) presented a case study on Tesco where the implementation of Balanced Scorecard matrix took place. During early 1990s Tesco implemented traditional model of Balanced Scorecard as suggested by Kaplan and Norton. However, during 1996 the company updated it model through use of other measures along with Balanced Scorecard and finally the management came up with steering wheel concept where it included community as another perspective in Balanced Scorecard. Inclusion of Community was due to importance to reputation of Tesco and its contribution towards financial performance of company. This importance of Community rises from the fact that UK consumers are more inclined towards firms that contribute more to the societies and communities where they operate and thus, generate profits. The successful implementation of a fifth perspective in BSC at Tesco is an example that can be followed by Best Value PLC in its implementation of BSC.
Relevance and Reliability of Interviews
The study includes interview with Robert Kaplan who initiated the concept of Balanced Scorecard and therefore this interview provides an insight into details regarding Balance Scorecard, its implementation and elements associated with it. Kaplan has discussed various aspects of BSC and specifically the concept of Strategy Maps. However, this interview might give a biased opinion since the interview was also a promotional campaign for latest book of Kaplan regarding Strategy Maps and therefore, assumptions posted by Kaplan might be subjective in real life.
Relevance and Reliability of Newspaper Articles
The newspaper articles and other published articles used in this research study are from authentic printing press including The Times and Financial Times. Information regarding certain organizations like Tesco is also taken from the Times which prove the reliability of information. Also the time period from which articles have been selected varies from 2004 to 2008 which is a relevant time period to analyze the feasibility of Balanced Scorecard.
3.7 Future Developments of The Balanced Scorecard
After the initial launch of Balanced Scorecard, researchers started to investigate for feasibility and relevance of the matrix according to generation firms environment. This research has resulted in further developments in the matrix that has enhanced the usage of BSC and made it a more comprehensive tool (Bible et al., 2006).
Recent Developments
With other constant updates on the model, Callaghan et al (2007) developed Revised Scorecard, an instrument that was used to expand elements of financial perspective and include all necessary elements related to shareholders and other stakeholders. Another model of Extended enterprise Balanced Scorecard was designed by Folan and Browne (2005) where various aspects of manufacturing firms were incorporated in the model. Several firms that have modified and adopted the Balanced Scorecard approach are given in this study.
Further Developments
Given the criticisms on Balanced Scorecard matrix, there have been constant updates on improvement of the model through elimination of erroneous elements like weightage of perspectives, their measures and use of software to adjust any problems (Cobbold and Lawrie, 2002). Several approaches have been used to solve the issues. For instance Punniyamoorthy and Murali (2008) introduced balanced score approach while other researchers introduced other mathematical solutions to cater to the problems related to BSC.
Ethics Perspective
With other evolutions in the design of Balanced Scorecard, certain researchers have suggested that there are certain elements that can be incorporated in the model of Balanced Scorecard. One of those elements that have gained significance is the ethical perspective in an organization (Arveson, 2002). Inclusion of ethical perspective is included due to increasing importance of ethical issues in financial firms that are needed to be governed by management (Mclvor, 2005).
Relevance and Reliability of Websites
There is still lack of reliability of websites since only a few authentic websites like that of Balanced Scorecard Institute are available online. Aveson (2002) in his article on Ethical issues related to Balanced Scorecard assert that although there are a number of relevant sources for access of information related to Balanced Scorecard, the reliability of these sources are questionable. There is need for establishment of more reliable websites related to Balanced Scorecard to provide information regarding all technical, strategic and ethical issues related to BSC.
Conclusion
Balanced Scorecard is a useful tool that helps managers in analyzing the factors that contribute the most towards achievement of firms goals and objectives and align the strategies accordingly. Through Balanced Scorecard, managers develop a relationship between firms operational and financial performance and improve decision making process of the firm.
The Key Performance indicators for each factor further enhance the improvement process through following of a proper strategic decision and establishing a direct relationship with companys main objective. This makes Balanced Scorecard not just another management tool but a strategic tool that is used from top to middle management for formulation of strategies (Kaplan and Norton, 1996).
Strategies like Balanced Scorecard approach requires careful management consideration since the impact of such tools is from top to bottom affecting each level of organization and therefore, the management has to be cautious in its proper implementation. According to Molleman (2007), if Balanced Scorecard is not accurately implemented the affect of unsuccessful transition can be long lasting. However, application of Balanced Scorecard remains as a recommended tool and strategy for service organization since the advantages of its implementation surpass its limitations (Antola et al., 2006 and Cobbold Lawrie, 2002).
There are various issues that are needed to be incorporated by management before implementation of balanced Scorecard. Firstly, any changes in original model should not be made until necessary. Balanced Scorecard is flexible enough to be altered according to firms needs, however, the management should make amendments that are less complex and that can add value to the use of Balanced Scorecard.
Several firms apply Balanced Scorecard with minor adjustments and still manage to successfully implement it and utilize from it in management decisions (Witcher and Chau, 2008). One of the most commonly and erroneously used perspective is that of customer satisfaction since it is one of the major factors that contribute towards performance and a low ranking in customer perspective means damaged market for the company. The solution to this problem is careful implementation of model and well trained strategic team to monitor the process of implementation (Witzel, 2008).
The implementation of Balanced Scorecard should be in accordance with firms goals and strategies and once the feasibility is drawn, each department of firm should be involved in the process through discussions or training sessions to ensure fewer constraints in the process. This approach is applicable during analysis of the tool and after its implementation.
Since its formulation, Balanced Scorecard has been constantly updated according to needs of business strategy and industry structure. With these developments, some elements of inaccuracy remain due to less objective aspects of weightage given to each element and its importance. Therefore, firms needs to apply extensive research and management skills to develop the model and integrate elements like human resource and ethical factors with more prudence than objective factors like financial perspective (Arveson, 2002). Consideration of such elements leads to successful implementation of Balanced Scorecard model and thus, promises improved performance.
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