The Balanced Scorecard
“What you measure is what you get” (Kaplan & Norton, 1992)
ABSTRACTThis document examines the Balanced Scorecard Model within Strategic Management, examines each perspective, discusses its implementation and finally looks at its limitations and the new modern approach to the model.
RYAN ALILECHE – G00260743Strategic Management 2
Plagiarism Disclaimer
Student Name: Ryan Alileche
Student Number: G00260743
Programme: Business (Hons) Economics & Finance
Year: 4
Module: Strategic Management 2
Lecturer: Kevin McDonnagh
Assignment Title: CA4
Due Date: 22th April 2016
Date Submitted: 22th April 2016
Additional Information:
I understand that plagiarism is a serious academic offence, and that GMIT deals with it according to the GMIT Policy on Plagiarism.
I have read and understand the GMIT Policy on Plagiarism and I agree to the requirements set out therein in relation to plagiarism and referencing. I confirm that I have referenced and acknowledged properly all sources used in preparation of this assignment. I understand that if I plagiarise, or if I assist others in doing so, that I will be subject to investigation as outlined in the GMIT Policy on Plagiarism.
I understand and agree that plagiarism detection software may be used on my assignment.
I declare that, except where appropriately referenced, this assignment is entirely my own work based on my personal study and/or research. I further declare that I have not engaged the services of another to either assist in, or complete this assignment.
Signed:
Date:
Please note: Students MUST retain a hard/soft copy of all assignments.
1
Executive SummaryThis document examines the Balanced Scorecard Model within Strategic Management,
examines each perspective, discusses its implementation and finally looks at its limitations
and the new modern approach to the model.
Introduction
The Financial performance of an organisation is inherently linked to its strategic
performance, therefore utilising a performance measurement system that strikes a balance
between an organisations financial objectives and strategic objectives is crucial. By only
monitoring financial objectives and performances this overlooks the fact that what ultimately
enables an organisation to deliver better financial results is the achievement of strategic
objectives that improve its competitiveness and market strength. (Thompson, et al., 2012)
The most commonly used framework for balancing financial objectives with strategic
objectives is the Balanced Scorecard. This is method for linking financial performance
objectives to specific strategic objectives that derive from an organisations business model. It
provides employees with clear guidelines about how their jobs are linked to the overall
success of a company so that they can contribute most productively and in cohesion for the
achievement of these goals. (Thompson, et al., 2012)
The Balanced Scorecard is not a way of formulating strategy. It is a way of
understanding and checking what you have to do throughout an
organisation to make a strategy work. (Lynch, 2000)
Richard Lynch says the four main principles behind the scorecard are;
1. Translating the vision – Trough clarifying and gaining consensus
2. Communicating and linking – through setting goals and establishing rewards for
success
3. Business Planning – To align objectives, allocate resources and establish milestones
4. Feedback and learning- To review the subsequent performance against the plan
(Lynch, 2000)
2
The Balanced Scorecard
The Balanced Scorecard is a strategic performance management tool developed by Dr.
Robert Kaplan, of the Harvard Business School, and Dr. David Norton, an international
strategy consultant for Renaissance Solutions Inc. Together they first introduced the
methodology in 1992 in an article published in the Harvard Business Review. They examined
the most successful businesses across the world and found similarities in the way they were
run. (Kaplan & Norton, 1992)
Kaplan and Norton observed that each of the top performing businesses had a very clear
vision and strategy that was managed across the areas of Finance, Customer, Internal
Processes and Knowledge & Growth. Together they recognised this structure as the balanced
scorecard, creating perspectives based on these areas thus providing a balance based on these
financial and non-financial measures. (Kaplan & Norton, 1992)
“What you measure is what you get” (Kaplan & Norton, 1992)
The Financial Perspective looks at top level financial objectives and measures to establish
how well the company is performing in the eyes of their shareholders. The Customer
Perspective looks how the customer views the company. The internal Processes section looks
at how well the business is running and whether it provides what the customer wants most.
Knowledge & growth looks at the workers within the company, the skills and competencies
they have and how they can improve and create value to the business. (Kaplan & Norton,
1992)
These perspectives outline the organisations vision and strategy and enable the creation of a
strategy map, which is the company strategy stated in simple terms, in an easy to follow
arrangement, built around the four perspectives from the balanced scorecard.
Within these perspectives is the establishment of a small number of strategic objectives,
targets and goals are then set to achieve each objective then they are measured regularly to
determine whether they are being met or not. (IntrafocusUK, 2012)
3
The Financial Perspective
This perspective asks - how do we look to our shareholders? It examines if the company’s
strategy will contribute to the bottom-line improvement of the company. This perspective
represents the long-term strategic objectives of the business and thus it incorporates the
tangible outcomes of the strategy in traditional financial terms. Kaplan and Norton say that
timely and accurate finance data will always be needed and provided by managers. (Kaplan
& Norton, 1992)
Companies will examine their profit, earnings per share (EPS), share price, return on
investment (ROI) and return on equity. These are common measures of financial performance
that companies will use to determine how the company did and in turn how well the
managers and employees performed. High profits indicate the company is doing well and can
have a positive effect on investor confidence
Financial measures are a vital element of the Balanced Scorecard, particularly in a for-profit
organisation. The goals and measures in this perspective tell us whether the strategy
executed, which is established through objectives and measures chosen in the other
perspectives, is leading to better bottom line results. (Niven, 2006)
An example of an organisations financial objectives would be to endure, succeed and
flourish. They ensure they endure by measuring cash flow, they succeed by measuring
monthly sales and flourish by increasing market share and return on investment.
A problem with only using financial measures include short sightedness. How this occurs is
when companies focus too much on profits and trying to influence share price in a short space
of time instead of looking at a long term position.
Another problem is that this perspective is very top focussed. For example a worker pushing
trolleys or sweeping floors in Tesco isn’t going to be concerned or incentivised with earnings
per share or ROI because their job is so removed from that aspect so they are likely to feel
their actions have no effect on it, only the top people in a company can really be effected or
can influence these measures. If you are the C.E.O of a company then the buck stops with
you when it comes to profits because you’re decisions directly affect share price, profits etc.
4
The Customer Perspective
Many companies today have corporate missions that focus on customers. “Every Little
Helps” for example is the slogan for Tesco which is directed to providing as many little
savings as possible on to customers. How a company performs from the point of view of its
customers has become a top priority for senior management (Kaplan & Norton, 1992)
This perspective looks to emphasize the need to satisfy the needs and wants of customers.
This perspective places an importance in customer focus and satisfaction. It is of the belief
that if customers are not satisfied then they will eventually find other suppliers that will meet
their demands. Poor performance in this aspect is a leading indicator of future decline, even
in times of high profits.
Purpose needs to be seen in the context of customer-orientate strategy. This should not
include only market share data but also areas such as customer retention, customer
profitability measures and customer satisfaction. (Lynch, 2000)
To measure the aspect of customer service a company might measure delivery times and look
to compare them with leading competitors. If they are slower then this is an area of concern
and the company should look to improve on it. Obviously if they are faster than this is a
competitive advantage that should look to maintain. (Johnson & Scholes, 2002)
An example would be if a business strategy highlights the need for introducing a new
product, then the scorecard might go beyond sales and market share data to explore customer
satisfaction and repeat business.
The Internal Processes Perspective
This perspective looks at how well a business runs and whether it’s providing the products
that the customer actually wants. It’s concerned with internal performance measures related
to productivity, capital investment against cost savings achieved, labour productivity
improvements and other factors that will indicate way in which a company is undertaking the
strategy inside a company. This can involve setting internal strategy targets and establishing
milestones for the implementation of strategy (Lynch, 2000)
Kaplan & Norton says that customer based measures are important, however they must be
translated into measures of what the company must do to meet its customers’ expectations.
Excellent customer performance derives from processes, decisions and actions occurring
5
throughout an organisation. Managers need to focus on these critical internal operations to
enable them to satisfy the needs of a customer. (Kaplan & Norton, 1992)
The internal measures for the balanced scorecard should stem from the business processes
that have the highest impact on customer satisfaction such as aspects that affect cycle time,
quality, employee skills and productivity. Businesses should also endeavour to identify and
measure their core competencies and the critical technologies necessary to ensure market
leadership. (Kaplan & Norton, 1992)
For example, the creation of a new website will improve not only the customer satisfaction
aspect but also include registering of the web page, design of the site and also the
maintenance of the site. Each of these elements can have specified target dates and costs.
To assess the quality of workers and its processes a scorecard measure would be to measure
training & development, job turnover, product quality and stock turnover. (Lynch, 2000)
The Knowledge & Growth Perspective
This perspective, also known as the innovation and learning perspective, looks to provide
feedback and learning through strategy reviews and sharing comments on the outcome of
events. It has the effect of highlighting the importance of communicating and linking people
with the purpose through education, goal setting and rewards for achieving the required
performance. It consists of employee training and corporate cultural attitudes linked to both
individual and corporate self-improvement.
(Lynch, 2000)
The Knowledge and Growth Perspective identifies the infrastructure that the company must
construct to generate long term growth and improvement. Organisations learning and growth
can come from 3 principle sources: People, Systems and Organisational Procedures. (Kaplan
& Norton, 1996)
People can learn and grow through adequate training policies which can help them to become
a more valuable asset to the business. Systems must be constantly updated and maintained to
enable a business to stay ahead of its competitors. Organisational procedures can scrutinise
alignment of employee incentives with general organisational success factors, and measured
rates of development in critical customer-based internal processes. Keeping systems current
6
and employees well trained adds extra costs however the end product is a more streamlined
company that is more capable of achieving its goals. (Kaplan & Norton, 1996)
These perspectives outline the organisations vision and strategy and enable the creation of a
strategy map, which is the company strategy stated in simple terms, in an easy to follow
arrangement, built around the four perspectives from the balanced scorecard.
Within these perspectives is the establishment of a small number of strategic objectives,
targets and goals are then set to achieve each objective then they are measured regularly to
determine whether they are being met or not. (IntrafocusUK, 2012)
Leading and Lagging Metrics
Measurement is done through Performance Measures. These are usually a small number of
these measures which are easily understood and can be acted on immediately. Performance
measures must be both leading and lagging. Poorly run businesses generally focus on lagging
indicators which can’t be influenced as the event that effects it has already has already
occurred, an example would be the number of sick days being taken or unit production. A
leading indicator is seen as the precursor to an event and as a result cannot be immediately
influenced, to do so requires a period of time ranging from anywhere from 3 months to 3
years. (Kaplan & Norton, 1992)
Implementation of the Balanced Scorecard
The Balanced Scorecard is not a to-do list, one-time effort, shopping list, complete analysis
or even a roadmap to the future. A well-crafted scorecard reflects the company’s vision,
simplifies and communicates the vision, delivers a quick and complete idea of the company’s
health.
In crafting a Balanced Scorecard, a company must define a small number of goals for each
perspective, select indicators for each goal, construct the metrics by which performance is to
be measured, and then follow up by collecting data and assessing results.
7
Goals should be reflective of what the company wants to achieve in line with its vision.
Indicators should be comprehensive, flexible and should allow for innovation and variety. It
should be easy and straight forward to assess results to determine whether or not the company
is achieving its goals.
8
Kenya Red Cross
9
The Red Cross in Kenya use the Balanced Scorecard. They use clearly defined goals,
measure their performance through a percentage ranking for completion and state what needs
to be done to meet each target or sustain it. (Kenya Red Cross Society, 2016)
The Limitations and Modern Take on the Model
The Balanced Scorecard provided a major breakthrough in assessing company performance,
however, limitations in the model have been discovered. Atkins, Waterhouse and Wells argue
that the model fails to sufficiently highlight the contributions that staffs and suppliers give to
help the business accomplish its goals, Recognise the role of the community in outlining the
environment within which the business works and finally identify that performance
measurement as a two-way procedure, which allows management to measure investors’
10
contributions to the business’s primary and secondary goals and allows investors to evaluate
whether the business is capable of accomplishing its duties to them both present and in the
future. (Atkinson, Waterhouse, & Wells, 1997)
It’s also been argued that the original model doesn’t factor in the importance of HRM and
that the lack of focus on this aspect can be seen as a significant weakness given its
importance in today’s business environment. (Johnson & Scholes, 2002)
Over the years the scorecard has been modified to make it more relevant to today’s business
environment. There are a number of important aspects that aren’t looked at such as
regulators, suppliers, environmental and competitor aspects. To solve this many businesses
will simply add these new perspectives to their own scorecard. (Marr, 2016)
StatoilHydro, an oil and gas company added a Health, Environment and Safety perspective to
their scorecards to reflect their own strategic needs. The company has used the model since
the mid-90s and utilises it companywide from corporate level to departmental and team
levels. (Marr, 2016)
Conclusion
The Balanced Scorecard represents nothing new. Educating, acquiring feedback, setting goals
and targets have been around for a long time. As Norton points out, the danger of the
scorecard is that it places a strong emphasis on measuring performance, which might not be
what is important strategically, and not on gaining commitment and action. The scorecard can
lead to too much measurement in larger companies which can become a big issue. (Kaplan &
Norton, 1992)
However the scorecard can be a success as it enables a business to translate a vision into
practical and useful targets & measures and moving strategy beyond overly simple measures
like ROI and Earnings per Share.
The Balanced Scorecard has become a valuable tool to ensure alignment through strategy
maps, improved communications and ultimately lead to a better performing organisation that
is in tune with its business strategy
Bibliography
11
Atkinson, A. A., Waterhouse, J. H., & Wells, R. B. (1997). A Stakeholder Approach to
Strategic Performance Measurement. MIT Sloan Management Review.
IntrafocusUK. (2012, August 9th). Balanced Scorecard. Retrieved from youtube.com:
https://www.youtube.com/watch?v=M_IlOlywryw
Johnson, G., & Scholes, K. (2002). Exploring Corporate Strategy. Harlow: Pearson
Education Ltd.
Kaplan, & Norton. (1992). The Balanced Scorecard - Measures That Drive Success. Harvard
Business Review.
Kaplan, R., & Norton, D. (1996). Linking the Balanced Scorecard to Strategy. Calafornia
Management Review, 53-70.
Kenya Red Cross Society. (2016, April 20th). Kenya Red Cross Balanced Scorecard.
Retrieved from balancedscorecard.org:
https://balancedscorecard.org/Portals/0/PDF/KenyaRed%20CrossScorecardPoster.pdf
Lynch, R. (2000). Corporate Strategy. London: Pearson Education Ltd.
Niven, P. R. (2006). Balanced Scorecard Step-by-Step: Maximizing Performance and
Maintaining Results. New Jersey: Wiley.
Thompson, Strickland, Gamble, Peteraf, Janes, & Sutton. (2012). Crafting and Executing
Strategy: The Quest For Competitive Advantage . London: McGraw-Hill Irwin.
12
Top Related