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Key Topics
Requirement
Discuss the use of the balanced scorecard as a tool for improving organizational performance.
Solution
Introduction
Balanced Scorecard is considered as an important aspect of the management. A balanced scorecard is a new approach to strategic management which was developed in 1990 by Robert Kaplan or David Norton. On the basis of vagueness and weakness of previous management approaches, balanced scorecard approach highlights clear prescriptions of the financial perspective of a business organization (Kaplan, 1996). The main motive of this paper is to investigate the role of the scorecard in enhancing and improving the performance of an organization. Balanced scorecard mainly represents a central list of numbers which describe every part of the organization's success like people, financials, suppliers, customers, and operation. The represented number not only shows the important outcomes but also highlights the various factors which influence these outcomes significantly.
The balanced scorecard is a popular management system which permits the organizations to recognize their vision and strategy and interpret them into action. The balanced scorecard provides feedback of both the internal business processes and the external business processes (Kopecka, 2015). The Balanced Scorecard views the organization from four perspectives, namely, perspective related to the business process, perspective related to the growth process, different customer perspective, and financial perspective.
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Balanced Scorecard and Organizational Performance
The balanced scorecard is considered as a framework of performance management activities that establish a suitable link between the day to day operations of a business organization and its strategy. Balanced scorecard provides a holistic view of the organization which is designed on the basis of organization objectives. The organizations can build balanced scorecard for themselves after analyzing their strategic objectives which describe the whole functioning. The organizations prescribe their four balanced scorecard perspectives, from which they can choose different measures for fulfilling their predetermined objectives. These measures of the balanced scorecard represent the quantitative indicators of an organization which indicates that how the performance of a strategic objective can be fulfilled (Lueg, 2013).
The proper functioning of the organization can be supplemented by the balanced scorecard approach. The use of non-traditional financial measures and the traditional financial measures mainly focus on three other perspectives which are known as internal business processes, customers’ perspective and learning and growth perspective can be preferred. The balanced scorecard mainly helps the organization in fixing the compensation of the employees that will be a motivating factor for the employees. This will play an important role in improving the performance of the organization. As per the research survey of Balanced Scorecard, it was found that 72% of the respondents utilized the balanced scorecard or other variants. On the other hand, 16% are seriously considered the use of scorecard for compensation purpose (Kaplan, 2004). As per the research conducted by the Ittner (2008), 25% of the firms of US utilize both non-financial and financial measures in the annual bonus contracts of their chief executive officers, with the weight placed on these measures by the firms’ strategic objectives. Calculation of financial measures is not sufficient for improving the performance of the organization.
The organization needs to follow different aspects of the balanced scorecard for implementing it in a significant manner. Balanced scorecard utilizes multiple signals of the agency for measuring the financial measures of the organization. Utilization of balanced scorecard concept with its theoretical work on performance evaluation provides most efficient means for the business managers. Balanced scorecard is developed by the organizations to enhance their revenue by improving its sales from existing customers. It offers comprehensive solutions to targeted customers of a business organization. It helps achieve excellence in the performance of business functions through continuous operations of business processes, and merge incentives and rewards of the employees with the different strategies of the business.
The BSC has gained popularity as an efficient tool of the management that merges corporate strategy of the organization with the actions and goals of the employees. During the 1980s, accounting researcher explained the enhancing irrelevance or performance measurement practices and traditional control. Kaplan and Norton introduced some principles which guide in the implementation of the balanced scorecard in an organization effectively.
Balanced scorecard helps in measuring the performance of the organization by following ways:
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Translate strategy into operational terms: The balanced scorecard is not only considered as a tool of strategy formulation, but it also helps the management in implementation of strategic decisions. Strategy formulation is considered as an art or the description of the strategy. If the organization wants to improve its performance, then it is necessary for an organization to link and to reinforce all activities through its organizational strategies.
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Align the organization to the strategy: As per the work done by the Kaplan and Norton, it was shown that the successful implementation of the balanced scorecard completely depends on the ability of the organization to rely on consistent strategic alignment. The organization can efficiently utilize the balanced scorecard by communicating and developing a number of strategic themes. These themes allow the organization to focus and balance conflicting short-and-long term priorities. The strategic themes reveal what is happening internally in the organization to achieve strategic outcomes, and deliver a mode of segmenting the formulated strategy into projects or general categories.
Kaplan and Norton have formulated a set of measures which enables the managers of the organization to have a comprehensive view of the organization’s performance. Balanced scorecard helps the managers in identifying the relevant information by using the four perspectives. Some of the perspectives have been discussed ahead.
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Financial perspective: In this, the leadership team of the organization firstly formulates their objective regarding the financial target of the newly formulated strategy. One of the examples can be when the organization wants to double the capital employed to 13% within the next two years from its current depressed level of 7%. Balanced scorecard helps that organization in fulfilling its objective by utilizing the two financial levers which are growth and productivity. The productivity of the organization is improved through two elements which are asset intensity and cost reduction. These elements of the organization can be calculated by using Balanced Scorecard. Thus the financial perspectives combine measures and objectives for both revenue growth and productivity.
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Customer Perspective: Through using the customer perspective the organization segments its target consumers in different categories. This success can be achieved through studying the market share of the organizations. Balanced scorecard helps in strengthening distributor and dealer relationships by creating win-win partnerships.
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Process Perspective: Balanced scorecard helps the organizations in the management of business operations to improve quality, efficiency, and responsiveness. Management of the customers for generating profit (Black, 2014), and Develop innovation strategies for building new products and services.
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Learning and Growth perspective: Balanced Scorecard helps the organization in enhancing the skills and motivation level of the employees which done through implementing information technology and aligning employees to work on those strategies. The areas that can be improved by using Balanced Scorecard are development of skills and core competencies, empower and engage employees, and provide access to strategic information.
Balanced scorecard also helps in formulating different communication strategies for an organization which serves as a device for management control (Jovanovi?, 2012). There is an indirect relationship between the improved performance of the balanced scorecard or the management control functions. Balanced scorecard contributes more for improving the performance which improve profitability and efficiency of an organization.
One of the examples of the successful implementation of BSC is in relation to the Infosys. Infosys was founded in India in 1981. During 2000, the organization decided to expand its portfolio of IT services beyond Traditional IT outsourcing. This was done by partnering with global clients to transform their businesses by launching various advanced technology, IT services and products. The organization has efficiently done this by utilizing the balanced scorecard. Now the organization had more than $60 million worth. Infosys utilize skilled IT labor for fulfilling its strategic objectives (Gupta, 2014). Till 2008 the organization had only 18 clients but now it is generating above 500 million revenues from its more than 100 clients. The organization is engaged in providing multiple services for many years. Now the organization is not only recognized as an IT body shop but also known as trusted transformational IT organization. Executives of the Infosys formulated a balanced scorecard framework by which the organization formulates, monitor and communicate its strategy to its different business partners. The CEO of the organization gives the credit of its success to its efficient balanced scorecard system.
The balanced scorecard allows the management of the organization to promote different strategic changes constantly through stretched goals. Till 2003, the organization had significantly steered the transformation of itself through various evolution stages utilizing the Balanced Scorecard. The organization continuously moves on by facing different strategic challenges while implementing the changes in the business processes. All these challenges require the better execution of strategies by the management of the organization (Hoque, 2014). These strategies of the organization are enforced by comprehensively using the Balanced Scorecard system.
Conclusion
After studying all this, we can conclude that the balanced scorecard has been utilized by the various business organizations to a larger extent. It is mostly utilized as a performance framework and strategy in public and private business organizations. The findings of the study concluded that there are some organizations whose operational culture permitted the management to understand the concept of Balance Scorecard and utilize it in an efficient manner for the success of the organization. The organizations which are not following the balanced scorecard concept finds hard to achievable objectives, hard to measure performance and formation of inappropriate goals and targets of the organizations. Balanced scorecard helps the management of the organization to formulate various plans and strategies for implementing these plans efficiently (Keyes, 2016). As per the strategic map of the balanced scorecard, Kaplan and Norton suggested that non-profit organization and the government should put the citizen and customers at the top of their strategic map. This should be done by the organizations because this structure does not provide any profits to them. If the organizations want to survive for a longer period, it is necessary for them to improve their financial position. Finally, it can be said that the financial resources which are obtained by the organizations through private and public funding should be managed efficiently and this could be done by using balanced scorecard concept efficiently in the organizations.
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Lueg, K., & Lueg, R. (2013). The Balanced Scorecard and different Business Models in the textile industry–A case study. International Journal of Strategic Management, 13(2), 61-66.
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Lueg, R., & Vu, L. (2015). Success factors in Balanced Scorecard implementations--A literature review. Management Revue, 26(4).
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Kopecka, N. (2015). The Balanced Scorecard Implementation, Integrated Approach and the Quality of Its Measurement. Procedia Economics and Finance, 25, 59-69.
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Jovanovi?, D. (2012). Atkinson, AA, Kaplan, RS, Matsumura, EM and Young, SM: Management accounting: Information for decision making and strategy execution, Pearson education limited, Edinburgh, 2012. Ekonomski horizonti, 14(3), 207-209.
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Kaplan, R. S., & Norton, D. P. (1996). The balanced scorecard: translating strategy into action. Harvard Business Press.
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Kaplan, R. S., & Norton, D. P. (1996). Using the balanced scorecard as a strategic management system.
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Kaplan, R. S., & Norton, D. P. (2004). Strategy maps: Converting intangible assets into tangible outcomes. Harvard Business Press.
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Gupta, S., & Dzharova, H. (2014). Innovation and adaptation: Continuing the Infosys journey: In conversation with SD Shibulal, Co-founder, CEO & Managing Director, Infosys. IIMB Management Review, 26(4), 249-256.
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Black, S., Washington, M., & Rasheed, H. (2014). Business Model Innovation and the Balanced Scorecard.
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Hoque, Z. (2014). 20 years of studies on the balanced scorecard: Trends, accomplishments, gaps and opportunities for future research. The British accounting review, 46(1), 33-59.
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Keyes, J. (2016). Implementing the IT balanced scorecard: Aligning IT with corporate strategy. CRC Press.
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Management accounting Robert s. Kaplan. Slideshare.net. http://www.slideshare.net/hiranyamht1/management-accounting-robert-s-kaplan
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