What Is the Balanced Scorecard?

According to its creators (Kaplan and Norton, 1992), the BSC5 has been offered as a superior combination of non-financial and financial measures developed to meet the shortcomings of traditional management control and performance measurement systems.

The BSC incorporates the financial performance measures with the non-financial performance measures in areas such as customers, internal processes and learning and growth. Consequently, the BSC includes measures of financial performance, customer relations, internal business processes and organisational learning and growth. The combination of financial and non-financial measures of the BSC was developed to link short-term operational control to the long-term vision and strategy of the business (Kaplan and Norton, 1992, 1996a, 2001). The BSC, therefore, explicitly adopts a multi-dimensional framework by combining financial and non-financial performance measures (Otley, 1999). Hence, the BSC allows a more structured approach to performance management while also avoiding some of the concerns associated with the more traditional control methods.

The BSC allows for the evaluation of managerial performance as well as the individual unit or division. In fact, Kaplan and Norton (1993, 2001) argue that one of the most important strengths of the BSC is that each unit in the organisation develops its own specific or unique6 measures that capture the unit’s strategy, beside common measures that are employed for all units (Kaplan and Norton, 1993, 2001). Therefore, there are financial and non-financial measures in all four perspectives (i.e., financial, customers, internal process, and learning and growth) that should be used to evaluate managerial/unit performance. Some of

5 _{In this study, the term balanced scorecard (“BSC”) is used to refer to an environment where}

financial and non-financial measures are commonly used in the performance evaluation process.

6 _{Some studies use the terms ‘unique and common’ measures to refer to measures used within}

each perspective of the BSC (see, for example, Lipe and Salterio, 2000, 2002; Libby, Salterio and Webb, 2004; Robert, Albright and Hibbets, 2004; Banker, Chang and Pazzini, 2004, Dilla and Steinbart, 2005), while other studies use the terms ‘financial and non-financial’ measures (see, for example, Lau and Sholihin, 2005). In this study, financial and non-financial measures will be used to refer to the measures within the four perspective of the BSC.

the specific measures chosen for each individual business unit in the organisation will likely differ from those from other units because in diversified organisations, individual business units may face different competitive pressures, operate in different product markets, and may therefore require different divisional strategies (Kaplan and Norton, 1993). Consequently, business units may develop customized scorecards to fit their unique situations within the context of the overall organisational strategy (Kaplan and Norton, 2001). Hence, even though business units within a company may have several BSC measures in financial measures, the non-financial measures represent what individual units must accomplish in order to succeed (Kaplan and Norton, 1996b).

The four critical perspectives that can be translated to conceptualise the organisation’s vision and strategy (financial, customer, internal business process, and learning and growth) is illustrated in Figure 2.1. This is followed by a brief discussion of each perspective.

Figure 2.1: The balanced scorecard: A framework to translate a strategy into operational terms

Financial Vision and Strategy Learning and Growth Internal Business Process Customer

2.3.1.1 Financial Perspective

In the BSC model, Kaplan and Norton (1996a) still use the financial perspective due to its ability to summarise the readily measurable and important economic consequences of actions already taken. This indicates whether the organisation's strategy and its implementation are contributing to the bottom-line improvement (Kaplan and Atkinson, 1998). Measures of financial goals can range from traditional accounting approaches such as total costs, total revenue, profit margin, operating income, return on capital, to sophisticated value-added measures intended to link managerial goals to shareholder interests (McKenzie and Shilling, 1998).

2.3.1.2 Customer Perspective

From the customer perspective of the BSC, it is very important for managers to identify the customer and market segments where the organisation will compete with its competitors and determine the performance measures of the organisation in these targeted segments (Kaplan and Norton, 1996a). Furthermore, Kaplan and Norton (1996b) stated that understanding the customer and the market segments are critical for the managers in order to identify which of the targeted customer groups have contributed the greatest growth and profitability. Therefore, the managers can decide which particular strategy is to be used in those segments. The example of the measures of customer perspective include customer satisfaction, customer retention, new customer acquisition, customer profitability, market share in targeted segments, quality, and the value added to customers through products and services (Kaplan and Norton, 1996b).

2.3.1.3 Internal Business Process Perspective

From an internal business process perspective of the BSC, managers identify the critical internal processes at which the organisation must excel. According to Kaplan and Norton (1996a) identifying the critical internal business processes enables the company to: (1) deliver the value propositions that are crucial to attract and retain customers in targeted market segments; and (2) satisfy shareholders expectations for the excellent financial returns.

This is crucial since these procedures focus on the internal processes that have the greatest impact on achieving both customers' satisfaction and the financial goals of the organisation. From here, they developed a generic value chain model for creating value for customers and producing financial results. The generic value chain model comprises three principal business processes (Kaplan and Atkinson, 1998):

• innovation;

• operations; and

• post-sales service.

Kaplan and Atkinson (1998) explained that the first step in the generic value chain is innovation where the organisation's researcher identifies the customers' needs and creates the products and services that will meet those needs. In this step the organisation also identifies the new markets, new customers and the needs of existing customers. This step enables the organisation to design and develop new products and services in order to reach the new markets and customers and to satisfy customers' newly identified needs.

The second step in the generic value chain is to deal with operations where existing products and services are produced and delivered to customers. This process stresses efficient, consistent and timely delivery of existing products and services to existing customers. The important objectives of this step are operational excellence and cost reduction in producing and delivering products and services. However, in the whole of the internal value chain such operational excellence may be not the most critical component for achieving financial and customer objectives. The existing operations tend to be repetitive and traditionally its processes have been monitored and controlled by financial measures such as standard cost, budgets and variances. This focus on financial measures, however, can sometimes lead to highly dysfunctional actions. Therefore, some aspect such as measurement of quality and cycle time should be added as critical performance measures in the organisation's internal business process perspective (Kaplan and Atkinson, 1998)

The third and final step in the generic value chain is post-sales service. This is the service provided to the customer after the sale or delivery of service. It includes warranty and repair activities, treatment of defects and returns, and the processing and administration of payments, such as credit administration. Some of the organisations that deal with environmentally sensitive chemicals may provide performance measures that relate to the safe disposal of waste from the production process. All of these activities add value to the customers who used the organisation's product and service (Kaplan and Atkinson, 1998).

Kaplan and Atkinson (1998) argue that the internal business process perspective provides two basic differences between the traditional and the BSC methods to performance measurement. First, the traditional method focuses on monitoring and improving existing business processes, while the BSC method will usually identify new processes at which the organisation must excel to meet customer and financial objectives. Second, the traditional method focuses on the processes of delivering existing products and services to existing customers, while the BSC incorporates innovative processes into the internal business process perspective.

2.3.1.4 Learning and Growth Perspective

In the learning and growth perspective of the BSC, managers identify the infrastructure of the organisation that must be built in order to create long-term growth and improvement (Kaplan and Atkinson, 1998). They argue that the ability to continually improve one’s capabilities to deliver value to their customers and shareholders is crucial in a globalised economy. Accordingly, there are three principal sources of value in the learning and growth perspective: people; systems; and organisational procedures. Often there is a large gap between financial, customer and internal business process objectives on the BSC with existing capabilities of people, systems and procedures and what will be required to achieve the objectives. Therefore, Kaplan and Atkinson (1998) argue that the organisation must invest in continuing training programs for employees at all levels, enhancing information technology and systems, and aligning organisational procedures.

From the discussion above, it is clear that the BSC emphasis is not only on financial measures but also on non-financial measures such as new product development, market share, customer satisfaction, safety and pollution reduction. Olve et al. (1999) declared that the BSC is a continuous process that combines the four perspectives, which are interrelated. For example, if the organisation wants to be profitable, they have to have loyal customers. To make the customers loyal, they have to provide good products and services. To provide those, they need appropriate and well functioning processes and for that purpose they must develop the capabilities of their employees. Not surprisingly, therefore, Kaplan and Norton (1996a) argue that a properly constructed BSC should tell the story of the organisation strategy. That is about the cause-and-effect relationship between outcome and the performance drivers of those outcomes. Every measure selected on a BSC should be an element in a chain of cause-and-effect relationships that communicates the meaning of the business's strategy to the organisation.