Balanced scorecard technique

In response to external changes in the business environment, performance management systems have emerged to improve strategy implementation. While budgets have been the most common control tools, new performance management systems are multidimensional because they include financial and non-financial measures. The balanced scorecard developed by Kaplan and Norton in 1992 is one of the most common performance management tools. The tool links organisations' long- term intentions with short-term operational actions (Norrekilt, 2000, Speckbacher, Bischof & Pfeiffer 2003 and Bourne, Neely, Mills & Platts 2003). The balanced scorecard provides organisations' management with a set of measures that give a comprehensive view of the business in terms of four key perspectives within which a vision, strategy and goals are articulated before translating them into specific initiatives, targets and measures. The four perspectives are financial, customer, internal business, and learning/growth. Further, Ian and Gavin (2001:5) indicate that the use of balanced scorecards improves strategic management capabilities towards strategy implementation and its development process is a sure way of introducing the three improvements required in the organisation, namely articulation of strategy, enhanced communication and feedback and alignment of processes to support strategy implementation.

The balanced scorecard is a powerful tool for supporting strategy implementation initiatives. The tool was developed by Kaplan and Norton (1992) to include both financial measures that report the results of actions already taken and operational measures on customer satisfaction, internal processes and improvement activities – operational measures that are drivers for future financial performance (Kaplan and Norton, 2001). Unlike the traditional systems, the balanced scorecard puts strategy, vision and communication in the centre rather than control. The format of the balanced scored card is depicted in Figure 4.3 below.

Figure 4.3: Key measures of the balanced scorecard

Long-term shareholder value

Financial

Customer

Internal processes

Learning/growth

Source: Kaplan (2005:45)

Evidence on the success of the balanced scorecard has been reported across many industries and sectors (Hepworth, 2000:559). According to Marr and Schuima (2003), 60% of Fortune 1000 companies are reported to use a balanced scorecard performance measurement system. However, attention has been drawn to the complexity of the system and the need for commitment to accepting it for the success of its application, and many pitfalls and problems have been identified in practice (Kaplan & Norton, 2001) but no failures of the concept were identified (Hepworth, 2000:559). The advantage of the tool compared with some traditional tools such as budgeting are as follows: it provides balanced organisational assessment, combines financial and non-financial

Improve cost structure Enhance customer value

Increase asset utilization Expand revenue opportunities

Customer value proposition

Price Availability Functionality Partnership

Quality Selection Service Brand image

Operations Customer Innovation Regulatory &

management management processes social processes

Human capital Information capital Organisational capital

indicators, focuses on drivers of performance, and is a powerful tool for linking strategy and operations (Atkinson & Brander, 2001). Although the use of the balanced scorecard lacks empirical studies, organisations that are using the tool have reported improved performance, which illustrates that the tool is effective in linking the long-term strategic goals with short-term operational planning. Contrary to the claim of being the best practice in strategy implementation, balanced scoredcard technique does not solve all implementation problems or provide new insights into strategy implementation because the four implementation factors and sub-factors are similar to factors identified by previous scholars. The balanced scorecard is a control mechanism suggesting a top- down approach with little participation from lower levels. Further, strategy formulation and implementation are regarded as two separate phases, and finally the tool does not give attention to problems experienced during the implementation process, such as conflicts, struggles among interest groups, organisational culture and resource allocation (Creelman, 2000:, Norreklit, 2000:70 and Okumus, 2003:875).

According to Metawie (2005:6), the main weakness of the balanced scorecard is that it is primarily designed to provide senior managers with an overall view of performance, thus, is not intended for, or applicable, at the factory operational level. Moreover, as a multi-stakeholders approach, it has been criticised for not considering the interests of all stakeholders, such as suppliers, competitors, regulators, and the community. Further, Brignal and Modell (2000:281) argue that the balanced scorecard literature has neglected the relative bargaining power of different stakeholders in determining whose interests will predominate in an organisation, which affects which aspects of performance are measured, reported and acted upon. However, while Kaplan and Norton (2001:87) acknowledge there are many pitfalls and problems identified in the use of the balanced scorecard, no failures of the concept have been identified. This means that the main problem is the application of the framework and not the framework itself.

According to the originators of the performance measurement framework, it is effective and helps organisations to improve performance and focus on their strategies and

vision. Studies of the effectiveness of the BSC have elicited different views; some state that there is a high failure rate in the application of the framework while others have concluded that the framework is effective in supporting organisations in implementing strategies and achieve high performance. The assumption of the present study is that the use of BSC supports implementation of strategy, leading to high performance of organisations. For this reason, the use of performance measurement frameworks and strategy control systems has been identified as a factor that either supports MFOs to implement strategy or acts as an impediment if not used.

4.5 CONCLUSION

Strategic control tools are essential to ensure that the long-term strategy is linked with an organisation’s short-term operational demands. Successful strategy implementation is substantially dependent on strategic control and management systems. The systems need to incorporate information that can enable managers to track progress or get to know how they are doing, while also providing opportunities to adapt and revise strategies when required (Atkinson, 2006:1444). However, while strategy formulation has commonly agreed tools, they are lacking in strategy implementation. Lack of such tools is cited as a cause of failure in strategy implementation, While some authors advocate the use of project management tools in strategy implementation, there is no consensus about this approach. Further, while the balanced scorecard is widely recognised and used, there are limited empirical studies to ascertain its effectiveness in supporting strategy implementation, and the few studies that have been carried out have elicited different views. Hence, there is a need to identify all possible tools that are effective in supporting an organisation’s implementation strategy.

CHAPTER 5