Balanced Scorecard Approach - Essay Example

? Balanced Scorecard Approach: A Critical Review Balanced Scorecard Approach: A Critical Review Introduction Balanced Scorecard is a strategic performance management tool, which is mainly used by managers to regulate strategy execution activities and subsequent monitoring processes. Although the first Balanced Scorecard was designed by Art Schneiderman in 1970, the concept of Balanced Scorecard was extensively developed and widely popularized by Robert S. Kaplan and David P. Norton. According to them, a Balanced Scorecard “defines the set of near-term objectives and activities, the drivers that will differentiate a company from its competitors and create long-term customer and shareholder value, the outcomes.” (Kaplan & Norton, 2001, p.76). The most fascinating feature of a Balanced Scorecard is that a set of financial and non-financial tools are presented in a single succinct report by comparing each tool to a ‘target’ value. This strategic performance management tool was developed with intent to replace traditional operational reports and to present a concise summary that includes the most relevant information. The first versions of Balanced Scorecard held the view that its relevance was greatly related to corporate strategy and the proposed design methods. As noted by Kaplan & Norton (2001), during the initial stages, it was believed that this tool would most fit the needs and requirements of mid-sized firms and hence the model was mainly employed to measure aspects like customer, internal business processes, and learning and growth (pp.76-77). This tool was periodically modified and it became popular across the globe by the end of the 20th century. However, modern management experts argue that this model is not sufficient enough to manage complex strategy implementation processes. This paper will critically analyze the potential limitations of the approach while comparing it with the emerging approaches to organizational strategy. Limitations of the Balanced Scorecard approach It is identified that the Balanced Scorecard model of Kaplan and Norton is not really effective. In the modern complex business environment, setting right objectives and following them properly is extremely essential to ensure the sustainable development of any organization. In order to follow the objectives properly, it is absolutely vital to monitor every action with a more strategy focused measurement system. Today’s scholars opine that the Balanced Scorecard model is not so optimal and strategy focused; and therefore, this system cannot ensure a sustainable business environment. In the view of Rillo (2004), one of the most noticeable limitations of the Balanced Scorecard model is that it could not effectively connect cause and effect relations time-wise. The author continues that an important strength “that the Balanced Scorecard is claimed to possess is the strong causal interrelations between the different elements that are mapped using the core strategy of an organization as a source as the financial measures have been considered merely a reflection of past activities already taken place” (Rillo, 2004). Critics argue that this model is not supported by the Hume criterion for cause and effect relationship, which states that one activity leads another in time and there exists a causal connection between these two activities. Furthermore, it seems that this concept does not give necessary emphasis on time factor, which is vital to ensure the success of a strategy execution process. Likewise, Kaplan and Norton (2001) tell that strategic objectives must be categorized into budgetary measures so as to be pursued on predetermined basis (pp.294-296). As per this view, different objectives cannot be monitored until predetermined intervals and the measurement method is capable of providing relevant information for analysis. Many of the modern theorists do not know whether or not there exists a causal interrelation between customer, internal business processes, and learning and growth in all circumstances as claimed by Kaplan and Norton. The Balance Scorecard model developed by Kaplan and Norton argues that more revenues will be generated if customers are more loyal and satisfied with the products or services provided by the organization (pp.122-123). Scholars like Norreklit strongly disapprove such a connection between customers and revenues derived. To justify his argument using real life examples, Norreklit (2000) says that customers with high quality service expectations but a moderate budget would make relatively small purchases and generate a little profit for the organization regardless of their loyalty, even though they are well satisfied with the products or services offered. Similarly, modern theorists also question the authenticity of the linkage between internal business processes and customer satisfaction. Olve et al also have pointed out the examples of some Swedish companies where the Balance Scorecard model failed to prove the cause and effect relation. Hence, opponents strongly support the view that more coherent measures must be employed to effectively establish cause and effect relations in reality. Another disadvantage of Balanced Scorecard method is that it does not consider external environment, interest groups such as third party stakeholders, and day to day business activities of competitors. In the opinion of Kaplan and Norton, rapidly changing external environment does not have a significant role to play in strategy analysis processes. However, it is clear that there are many cases where it is not possible to effectively implement a strategy unless the external environment is not scanned frequently. Similarly, third party interest groups and competitors’ activities greatly affect the way a strategy is framed and implemented. The hierarchical top-down set up approach followed by the Balanced Scorecard model may not produce intended outcomes for several reasons. Firstly, when strategic objectives are structured in a hierarchical set up, emphasis is given to result-driven programs rather than internal needs of personnel. Under such circumstances, employees are not encouraged to provide their own contributions. Modern managements have identified the significance of employee contribution in successfully executing a strategy. Secondly, it is not advisable for organizations to frame both objectives and measures in a hierarchical set up as this practice would cause troubles to the integration of work done by different departments. In many cases, it has been identified that the Balanced Scorecard approach does not suit small and medium scale enterprises. The Balance Scorecard framework modified by Kaplan and Norton (2001) requires a sequence of management meetings, project management group discussions, and establishment of comprehensive control system (p.304). In practice, this approach is not ideal because it is not applicable for small and medium sized organizations where enough human resources may not be available to carry out the procedures described in the Balanced Scorecard model. Evidently, Kaplan and Norton developed this framework by focusing on relatively healthy organizations and companies at stable development phase. Another major criticism of Balanced Scorecard model is that it is only a conceptual framework and it fails on elaboration if there are no previous practical experiences. One of the minor limitations of this approach is that it depends too much on indicators that provide only final outcomes. Potential Misconceptions Regarding Strategic Performance Management It is obvious that strategic performance management, interchangeably enterprise performance management has a vital role in a workplace environment. This framework is necessary to make sure that prefixed goals are being effectively achieved by individuals, teams, and the organization as a whole. Unlike the traditional practice, modern strategic performance management models give specific focus on employee contributions mainly due to the socialization of managerial operations. Although the significance of strategic performance management has considerably increased over the last few years, many people still have some misconceptions about enterprise performance management. One of the major misconceptions regarding strategy performance management is that feedbacks must be given during the annual performance appraisal only. However, it must be noted that feedback collection is an ongoing process in enterprise performance management and hence the firm’s management has to frequently collect performance feedbacks from various departments once the strategy is implemented. If the management receives more positive feedbacks on a particular implemented strategy, it indicates the smooth function of the strategy. Similarly, many people believe that a strategy does not need to be monitored and revised once it is executed. They hold the view that the management’s duty gets completed as the strategy comes into force. It is obvious that business situations are notably changing each day, and therefore an implemented strategy would not produce the anticipated results if it is not monitored and revised timely. Sometimes, adverse market fluctuations and economic downturns may completely reverse the objective of an implemented strategy. Hence, organizations generally make arrangements for observing how effectively an executed strategy is performing. It is a general misconception that strategic performance management is only beneficial for management purposes. In fact, this practice also benefits shareholder, investors, credit lenders, and other external parties. This system is greatly helpful for shareholders to evaluate whether or not the company’s operations add value to their holdings. In addition, enterprise performance management extremely assists investors and credit lending agencies to periodically scrutinize the operational efficiency of the company and decide whether to offer more credit to the firm. Majority of the people including management professionals believe that strategic performance management is an approach only for addressing the growing complexity in today’s unpredictable, diverse, and dynamic business world. In fact, this tool also evaluates the organization’s strategic response to the identified level of complexity. In total, an enterprise performance management assists organizations to comprehend the importance of competition, strategic management, and decision making. This practice also fosters innovations and employee creativity so as to attain financial viability. Compare/contrast Alternative Approaches to Organizational Strategy Process analysis and activity based costing are two alternative approaches to organizational strategy and they assist firms to overcome cause and effect relation issues experienced in the Balanced Scorecard method. The concept of business process analysis can be simply defined as an evaluation of an organization’s current business processes under normal and exceptional situations. At the same time, activity based costing approach monitors different organizational activities and identifies the cost of each activity separately. These methods try to assess inputs and outcomes of each and every measure and analyze them from the view point of a continuous process. Scholars opine that both these approaches are process centered and can effectively figure out the far reaching impacts of the organization’s various activities. As discussed earlier, the Balanced Scorecard approach does not pay attention to several interest groups such as suppliers, competitors, and cooperation partners and therefore it fails to address the issues associated with strategy execution. Modern theorists opine that a Performance Prism methodology can be effectively employed to add such interest groups to the fundamental framework of Balanced Scorecard. The Performance Prism is a stakeholder centered model designed to analyze the performance and strategic management. This model mainly tries to figure out the current and future needs of stakeholders and identify what the organization expects from its stakeholders. The Performance Prism is a three dimensional framework including strategies, processes, and capabilities and it works in the light of an organization’s relationship with its stakeholders. Although this method was basically evolved from the Balanced Scorecard framework, it gives specific focus on an organization’s full range of stakeholders. As this methodology was designed to meet stakeholder needs and requirements, it is applicable to any organizational unit irrespective of its nature and size. Hence, this strategy would be advisable for organizations to address several limitations of the Balanced Scorecard approach. Likewise, a dynamic system approach has evolved to replace the hierarchical top-down set up of both objectives and measures and thereby to minimize problems in strategy implementation. Similarly, individual approach is recommended as an alternative framework to Balanced Scorecard. Supporters of this framework argue that it would avoid a series of complex management procedures specified in the Balanced Scorecard model. Hence, the individual approach may be suitable to large multinational corporations as well as small and medium sized organizations having limited human resources. Evidences indicate that many small and medium sized firms in Finland have successfully applied this model to achieve more reliable and authentic outcomes. However, the individual approach would not work better in case of multinational corporations that everyday deal with a huge volume of business transactions. Strategy map is another alternatively used strategic performance management tool to Balanced Scorecard. Traditional Balanced Scorecard frameworks failed to decide the type of activities and outcomes to be monitored. Since the strategy map provides a clear and concise visual representation of the strategic objectives to be emphasized, this tool is considered useful in assisting management team to identify crucial objectives and work on them. Finally, the Pryor’s 5Ps model also has the potential to successfully replace the Balanced Scorecard approach; and the five basis elements including purpose, principles, processes, people, and performance constitute its framework. Example of an Alternative Approach Implemented within an Industry or Organization From the above sessions, it is clear that the Balanced Scorecard is not comprehensive enough to meet the needs and requirements of modern complex business environment. Since this approach fails to reach the expectations, modern business houses seek alternative approaches to the Balanced Scorecard model. To illustrate, the Department of Veterans’ Affairs (DVA) in Australia have replaced the Balance Scorecard with the Business Report Card during the last decade. The Department of Veterans Affairs in Australia is working for the government to fulfill the country’s obligations to war veterans and their dependants. As stated in the annual report (2005-06), The DVA’s performance management evaluates its performance against the proposed outcomes set for the department by Australian government. More precisely, the DVA evaluates its performances against outcomes and client service standards in terms of quality, quantity, and other indicators. It also needs to assess the objectives frequently relating to key result areas including risk management, partnerships, business performance, and staff commitment. The DVA’s annual report states that it replaced the Balanced Scorecard approach with “a more succinct and focused one DVA Report Card” during the period 2005-06. It is also stated that “this is the Department’s primary performance management tool, providing concise financial, operational and strategic information that allows senior management to monitor and oversee DVA activity and plan future directions” (Annual Report 2005-06). The Balanced Scorecard model could not effectively meet the complex operational requirement of the DVA and hence it was replaced. A Business Report Card is extremely useful to begin doing activities that would enhance the firm’s growth and stop doing activities that may stunt the organizational growth. Unlike the Balance Scorecard framework, the Report Card approach would help a company to compare itself with high-growth organizations. Conclusion In total, Balanced Scorecard method is not fully applicable in the modern complex business environment as this model involves many limitations. Issues associated with cause and effect relations are the major limitations of a Balanced Scorecard model. In addition, it does not give emphasis to external environment, third party stakeholders, and competitors. The paper also described a number of misconceptions about strategic performance management. Among them, the major one is that a strategy does not need to be revised once it is implemented. In order to overcome the limitations associated with the Balanced Scorecard model, a number of other approaches such as Performance Prism and process analysis have been developed. The Department of Veterans’ Affairs is an example where the Balanced Scorecard approach was replaced with Business Reporting Card model as the former failed to meet the department’s expectations. References Annual Report 2005-06. The Department of Veterans’ Affairs (DVA). Retrieved from http://www.dva.gov.au/aboutDVA/publications/corporate/annualreport/Documents/annual_report.pdf Kaplan, R. S & Norton, D. P. (2001). The strategy-focused organization: How balanced scorecard companies thrive in the new business environment. Boston, MA: Harvard Business Press. Norreklit, H. (2000). The balance on the balanced scorecard—A critical analysis of some of its assumptions. Management Accounting Research, 11, 65-88. Rillo, M. (2004). Limitations of Balance Scorecards. University of Tartu. College of Parnu. 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