Kaplan and Norton's Balanced Scorecard - Case Study Example

Balanced Scorecard

Kaplan and Norton’s Balanced Scorecard

The balanced scorecard is an approach to strategic business management that has been applied extensively in various industries, non-profit organizations, and businesses as well as in public administration. The primary purpose of the scorecard is to align the day-to-day activities of the organization with its strategy and vision. It is also crucial in the improvement of communication, both internal and external, and evaluate the performance of the organization against the goals.

Use of a Performance Measurement System

The balanced scorecard emerged as a performance measurement framework which integrated non-financial measures into the initial financial metrics. As a result, managers had a more balanced view of performance that placed value on all aspects of the organization rather than the financials only (Hoque, 2014, 5). Over the years, the balanced scorecard has evolved from the initial measure to become a complete strategic planning and management strategy that turns the organization’s strategic plan into actionable activities. The balanced scorecard does not only identify the necessary approaches but also acknowledges their measurement strategies.

Besides the integration of the objectives and targets of an organization, the balanced scorecard also identifies the measures and initiatives for the achievement of such targets and objectives. Business objectives should have associated measures, which can simply illustrate the degree to which the organization has achieved them; it forms a segment of the general organizational vision considering that it is multi-faceted. In such a context, reporting should be used to compare the performance of the organization in a particular period with the values of the target, which are normally long-term. As rewarding is complementary to evaluation and productivity, the reward system should be connected to the scorecard measures for the individual employee as described by (Drury, 2013, 610)

As an illustration, the organizational executives should begin by identifying the specific goals, such as those associated with financials. Besides the general measure of the financial performance of the organization, such as the return on investment (ROI), they should also develop measurements of the individual employees, which can be run on shorter periods. In this case the employees can be asked to respond on the number of new clients he/she has met and the number of products designed, which can form the basis reward and appraisal.

Assumptions

There are various assumptions that managers and users of the balanced scorecard must be aware of in a bid to leverage the accrued benefits. One of the assumptions that is critically discussed by Norreklit (2000, 70) is the cause and effect relationships chain facilitated by the model. As pointed out earlier, the balanced scorecard aligns or simply connects the organization’s vision, values, goals, and objectives with the daily operational activities, which has to the linked through the cause and effect relationships to ensure success. For instance, organizational management should strive to draw links to the objectives, which can begin with the capacitation of employees, and integration of information technology that result in proper flow of the internal business strategies. On the other hand, better internal business flow would deliver better value to the customers that would facilitate higher customer confidence and satisfaction. Higher customer satisfaction levels would definitely lead to a higher customer base and more revenues, which would increase the shareholder value.

The second assumption emerging from the analysis developed by Norreklit (2000, 71) is the link between the perspectives of the balanced scorecard model and time. The balanced scorecard, which has four perspectives, is designed to drive the activities of an organization through the indicators. For example, some perspectives focus more on the organization’s past performance, such as the financials; they may be termed as historical or ragging indicators. On the other hand, other performance indicators focus on the future and the desired position, such as innovation, which are better known as leading indicators. It is important to note that there are the perspectives that focus more on the current issues such as the prevailing needs of the customers, and the business processes or operations.

As noted by Kaplan and Norton, there was the need to transform the scorecard from a performance measurement to strategic management approach (Kaplan & Norton, 2008, 68). In this regard, the third assumption by Norreklit (2000, 77) is the possible use of the balanced scorecard as a strategic management tool. The balanced scorecard is useful in linking the long-term organizational vision and the short-term strategies, which are in turn changed into actionable day-to-day activities that guide in the achievement of the short-term goals. As an implication, it can be defined as a strategic management tool that facilitates planning and implementation activities.

The Four Perspectives

Kaplan and Norton (1996, 76) identify four perspectives of the balanced scorecard, which translates into the processes of a business. As argues in the limitation of the balanced scorecard, the balanced scorecard operates under the cause and effect relationship concept and, as a result, it links different aspects of organizational management and the organization itself. The four perspectives of the balanced scorecard framework include the financials, customer, and internal processes as well as learning and growth.

The financial performance measures applied by the balanced scorecard include the ROI and the net income. The financial measures provide a platform for the comparison of the performance of the individual organization over a period of time as well as with other organizations. The financial perspective is crucial to the stakeholders, especially the shareholders and funders as they show if the organization is making profits or spending its financial allocations wisely. Financial measures mainly provide information about the past and can serve as an incentive for better future performance.

The customer perspective of the scorecard represents or focuses on the organizational objectives that seek to address the needs of the clients and the market. One of the objectives that exist within this perspective is market segmentation, which applies with for-profit organizations. For instance, to ensure that the company achieves market growth, which can be measured by number of clients in every operational region, it is important that it fully understands the dynamics in demographics. In this case, a car manufacturer must understand the income level of the population.

The internal process perspective mainly focuses on the internal goals and objectives. Perspective relates the demands of the customers with the key processes required to satisfy such needs. The perspective covers the day-to-day activities of the organization and their relationship with the goals (Kaplan & Norton, 2008, 70). The performance of the employees falls under the internal process perspectives where the management should consider the best approaches to the optimization of performance. For example, it may be crucial that the organization buys machines and trains the employees to enable them increase production from 500 units to 1000 units every day.

According to Drury (2013, 606), it is important that an organization continues to learn in an effort to sustain its growth. The learning and growth perspective of the balanced scorecard encompasses such drivers of an organizational future. The perspective sees the importance in improvement of an organization’s capacity, which is integral in the achievement of its long-term goals. There are three capital components of the perspective that include human, information, and organizational, which represents the need for skills, technology infrastructure, and competitive organizational culture respectively.

Strengths and Weaknesses of the Balanced Scorecard

Drury (2013, 612) identifies four strengths of the balanced scorecard theory. First, the balanced scorecard identifies and harmonizes four distinct perspectives of performance that have a relationship with the organization’s competitiveness. Through the use of the balanced scorecard, businesses can become more result oriented, improve the quality to stakeholders, and manage the long-term goals effectively (Hoque, 2014, 4). Second, the scorecard provides a platform for the translation of the strategic goals into actionable operations besides developing the performance measures. Third, the balanced scorecard brings together all the relevant performance measures for business executives, which facilitates uniform assessment and improvement. Finally, the scorecard interlinks the four perspectives, which provides a communication network for the activation and implementation of goals.

On the downside, the failure of the balanced scorecard to consider the input of other stakeholders such as suppliers may result in failure (Rompho, 2011, 39). When organizational management fail to go beyond the scorecard to evaluate the organization’s performance, some crucial details such as the compliance of the organization with the requirements of authorities may be overlooked. The balanced scorecard does not emphasize on some of the crucial aspects of the organization such as the human resources even as they are mentioned by the internal processes perspective. It is common that organizations spend too much time in the formulation of performance indicators under the balanced scorecard than the time spent in proper definition of the strategies, which yields performance indicators without corresponding well-articulated strategies (Hoque & James, 2000, 1).

Case Study: BAE Systems Scorecard

BAE Systems is a multinational aerospace and security company that has headquarters in London, United Kingdom. The company has a scorecard system that is used in the evaluation of performance, which like the balanced scorecard developed by the Kaplan and Norton, represents an evolution in the measurement of performance. The company identifies the performance measurement system as the Business Values Scorecard (BVS). Like the balanced scorecard, the BVS incorporates both financial and non-financial measures due to the understanding that non-financial measures play a major role in the determination of performance. Ideally, the BVS represents a customized balanced scorecard.

Changes Prompting the Development of the BVS

There are several changes that resulted in the adoption of a performance measurement system, such as BVS at BAE. The most significant change was the need to expand of the company’s operations, which implies that the management had to be key in the setting the focus of BAE systems and develop the ways to measure their achievement. Some of the goals included the maximization of the value of its portfolio, exploitation of new growth opportunities, and consideration of further industry consolidation. For instance, there was the need to go beyond the national boundaries to exploit global markets such as The United States, Libya, and Kazakhstan (Jazayeri & Scapens, 2008, 54).

The drive to expand operations through three different focuses emerged from the internal and external pressure to become competitive. As noted by Jazayeri and Scapens (2008, 55), the fall of the Berlin wall resulted in the change in market dynamics such that there was more competition in the industry. As a consequence, BAE has to improve its position, especially through a change in culture, to ensure that it handles competition besides regaining its market share.

Management of the Cultural Change Project

According to Jazayeri and Scapens (2008, 57), a change in organizational culture is critical in the improvement of BAE’s competence. Its purpose was to focus the organization on the five values that included performance, customers, people, innovation, and partnerships. The CE at BAE was at the centre of the transition, which began with the identification of the strengths and weaknesses of the organization through the involvement of the employees. The CE then developed the “130 Group” that brought together the organization’s senior leadership; the group also included outsourced consultants.

The 130 Group had the primary role of assisting in the change project and creating the vision for change; the group used the five values to develop the vision. The group then developed progressive short-term goals considering that change takes time. The 130 Group was then separated according to the 5 values. Since each of the members of group was a senior manager of a business unit, it was possible for them to drive change in their jurisdictions. Finally, there was need to link the cultural change process with the organization’s performance in a way that enabled the key players to feel that they own the company’s competitiveness (Jazayeri & Scapens, 2008, 59).

Five Key Values in the Culture Change Project

The five key values include performance, people, customer, partnership, and innovation and technology. The performance is the key to winning in a way that the organization set goals to challenge performance. The organization value people not as an extension of machinery but as strength and managers of functionality. The customers are at the centre of all internal and external operations and the organization must strive to meet their expectations. The engagement of partners was crucial in ensuring long-term success. Finally, innovation and technology are crucial to ensure change.

Performance Measures in the BVS

One of the requirements applied in the determination of the measures to use in the BVS was the ability to measure and the frequency of measurement. For instance, the use of charts and colour-coding made it easy to record and report performance. It was also important that the measures were coherent in the sense that they bond the five values together rather than identifying them as separate components, which is contrary to the cause-and-effect relationship used by the BS. The measures were to ensure that the values were pursued simultaneously due to their interdependence in success (Jazayeri & Scapens, 2008, 62).

Success of BVS

One of the ways that indicated the success of the BVS was the ability to filter a change in culture within BAE. The major difference between the BVS and BS, which is another success factor is in the manner of implementation where employees in the BAE felt that they were more included in the change from the beginning. As pointed out earlier, BS does not place emphasis on the human resources, which is not the same case with BVS. On the other hand, BVS has the primary aim of integrating change within the organization while the BC is a tool to be used by members of the top management. It is also important to note that the BVS emphasizes on the coherence while BS operates under the cause-and-effect rule. Nonetheless, both BVS and BS emphasize on the need to measure the performance of an organization. In addition, they are both applicable as strategic management systems.

Conclusion

The need for firms to boost their competitiveness has prompted the increased focus on strategic management systems such as the BS and BVS. The balanced scorecard that had the primary aim of measuring performance evolved with the need to match particular goals with their measurement criteria. As a result, the BS guides the organization in the identification of short-term goals, which is similar with the BVS, and turn the goals in actionable day-to-day operations. It is then possible to evaluate performance in consideration of the goals. On the other than BAE largely emphasises on cultural change although its ultimate goal is the measurement of performance.

Reference List

Drury, C., 2013. AC302 Advanced Management Accounting. Cengage Learning.

Hoque, Z. and James, W., 2000. Linking Balanced Scorecard Measures to Size and Markets: Impact on Organizational Performance. Journal of Management Accounting Research, 12(1), pp.1-17.

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), pp.33-59.

Jazayeri, M. and Scapens, R., 2008. The Business Values Scorecard within BAE Systems: The evolution of a performance measurement system. The British Accounting Review, 40(1), pp.48-70.

Kaplan, R.S. and Norton, D.P., 1996. Using the balanced scorecard as a strategic management system.

Kaplan, R.S. and Norton, D.P., 2008. Mastering the management system. Harvard Business Review, 86(1), p.62.

Norreklit, H., 2000. The balance on the balanced scorecard a critical analysis of some of its assumptions. Management Accounting Research, 11(1), pp.65-88.

Rompho, N., 2011. Why the Balanced Scorecard Fails in SMEs: A Case Study. IJBM, 6(11).