The Balance Scorecard Tool - Essay Example

? A brief essay about a sustainability framework or tool Contents Balance Scorecard 3 Strengths and Limitations of Balance Scorecard 4 Strengths 5 Limitations 6 Recommendations 7 References 9 Balance Scorecard The Balance Scorecard is a framework or tool for measurement of sustainability of an organization which acts as a decision support system for the management for taking necessary action in order achieve sustainability of business operations in the long run. In order to maintain sustainability of business, it requires constant monitoring of business operation which needs to be measured and quantified as per certain parameters that are preset. The various perspectives, with the help of which the performance of an organization are measured are namely financial perspective, customer’s perspective, internal perspective and learning perspective (Niven, 2005, p.49). The performance in these internal and external areas supported by proper funding and training of human capital are essential for sustainable growth of business of a company. Each perspective of growth of the company is assigned a metric and a target value against which the performance of the company is measured. The financial objectives of the company are growth of revenue, growth of operating profits and solvency of the company in short term as well as long term (Olve and Sjostrand, 2006, p.43). The fulfilment of these objectives is essential in order to achieve sustainability in business operations. The revenue growth is measured by an annual rate of growth and a target value is assigned against which the actual growth rate is measured. The growth of operating profits is measured by the amount of earnings before interest and tax as a percentage of sales. The metric for short term solvency is the current ratio and for long term solvency is the long term debt-equity ratio. The actual performance of the companies in any industry is measured against these metrics and the achievement of these metrics against the target values. The performance on sustainability of the company from customer’s perspective is measured by the average transaction size of customers, annual rate of increase in customer base and percentage reduction of customer complaints. The measurement of the company’s performance against the target values of these metrics supports the decision making process of the management. The internal performance of the company is measured by evaluating the performance to fulfil the objectives of product innovation, quality of service, sustenance of domestic market share, etc. These are measured by the metrics namely, the percentage of expenses for research and development with respect to the revenues earned, average turnaround time, percentage of market share, etc (Kaplan and Norton, 1996, p.79). The actual performance of the company against the target value of these metrics helps the management to take decision to attain sustainability of the organization. The final perspective is the learning perspective which helps the companies in any industry to retain their employees and train them for sustainable operations and development. The learning performance of the companies could be measured with the help of metrics like employee turnover, annual hours of training of the employees and average compensation. The comparison of actual values of these metrics against the target values helps the business to take decisions on sustainability (Blokdijk, 2008, p.88). The Balance Scorecard provides insight to the management on the different areas of business management and also allows them to take necessary steps for ensuring sustainability of business. Strengths and Limitations of Balance Scorecard The balanced scorecard is an important strategic performance measurement tool and semi-standard structured report that helps the managers to keep track of several activities executed by the staffs. In addition, this tool effectively monitors the consequences arising from several organizational actions. This part of the essay will determine several strengths and limitations of balance scorecard sustainability tool. Strengths Balance scorecard is one of the key performance measurement tools or models. Traditional performance measurement model focuses on external accounting information and data. It is obsolete. Organizations can avail several long rows of benefits or the advantages by the implementation of balance scorecard tool. First of all, balance scorecard helps an organization to generate unexpected and creative ideas that can enhance the business operation of an organization. Balance score card is a significant strategic initiative that helps an organization to follow best practices methodologies which are cascade through entire organization (White, 2009, p.20). This strategic performance measurement tool helps to align key and significant performance measures with strategy at all the particular levels of entire organization. This performance measurement framework helps the management of an organization to provide comprehensive overview or picture of entire business operations (Brebbia and Beriatos, 2011, p.530). The management of an organization can effectively understand business objectives and goals through the implementation of balance scorecard in business operation process. The methodology facilitates effective communication at all the levels of entire organization. Effective communication within the organization enhances significant team cooperation. All the team members used to help their subordinates in order to gain successive output or result. This performance measurement framework helps an organization to maintain sustainability in business process. Moreover, it brings stability in financial measurement process. The management of an organization transforms their strategy into desired actions and behaviours through the implementation of balance scorecard in performance measurement process. The concept of balance scorecard expertly provides strategic learning and feedback that helps to maintain the transparency and sustainability (Thorn, Kraus and Parker, 2011, pp.1-10). Management can develop a strong cross organizational team that helps to propose more open communication channels. People within the organization become enthusiastic towards hard work and positive performance level. This balance scorecard tool can measure the initiatives effectively and evaluate those initiatives or actions based on the industry standards. Effective implementation of balance scorecard model can reduce the threat of gigantic amount of information’s expose. Last but not the least; organizations can avail several unique and potential competitive advantages through the implementation of balance scorecard model. It reduces operational time frame. It improves business and decision making process. Moreover, balance scorecard framework helps the management of an organization to provide better solution to the problems and challenges comparing to other performance measurement frameworks. Limitations It is true that implementation of balanced scorecard framework enhances the performance measurement process of an organization, but several limitations of this tool can affect the process of measurement. These limitations are described below. Balance scorecard model generally neglects the time dimension aspect. It does not integrate the time dimension with the cause effect relationship. Therefore, lack of explanation of time can affect the performance measurement process. Moreover, this balance scorecard approach does not integrate top level measurement with the operation level measurement. This lack of integration can generate strategic challenges (Cuthbertson, 2011, p.75). The absence of this integration process can limit the use of balance scorecard tool from the higher level of an organization. It can develop several communication problems within all the levels of an entire organization. Ultimately, this can affect the business output and stability of the firm. Several organizations use traditional balance scorecard tools and models in order to reduce the business operation cost. This traditional model is quite ineffective to the corporate sustainability (Clegg, 2011, p.23). Balance scorecard generally focuses on internal aspects of an organization. It is quite important for the organizations to keep track the movements of competitors. Lack of externally focus ability cannot help an organization to understand about the nature of competition within the similar industry (Chai, 2009, p.134). In addition, this balance scorecard framework does not consider the enlarged value chain in which the contribution of suppliers and employees are featured. It is quite important for the firms to mention and review the contribution of all the individuals related with the organization. Lack of validation of this balance scorecard tool or framework can overlook several critical measurements that can affect performance measurement process. Recommendations The Balance Scorecard is recommended for usage by the companies especially in the manufacturing and services industries. The Balance Scorecard is mainly helpful as a decision support system for the manufacturing companies as it provides a constant overview of the achievements of the company from financial perspective. The management could also look to allocate funds for operational areas in which the company seeks development with an eye towards sustainability (Bourne and Bourne, 2007, p.37). It is also recommended for the companies in the services sector to use the Balance Scorecard as the management would be able to track the fulfilment of customer perspectives in terms of quality of service and reduction of complaints. The learning perspective is recommended for use of all companies irrespective of any industry. Looking at the overall framework of Balance Scorecard, it is recommended to measure the actual performance of the companies with respect to time. The measurement of time adjusted business performance against the designed metrics would provide the management important information that is crucial for a particular period of time. Inclusion of time aspect in the Balance Scorecard would add relevance to the measured business performance aimed at taking decision on sustainability. Another recommendation for updating the Balance Score Card would be assessment of the business performance in the competitive scenario (Kammerer, 2009, p.56). The emerging threats from the new entrants, substitute products, competition among the market players, bargaining power of the suppliers and consumers should be included in the overall assessment of the business performance that is aimed at achieving sustainability. References Blokdijk, G. 2008. Balanced Scorecard 100 Success Secrets. Lulu.com; USA. Bourne, M. and Bourne, P. 2007. Balanced Scorecard. Hodder Arnold; USA. Brebbia, C., and Beriatos, E., 2011. Sustainable Development and Planning. New York: WIT Press. Chai, N., 2009. Sustainability Performance Evaluation System. New York: Springer. Chuthbertson, R., 2011. Sustainable Supply Chain Management. New York: Springer. Clegg, B., 2011. Sustainable Businesses. New Jersey: Pearson. Kammerer, M. 2009. The Balanced Scorecard - Advantages and Disadvantages. GRIN Verlag; Germany. KAPLAN, R. and NORTON, D. 1996. The Balanced Scorecard: Translating Strategy Into Action. Harvard Business Press; USA. Niven, P. R. 2005. Balanced Scorecard Diagnostics: Maintaining Maximum Performance. John Wiley & Sons; New Jersey. Olve, N. and Sjostrand, A. 2006. Balanced Scorecard. Wiley; USA. Thorn, M. J., Kraus, J. L., & Parker, D. R., 2011. Life-cycle assessment as a sustainability management tool: Strengths, weaknesses, and other considerations. Environmental Quality Management, 20(3), pp.1-10. White, G., 2009. Sustainability Reporting. New York: Business Expert Press. Read More