Balanced Scorecard for the Chief Executive Officer - Case Study Example

[your teacher’s of the Table of Contents I. Design a Balanced Scorecard for the Chief Executive Officer (managing director) of Yunnan Lucky Air (35 marks) 3 A. Explanation to the Appendix 4 II. Critically evaluate the benefits and limitations of your Balanced Scorecard, citing relevant literature. Ensure that your arguments are relevant to Yunnan Lucky Air (65 marks) 5 A. Introduction 5 B. Benefits of balanced scorecard 5 i. BSC as a multidimensional assessment by means of the four perspectives 5 ii. BSC as a strategy map that defines the causality structure among these four perspectives 6 iii. BSC as a strategic measure of performance 7 iv. BSC as a tool to reduce agency cost, and align objectives of employees to those of the organisation 8 C. Limitations of balanced scorecard 9 i. BSC lacks basic guidelines are needed for selecting an enterprise’s performance measures to conform to the Balanced Scorecard format 9 ii. BSC lacks a time dimension to measure the lag between the causes and effects in the framework 9 iii. BSC does not incorporate the situational drivers of strategy 10 iv. BSC does not talk about external processes 11 D. Recommendation 11 I. Design a Balanced Scorecard for the Chief Executive Officer (managing director) of Yunnan Lucky Air (35 marks) A. Explanation to the Appendix Yunnan Lucky Airs low cost positioning is not enough to make it a profitable airline within the countrys industry over the longer term. In order for the companys operations to remain sustainable, it has to capitalise on future opportunities, and integrate both an outside-in and inside-out competitive advantage around it. The companys expansion strategy revolves around being the on-line travel leader by having a superior web-based e-commerce platform. This will enable the company to capture a larger share of the air travel market, in contrast to its old positioning of being a low-cost airline, but with limited offers as regards to routes. The balanced scorecard revolves around this strategy. In relation to growing the revenues, the shift of emphasis on traditional ticketing distribution will enable the company to cut on various items on its administrative overhead. This entails a shift in market strategy, mainly by re-positioning the Yunnan Lucky Air brand to becoming an on-line travel leader through its e-commerce business model. These changes are reflected on the perceptions as objectives about the brand and the website on the customers perspective, and would later transform into expectations of customers. In order to meet these expectations, various internal processes in line with the adoption of the e-commerce business model in terms of sales and distribution should be addressed. Lastly, learning and growth objectives are related to the changes in the companys HR policies because of the new organisational structure. Fulfiling these objectives tell about how the strategies will be carried out as soon as changes are enacted. II. Critically evaluate the benefits and limitations of your Balanced Scorecard, citing relevant literature. Ensure that your arguments are relevant to Yunnan Lucky Air (65 marks) A. Introduction The balanced scorecard has been widely accepted by the business community since its introduction by Norton and Kaplan in 1992 (Kaplan & Norton 1993). This paper aims to explore the benefits as well as the limitations of the framework in order to recommend the adoption of it to the business practices of the Chinese airline company, Yunnan Lucky Air. B. Benefits of balanced scorecard i. BSC as a multidimensional assessment by means of the four perspectives One major benefit of the balanced scorecard is that the framework provides a multidimensional assessment of the issues in line with a companys vision and strategy using the four perspectives (Dror 2008). In the case of Yunnan Lucky Air, for instance, setting an expansion strategy can be off-the-target if the objectives in line with the strategy are not coordinated by these four objectives. If the company chooses to expand with only regard to the customers and not its shareholders, an expansion strategy of continuing the low-cost positioning seems to be a good one. However, from the point of view of the shareholders, this is a losing strategy. Therefore, in order for the company to assess the strategy from different dimensions, the use of BSC provides a clear alignment of objectives with regard to the companys key stakeholders. Knowing that this positioning strategy is a losing one, the company is forced to look for a different sustainable positioning that will not only serve the customers but the shareholders interests as well. ii. BSC as a strategy map that defines the causality structure among these four perspectives According to Dror, a strategy map is a framework that connects the strategic objectives of a company in order to create value (2008, 585). After the company has crafted a vision, the objectives follow. However, integrating these objectives into one major goal which is to create value for the company in the form of pursuing profitable activities by focusing on the customer will be hard to achieve without an integrative framework. According to Budde, the essence of the balance scorecard is to “identify, communicate and implement the strategy within the firm (2007).” This is another benefit of BSC as a strategy map. In the case of Yunnan Lucky Air, like any other businesses, the end-result focuses on the maximising the value of the company, and the returns to its shareholders. However, in order to achieve this, the companys management has to look at non-financial activities that create value. In the airlines case, this means by providing customers superior service so that the company can build a larger customer base, which will provide the company a stream of cash flows in the future. In order to satisfy the consumers, various internal processes have to coordinated. In line with these three perspectives, objectives for future sustainability of operations are also incorporated in the form of objectives in the learning and growth within the company. As a strategy map, BSC lays down the interconnectivity of the four perspectives for a more coherent approach when the strategy is already implemented. iii. BSC as a strategic measure of performance Because of BSCs multidimensional approach, it has been regarded as a strategic measure of performance (Budde 2007). For quite some time, practitioners in the business world have been troubled by the lack of tools that can be used in order to measure the organisations performance (Kaplan & Norton 2007). Although performance evaluation on the basis of financial factors have traditionally been used, these do not really reflect the non-financial factors that have contributed to the financial success of the company. Therefore, in order to measure a companys performance on the strategic level, using BSC is much of a benefit. In Yunnan Lucky Air case, for example, while it has achieved profitability over the past few years, it does not tell about other strategic concerns of the company, which are reflected by the other three perspectives. This company can use BSC in order to assess its true performance on the strategic level. Aside from it, because BSC provides some way in order to compare targets against actual performance, managers and key people who hold the responsibilities in order to fulfil those targets can be rewarded as their performance is assessed. This is the advantage that BSC can provide to Yunnan Lucky Air. iv. BSC as a tool to reduce agency cost, and align objectives of employees to those of the organisation Agency cost has long been an issue among businesses. Because of conflict of interests between the employees and shareholders, agency cost is a serious concern by many practitioners in relation to fulfilment of strategy and reaching objectives. Yunnan Lucky Air can benefit from the BSC by using it to align the objectives of its employees to the objectives of the organisation and the shareholders (Liedtka, Church & Ray 2008). The airline company can also use the balanced scorecard in order to reward its managers when they perform according to the targets in the four perspectives (Liedtka, Church & Ray 2008). As a motivational tool, the company can better implement the changes, with the support of its employees now that their objectives are in line with those of the company and the shareholders. BSC can be used by the company to determine compensation and remuneration, tying it up to the performance according to the designated targets. In other companies, the BSC can be adapted in such a way that it becomes a personal balanced scorecard of an individual employee of Yunnan Lucky Air. This way, the employee will be encouraged by the company to choose which of her targets is most aligned in those of the companys. This alignment of objectives can result in higher employee satisfaction due to higher motivation (Kaplan & Norton 1996). C. Limitations of balanced scorecard i. BSC lacks basic guidelines are needed for selecting an enterprise’s performance measures to conform to the Balanced Scorecard format According to Dror, one limitation of BSC is that it is vague as regards the performance measures that firms can choose from in order to define and implement the strategy well (2008). Because there are no guidelines in which sort of performance measures a company should use, the balanced scorecard might produce not so balanced results when the company defines and implements its strategy (Sushil 2008). In the case of Yunnan Lucky Air, when formulating its balanced scorecard, it is hard to define which non-financial measures will really correspond to the financial success of the company. Although the cause and effect relationships between the variables are determined, a guideline of where to look and focus at may be necessary in order for a company to know that its on the right track in conforming to the Balanced Scorecard format. ii. BSC lacks a time dimension to measure the lag between the causes and effects in the framework Another significant criticism for the BSC framework is its lack of time dimension. The perspectives are designed in such a way that there are causative relationships between the variables, i.e. the financial success is a result of fulfiling the objectives on the customers perspective, while this success is dependent on the fulfilment of objectives in the internal processes perspective (Kaplan & Norton 1993). In the case of Yunnan Lucky Air, this is a serious consideration. Capturing the market share in an industry cannot be done in the span of one year. Even when the companys e-commerce platform has been properly set, a series of marketing communications campaign is needed in order for the company to communicate the new brand positioning. The expected financial success from the companys immediate activities in line with the customers perspective may not be achieved because of the time lag, and the balanced scorecard may not produced a balanced result. Brand building takes some time, in order for the company to establish itself in its new brand position. Therefore, this is also an important limitation of the BSC framework. iii. BSC does not incorporate the situational drivers of strategy According to Sushil, one limitation of the BSC is that it does not include the situational drivers of a strategy (2008). When formulating a strategy, one does not think about formulating a strategy proactively, but also reactively. In environment where there are a lot of forces that could impact a companys operations, the strategy has to also be reactive, or in response to those forces. In the case of Yunnan Lucky Air, the company operates within an industry where there are a lot of constraints and restraints. These forces include heavy government regulations and the monopoly of GDS which limits the companys prospects for expansion. In order to effectively implement the strategy, these forces have to be kept in mind as well. If government places heavier regulations, for example, by regulating the e-commerce activities in China, this force will definitely affect the companys targets and fulfilment of objectives. Therefore, iv. BSC does not talk about external processes Another criticism of BSC is that while it incorporates internal processes as a perspective in crafting its strategic initiatives and objectives, external processes, which are also some of the most crucial activities that a corporation should undertake as part of the strategy are not included in the framework. In Yunnan Lucky Airs case, for example certain external processes such as outsourcing of the e-commerce site, strategic alliances, or mergers in order to grow its fleet and capacity without violating the rules that have been set by the government (Sushil 2008). These are important external processes that should be integrated with the companys strategy. This is another limitation of BSC. D. Recommendation Despite the limitations of the balanced scorecard, the framework provides a lot of benefits which make it a good framework that the company can employ both as a strategy map and a measure of performance on the strategic level. The strategic initiatives that involve non-financial factors, but are crucial in achieving financial factors are also integrated by the BSC framework. However, Yunnan Lucky Air must only use the balanced scorecard as one of the major frameworks that it needs to use in strategic management. Criticisms that have been raised such as the situational drivers of strategy, lack of time dimensions and the external processes which are not incorporated in the analysis, are significant and are also important dimensions of strategy. This can be resolved by using other strategic management frameworks together with the BSC. But, all in all, employing the balanced score card in the airlines strategic planning and management is a must for the company in order to ensure its smooth transition and implementation of its new strategy. References BUDDE, JÖRG. 2007. "Performance Measure Congruity and the Balanced Scorecard." Journal of Accounting Research 45, no. 3: 515-539. Business Source Premier, EBSCOhost (accessed October 26, 2009). Dror, Shuki. 2008 June. "The Balanced Scorecard versus quality awards models as strategic frameworks." Total Quality Management 19, no. 6: 583-593. Business Source Premier, EBSCOhost (accessed October 26, 2009). Kaplan, Robert & David Norton. 1993 September-October. "Putting the Balanced Scorecard to Work." Harvard Business Review p. 134-147. Business Source Premier, EBSCOhost (accessed October 26, 2009). Kaplan, Robert & David Norton. 1996 Fall. "Linking the Balanced Scorecard to Strategy." California Management Review 39, no. 1: 53-79. Business Source Premier, EBSCOhost (accessed October 26, 2009). Kaplan, Robert & David Norton. 2007 July-August. "Using the Balanced Scorecard as a Strategic Management System." Harvard Business Review p. 150-161. Business Source Premier, EBSCOhost (accessed October 26, 2009). Liedtka, Stephen, Bryan Church & Manash Ray. 2008 November 2. "Performance Variability, Ambiguity, Intolerance, and Balanced Scorecard-Based Performance Assessments." Behavioural Research in Accounting 20, no. 2: 73-88. Business Source Premier, EBSCOhost (accessed October 26, 2009). Sushil. 2008. "How Balanced is Balanced Scorecard." Global Journal of Flexible Systems Management 9, no. 2 & 3: iii-iv. Business Source Premier, EBSCOhost (accessed October 26, 2009). Read More