Balance Score Card and Its Major Features
HA2011 Managerial Accounting
The measurement of performance of the organization is one of the most difficult and important tasks of management team. While there are many performance measurement tools available, it is necessary to use the tool that targets all the aspects of the organization and aligns with the dynamic and competitive outside environment. Balance Score Card (BSC) is the performance measurement tool which uses the four perspectives to evaluate the performance of the organization. The system is very flexible and can be adopted by any organization. The report discusses the BSC and its key features. The report also discusses why BSC is better than other traditional performance measurement tools. It reflects the suitability of the BSC for the measurement of performance of Simplify Kitchen Ltd.
Balance Score Card – Effective tool for Performance Management
The business under review for implementation of the Balance Score Card as the performance management system is ‘Simplify Kitchen Ltd.’. The business is the manufacturer and retailer of kitchen supporting electronic goods. The products include the electric mixer, grinder, copper, microwave, oven, fryer, etc. The business has its own retail shops all across the country and even supplies the products to other retailers. Though the demand of the automatic kitchen products is increasing it is observed that the sales and revenues of the business are declining. Increasing competition is of course one of the reasons of the decline, but it is observed that the company is losing its market share gradually. The cost of products is competitive to other products and so should not be the reason for decrease in sales.
The company measures the performance on the financial basis only and uses revenues, profits, sales volume and net earnings per share as their performance measurement tools. It is a well known fact that the financial measures are not enough to measure the performance of the company in this dynamic and competitive world and thus the firm needs more comprehensive performance measurement tool to improve its performance and sustain. The use of BSC as a tool to measure the performance of the organization is being evaluated in the report.
Introduction to Balance Score Card
Balance Score Card is the modern strategic planning and managing system. The system gives the management a perspective to look at the company as a whole. The system provides the higher management clarity in the strategic goals that are to be achieved by the company and helps them in identifying the key performance indicators (KPIs) to achieve the strategic goals. BSC was first developed by Dr. Robert Kaplan and Dr. David Norton as a means to measure the performance of the organization with the help of balanced set of performances.
Presently BSC is used by large number of organization all across the world to measure the performance of the organization. The system helps in management by using the problem solving approach towards the performance issues of the organization. The steps involved in the approach are:
- Identify the goals that the organization wants to achieve
- Align the operations towards achieving those goals
- Prioritize the processes, activities and services which are important to achieve the goals and
- Measure the progress towards achieving the strategic goals and targets from time to time
In this way the BSC system helps in connecting the various subsystems of the organization towards the overall organizational goals. This way the organization is able to clearly identify and understand the following objectives:
- Mission of the firm – the purpose
- Vision- where to reach
- Core values – what to concentrate upon as the basic belief
- Strategic areas – the themes to be followed
- Operational elements – the objectives of the activities
- Measures – identify the key indicators to measure the strategic performance
- Targets – sets the level of performance desired to achieve
- Initiatives – the projects and actions that should be taken to achieve the targets
The connection between the various aspects of the firm can be diagrammatically represented as follows:
Since the BSC lays down the connections between the strategic goals and the means to achieve them, it is suitable for all the business, industries, government organizations and even nonprofit organizations. The system breaks down the high-level strategies into small measurable activities. The studies show that BSC is among the top ten management tools used by the organizations around the world (balancescoreacrd.org).
Key Features of BSC
The BSC system views the organization and its progress in terms of four major perspectives. The objectives and performance indicators revolve around theses four perspectives. Each of the four perfectives focuses a different side of the organization and thus balances all the aspects for sustainable performance. These four perspectives are:
- Financial Perspective – the perspective considers the financial performance of the organization. The measures in this perspective show if the overall company strategy is contributing to the bottom line in the income statement. In cannot be denied that in order to survive and sustain the firm needs cash flows and profits in the income statements (Kaplan, R & Norton, D., 1992). The objective of every business is to earn profit and if it is a nonprofit organization still it needs to make money in order to pay salaries to its staff and management and expand its operations. The shareholders, management, employees all want to invest in and work with profitable organizations as they provide them with good returns. Thus financial perspective remains the main perspective in measuring the performance of the organization.
- Customer/Stakeholder Perspective - this perspective views the performance of the organization from the stakeholders and customer views. Focus on customers and stakeholders are an important part of the mission of the organization in order to deliver overall value. This perspective requires that the management considers it important to fulfill the needs and requirements of the customers and stakeholders of the firm. The major concerns of the customers are timeliness of the service, quality, service and cost (balancescorecard.org). It can be understood from the case that even if a company is providing low cost products to the customers, they will not be preferred in the market unless to fulfill the needs of the customers. On the other side if the products/services fulfill the needs of the customers, they will be willing to shell out some extra bucks to procure them. Similarly customers prefer to buy some goods over others due to the good after sales services provided by the companies. Thus the organization should consider all these measures to gauge their performance form the customers’ perspective.
- Internal Process Perspective: this perspective looks at the business processes and sees how smoothly the business is running. Improving the efficiency of the business by reducing the idle time, waste and doing more value adding activities in the supply chain is the main objective of this perspective. Adapting to the changes and having operating flexibility is the core principle behind this perspective. Thus it is important that the management keeps it focus on the critical internal operations which are necessary to provide goods/services to the customers according to their needs and improves the profitability of the firm (Kaplan, R & Norton, D., 1992). The perspective helps the organization in identifying its core competencies and helps in identifying the important technologies that are required to maintain the leadership. Thus the company needs to identify the process and competencies that want to excel in and select the performance measures to gauge the progress in the area.
- Learning & Growth/Innovation Perspective – The targets for success are changing in competitive environment and hence the firms need to make continuous improvements to their existing processes in light of changes in the environment. Thus the company must be ready and eager to introduce new services/products and use new technologies for the existing products of the firms. Global competition requires continuous improvements and changes into the products and services provided by the firm. The employees of the firm must be having the knowledge and technology to the latest developments. In the innovative world and continuous developments era, technology drives the growth and progress of the firm. Thus learning and growth in internal processes of the firm is of paramount importance (balancedscorecards.com). It requires that the firm must be aware of the trends and technology in the industry. The customer satisfaction and the profitability can be ensured when the operating process of the firm are equipped with latest up gradations and the employees are imparted required skill and knowledge. The ability to adapt to the latest technologies and introduce them in the internal process adds the value to the company keeps it equipped for new markets and challenges in the existing markets (Kaplan, R & Norton, D., 1992). The biggest example of the learning and growth as a necessity is the mobile phones manufacturing industry. With the introduction of Android software and smart technologies the mobile phone manufacturers adapted to the latest technologies and came up smart phones. The companies which incorporate latest technological changes reap the benefits of the higher sales in the market. Samsung and Apple being the leaders are able to sustain the changing technological environments. While Nokia and Motorola lacked quick adaptations to the new technology and hence are left behind in market share.
Thus the four perspectives of the BSC are designed to cover all the organizational activities both internally and externally. The strategy once formulated is then translated into specific objectives which can be classified into the above four perspectives. Some common measures to monitor the performance and success of an organization under the four perspectives can be summarized as follows (Mackay, A., 2004):
Table: Examples of some Objectives and Measures under each perspective
|Learning & Growth||Internal Business Processes|
|‘To value our staff’||Employee Retention Index||‘To continually challenge competitor products in the market place’||Time to Market for Next Generation of Products|
|‘To maximize productivity’||Output per Head||‘To compete on product reliability’||Production Defect Rates|
|‘To develop a skilled workforce’||Number of Training Hours Completed Per Head||‘To compete on competitive logistics capabilities’||Stock Replenishment Cycle Times|
|‘To provide internal information||Information Availability Survey Index||‘To compete on product delivery channel mix’||Volumes of Transactions Conducted Through Each of Our Delivery Channels|
|‘To create organizational alignment’||Peer Evaluation Measures Within / Between Teams||‘To capture a unique supply Chain’||Percentage of Supplier’s Revenue Dependent on Us|
|‘To cultivate a core competence in …’||Skill and Technology Measures Related to Desired Competence||‘To reinvent our value Creation System’||Benchmarking Index for Supplier of Outsourced Activities|
|‘To achieve a higher return on investment’||ROI, ROCE||‘To dominate our major markets’||Market Share|
|‘To see significant revenue from our new product launch’||Revenue Growth on Selected product Lines||‘To delight our targeted Customers||Customer Satisfaction Survey Results|
|‘To maximize profitability per transaction’||Unit Costs||‘To increase revenue through repeat purchases’||Customer Retention Over Time|
|‘To minimize our cost of obtaining funds’||Credit Rating||‘To grow our business in a selected target group’||Customer Acquisition From Target Group|
|‘To delight our shareholders’||Value Added Measures||‘To add margin through image or fashion’||Marketing Spend as a Percentage of Sales|
|‘To improve our cash flow’||Creditor Days||‘To build customer recognition’||Corporate Image or Brand Awareness Polls|
Source: (Mackay, A., 2004)
Difference between BSC and Traditional Performance Measurement Systems
The success of the BSC lies in its ability to consider all the aspects of an organization and not just targeting few areas as was in the traditional performance measurement systems.
The traditional performance measurement systems were concerned mostly with the financial performance of the organization. The sole measurement criteria for the performance of the organization were the financial measures like the profitability, revenue , cash flows, earnings per share, Return on assets, etc (Suvarna, V., 2012). However, the dynamic environment and global competition requires the organization to improve their performance management systems to look beyond the financial measures. The traditional performance measures took into account the financial cost and revenues of the past periods and used them to forecast the future performance of the organizations. These indicators are referred to as the lag indicators. The measurement of performance on the basis of lag indicators is not reliable and does not assure of the future success and performance of the organization. The financial performance is not suitable for measuring the performance of the organization in the modern times because of the changing focus of the stakeholders and the change in the external environment. The new economy is more complex and just the financial reports are not indicative of the true shareholders value. The sustainable shareholders value depends upon a number of non-financial factors such as the loyalty of customers, the satisfaction of employees, the use of latest technologies in the operations and internal processes and the ability of the organization to innovate (Striteska & Spickova, 2012).
Thus the new performance management system should be able to incorporate the changing objectives of the business, should consider non-financial factors as well as key success factors, should identify with the strategy of the business, should be based upon the objectives of the organization, should be flexible, cover all the sides of the business and should link the performance to the reward system (Striteska & Spickova, 2012).
Balance Score Card (BSC) as developed by Kaplan and Norton, considers all the levels in the organization. It is a better performance management system because it is not dependent only on the financial measures. The BSC is not only the measurement system but also helps in strategic management and is an effective communication tool (Striteska & Spickova, 2012). Another nig strength of the BSC is its ability to adapt to different organizations and to different environment. The system contains a set of inert-linked steps to be followed by the organization while designing the performance management system. The system does provide table of some important measurement indicators, but they are very flexible and can be easily modified by linking them to the objectives and goals of the organization (Macay, A., 2004).
Suitability of BSC to Business
BSC can be implemented for any business because of the flexibility it offers. It can be effectively implemented for the Simplify Kitchen Ltd. as well. The first step in implementing the BSC is the development of the business strategy. The operational objectives and measuring criterion can then be linked with the strategy. The organization needs commitment from all the management levels towards the BSC approach. The objectives and the measurement criterions, the KPIs (Key Performance Indicators) are very important and needs to be identified in consultation with the operations head and the field management personnel. The KPIs identified by the management should be SMART indicators – specific, measurable, achievable, relevant and time bound. Framing the BSC is one of the most important tasks because it the KPIs identified are not correct and not aligned with the strategy of the company the whole system might fail. The BSC team needs to target each perspective and quadrant at a time and identify the KPIs . The organization can also use the cascading BSC for each level of management with their individual and departmental strategies. However, it is necessary that the departmental strategies are aligned to the over organizational goals. The basic questions that should be answered while identifying the KPI can be summarized as follows:
i. What does out customers expect from us? (Customer perspective)
- As cost leaders, quality products, good after sales service, latest technological products, etc
ii. What should be out core competence? (Internal perspective)
- Reducing cost of products, develop new products, etc
iii. Should we improve or innovate? (Innovation and learning perspective)
- Use new technologies to add value to existing products, innovate new products, etc
iv. What are shareholders think about us? (Financial perspective)
- Provide high dividends initially by limiting the growth, retain earnings for expansion, etc
It is important that the KPIs identified in the all the four perspectives must be aligned towards the organizational strategy and should not contradict with each other. Communication of the KPIs and sharing of the balance score card across the management is also very important part of implementing the system. The lack of communication might lead to confusion and lead to different KPIs being followed by different levels of management or departments. The Simplify Kitchen Ltd management team can use the below template once it identifies its organizational strategy.
The Balanced Scorecard Links Performance Measures with each other and with the goals and mission of the organization. Thus the system is helpful in aligning the various actions of the organization towards achieving the single goal. By identifying the KPIs the BSC also helps in reducing the load of information on the lower management and file workers by limiting the performance measures n which they are to be evaluated. It is most of the time to many performance measures that confuse the employees on which to concentrate upon. It is rare that the companies have too few measures. The BSC can be upgraded for deleting of existing measures and adding new measures according to the changing environment and competition. The Balance score card motivates the employees by targeting on the few measures which are very critical.