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Balanced Score Card: Term Definition

Introduction

The balanced scorecard is a calculated planning tool and management system that is commonly used in business and industry, state corporations, and not for profit-making organizations universally to bring into line business transactions with the organizational visions and broad strategy. In the recent past, the balanced scorecard has proved instrumental as a means of enhancing internal and external communications and providing an organizational benchmark against its strategic goals and desired objectives. The main reason behind the creation of a balanced scorecard is to provide managers with performance measurement through which they could achieve a more balanced view of organizational performance. (Kaplan & Norton 1996).

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A balanced scorecard has progressed from its premature introductory stage as an effortless performance measurement outline to a complete strategic planning and management system. The “latest” balanced scorecard renovates an organization’s strategic plan from striking but inert manuscript into the stride for the organization daily. It provides a scaffold that not only provides performance measurements, but guides planners recognize what should be done and measured.

It allows executives to truly implement their strategies. The purpose of this paper, therefore, is to enhance the reader’s knowledge in understanding the concept of a balanced scorecard. Organizations are usually put into tough decision-making processes occasioned by the current prevailing unprecedented environmental dynamics. (Norreklit 2000)

Aligning an organization’s strategic goals with its visions is, therefore, a recipe for good performance. Measuring performance over time will provide an organization with a golden opportunity to make strategic comparisons that are likely to point out loopholes. Taking Inmold Technology Ltd as a case study, this paper presents a practical situation on how organizations can use balance score as a management planning tool. The current global business environment has become extremely volatile, characterized by strong global and international competition. Business organizations are increasingly becoming under pressure to achieve a competitive advantage so that sustainable performance can be established.

A balanced scorecard will provide a means of communication about the previous and past financial performance and open opportunities for executives to make necessary adjustments to the overall business strategy. (Banker 2004)

In-Mold Technology is a manufacturing firm that specializes in plastics. With over forty years of experience in the manufacturing sector, Inmold Technology is better placed to match into the competitive world, by choosing to adopt the use of a balanced score card as a strategic management planning tool. Mold Technology Inc. offers its customers an inclusive variety of plastics decorating processes that result in products with a greater fit and finish the distinctive character and factually explicit flexibility. Mold Technology also offers a complete suite of injection-molding services, making it a client’s last resort in meeting all plastic decoration and injection-molding needs. (Kaplan & Norton 1996).

The principles of the balanced scorecard (In Mold Technology)

Balance scorecard as a management tool operates on the four main perspective principles from which managers would view organization. These include; the learning and growth perspective, business process perspective, the customer perspective, and finally the financial perspective. This paper analyzes the whole organizational processes at In-Mold technology from the above-mentioned perspectives. (Norreklit 2000)

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Learning and growth perspective

This perspective emphasizes the importance of employees training and acquisition of corporate cultural attitudes related to both individual and corporate personal improvement. The essence of training in any workplace is to enhance performance. In the current business environment where technological advancement has become a management synonym, companies are under obligation to ensure that employees are better equipped to handle their professional and technical responsibilities without any problem. The sudden move from the industrial economy to a knowledge-based economy has meant that knowledge has become a tremendous priority in the business sector. (Rohm 2004)

Mold Technology is a manufacturing organization. Learning, therefore, becomes crucial in reshaping and molding employees’ skills and competencies. The manufacturing industry has become so competitive, firms are engaged in inter and intra competitive manufacturing activities. In order to gain a robust competitive edge, strategic training and learning systems and procedures should be put into place. The future of In-mold Technology is depended upon their employees’ knowledge. Peak performers’ organizations are characterized by aggressive training and learning systems. This is meant to provide their organizations with an adequate and proper knowledge database. (Papalexandris et al 2004)

According to Michael Porter, a renowned management scholar, gaining a competitive organization must be supported by a continuous learning process. This is the only way firms can achieve sustainable performance, especially in a very dynamic and volatile economic environment. Training, therefore, ensures that an organization is not left behind. In a rapidly changing environment, consumers change their tastes, and therefore to match the changing demands and preferences of clients, firms should diversify their training programs to incorporate the environmental needs. (Voelper, et al 2006)

The employee in service within the company i.e. knowledge and skills of the employees as well as the culture of interpersonal relationships the people associated with the organization the type of relations with our stakeholder’s customers, suppliers, investors, etc. and- in effect- access to their comprehension and skills, the organization’s structures to bond up the potential and capabilities of the organization and the knowledge of employees with the competence of the machinery / means of production, raw materials, communications procedures, and organizational structures, and the social resources installed by the organization e.g. the public education and awareness system, the Internet or the environment, which also symbolize prospects for the business. (Virginia, et al 2008)

The accounting significance of learning and growth perspective

High level of production

A learning organization ensures that its workforce is professionally and technically competent. When employees are competent they can achieve the production target or at times may surpass. When this happens the firm would have achieved production efficiency which is the prerequisite for competitive advantage. Since manufacturing comprises many important stages and processes, effectiveness and efficiency would ensure there are no unnecessary wastages. Achieving a high level of production would mean that In-mold technology would have adequate stock to effectively meet the market demand. This eliminates the possibility of stock outs and hence may boost sales both in the long and short run. (Voelper, etal 2006)

Innovation and inventive workforce

The current global world is competitively dynamic. Under this condition, an organization must be unique and creative enough to score in the environment. So that In-Mold technology achieves a competitive space, constant learning and training should form part and parcel of the company’s management process. Learning will ensure that an organization acquires new skills and techniques that can be used in product design, promotion, presentations, marketing, research, and development. Learning may also place In Mold Inc to acquire new communication and transport technologies that are more efficient and effective. In general, learning would ensure that In-Mold Technology makes great steps in the industry to strategically outsmart its rivals and hence high performance. (Papalexandris etal 2004)

The Business Process Perspective

This comprises internal business processes like communication, motivation, planning, coordination, procurement, and transport, marketing, advertising, and sales promotion. The idea is to establish metrics that enable managers to know how well their business is performing and to determine whether its products and services are in line with customers’ specifications and requirements. These internal processes can only be instituted by professionals who understand them well to much the business objectives. (Rohm 2004)

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Marketing Research

This refers to an organization’s fieldwork activity specifically intended to look into certain features about the existing and new products and services that customers want but are not currently provided. In-mold Technology can unleash market research to determine whether their products meet customers’ requirements. Using the feedback received from the activity, In-Mold will be able to know how well or bad their products are performing. Where there are underperformers, necessary steps would be taken as a corrective measure. (Papalexandris etal 2005)

Motivation

This is considered an important internal organizational practice. Motivation is directly related to employee performance. Mold Technology is an example of a manufacturing organization that occasionally suffers from serious employees unrests.

Motivation, therefore, has a direct consequence on the organization’s production level achieved at any given point. (Banker 2004) Motivated staffs are likely to lead to magnificent performance while employees who lack morale seem to have problems, destructive, and are performers’ inhibitors. A balanced scorecard will provide In Mold Technology with an opportunity to review its employee’s morale over time and make necessary changes where possible so the organization performs according to its budget. It is therefore an important tool for high motivation that consequently leads to high performance. (Norreklit 2000)

Communication

In a rapidly evolving economy business executives are constantly looking for effective mediums and channels of communication that would achieve the greatest customer convenience, inter-departmental coordination, planning, and external organizational responses. Only effective communication channels and techniques can achieve this. The information age organizations are technology-oriented and that, internal communication strategies should represent the environmental changes if effective performance results are to be achieved. In-mold Technology can use a balanced scorecard to institute a mechanism through which they can be able to detect whether their communication networks meet their business strategy. A factor supporting the connecting with the balanced scorecard is the specific notion of an organization’s strategy that can be the ensuing gain (Kaplan & Norton 1996).

The Client/customer perspective

Contemporary management practices have indicated a major shift to customer care and satisfaction. With increased environmental and competition pressures, attention to customers has become a threshold in-market success. According to Michael Porter in his competitive strategy i.e. The Five Force Module, customer buying behavior is determined by looking at the interrelationship between the firm and its customers. The more customers seem to exert control over a firm the more the industry remains competitive. However, customer satisfaction and care remain core in an organization’s bid to achieve a competitive edge. It defines the indefinable values which are required to elevate business actions and consumer relationships to a higher level (Kaplan &Norton 1996).

By adopting a balanced scorecard, In Mold Technology would be able to institute metrics through which they can use to measure customer satisfaction over time. Though it’s normally difficult to measure customer satisfaction, oral interviews, suggestion boxes, and customer frequency may be used. Comparisons can be made about the volume of sales recorded annually or monthly. The feedback can be used to determine whether the organization is meeting its client requirement or not. High customer satisfaction would lead to high sales revenue and hence good profit margins. This is the requirement of an adequate accounting system. (Kaplan,& Norton 1992)

The Financial Perspective

The financial perspective uses financial data to evaluate and compare the performance of an organization over a long period. Financial data become more important especially in the manufacturing industry where performance is based on the number of products produced and sold and the associated costs and revenues incurred and made respectively. Mold Technology can use its balance sheet, income statement, and cash flow statements to compare its performance over its different accounting periods. (Kaplan& Norton 2004)

The income statement

This is a financial statement that can be used to show an entity’s reported financial profits and costs incurred in any accounting period. The income statement also shows a gross profit for the period and any other income received from a source other than an entity’s normal operations. In Mold Technology can use the income statement to set a standard of performance for perhaps the next three to a five-year accounting period. If the net profit margin has been set at a value that is not less than 25% on an annual basis and can only increase or remain constant, the responsibility of the managers would be to work tirelessly to ensure that no deviation is experienced. Based on the standard ratios set, In Mold Technology can compare this performance consistently to determine whether the planned budget is achievable or not. Where there is underperformance, a prompt response is made. (Banker 2004)

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Balance sheet

The balance sheet is a financial statement that shows a financial position of an entity at any specified period. A balance sheet would show the shareholder’s worth, assets, and liabilities of an organization at the end of every financial year. Managers of In Mold Technology can use the balance sheet to compare their financial performance over time of for instance five to ten years. The feedback can be mapped on the organization’s overall strategy to show whether it is inline or not. From the balance sheet, it’s possible to compute the basic accounting ratios like liquidity, gearing/leverage, and profitability. (Dinesh, & Palmer 1998)

Financial and accounting managers would then interpret and discuss the ratios. Liquidity ratios would suggest that In-Mold is in a better position to meet its short-term obligations like paying staff salaries, the frequent and regular purchase of raw materials, plant and machinery maintenance, rentals, etc. Profitability ratios would reveal that a firm can be able to sustain long-term operations now and in the future. High gearing ratios are dangerous in that In-Mold Technology may not be able to meet its loan requirement and that it’s either borrowing more than it can pay or is just inefficient. (Kaplan & Norton 2004)

These ratios can be standardized for previous, present, and future comparison and consistency. Where there is a deviation then a corrective measure is taken immediately to achieve good performance. This is the essence of the financial perspective. Although the financial perspective is instrumental, different scholars have expressed their dissatisfaction regarding its weaknesses. Most experts argue that it relies heavily on the use of traditional financial accounting and therefore fails to incorporate the current business challenges. (Douglas & Hubbard 2007)

The congruence of Balance Score Card

Aligning performance measurement with an organization’s missions, visions and objectives will ensure there is complete compatibility. This requires a strategy that is used as a mapping and communication tool on how an organization achieves great value through the entire process. Based on the three perspectives, learning and growth enable managers to improve an organization’s internal process perspective and objectives, which in turn allow a framework for achieving desired outcomes in the client and financial perspectives. (Charles, Frederick, & Peter Economy 2007)

Conclusion

A balanced scorecard presents managers with typical fundamental scenarios in which they can be able to ask themselves where things go wrong why and when. However many executives assume that effective development of a scorecard would imply an automatic impressive performance, managers need to ask themselves strategic questions as to what and how should the scorecard function effectively. Successful implementation of the program should be supported by robust performance management software with unquestioned capability to deliver desired performance information to the targeted group at the required time.

Since organizations are operating in an era of technological advancement, successful implementation of the scorecard therefore is aided by automation. This can ensure that the program attains structure and discipline in its entire life cycle.

List of references

Banker, DR 2004, A balanced scorecard analysis of performance metrics. European Journal of Operational Research, vol.154, no.2, pp.423-436.

Charles H, Frederick B, & Peter Economy 2007, “Balanced Scorecard Strategy for Dummies” Wiley Publishing, Inc. Web.

Douglas W. Hubbard 2007,”How to Measure Anything: Finding the Value of Intangibles In Business” John Wiley & Sons. Web.

Dinesh, D & Palmer, E 1998,Management by objectives and the Balanced will Rome fall again. Management Decision, vol.36, no.6, pp.363-369.

Kaplan, R. S., & Norton, D. P 2004, Measuring the strategic readiness of intangible assets. Harvard Business Review, vol. 82, no.2, pp. 52-63.

Kaplan, R. S., & Norton, D. P 2004, Strategy maps: Converting intangible assets into tangible outcomes. Boston: Harvard Business School Press.

Kaplan R S and Norton D P 1992, “The balanced scorecard: measures that drive Performance”, Harvard Business Review, pp 71–80.

Kaplan R S and Norton D P, 1996, “Using the balanced scorecard as a strategic Management system”, Harvard Business Review, pp.75–85.

Kaplan R S and Norton D P 1996, “Balanced Scorecard: Translating Strategy into Action” Harvard Business School Press.

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

Papalexandris, A., Ioannou, G., Prastacos, G.P. and Soderquist, K.E 2005, An Integrated methodology for putting the Balanced Scorecard into action. European Management Journal, vol.23, no.2, pp. 214-227.

Papalexandris, A., Ioannou, G. and Prastacos, G.P 2004, implementing the Balanced Scorecard in Greece: a software firm’s experience. Long Range Planning, vol. 37, no.4, pp. 347-362.

Rohm, H 2004, “A Balancing Act”, Perform Magazine, vol. 2 no. 2.

Voelper, S., Leibold, M., Eckhoff R., Davenport T 2006, The tyranny of the Balanced Scorecard in the innovation economy, Journal of Intellectual Capital, Vol. 7, no.1, pp. 43-60.

Vergidis, K etal 2008, Business process perspectives: Theoretical developments vs. Real-world practice. International Journal of Production Economics, vol.114, no.1, pp.91-104.

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