Introduction
Over a long time, managers were utilising financial measures in evaluating and analysing the performance of profit-making organisations. However, this situation changed following the development of a balanced scorecard (BSC) in the early 1990s. Through the inclusion of internal, learning, and customer perspectives in measuring performance, BSC has helped to address the challenge of relying on various performance-determining financial measures. Indeed, managers in different organisations had already begun opposing the utilisation of financial measures to evaluate performance even before the BSC was developed.
BSC enabled managers to pay attention to minimal critical measures. This strategy has reduced the complexity that is witnessed during the organisational evaluation and monitoring process due to the information overload. It has ensured that several aspects of an organisation are considered in the performance evaluation process, amid the growing organisational complexities. The balanced scorecard was introduced as a means for measuring organisational performance in 1992. Today, it has developed into a strategic management tool. This paper critically evaluates the development and the role of a balanced scorecard in production and service organisations. It pays critical consideration on the practical application of the balanced scorecard in organisations.
Development of a Balanced Scorecard
The development process of BSC may be discussed from the approach of its capacity to measure performance and/or as a strategic management tool. When it is used in measuring performance, managers can utilise it in determining organisational productivity. When used in strategic management, it forms an important aspect of decision-making processes, especially on critical areas that require a change in the current and future success of service and production organisations.
Measuring Performance using BSC
The balanced scorecard evaluates organisational performance through semi-standardised and structured tools. It finds ample application when deployed alongside design methods and tools that allow the automation of organisational performance. BSC finds practical application in both the service sector and production organisations when measuring employee performance. Kaplan and Norton first modelled a balanced scorecard for use in these organisations. The model addresses issues such as financial processes, customer and organisational growth, and learning as its three main components (Kaplan & Norton 1996). The financial component identifies a myriad of limited financial measures that are necessary for high-performing organisations.
In developing BSC for measuring the performance of an organisation, it is necessary to choose financial measures that respond to organisational concerns with regard to the desired financial image of the investors and other parties who have stakes in a company’s financial performance (Madsen & Slåtten 2015). Compared to financial performance measures, Kaplan and Norton (1993) assert that BSC not only addresses issues of past fiscal year’s performance but also responds to the question of what needs to be done to improve organisational financial performance within the forthcoming fiscal year. To this extent, it serves the dual role of indicating the past and future financial performance. In this capacity, BSC does not dwell on the attainment of long-term organisational goals and objectives. It focuses on the short-term past and future performance of an organisation, irrespective of its sector of operation.
The customer component of BSC focuses on the manner in which the clients of an organisation perceive it (organisation). Its primary concern is on the fulfilment of wants and the clients’ needs. Indeed, organisations have the highest room of growth and success in case they have the capacity of meeting the emerging needs and wants of their customers. Dess, Lumpkin, and Taylor (2005) assert that without customer satisfaction with the products and/or services that an organisation renders, it is challenging to achieve a competitive advantage. Therefore, by providing a mechanism for measuring variations in customer anticipations, a room is created for developing and rebranding products and services to meet the changing customer needs to boost sales volumes.
Internal business process elements of BSC address the necessary strategic issues, which, while implemented successfully, improve organisational performance. Its primary objective entails ‘highlighting excellence at performing internal processes and in employee competencies and skills’ (Brain 2005, p.37). Growth and learning aspects of BSC offer an organisation with the necessary information for facilitating continuous improvement with the objective of increasing value creation and organisational modernisation. It creates an avenue for dynamic improvements in service sector together with organisations that produce or sell products.
BSC that is deployed in service and product organisations should be developed and/or designed to meet an organisation’s unique requirements (Pollanen & Xi 2015). Kaplan and Norton (1996) discuss this process. The first step involves identifying various limited non-financial and financial measures for organisational performance, accompanied by establishing their different targets. This step is critical in ensuring that organisations develop the capability to meet their expectations. Any deviation from targets establishes responsibility for managers to develop strategies for improving performance to align it with the targets. In the first step, Kaplan and Norton (1996, p.75) posit that an organisation needs to change its vision into operational goals. The second, third, fourth, and fifth steps for BSC development entail ‘collaborating the vision and connecting it to distinct performance, business planning, and guideline setting, feedback, learning and fitting strategy’ (Drury 2007, p.105). In the original BSC, an organisation needs to select 5 to 6 measures for its four main components. This situation creates the problem of developing and implementing the most appropriate and effective performance measures of the components of BSC.
The above challenge necessitates the modification of the original BSC developed by Kaplan and Norton. Indeed, Broccardo (2010) proposes the addition of a perspective that guarantees its flexibility. The flexibility of a BSC implies ‘the capability of the BSC tool to adapt to every situation and to offer new perspectives from which new stakeholders can be considered’ (Broccardo 2010, pp. 81-82). Organisations encounter different operational situations that require the deployment of varying approaches to improving their performance. Therefore, the flexibility of BSC makes it adaptable to organisations of all kinds, irrespective of whether they deal with products and services or depending on operational market dynamics. In fact, in its original form, the BSC cannot be applied in diverse organisations. Consequently, Broccardo’s (2010) modifications are not only appropriate but also come in handy when performance encompasses an important aspect of ensuring the continuity of organisations that operate in highly competitive markets due to the increased range of products that are availed to the markets by globalised manufacturers and service providers.
The original BSC does not offer a template, which may be applied in general industries. This challenge highlights the necessity for ensuring BSC customisation to meet the needs of different organisational operation industries and business environments. Broccardo (2010) recognises that the four aspects of BSC are balanced in their design. However, the flexibility enhances its adaptability in the deployment as a strategic tool and performance measurement tool. A possible way to proceed is by incorporating enterprise and client factors, forces of change, business stability, practical and the involuntary organisational driving forces, in-house and peripheral business actors, and outdoor and domestic business processes (Broccardo 2010) into the original BSC to make it’s flexible.
The above modification identifies important aspects, which may require customisation in addition to their measurement. This process permits the application of BSC in a wide variety of industries. For example, in restaurants, which operate in the service industry, Broccardo (2010) confirms the necessity of incorporating perspectives such as ‘consumer’ perspective, customer ‘restaurant keeper’ perspective, internal process perspectives, and human and organisational resource perspectives into the BSC in measuring performance in the industry. Compared to the model developed by Kaplan and Norton (1993), Broccardo’s (2010) model deploys customer perspective in measuring the degree of satisfaction with services that are provided in restaurants. Restaurant keeper perspectives measure the satisfaction of all eatery keepers. Hence, in the service sector, the satisfaction of people who provide services (employees) together with customers is critical to ensuring high performance. Therefore, it is necessary to incorporate the organisational resource perspective together with the human resource perspective into the original BSC model proposed by Kaplan and Norton.
Developing a Balanced Scorecard as a Strategic Management Tool
Organisations that seek to gain a competitive advantage in the dynamic operational environment that is characterised by high competition apply effective strategic management efforts to remain relevant and/or gain market share to break even (Nielsen & Nielsen 2015). The objective of any company is to deliver value to its owners. This value is normally expressed in terms of the returns on investments. Strategic management plays an essential role in an organisation since it helps an organisation to gain competitive advantage. There are various strategies that can be used in gaining a competitive advantage, including pursuing low-cost strategies to help in driving the success of an organisation and conducting extensive promotion of products to win customer confidence (Dess, Lumpkin, & Taylor, 2005). Cost reduction focuses on reducing the prices of products and services in the industries. It aims at increasing profit while reducing the operational costs. Irrespective of the strategy deployed by an organisation, it is important to create long-term value and sustainability of the business of any business entity. Can BSC help in this effort?
The activities of strategic management change static plans into strategic performance outcomes that enable gradual development of strategies to drive situational change. Strategic management focuses on analysing an organisation’s strategic goals, which include visions, missions, and objectives alongside the analysis of the organisational environment, both internally and externally. To make decisions, it is important for managers and leaders in both service and products organisations to develop a means of measuring whether their strategic management decisions yield recommendable results (Chen, Yu, & Lin 2015). A balanced scorecard finds application to realise this concern.
The work of Kaplan and Norton (1996) forms the foundation of the applicability of BSC in strategic management. It identifies feedback and learning, translation of the organisational vision, communication and linkages, and business planning as important constituents of BSC. When using BSC as a strategic tool, clarifying on strategic visions or establishing a consensus is necessary. The primary objective here entails ensuring that all managerial decisions are translatable into some operational plans that have the capability to build local strategy implementers. Kaplan and Norton (1996) assert that this plan only happens in case statements of long-term success are integrated into business objectives and measures that are acceptable and observed by all people in the senior decision-making hierarchies.
As a strategic management tool, BSC recognises the contribution of communication in the success of products and service organisations. Communication enables managers at all organisational levels to push strategies across and along the bureaucratic organisational structure. Through business planning, organisations in both service and production sector acquire the capacity for integrating finances with developed business plans. The integration permits organisations to focus on those initiatives that can foster the attainment of long-term objectives and goals. However, the integration of business plans with organisational financial resources is not adequate to achieve long-term strategic success without the development of a mechanism for measuring organisational effectiveness.
The feedback and learning perspectives of BSC help in resolving this challenge. Kaplan and Norton (1996, p.77) reckon, ‘the existing feedback and review processes focus on whether a company, its departments, or its individual employees have met their budgeted financial goals.’ Employing BSC at the centre of the four perspectives of strategic management facilitates the building of management systems that monitor the success of both production and service sector organisations from the perspectives of their internal processes, learning and growth, and the customer focus. Indeed, Apple the Company has deployed BSC in its planning for long-term performance that is pivoted around customer satisfaction, employee commitment and alignment, examining and expansion of shareholders’ value, and expanding market share (Kaplan & Norton 1993). Rockwater used the BSC in responding to alterations of operational industry. BSC also finds application in external reporting.
The Use of a Balanced Scorecard in Production and Service Organisations
For maximum performance, organisations in service and production industries deploy particular rules and regulations in their business processes. This strategy is critical for long-term service delivery and production. Indeed, without the use of necessary connections, such organisations have a low probability of gaining success. Consequently, performance measuring is an important chore for any organisation that seeks to operate in a dynamic business environment. Without measurements, an opportunity for determining the status and the necessary changes to deal with low performing business units or product and service lines are nonexistent. BSC functions as a tool for these measurements. It comprises an important tool that executives can utilise to translate the strategic objectives of an organisation while at the same time measuring performance (Kaplan & Norton 1993). It enables organisations to avoid troubles through the reduction of challenges that lead to failure to achieve some prescribed performance levels.
Anything that cannot be measured makes it hard to determine the extent of its achievement. Therefore, by measuring performance, it becomes possible to track potential loopholes in an organisation that may hinder its success. For example, some organisations may report high financial performance, yet suffer from achieving customer satisfaction. Consequently, the recorded financial performance only lasts for a while. Customer satisfaction is important for maintaining a customer-organisation positive relationship, which is necessary for consistent sales.
With low customer satisfaction, high sales in the short term may be witnessed due to low threats of substitutes. When a new competitor joins the market, an organisation loses its clientele to it. Such a problem can be avoided by having knowledge of products or service attributes that lower customer satisfaction. This way, BSC does not only help in measuring customer satisfaction but also comprises a strategic management tool. In fact, Kaplan and Norton (1993) reveal how BSC facilitates in making breakthrough improvements. BSC is instrumental in products and services value creation, improvement of processes, building customer relationships, and in-market developments.
BSC is receiving increasing popularity as both a performance measurement and strategic management tool. Broccardo (2010) investigated various performance measurement tools in different organisations. Many of the tools share similarities with the BSC approach. Broccardo (2010) argues that BSC has received immense popularity among non-profit-making and profit-making organisations that operate in both service and product sectors. Inferring from the case studies of Apple and Rockwater, Kaplan and Norton (1996) study the manner in which BSC can be used as a strategic management tool. They note the viability of the BSC in strategic management in the two corporations.
Through the utilisation of strategic management concepts, the competitive advantage of an organisation can be realised through several ways. Dess, Lumpkin, and Taylor agree with this assertion. They assert, ‘sustainable competitive advantage cannot be realised through operational effectiveness alone’ (Dess, Lumpkin, & Taylor 2005, p.56). Rather, the scholars suggest that various management innovations that were realised over the last two decades act as crucial tools for enhancing sustainable competitive advantage. The innovations include benchmarking, the deployment of strategies for effective production such as the just-in-time production philosophy, reengineering, and outsourcing among others. Operational effectiveness implies the ability to conduct organisational activities in a way that out-powers rivals. In this process, a means of measuring operational effectiveness is necessary for both service and product organisations. The concept of organisational effectiveness is articulated to the idea that organisations must operate in a manner that warrant the ability to achieve their outcomes. Organisations’ effectiveness is crucial to investors. They are interested in the capacity of organisations to deliver value in the form of returns on investments (Herman & Renz 2008). Performance acts as an indicator of organisational effectiveness that is measured using the balanced scorecard.
Any performance measurement process must possess a mechanism for providing feedback to the developed success strategies. Devinney and Yip (2009) assert that performance comprises a critical criterion for evaluating the operational environments of both service and product organisations. Evaluating the financial performance of an organisation upon the implementation of a strategy of performance improvement provides performance feedback. The response includes returns on organisational investments, changes in organisational assets, and the evaluation of the changes in the profitability of an organisation. Feedback on the performance management approaches can also be evaluated from the context of increment on the market share of an organisation, changes in sales level, and even changes in the shareholder returns in the form of the magnitude of dividends.
A balanced scorecard can capture all the above indicators of organisational performance. An important measure of the performance of an organisation involves determining the success of strategies that are deployed to enhance performance. The measure alters managerial approaches to promoting employee engagement by managing employees’ cross-cultural differences that are associated with their diversities to enhance global growth. To this extent, the balanced scorecard provides the required feedback of a performance management model. Through the inclusion of people’s perspectives, organisations in service and product sector can deploy the BSC in evaluating and analysing the impacts of its people (employees) on performance. This strategy guarantees business sustainability in the short and long term.
BSC allows services and product organisations to review their internal and external environments, which may influence their performance. Through it, internal organisational managers gain a mechanism for establishing the necessary business strategies that aid in developing response mechanisms concerning changes in external environments. This way, BSC provides a comprehensive tool for analysing service and product organisations (Brain 2005), which also permits the identification of strengths and weaknesses of the organisations. Consequently, organisations can plan and direct an appropriate mix of resources in overcoming weaknesses while maintaining strengths to build a competitive advantage. There is an increasing concern for service and product organisations to deliver value to not only their owners but also other stakeholders who have stakes in the performance of a firm. Hence, organisations have an additional responsibility to engage in socially responsible business activities. BSC avails a mechanism for identifying various challenges that may negatively impair CSR policies for service and product organisations.
Conclusion
All organisations need performance measurement tools as a guide to making effective decisions. Traditionally, organisations measured their performance through financial measurement tools. However, the increasing complexities of operational environments and contributors to the success of an organisation have turned out ineffective approaches since non-financial variables such as customer satisfaction cannot be measured using financial measures. The BSC emerges as a performance and strategic management tool that overcomes the challenges of the traditional financial tools for measuring organisational performance. Through various modifications of the original BSC model, it is now flexible so that it forms a universal tool for measuring performance, irrespective of the industry of operation of an organisation.
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