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Balanced Scorecard in Service and Production Organizations

Introduction

The success of organisations that operate in today’s highly competitive environment requires the deployment of strategic management concepts. Such concepts yield success when there exists of a means of measuring performance so that an organisation can set certain performance perimeters to achieve the desired future goals. Before the development of the balanced scorecard (BSC), organisations measured their performance using financial measurement tools. After its development in the 1990s, the balanced scorecard incorporated other mechanisms for measuring performance, including customer perspectives and learning, as opposed to depending only on financial measures to gauge organisational performance (Broccardo 2010).

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Even before the development of the BSC, managers had already started objecting to the dependence on financial measures to evaluate organisational performance. Through the BSC, managers could pay attention to only limited critical measures to reduce the complications in monitoring and evaluation of organisations. Therefore, the BSC was an important solution to the growing complexities of organisations since they had plans for expanding their markets to include internationalisation strategies. Considering this significance of the BSC, an emerging question is whether it suits the needs of both production and service organisations. Guided by this interrogative, this paper critically evaluates development and role of the BSC in service and production organisations.

Using the BSC in Production and Service Organisations

Determining the development and role of the balanced scorecard in service and production organisations requires an evaluation of the role it was developed to accomplish. Such evaluation is incomplete without considering whether such roles comprise essential measurement areas of concern in both types of organisations. This section discusses the strategic management and performance measures as two essential purposes accomplished by the BSC.

Measuring a Firm’s Performance

Financial measures have been deployed over a long time in measuring the performance of service and production organisations. Can BSC replace this functional purpose of financial measures? This question has attracted a scholarly debate in the discussion of the practical application of the BSC. Aaker (2000) initiates this debate by arguing that financial elements in high-performance organisations only identify some limited financial measures. Using the BSC requires the selection of measures that respond to an organisation’s needs relative to its image before the owners (shareholders). In this capacity, the BSC focus not only on measuring past fiscal year’s organisational performance but also looks into the future performance levels. Kaplan and Norton (1993) assert that this focus makes BSC well suited in determining the necessary steps to achieve performance levels set for the incoming year until when financial statements of an organisation are prepared. Therefore, it indicates both past and future performance of service and production organisations.

The BSC is founded on the premise of not focusing on long-term goals and objectives of an organisation’s performance (Kaplan & Norton 1996). However, it finds application in monitoring and measuring employee performance. In fact, the BSC comprises a semi-standardised structured tool for evaluating organisational strategy performance. It works well and effectively when it receives support from design methods and automation tools. Broccardo (2010) posits that the first model brought forward by Kaplan and Norton (1993) had four main perspectives, namely financial, customer, internal organisational process, and learning and organisational growth. These critical components need to be considered when developing a BSC in measuring performance in service and production organisations.

Customer perspectives seek to ensure customer satisfaction in terms of their wants and/or needs that they anticipate organisations to fulfil for them. Kellermans et al. (2013) assert that organisations are more likely to gain competitive advantage when they address the needs of their stakeholders, including customers. By providing mechanisms for measuring customer anticipations, the BSC alters products and services attributes to meet the emerging consumer needs. This process has the effect of inducing and maintaining customer loyalty, which is necessary for boosting the current and future organisational performance.

The internal business element of BSC addresses strategic initiatives that are necessary in enhancing organisation’s performance. Kellermans et al. (2013) assert that BSC focuses on excellence in the performance of various internal processes. It also enhances the skills and competences possessed by organisations’ employees. Organisational learning and growth elements generate information that an organisation can deploy for value creation and/or remaining modernised. Therefore, it provides opportunities for creating dynamic strategies for improving organisations’ performance in the service and production sectors.

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From the above discussion, the development of a balanced scorecard to measure performance requires the observance of some specific steps. Kaplan and Norton (1996) identify the limited non-monetary and monetary measures as the first step. Specific and realisable targets are then allocated to them. This situation makes it easy for monitoring and control of organisations’ expectations. In case deviations from targets are noted, managers are called upon to incorporate performance improvement mechanisms. In this process, both service and production organisations need to change their vision to some operational goals. The other steps include, ‘collaborating vision and connecting it to distinct performance, business planning and guideline setting, feedback, learning, and fitting strategy’ (Andersen, Lawrie, & Savič 2004, p.637). In the original BSC model, organisations identify five or six measures for the four elements. In this effort, the challenge rests on the identification of effective measures. This problem led to Broccardo’s (2010) modification of the original model proposed by Kaplan and Norton. The modification’s goals entailed ensuring flexibility of the BSC.

Different organisations have diverse situations that influence their performance measurements. Therefore, it is necessary to adopt different strategies and approaches to performance measurement. In this context, Broccardo’s (2010) modifications are incredibly important in service and production organisations that operate under different business environmental conditions. Flexibility is perhaps one of the most important aspects of the modifications of the original BSC model. According to Broccardo (2010, pp. 81-82), flexibility implies ‘the capability of the BSC tool to adapt to every situation and to offer new perspectives from which new stakeholders can be considered.’ In its original form, Broccardo (2010) suggests that the BSC cannot apply effectively in organisations that have unique needs. Such flexibility is achieved by incorporating an additional balancing mechanism to it so that it can perform dual roles of performance measurement and strategic management. These mechanisms include enterprise and customer factors, forces of change and business continuity, and proactive and reactive organisational driving forces (Sushil 2008).

Using the Balanced Scorecard as a Strategic Management Tool

Strategic management involves a systematic and comprehensive process deployed by organisations in line with their resources. The process alters static plans into dynamic strategies that guarantee consistent alignment of organisations’ activities with their mission, goals, vision statement, and objectives (Northcott &Taulapapa 2012). The goal of strategic management involves ensuring adaptability, learning, and growth of an organisation in the changing operational internal and external environment. For effectiveness of the developed strategies to contribute in decision-making, production and service organisations need to have a means of measuring their (strategies) degree of success. Indeed, the BSC proves useful in this quest.

Kaplan and Norton’s (1996) BSC model provides mechanisms for facilitating its utilisation in strategic management. For example, Kaplan and Norton (1996) regards translation of the organisational vision, communication, business planning, and feedback and learning as useful provisions that permit the utilisation of BSC in strategic management. Vision translation entails developing clarifications concerning organisations’ success strategies and establishing a consensus. The primary objective here is translating approaches deployed in strategic management into operational terms that are critical in providing a way of guiding strategy implementers.

Strategic management requires ardent communication of success strategies along and cross the organisational hierarchical structure. The BSC provides room for communication and linkage of perspectives in its architecture. Hence, managers can develop capacities for organisational structural communication (Kaplan & Norton 1996). Through the BSC’s business planning perspectives, production and service organisations combine their business plans with financial policies. The integration makes it focus narrowly on some initiatives, which facilitate the attainment of organisation’s long-term goals and aims.

However, the integration of business plans and financial policies of an organisation does not address the challenge of measuring the effectiveness of the plans. Through feedback and learning perspectives, BSC helps in resolving this important concern in strategic management. Through feedback reviews, Kaplan and Norton (1996) reveal how BSC helps in evaluating the capacity of departments and employees to meet the budgeted financial goals.

Rockwater and Apple are examples of companies, which have successfully deployed the BSC as both a strategic and a performance measurement tool. The Apple Company uses the BSC in planning for long-term performance. The company has focused on satisfying its customers, inducing and enhancing employees’ commitment, raising the value of shareholders, and increasing its global market share (Kaplan & Norton 1993). Rockwater found BSC critical in responding to situational changes in its business environment. Despite the slow adoption of BSC in external reporting, it can be utilised to achieve this function in strategic management.

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Role of a Balanced Scorecard in Service and Production Organisations

The BSC may be adapted for use in both production and service organisations. However, it is important to include additional perspectives suggested by Broccardo (2010) to enhance its customisation to meet the specific needs of an organisation’s measurement. In the service sector, for instance, the case of restaurants, Broccardo (2010) identifies five necessary perspectives that require measurement. The aspects include monetary perception, client ‘restaurant keeper’ standpoint, shopper ‘consumer’ point of view, in-house processes perspective, and human and organisational resources.

In the application of BSC in both production and service sector organisations, the monetary viewpoint fulfils the role of indicating the attainment of business goals. This goal may be achieved through increased turnover and profitability. Comparably, similar to Kaplan and Norton’s (1993) BSC model, the client standpoint in Broccardo’s (2010) BSC model in service organisations indicates buyer contentment levels. Consequently, opposed to the production industry, the service industry requires the satisfaction of both its human resources and customers to achieve high performance. The application of BSC this way receives support from Broccardo (2010) by incorporating human and organisational resource perspectives into Kaplan and Norton’s (1993) BSC model.

After developing success strategies, the next phase entails looking for their successful implementation mechanisms. However, the inexistence of ways of measuring the business perspectives of an organisation creates problems in evaluating the implemented strategies in terms of their contribution to organisational performance. This gap underlines the necessity for developing a means of measuring performance dynamics of service and production organisations. To this extent, a BSC finds applications in the two types of organisations. In fact, Kaplan and Norton (1993) assert that a BSC is an effective way of ensuring the development of comprehensive mechanisms for changing strategic objectives to be in line with BSC performance measures. Hence, BSC is valuable to both production and service organisations. It aids in resolving all types of business challenges through the identification of organisational perspectives that lead to the failure to achieve the projected performance levels.

A typical case where BSC is applicable in service and production organisations is where a high financial performance is reported, yet no mechanism can be used to gauge the firm’s performance in terms of managing its customer relationships. In such a case, the high financial performance may only occur for short-term. Reduced sales imply reduced revenues. By integrating various perspectives and determinants of long-term firm’s performance, the BSC performs the dual role of performance measurement while acting as a management system (Broccardo 2010) for both production and service organisations.

The positive reception of BSC in the corporate world reflects its increasing recognition of its roles in service and production organisations. For example, Kurtman (1997) conducted a study on the tools used by organisations to measure performance. The study found that 64% of all studied organisations deployed performance measurement tools that were comparable to the BSC. In a research on the reception of BSC by different types of organisations, Edvinsson (1997) observes a high popularity of BSC amongst non-profit-making entities, government units, and various types of corporations.

Kaplan and Norton (1996) find BSC highly effective in its application as a strategic and performance measurement tool. Broccardo (2010) finds BSC valuable in measuring both non-financial and financial aspects of an organisation. In service organisations, the level of customer satisfaction acts as a source of competitive advantage. Similarly, in production organisations, commodities offered for sale must serve utility needs and wants of the customers. Hence, in both service and production organisations, customer satisfaction comprises an important aspect, around which an organisation can build its competitive advantage. Traditional tools of measuring organisational performance in service and production organisations fail when their complexities increase. Considering that all organisations aim at increasing their growth to develop economies of scale, complexity is inevitable. Therefore, it becomes necessary to have a tool for effectively measuring performance while serving strategic management roles in an environment of business complexities. (Broccardo 2010) identifies the modified BSC as the tool to accomplish these roles.

Conclusion

Decision-making processes in an organisation, irrespective of whether it trades in services or tangible products, are informed by the available performance information. When making strategic management decisions, it is also necessary to have a reliable tool for measuring the effectiveness of the decisions. The paper has discussed the BSC as the tool that permits service and production organisations to measure their performance. The tool also serves strategic management functions. Kaplan and Norton’s BSC model proves effective in measuring performance in an organisation from a multidimensional approach, as opposed to one-dimensional traditional approach of measuring performance using financial measurement tools. However, its modification is necessary to enhance its applicability in measuring all aspects of an organisation that operates in service and production sectors by customising it to meet specific organisation’s needs.

References

Aaker, D 2000, ‘The Financial Information Content of Perceived Quality’, Journal of Marketing, vol. 2, no.1, pp. 191-201.

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Andersen, H, Lawrie, G & Savič, N 2004, ‘Effective quality management through third-generation balanced scorecard’, International Journal of Productivity and Performance Management, vol. 53, no. 7, pp. 634–645.

Broccardo, L 2010, ‘Economia Aziendale Online’, International Business Review, vol. 1, no. 2, pp. 81-91.

Edvinsson, L 1997, Intellectual Capital: Realising Your Company’s True Value by Finding Its Hidden Brainpower, Harper Business, New York, NY.

Kaplan, R & Norton, D 1993, ‘Putting The Balanced Scorecard To Work’, Harvard Business Review, vol. 71, no. 5, pp. 134-147.

Kaplan, R & Norton, D 1996, ‘Using the Balanced Scorecard as a Strategic Management System’, Harvard Business Review, vol. 74, no. 1, pp. 75-85.

Kellermans, W, Floyd, W, Veiga, W & Matherne C 2013, ‘Strategic Alignment: A missing link in the relationship between strategic consensus and organisational performance’, Strategic Organisation, vol. 11, no. 3, pp. 304–328.

Kurtman, J 1997, ‘Putting the Balanced Scorecard to Work’, Harvard Business Review, vol. 1, no. 1, pp. 132-145.

Northcott, D &Taulapapa, T 2012, ‘Sing the balanced scorecard to manage performance in public sector organisations’, The International Journal of Public Sector Management, vol. 25, no. 3, pp. 166–191.

Sushil, N 2008, ‘How Balanced is Balanced Scorecard?’, Global Journal of Flexible systems management, vol. 9, no. 2, pp. 3-4.

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