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The Role of a Balanced Scorecard in Production and Service Organizations

Introduction

For several years, managers deployed financial measures to evaluate the performance of their organizations. However, this culture changed in the 1990s following the development of a Balanced Scorecard (BSC). By capturing organizational internal matters and customer perspectives to measure performance, BSC helped to solve the problem of over-reliance on financial measures to determine the progress of an organization (Broccardo 2010). However, managers had begun to oppose the move. The technique enabled them to pay attention to minimal critical measures. The outcome was a reduction of the complexity of organizational evaluation and monitoring processes due to information overload. The move also ensured that several organizational aspects were considered in the performance evaluation process amid the growing organizational complexities. The Balanced Scorecard was introduced as a means of measuring organizational performance in 1992. Today, it has evolved to become a strategic management tool. This paper uses the work of Kaplan and Norton (1993), Kaplan and Norton (1996), and Broccardo (2010) alongside other scholarly materials to evaluate the development and role of a Balanced Scorecard in production and service organizations.

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Development of a Balanced Scorecard for Measuring Performance

A Balanced Scorecard is a semi-standardised structured tool for evaluating organisational strategy performance. It works more effectively when supported by design methods and automation tools. Both service and production organisations can use BSC in tracking and monitoring employee performance. The first model that was brought forward by Kaplan and Norton had four main perspectives, namely monetary, client, in-house organisational processes, and learning and organisational intensification (Broccardo 2010, Kaplan & Norton 1996).

Financial measures identify the various limited monetary elements that are key to organisational performance (Aaker 2000). In particular, developers of the BSC financial measure select only those measures that respond best to the concerns of an organisation in terms of how it should appear before its owners or shareholders. Opposed to traditional financial measures, the BSC financial perspective not only responds to what happened in the past fiscal year, but also to what needs to be done to improve organisational performance in the forthcoming financial period (Kaplan & Norton 1993). This claim means that it acts as both current and future success indicator. As such, BSC builds its premises around measures and targets that do not relate to an organisations’ progress in the realisation of long-term objectives and goals (Kaplan & Norton 1996).

The customer aspect aids in responding to the concern of how customers see an organisation. Its objective is to satisfy wants and the needs of organisational customers. Organisations grow when they increase their appeal to customers who consume their services and products. The levels of customer satisfaction to organisational products and services remain the single most important source of organisational competitive advantage (Sveiby 2007). The availability of a measure of customer expectation provides a room for changing certain products or service attributes to meet customer needs and wants as a way of driving higher sales levels.

The internal business perspective answers the concern of the necessary strategic focus of an organisation to improve its performance. Its main objective is to ‘highlight excellence at performing internal processes and in employee competencies and skills’ (Brain 2005, p.37). Learning and growth perspectives provide an organisation with information on the necessary improvements to permit value creation and modernisation. Its objective is to offer a paradigm of dynamic organisational improvement. How can service and product organisations design or develop a Balanced Scorecard?

Kaplan and Norton (1996) discuss the process of developing a Balanced Scorecard. The first step entails the identification of a limited number of non-financial and financial performance measures followed by assigning some targets to them. This step helps an organisation to monitor and control its capacity to meet the anticipated aims (Banker 1998). Identifying any deviation calls for managers to adopt requisite steps for performance improvement. In the first step, Kaplan and Norton (1996) confirm that an organisation converts its vision to an operational goal. ‘Collaborating the vision and connecting it to distinct performance, business planning and guideline setting, feedback, learning and fitting strategy’ (Beaver 1999, p.66) follow consecutively. The original design of the process for developing BSC requires the selection of five or six measures for the main four BSC perspectives (Beaver 1999). In this process, organisations encounter challenges while selecting the most effective measures.

Broccardo (2010) proposes a modification of the original Kaplan and Norton’s BSC by incorporating an additional perspective to make it flexible. According to him, flexibility means, ‘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). Different organisations experience different situations that require the adoption of unique strategic decisions to improve their performance. Consequently, flexibility of the BSC is necessary so that it can find an application in all organisations, irrespective of whether they deal with services/products or the characteristics of the operation industry.

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Broccardo’s (2010) modification of the BSC comes in handy. In its original form, it fails to apply in all diverse organisations. BSC does not comprise a template that is applicable in general industry-wide. Aaker (2000) suggests that this limitation stresses the importance of customising BSC to realise the needs and wants of different markets, environments, and strategies of a specific organisation. Broccardo (2010) asserts that although the four perspectives of a Balanced Scorecard are unbiased, additional balancing is necessary to ensure flexibility and adaptability of the scorecard to measure performance and to act as a strategic management tool. Sushil (2008) identifies venture and buyer factors, forces of change and the industry permanence, upbeat and the spontaneous organisational driving forces, in-house and outdoor business actors, open-air and interior business processes among others as the necessary changes.

According to Broccardo (2010), an additional perspective in the original BSC considers the necessary areas that require not only measurement, but also customisation. In the service sector industry such as a restaurant, Broccardo (2010) identifies five necessary measurement perspectives, namely the financial viewpoint, client outlook, eatery keeper angle, internal processes standpoint, and human and organisational resources point of view (Broccardo 2010). The financial perspective functions as an indicator of attaining business goals by increasing turnover and profitability. Consistent with Kaplan and Norton’s (1993) BSC model, in Broccardo’s (2010) BSC model for service sector industry, the customer perspective measures the degree of consumer contentment. The restaurant keeper perspective measures eatery keeper satisfaction. This observation suggests that the service industry requires satisfaction of its human resources and customers to register a higher performance, as opposed to the production industry. This assertion is evidenced by the addition of human and organisational resource perspective to the original BSC perspectives.

In the service sector organisations, human resources together with information systems facilitate the realisation of organisational visions. The organisations have to commit financial resources to their training and development. People are important assets for organisations that operate in both service and production industries. Recognition of the value of people in an organisation prompts businesses to invest in human capital management with the chief objective of ‘responsibly attracting, developing, and managing a firm’s biggest asset, people’ (Bowles & Gintis 2005, p.75). Investment in human capital is particularly significant in an organisation whose success is driven by the capacity to change various operational approaches to meet new changes in the business environments (Seymour 2003). However, such investments are unjustified without a means of measuring changes in terms of effectiveness of employees in their work. Indeed, Kaplan and Norton (1993) maintain that management cannot make decisions or control an organisation without measurement. Thus, any investment in human resources has to be measured. BSC proves effective in this end.

Development of a Balanced Scorecard as a Strategic Management System

Strategic management involves a group of continuous activities and comprehensive processes that organisations use to systematise and align resources systematically. Actions in strategic management are aligned with the organisations’ mission, vision, and plans (Dess, Lumpkin & Taylor 2005). Activities in strategic management change a static plan into an organisation that gives strategic performance outcome to reach decisions while at the same time enabling strategies to gradually develop and grow as requirements and situations change. Strategic management focuses on analysing an organisation’s strategic goals, which include vision, missions, and objectives alongside the analysis of the organisation’s environment, both internally and externally. For effective decision-making, it is important for managers to develop a means of measuring whether their strategic management decisions are yielding fruits or not. A Balanced Scorecard can be useful to this extent.

Kaplan and Norton (1996) identify four perspectives that facilitate the utilisation of a Balanced Scorecard in strategic management. These standpoints include conversion of the organisational dream, communication and connecting, business arrangement, and opinion and learning. The first step involves clarification of the strategic visions coupled with the building of a consensus. The goal is to ensure that managerial strategic management approaches translate into operational terms to guide strategy implementers at local levels. This goal is realised when long-term success statements become integrated with objectives and measures that are acceptable to all organisational senior executive decision makers (Kaplan & Norton 1996).

In strategic management, without effective communication, it becomes hard to implement specific actions that are necessary for the achievement of a strategic decision. Using BSC as a strategic management system recognises the importance of organisational communication. Through the communication and linking perspective of the BSC, managers develop the capability to communicate strategies across and along organisational structures (Kaplan & Norton 1996). Business planning ensures the integration of the service sector and production organisations’ financial and business plans. Integration allows a narrow focus on some specific initiatives that lead to the achievement of organisational long-term strategic goals and objectives.

Even with the integration of an organisation’s business and financial objectives, the achievement of strategic long-term objectives requires a mechanism for determining its effectiveness. BSC solves this challenge through the provision of feedback and learning perspectives. Kaplan and Norton (1996, p.77) observe, ‘Existing feedback and review processes focus on whether a company, its departments, or its individual employees have met their budgeted financial goals.’ Using the BSC at the centre of the four perspectives of strategic management facilitates the monitoring of building management systems in the production and service sector organisations from the context of internal processes, learning and growth, and customers. This situation offers a mechanism for evaluating the strategies from the paradigms of organisational performance.

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A Balanced Scorecard is instrumental in overseeing a company’s operations. For instance, the Apple Company has deployed it in planning its long-term performance that is centred on purchaser contentment, worker devotion and association, increasing investor worth, and increasing organisational market share (Kaplan & Norton 1993). Rockwater used it as a mechanism for responding to changes in its operational industry. Although Kaplan and Norton (1993) have reported reluctance in terms of embracing BSC in external reporting due to the witnessed low interest in altering it from being used as a performance measurement tool, it can be used in external reporting. This claim implies the easiness of the adaptability of the BSC in organisations, whether dealing with services or production of goods. Is it a sustainable mechanism for measuring performance in organisations? Should it be used as a strategic management system? The next section responds to this interrogative by examining the role of a Balanced Scorecard in organisations, irrespective of their areas of specialisation.

Role of a Balanced Scorecard in Production and Service Organisations

Organisations that operate in service and production of goods need to follow specific rules and regulations to ensure optimal performance. Adopting this strategy makes them remain in the production or service delivery industry in the long-term. Erskine (2012) asserts that without deploying the appropriate connections, it is highly improbable that organisations will gain success. This claim suggests that performance measurement is a critical aspect of organisational success. Without measures, it becomes impossible to know the current position of an organisation and the required changes or areas of improvement to bring back poorly performing organisations on track to prevent their collapse. BSC aids in this situation.

Although organisations may implement their success strategies effectively, in the absence of a reliable means of measuring organisational business, management suffers from the inability to make any decision. Thus, it is important for an organisation to understand clearly its performance dynamics. BSC constitutes an effective measurement tool for enabling executives to have a comprehensive framework for translating organisational strategic objectives into a consistent performance measure (Kaplan & Norton 1993).

BSC enables organisations to reduce all kinds of problems. It provides a means of identifying organisational aspects that fail the overall performance. For instance, an organisation may be reporting a high financial performance. Unfortunately, without measuring customer satisfaction, this situation may only give a short-term indication of the high performance. High sales may be attributed to lack of substitute products to satisfy consumer needs. Therefore, in case another organisation emerges to produce such a product, sales volume has to reduce tremendously. This problem can be prevented if an organisation knows what aspects of service or a product it is looking for and its desired improvements in the offered service or product. In this extent, BSC constitutes not only a performance measure, but also a management system (Broccardo 2010). Kaplan and Norton (1993) confirm that BSC can act as a breakthrough, which is essential in organisational areas such as product and service, process, customers, and market developments.

Increasing popularity in the use of BSC or some other similar performance measurement tools evidences the role of a Balanced Scorecard in performance measurement and as a strategic management system. Kurtman’s (1997) study on organisational tools for performance measurement reveals that 64 % of all studied organisations use performance measurement tools that are similar to BSC. Edvinsson (1997) observes an increasing popularity of BSC among non-profit making entities, government units, and corporations. Kaplan and Norton (1996) examine how BSC can be used as a strategic management system with reference to Apple and Rockwater. The researchers find it highly effective in accomplishing these two roles in the two organisations.

Strategic management plays important roles in an organisation. It helps organisations to gain a competitive advantage. Various strategies are deployable in gaining a competitive advantage, among them being the pursuit of discounted strategies and conducting an extensive promotion of products to win consumer assurance (Dess, Lumpkin & Taylor 2005). Cost reduction focuses on reducing the charges of products and services in industries. It aims at increasing profit while reducing the operational costs. Companies in both service and production industries use this strategy to charge low prices on key products. The strategy works best when customers are aware of the price of products and services on offer. How can an organisation understand customer responses and perceptions about prices and the utility of the provided merchandise and services? A tool for measurement of these issues is relevant to any organisation that is seeking to build good customer relationships as a source of organisational success. The flexibility attribute of BSC, as discussed by Broccardo (2010), to measure almost every financial and non-financial perspective of an organisation makes it an adaptable and sustainable mechanism for measuring the concerns of strategic management.

BSC provides a sustainable managerial tool, subject to the justifications for various components that are deployed in the tool to measure performance or to drive strategic management decisions. This way, it provides a sustainable and reliable means of not only monitoring, but also controlling organisations in all industries. Traditional performance measurement tools failed when new organisational complexities emerged. BSC recovers such complexities. It permits ardent flow of information on causes of the complexities to facilitate the adoption of new strategies for driving organisational success. This situation is possible due to the capacity of BSC to link business strategies with objectives, measures, and business targets (Broccardo 2010).

BSC does not represent a strategy as a loose collection of various performance measures and/or indicators. Rather, it links organisational strategies with causes and effects of various challenges. However, its sustainable use requires the management to understand its proper formulation to enhance measurement of both financial and non-financial performance. BSC helps in identifying and managing various environmental improvements with reference to social and financial performance goals. This claim suggests that it fosters business sustainability concerning economic, social, and ecological developments (Zadek 1999).

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A Balanced Scorecard permits external and internal view of organisational performance. This case makes it possible for internal managers to develop appropriate strategies for responding to the external environment. As such, it provides a comprehensive organisational analytical approach (Brain 2005). It provides a mechanism for identifying any organisational weaknesses as a way of ensuring the utilisation of organisational resources to convert weakness to strengths in a bid to develop a competitive advantage. Hence, it increases the capabilities of an organisation while operating in an aggressive market. Consequently, it constitutes a universal mechanism for measuring performance while at the same time acting as a premeditated management instrument. With the increasing concerns about the role of organisations in delivering value not only to the owners, but also to other stakeholders who have stakes in the performance of a firm, an organisation has an additional responsibility to engage in business activities in a socially responsible manner. BSC provides a way of identifying key challenges that may hinder the operation of an organisation in a socially responsible manner.

Conclusion

Organisations require performance measurement techniques to make decisions. Traditional performance measurement tools focused on the previous financial performance measurements in making decisions concerning the forthcoming fiscal years. With the growing management complexity, such measurement tools became ineffective. Non-financial variables such as customer satisfaction became important determinants of the capacity of an organisation to build a competitive advantage. Balanced Scorecard (BSC) provided a solution to this challenge. Although it was initially used in performance measurement in the context of four perspectives, namely financial, customer, internal business, and learning and growth perspectives, BSC currently constitutes an effective strategic management system. Its flexibility ensures that it can also be utilised in external and internal measurement of an organisational performance.

Measurement of non-financial and financial performance aspects of an organisation, including social, ecological, and business-related perspectives, is important in developing the appropriate success strategies for all organisations. BSC is an effective and universal tool for performance measurement and developing strategic decisions in organisations in both service and production industries. The only challenge that managers need to solve is a proper customisation of the BSC to address specific needs in unique operational internal and external environments.

References

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

Banker, R 1998, An Empirical Investigation of an Incentive Plan Based on Non-financial Performance Measures, Routledge, London.

Beaver, W 1999, ‘What Determines Price-Earnings Ratios’, Financial Analysts Journal, vol. 4 no. 2, pp. 65-76.

Bowles, S & Gintis, H 2005, ‘The Problem with Human Capital Theory–A Marxian Critique’, American Economic Review, vol. 65 no. 2, pp. 74–82.

Brain, C 2005, Using the Balanced Scorecard, Norton Publishers, New York, NY.

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

Dess, G, Lumpkin, G & Taylor, M 2005, Strategic Management, McGraw-Hill Irwin, New York, NY.

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

Erskine, A 2012, ‘Human Capital Management’, Management Services, vol. 1 no. 1, pp. 12-13.

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.

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

Seymour, W 2003, Intellectual Capital in Twenty-First-Century Politics, Paideia, Ashfield, MA.

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

Sveiby, K 2007, ‘The Intangible Asset Monitor’, Journal of Human Resource Casting and Accounting, vol. 2 no.1, pp. 67-71.

Zadek, S 1999, ‘Stalking sustainability’, Greener Management International, vol. 26 no. 7/8, pp. 1-11.

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