Balanced Scorecard Exam
(a) Briefly describe the framework and potential content of the Balanced Scorecard as promoted by Kaplan and Norton.
First detailed by Kaplan and Norton in 1996, the balanced scorecard evolved into a critical management tool. For the authors, other fundamental perspectives can balance the financial perspective of the company. These perspectives are relevant in becoming a strategy-focused company. Other than the financial perspective, the other perspectives include customer, internal businesses and learning and growth. With vision and strategy at the core of the balanced scorecard, there are other important elements for each perspective. These are the objectives, measures, targets, and initiatives, all of which must be inherent in the organization.
Some examples are as follows:
a) Customer
The objective should be 100% customer satisfaction. The measures should be the number of loyal customers and rate of repeat purchases. The target should be high-quality product and service provision. The initiatives must be a consumer reward system program
b) Financial
The objective should be revenue growth and profit increase. The measures should be DEA (or data envelopment analysis) efficiency scores relating to revenue and profit margin. The target should be high productivity rates among decision-making units. The initiatives must be an input and output analysis.
c) Internal business processes
The objective should be cost reduction. The measures should be the expense as a percentage of profit and cost as a percentage of revenue. The target should be cost reduction measures at the operational level. The initiatives must be the introduction of cost-cutting measures.
d) Learning and growth
The objective should be service innovation. The measures should be investment on upgrades and upskilling. The target should be a targeted investment strategy. The initiatives must be conducting a materiality analysis to determine which needs upgrades and who needs upskilling.
Personally, as the contemporary organization moves along with the changes in the global business environment, there other perspectives that the balanced scorecard should include. The first is the employee. Like customers, employees must be also treated as a separate entity in the balanced scorecard. The second is green practices. Green practices within the organization are increasingly becoming important in the overall management of a business. Employees and green practices have their economic value added, which means that the financial perspective is somewhat affected by these factors. The third is sustainability. Vision and strategy still hold their importance, but they should include sustainability at its core. The reason behind this is that all of these perspectives would be irrelevant if they are not sustainable or if they cannot contribute to the continued existence and survival of the organization.
(b) Evaluate the extent to which the Balanced Scorecard is:
(i) An improvement upon exclusive reliance on financial measures
Organizations do not exist in a vacuum hence profitability is no longer the sole basis of the survival of such though it is still very critical. As such, financial measures must be accompanied by other measures to make the performance more balance. For one, there are many qualitative elements directly and indirectly related to the operation, and these elements are definitely difficult to quantify. Some of these qualitative elements include the perceptions, beliefs and attitudes of the employees as well as the motivating factors driving the customers to make a purchase. Even the organizational culture and subcultures cannot be easily quantified. Also, there are inherent drawbacks to using financial measures alone including the indication of future performance. Financial measures can only analyze, estimate and predict.
This is where the role of balanced scorecard becomes even more significant today. Kaplan and Norton was able to combine financial with non-financial measures in measuring the current performance of the firm.
(ii) Suited to the ‘information age’
In an era where organizations are trying to be a knowledge organization, there is a need to look beyond the financial perspective that does not completely gauge the organization in creating value. Any value proposition of a firm encompasses customer relationship, human resource and innovative process. It is all that and more. Businesses today have value propositions that are always forward-looking. Competition is no longer measured on short term but rather on long term hence becoming sustainable is the goal.
Balanced scorecard is best suited for this information age since it captures all the elements and make these elements operational needed to compete with other firms. These elements include but are not limited to product customization, employee skills, information technology, innovative processes and many others. There should be strategies for these elements that the organization must create and put into action.
(iii) A contribution to strategic management accounting
Seemingly, all the strategies within an organization aim or are directed at improving the financial performance of the firm. This could be the reason why Kaplan and Norton puts emphasis on financial perspective since there are other perspectives that should be inexistence to balance the overall perspective of the company. When strategic management accounting enters the pictures, this is the focal point of the introduction of the balanced scorecard. The scorecard becomes the foundation, the catalyst and the facilitator of the strategic management accounting.
While it is not decisive of the firm’s future profitability, the balanced scorecard encourages continual financial improvement within the organization. The goal of strategic management accounting is sustaining the competitive edge of the business through financial performance. Such a performance flows from and consistent with the grand strategy of the firm. Taking into consideration the cause and effect, if the company wants to improve at something, other performance measures must be also improved, achieving the desired results in the process; results that mostly manifest through in the balance sheet as profit or revenue among others.
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