Balance Scorecard (bsc)

Faced with more uncertainties and challenges caused by rapidly changing environment, companies need to establish distinctive and sustainable competitive advantages against others, resulting in the development of Balanced Scorecard (BSC) as a performance measurement tool. This essay is aimed to provide a detailed understanding of BSC and evaluate its use as a performance measurement tool, including its origins, prominence and approach to performance measurement. The advantages and limitations of BSC as a performance measurement tool will also be discussed. Examples will be used where is necessary.

The origins of BSC can be traced back to 1990, when the Nolan-Norton study group raised the topic called ‘measuring performance in organizations of the future’ in a one-year multi-company study (Kaplan and Norton, 2005). Since companies needed to deal with more complexities of management caused by the changes in technology and customer preferences, the existed performance measurement tools, which only measured financial factors, became too reductive to foresee future value of a company (Gomes and Romao, 2014). The project facilitator, David Norton, and the academic consultant, Robert Kaplan, were looking for a new method to measure companies’ performance (Geense, 2005). In the study, a company named Analog Devices presented a measurement tool called ‘corporate scorecard’, which contained not only financial perspectives, but also measures related to non-financial performance (Kaplan and Norton, 2005). After some adjustments, Norton and Kaplan modified the ‘corporate scorecards’ measurement into BSC, which aims to summarize the key elements of success and help to align operations appropriately according to the overall strategy (Mooraj et al, 1999). It demonstrate the influence of current strategy on the company’s future (Jackson, 2015a). ‘Balanced’ means BSC balances between internal and external, financial and non-financial and lagging and leading factors (Kaplan and Norton, 2005).

According to Gartner Group, today over half of the major companies in the Europe use BSC to measure performance (Balanced Scorecard Institute, 2016). The main reason for the prominence of BSC as a performance measurement tool is its advantages over traditional performance measurement methods. BSC eases the strategy execution and gathers everyone around the mission of the company (Jackson, 2015b). It transfers the vision and strategy of the company into several clear objectives that will be further translated into an efficient communication tool to measure the company’s performance and eliminates the bias of traditional financial measurements to maintain transparency (Mooraj et al, 1999). Because of the strengths, more and more companies use BSC as a performance measurement tool in their daily operations, from for-profit to non-profit and from large to small (Awadallah and Allam, 2015). Today, many leading companies in their industries use BSC, such as Canon, BMW and TSB. John Christman, the CEO of BMW, said that BSC made strategies conduction much more successfully than before (BMW, 2008).

While using the BSC, four perspectives, including financial, customer, internal process and learning and growing, within which the first one is financial and the rests are non-financial, will be considered to assist the implementation of company strategy, (Merchant and Van der Stede, 2012). The customer perspective includes the measures related to the targeted customer groups (Mooraj et al, 1999). It focuses on the attitudes of customers towards the company and figures out the key matters should be considered about the value proposition delivered to the customers (Kaplan and Norton, 1996). Common objectives for customer perspective are time to serve, price and so on (Mooraj et al, 1999). Companies will be able to build loyalty among their targeted customers if they understand the specific factors valued most (Kaplan and Norton, 1996). For example, customers of express companies may value on-time delivery and protection to the goods most. By measuring customer satisfaction, express companies can realize whether improvement is required to prevent customers from switching to others. Despite the above ones, measures such as customer profitability and market share help companies realize which customer group to target at (Mooraj et al, 1999).

The internal process perspective measures the key internal processes companies should execute to satisfy customers’ needs correctly and efficiently (Kaplan and Norton, 1996). Examples under this category are cycle time and efficiency (Merchant and Van der Stede, 2012). For instance, express companies usually inspect efficiency by measuring their time of preparing between picking up and dispatching. Internal process measures enable organizations to attract the targeted customers, maintain customer retention and optimize financial returns (Kaplan and Norton, 1996). These measures can be quite efficient during changing period since they guide the constant adjustments on the strategy along with the changes according to the critical activities (Mooraj et al, 1999). Compared with the financial-oriented performance measurement, other than centering on improving the current processes, BSC also identifies totally new internal processes to excel at customers’ needs (Kaplan and Norton, 1996).

The learning and growing perspective focuses on companies’ improvement abilities (Merchant and Van der Stede, 2012). To achieve the strategic goals, companies need to measure the gap between ideal and realistic (Mooraj et al, 1999). Since simply using current technologies and skills cannot support long-term goals, measures in this category enable companies to figure out what to address and how to create extended improvement (Mooraj et al, 1999). For an express company, it has to keep updating its couriers’ equipment, such as tracking and signature machines, which can be measured by the number of lost parcels per month to achieve the ideal situation.

The financial perspective represents the thoughts of shareholders about the company (Merchant and Van der Stede, 2012). BSC retains the traditional financial perspective because it reflects the economic influence of the improvements in other non-financial perspectives (Kaplan and Norton, 1996). The common measures include revenue growth and return on equity (Merchant and Van der Stede, 2012). Kaplan and Norton summarized that the three levels of product or service life-cycle, growth sustain and harvest could be measured differently by process development and sales growth, return on investment and revenue volume (Mooraj et al, 1999).