Table of Contents
The balanced scorecard system assists the management of contemporary organisations to translate their vision and mission into specific and quantifiable objectives that can be appraised. The performance measurement system using balanced scorecard uses financial performance indicators such as revenues, and return on capital employed (Tappura et al, 2015). The balanced scorecard also uses other indicators of performance like customer value (generally measured from improved customer satisfaction and increase in market share), effectiveness of internal business processes (generally measured by evaluating the ability of company to achieve predefined quality standards and productivity rates), employee performance and innovation performance. It is also used as tool for strategic performance management that helps the management to monitor the operations and activities of staff and thereby control the consequences arising from various internal activities (Kaplan and Atkinson, 2015).
Application of balanced scorecard
The concept of balanced scorecard encompasses the major non-financial and financial indicators of an organisation related to customer’s requirement, organisational growth and learning and management of internal processes. According to Cooper, Ezzamel and Qu (2016), the balanced scorecard is widely adopted because the system is very flexible. This means that companies operating in different sectors can modify the original framework according to their requirement. To illustrate, Tesco includes five different perspectives to consider the commitment of business to the society in addition to aspects involving operations, customers, financial and people. This is one of the main reasons why the system is popularly used by public sector and private sector firms. The balance scorecard help organisations to replace the controversial financial objectives (which were basically driven by profit objective) with the organisation’s mission related objectives. As a result, the application of balanced scorecard will help the organisations to identify relevant stakeholders, internal resources and processes (Hoque, 2014).
According to Sainaghi, Phillips and Corti (2013), the balanced scorecard retains the traditional financial measures that explains historic performance. However, the non-financial measures helps to analyse intangible factors like customer relationships which is not considered as a financial measure. Hence, the balanced scorecard system analyses long term sustainability of the business.
Perspectives of balanced scorecard
According to Tjader et al (2014), the balanced scorecard assumes that organisations develop their performance metrics based on the following four perspectives and then gather data and analyse them relative to these perspectives:
- The perspective of growth and learning – This perspective includes attitudes related to corporate and individual progress resulting from corporate culture and employee training. In modern business environment most of the organisations are service oriented. In a knowledge-based work environment, the employees are the only repository of knowledge. The business environment in 21st century is constantly changing due to technological advancement and global competition. As a result, it is necessary for the workers to continuously learn and develop their skills (Keyes, 2016). The primary reason for organisations to invest their resources in training and development is to get competitive advantage over rivals. Learning and growth perspective of the balanced scorecard is the foundation for success for technology and knowledge-based business sectors. As per the arguments of Grigoroudis, Orfanoudaki and Zopounidis (2012), this perspective should give equal importance to both learning and training aspects. It also suggests that tutors and mentors of business should have effective communication that will help them to address problems.
- The financial perspective – The original framework of balanced scorecard does not undermine the importance of financial information. This is because the model assumes, accurate and timely funding of data will always remain priority for the managers. The central database of managing financial data helps managers to improve decision making process (Wu and Chang, 2012). Categories such as cost-benefit analysis and risk management are also considered as important financial performance measurement. Hence, according to scholars such as Rajesh et al (2012), these financial measurement categories should also be covered under the financial perspective of balanced scorecard.
- Perspectives of the customer – Modern businesses have realised the importance of customers in business growth and product development because customer satisfaction determines the success of the organisation and also its long term sustainability (Wu, 2012). According to Northcott and Ma’amora Taulapapa (2012), the main rationale for this assumption is that in a competitive business environment if the customers are not satisfied they will most likely switch to other suppliers that will meet their requirements. Hence, a poor perspective of customer is detrimental to business growth. The balanced scorecard framework suggests that customer satisfaction should be analysed in terms of different kind of customers (for example, value customers and premium customers) as well as type of processes used to provide a product or service (Nørreklit et al, 2012).
- The perspective of business process – The perspective of business process refers to management and control of all internal processes which adds value to the business. This metrics is very important perspectives for the managers because it allows them to understand how well the business has been performing. According to Agostino and Arnaboldi (2012), this perspective will help the management to improve the current business processes as per the requirements of the customers. Hence, it is important to carefully design this metrics based on critical market research. The businesses will also have to consider that every organisation has unique objective which cannot be developed by external consultants. Therefore, the management will have to carefully understand the needs of their clients and choose the most appropriate business model that will help them streamline the business process attuned to customer’s requirements (Jin et al, 2013).
Balanced scorecard as a system of strategic management
According to the studies conducted by Kaplan and Norton (2007), the balanced scorecard transformed conventional concepts about measuring performance metrics. When the model was first introduced, most of the companies were busy in enhancing their competitive advantage. The managers soon realised that competitive advantage in future will be influenced by intangible assets (like goodwill of customers) rather than their ability to efficiently manage physical resources.
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