In today’s business environment measuring business performance is a matter of life and death within any organisation (compare Ittner and Larcker, 1998). Due to the changing nature of work and increasing competition with changing demands (Neely, 1999) the number of people interested in business performance measurement has recently increased dramatically. But business performance measurement is confronted with a vital choice what system the company should use to quantify the success of the organisation’s strategy. In this context the Balanced Scorecard(Kaplan and Norton, 1992, 1996) is almost used as a synonym for measuring
Business Performance Measurement (BPM). With this in mind, the following dissertation aims at a critical exploration and
assessment of the framework of the Balanced Scorecard (BSC) and it examines if this framework merits its wide popularity experienced and still experiences.
Following a definition of the BSC, the author turns to the elements of the BSC with its key proclamations. Strengths and weaknesses will be outlined by considering different case scenarios. The main attention will be put on the question whether the BSC leads to better business results, as it is publicized, or if its wide use is only an outcome of its effective promotion.
Before the analysis comes to an ending in which it summarises the key points, the author suggests some recommendations for organisations when using the BSC, in order to meet its problem areas. In this context the author’s personal view will be
flowing in.
Table of Contents
Abstract
Table of Tables and Figures
Acknowledgements
Introduction
GENERAL INTRODUCTION INTO THE TOPIC
EVOLUTION: FINANCIAL VS. NON-FINANCIAL MEASURES
TOTAL QUALITY MANAGEMENT
POPULARITY OF THE BALANCED SCORECARD
AIM OF THE DISSERTATION
STRUCTURE OF THE PAPER
Methodology
RESEARCH APPROACH
RESEARCH DESIGN
CONTRIBUTION OF RESEARCHER
DATA COLLECTION
SECONDARY RESEARCH INTO EXISTING LITERATURE ON THE BALANCED SCORECARD
PRIMARY RESEARCH
Part I - Origins of the Balanced Scorecard
1.1 DEVELOPMENT OF THE BALANCED SCORECARD
1.2 KAPLAN AND NORTON’S USE OF “SUCCESS STORIES”
Part II - Key Points of the Balanced Scorecard
2.1 Analysis Balance
2.1.1 Balanced Focus Possible?
2.1.2 BARRIERS FOR BALANCE
2.2 Analysis Cause and Effect
2.2.1 Analysis Strategy Map
2.2.2 CO-VARIATION
2.2.3 Calculating Style
2.2.4 MACRO ENVIRONMENT: BARRIER FOR CAUSE AND EFFECTS
2.2.5 CAUSES RATHER MERELY THE EFFECTS
2.3 Analysis: Customer Value
2.3.1 CRITIQUE
2.3.2 CUSTOMER VALUE EQUAL PROFITABILITY?
2.4 Analysis proposed Perspectives
2.4.1 ADDITIONAL STAKEHOLDERS
2.4.1.1 LACK OF ATTENTION TO THE COMPETITION
2.4.2 QUESTIONABLE LEARNING AND GROWTH PERSPECTIVE
2.4.3 EMPLOYEE PERSPECTIVE
2.5 Analysis Measures
2.5.1 DANGER: OVER-MEASUREMENT
2.5.2 MILESTONES
2.5.3 RISK OF IMITATION
2.6 Analysis Strategy Part
2.6.1 FRAMEWORK STRATEGY
2.6.1.1 IS IT POSSIBLE TO FORMULATE STRATEGIES WITH A FRAMEWORK?
2.6.2 STRATEGIC PLANNING
2.6.3 NON-TAILORED STRATEGY
2.7 ANALYSIS: ADDING VALUE WITH THE BALANCED SCORECARD?
2.7.1 PORTER’S VALUE CHAIN AND THE BALANCED SCORECARD
2.7.2 DIFFERENCES
2.8 ANALYSIS: IMPLEMENTATION OF THE BSC
Part III Recommendations regarding use of BSC
3.1 Situational Analysis
3.1.1 WHEN ARE STRATEGIES GOOD?
3.1.2 DECISION PERIOD
3.2 Strategy Review and Adaptation-Situational Analysis
3.2.1 UPSHOT
3.3 Measuring the right things right
3.4 Vision Formulation
3.5 Communication
3.6 Upshot
3.6 Hoshin Kanri and the Balanced Scorecard
Part IV Why this popularity of the BSC?
Conclusion
FURTHER ISSUES
Bibliography
Appendix
Notes
Abstract
In today’s business environment measuring business performance is a matter of life and death within any organisation (compare Ittner and Larcker, 1998). Due to the changing nature of work and increasing competition with changing demands (Neely, 1999) the number of people interested in business performance measurement has recently increased dramatically. But business performance measurement is confronted with a vital choice what system the company should use to quantify the success of the organisation’s strategy. In this context the Balanced Scorecard (Kaplan and Norton, 1992, 1996) is almost used as a synonym for measuring Business Performance Measurement (BPM).
With this in mind, the following dissertation aims at a critical exploration and assessment of the framework of the Balanced Scorecard (BSC) and it examines if this framework merits its wide popularity experienced and still experiences.
Following a definition of the BSC, the author turns to the elements of the BSC with its key proclamations. Strengths and weaknesses will be outlined by considering different case scenarios. The main attention will be put on the question whether the BSC leads to better business results, as it is publicized, or if its wide use is only an outcome of its effective promotion.
Before the analysis comes to an ending in which it summarises the key points, the author suggests some recommendations for organisations when using the BSC, in order to meet its problem areas. In this context the author’s personal view will be flowing in.
Table of Tables and Figures
TABLES
Table 1: Reasons why traditional financial measures are criticised:
Table 2: Designing a BSC
Table 3: Perspectives of Performance Measured in Business Performance Management
Table 4: The BSC as a strategic control framework (Kaplan and Norton)
Table 5: Distinguishing characteristics of Hoshin Kanri
FIGURES
Figure 1: The Impact of the BSC in the field of Business Performance Measurement
Figure 2: The Balanced Scorecard
Figure 3: Roles of the BSC
Figure 4: Classification of Resources
Figure 5: Sample Cause & Effect Relationship Diagram
Figure 6: A strategy map by Kaplan and Norton.
Figure 7: Defensive and Offensive Strategies
Figure 8: Porter’s generic Value Chain
Figure 9: Decision and Implementation Phase
Figure 10: A Company’s Macroenvironment
Figure 11: The Five Generic Competitive Strategies
Acknowledgements
I am grateful for the guidance and useful criticism throughout the process of writing this dissertation of my supervisor U Raut-Roy from Ashcroft International Business School, Cambridge. My appreciation is also due to Andreas Nastke from Freiburg International Business School who has given me the opportunity to explore a topic which was both interesting and relevant to my personal development. I would also like to mention my friend Javier Kolland who has given me feedback and suggestions when it came to the English language.
I would also like to thank the staff of the Anglia Polytechnic University Library, who was very helpful and patient with my questions.
Finally, my greatest thanks go to my friends and in particular my family for their patience, support and trust in my capabilities.
Introduction
GENERAL INTRODUCTION INTO THE TOPIC
Measuring organisational strategic success is a continuous challenge for both managers and researchers. The choice of a Business Performance Measurement system is one of the most crucial challenges facing organisations. According to a survey of the Chief Financial Officer in 1995 “80% of large American companies want to change their strategic performance measurement system [...]” (Bill Birchard, 1995). A 1996 survey by the Institute of Management Accounting (IMA) found that only 15 per cent of respondents’ strategic measurement systems supported top management’s business objectives very well, while 43 per cent less than adequately or poorly (IMA, 1996). The turmoil and dissatisfaction lies greatly in the desperate search for the right strategic measurement tool, which makes many accountants believe that corporate performance measurement systems do not align with the business objectives well.
However, new reports and articles on the topic appear frequently every working day since 1994 (Neely, 2002). In 1996 in the USA alone one new book was launched every two weeks (Neely 1998, p.1). Between 1950 and 1991, the membership of AIA (American Institute of Accountants) and AIDPA (American Institute of Certified Public Accountants) grew from 16,062 to 301,410 – an increase of 1,877 per cent (Meyer and Gupta, 1994). Internet searches on the topic reveal more than 81 million sites dedicated to Business Performance Management. In addition the software market for solutions and applications for measuring and managing corporate performance is constantly growing (Marr and Neely, 2001). It becomes clear that Business Performance Measurement is a multimillion-dollar industry. And in this confusion managers used, after a survey conducted in 2002, 16 management tools, which is a 55 per cent leap compared to 2000 (Rigby, 2003).
Managers measure because they want to know how well their organisation is performing, “[...] as this enables informed decisions to be made and actions to be taken because it quantifies the efficiency and effectiveness of past actions” (Andy Neely 1998, p.2). They play a key role in developing strategic plans, evaluating the achievement of organisational objectives, and compensating managers (Ittner, Larcker, 1998). In a white paper for example the UK government declared: “To achieve sustainable business success in the demanding world marketplace, a company must [...] use relevant performance measures” (UK government white paper on Competitiveness, quoting RSA Tomorrow’s Company Inquiry Report, May 1994). Andy Neely puts the importance of measuring business performance as the four “CPs of measurement” (Neely 1998, p.71):
illustration not visible in this excerpt
EVOLUTION : FINANCIAL VS . NON -FINANCIAL MEASURES
During the 1980s and 1990s managers began to reject financial measures and were searching for a new means of measuring performance. While in 1982 62% of market capitalization was invested in tangible assets, in 2001 only 15% was invested (Statistics from the Balanced Scorecard Collaborative) in buildings, machines, and inventories. The initial interest in intangible-assets 1 came from the quality movement and the trend of firms to measure and report employee morale, product quality, and customer satisfaction. In response to the concerns numerous performance measurement frameworks and alternative methods of measurement, such as shareholder value analysis (Rappaport, 1986) and activity-based costing (Kaplan and Cooper, 1997) were proposed. They all wanted to meet the increase criticism (Table 1) of “[...] telling the story of the past, but nothing about the future alertness” (Nørreklit, 2000; Maskell, 1991; Hill, 1995; Crawford and Cox, 1990; Ghalayini et al., 1997; Jagdev et al., 1997; Kaplan and Cooper, 1998; Bitchi, 1994).
table 1: Reasons why traditional financial measures are criticised:
illustration not visible in this excerpt
TOTAL QUALITY MANAGEMENT
Western managers became increasingly exposed to the concept of Total Quality Management (TQM). The rise of the TQM movement drew the attention of managers to the importance of focussing on the customer and of providing quality products and services as a means of maintaining competitive advantage.
The TQM-movement with the focus on non-financial measures led in part to the publication of Kaplan and Norton’s “Balanced Scorecard“(BSC) which has developed to the most popular measurement framework.
Therefore a strong link between the BSC and the TQM tool is observable: “Both require a high understanding of customer satisfaction and deep commitment to philosophy on all levels of an organisation” (Deming 1982, Juran 1989).
POPULARITY OF THE BALANCED SCORECARD
Developed by Robert Kaplan, professor of accounting at Harvard Business School, and David Norton, president of Renaissance Strategy Group, the BSC has quickly advanced to the dominating strategic measurement system (Kaplan and Norton, 1992, p.71-79) in the field of Business Performance Measurement (Figure 1) and its dominance is still increasing (compare Marr, Schiuma, 2003). The book “The Balanced Scorecard” (Kaplan and Norton, 1996) has been awarded a prize by the American Accounting Association based on the justification that it was “the best theoretical contribution in 1997”. Many software vendors fought to get their share of the 2001 estimated $2.6 billion analytic application market, by producing innovative BSC applications aimed at easing the process of implementation (Bernard Marr, 2001). Recent estimates suggest that 60 per cent of the Fortune 1000 companies claim to have experimented with the BSC (Silk, 1998). 40 per cent of the largest businesses in the USA had adopted the BSC by the end of 2000, according to the USA research company Gartner Group. Evidence suggests that by 2001 the BSC had been adopted by 44 per cent of the world’s organisations (57% in the UK, 46% in the US and 26% in Germany and Austria).
figure 1: The Impact of the BSC in the field of Business Performance Measurement
“Most frequently cited authors by year (1st and 2nd Kaplan and Norton with their BSC)”
illustration not visible in this excerpt
What is neglected by the inventors of the BSC is that the framework deducts from the French “Tableau de Bord” (Bourguignon et al., 2001) and/or2 the Japanese “Hoshin Kanri” (Witcher, 2001), which both are in many ways similar to the BSC. Therefore enthusiasm for the BSC was very limited in French and Japanese companies.
In spite of its wide usage, it has shown to be inadequate in various circumstances and across differing firm types (Maltz at al., 2003). Gartner Group found out that only ten per cent of the Global 1000 companies “[...] have successfully implemented Corporate Performance Management compared to 60% of them proclaiming to use the BSC”, (Heaney at al., 2003).
This shows that there must be something contradictory about the “powerful management tool”, which the Harvard Business Review has tagged as one of the major business ideologies of the past 75 years (2000).
AIM OF THE DISSERTATION
Surprisingly there has been little research into how companies are adopting and applying the BSC and whether the Kaplan and Norton model actually works. Therefore, it is worth asking whether this is a valid model for obtaining the superior financial results assured.
Moreover, the dissertation evaluates if the international popularity of the BSC is due to its substance as an innovative and practical theory or simply to its promotional rhetoric. This is done in this manner because the author concludes that most managers decide to use the BSC on the basis of the information they get.
STRUCTURE OF THE PAPER
The remainder of the dissertation is organized in four main parts as follows.
In Part I the BSC framework will first be described with looking at its development over time since its primary introduction in 1992. This will build the basis for the following examination of the ideologies and principles proclaimed by the inventors.
Part II discusses the issues around the BSC theory. Firstly, the issue of the framework’s guidance to a strategy will be pointed out. Different questions set by the author then shed light on the doubtful value of the proclamations made by Kaplan and Norton, mainly its interpretation of customer value. The author explores and critically assesses the ways in which the BSC contributes to company performance.
Within Part III different recommendations concerning a successful implementation of the BSC will be proposed in order to successfully face the problematic issues. For this purpose, the author’s personal experience evaluating a BSC will help to draw a picture based on knowledge and practice with the measurement tool. Furthermore, it will be looked at the Japanese Hoshin Kanri theory in order to draw further conclusions on the discussed framework’s limitations.
Part IV discusses briefly what the reasons for the BSCs popularity are.
Finally the conclusion focuses on at the author’s findings and evaluates the implications they have on companies using the BSC.
Methodology
The main purpose of this dissertation is to analyse the current status of the BSC literature. Based on this, some recommendations will be given in the last part. In order to achieve these goals, several steps of the research process have been gone through.
RESEARCH APPROACH
A research approach can either be deductive (testing a theory), or inductive (building a theory), (Lewis, 2003). Since my investigation has been different the approach is neither only deductive nor only inductive, rather a mix of both. On the one hand I criticize the BSC model, but on the other hand I suggest recommendations for its better use.
RESEARCH DESIGN
According to Smith and Dainty (1991), research design is about organising research activity, including the collection of data, in ways that are most likely to achieve the research objectives. Two choices are of particular significance for this dissertation.
CONTRIBUTION OF RESEARCHER
First, it is important to decide whether the researcher remains distanced from, or gets involved with, the material that is being researched. Obviously this decision stems from one’s attitude about whether or not it is possible to remain independent from the trend contents being observed. Traditionally, it is assumed in science that the researcher must maintain complete independence in order to give any validity to the outcome. However, the author will involve own ideas, based on the belief that the best way of learning about a topic field is through the attempt to change it, and it should therefore be to some extent the objective of the action researcher.
DATA COLLECTION
Data can be divided into primary and secondary data. Primary data are collected through observations and secondary data are that have been collected and revised (Lewis, 2003). The author has made use of both; however, mainly secondary data are applied.
SECONDARY RESEARCH INTO EXISTING LITERATURE ON THE BALANCED SCORECARD
The discussion will show that when organisations espouse the existing literature on the BSC, they will be left to limitations because these literatures, by not specifically including significant factors discussed later, find business managers weakly prepared to compete in their industries.
To complete this objective, this dissertation is based on thorough research and analysis, mostly from books and articles about the BSC and other strategic theories such as Hoshin Kanri and Total Quality Management. The secondary data involved were collected under a wide range of relevant and subject-related resources like websites, different databases (“Emerald”, “Science Direct”), reports, research results on the internet (Google), books and articles in magazines such as The FT, Harvard Business Review or the European Management Journal, and other literature in order to produce a complete and up-to-date picture of the situation and issues surrounding the BSC theory. The subjects discussed in this dissertation are relatively new in business resources and most of the data available are presented in journals and periodicals rather than texts. It is worth mentioning that the university library played an important role in this research.
In general, research has been qualitative rather than quantitative; however, figures have been used to support the author’s analysis and conclusions.
By using existing material in secondary data which show the strategies that businesses need to survive in a competitive environment, it becomes possible to look at major issues like; the analysis of competitive environment and how corporate strategies are formulated with the intention of achieving competitive advantages. Furthermore it is viewed at two theories - Porter’s Value Chain and Hoshin Kanri – which both are proclaimed to have strong linkages to the discussed framework. This will help to, through the evaluation, further point out weaknesses or strengths of the BSC.
Due to the BSCs wide use the topic is covered in a considerably wide range, but little was found on a critical view which the author saw as an opportunity to exceed existing ideas and thoughts. Questions throughout the paper serve as a guideline to the reader and facilitate the presentation of theories.
I will review literatures on the BSC, performance measurement and strategy tools as a subject. I will then examine some of the pressures that businesses constantly undergo, in order to test whether the BSC would properly equip organisations for the business environment that they operate in. This dissertation will show the deficiencies in the BSC theory, which mainly lays in the lack of specific analysis within the core of the competitive environment and the general strategic planning activities of organisations. Therefore my objective is to integrate more analysis within the BSC environment based from several corporate misjudgements and misconducts about strategic activities.
If the existing BSC literature were proved to have failed in clearly preparing organisations to cope with their dynamic market environment, then my theory of actively including different recommendations discussed through the end of this dissertation would be sustained.
PRIMARY RESEARCH
Primary data were gathered when I assisted at both the creation and implementation of a BSC for a middle sized Pizza Franchise company with 300 employees and a turnover of 2,700,000 Euro. I often observed limitations and critical struggles using the BSC framework. One of the problems contributing to that was the underestimation of the topic until the final implementation based on the simple appearance of the model in literature. This encouraged the author to approach further managerial tools which proclaim to assist managers for strategic formulations and to form an own opinion as to how to improve the BSC use. The motivation to research and write this paper emerged from the genuine interest to look behind the issues taught of what the BSC does and to look into the issues of what it delivers, especially as the matters of business performance measurement became a part of most organisations’ daily business.
Part I - Origins of the Balanced Scorecard"
In 1992 Kaplan and Norton’s BSC first arose out of a research project with 12 companies deemed to be at the leading edge of performance measurement. The result of this research was, in Kaplan and Norton’s words “a set of measures that gives top managers a fast but comprehensive view of the business” (1992). The BSC (Kaplan and Norton 1992, 1996) addresses the perceived shortcomings in financially-oriented performance measurement systems. The model is based upon the premise that success has many facets, and “[...] what you measure is what you get” (Kaplan and Norton, 1992). Therefore traditional financial measures are supplemented with non-financial measures focused on at least three other perspectives: customer- (e.g. customer satisfaction), internal business processes- (e.g. process efficiency) and learning and growth- (e.g. employee capability) perspective (Figure 2).
figure 2: “The Balanced Scorecard”
illustration not visible in this excerpt
According to Kaplan and Norton advocates of the BSC:
“The name reflected the balance between short- and long-term objectives, between financial and non-financial measures, between lagging and leading indicators, and between external and internal performance perspectives.”
Robert S. Kaplan and David P. Norton, The Balanced Scorecard, Boston, MA: Harvard Business School Press, 1996, p.viii.)
Kaplan and Norton assert that their proposed framework “[...] translates a company’s vision and strategy into specific measurable objectives” (Kaplan and Norton, 1996) and it improved managerial decision making. While determining whether the BSC improves managers’ judgements and decisions can be difficult, a reasonable starting point is to determine whether and how the BSC affects these judgements.
The basis of the BSC is simple, which has the advantage that managers who first read about it can immediately understand it. However, the simple basis of the BSC literature causes managers to overlook the initially hard work for strategic analysis. Furthermore, managers suppose in some cases that BSC software could enable organisations to have a substitute for this work (Marr, 2001).
1.1 DEVELOPMENT OF THE BALANCED SCORECARD
Since its introduction in 1992 as performance measurement tool the BSC has gone through an increasing number of roles (Figure 3).
illustration not visible in this excerpt
figure 3: Roles of the BSC
Source: Compiled by the author
The first writing about the BSC in 1992 paid only little attention to the process of performance measurement system design (Kaplan and Norton, 1992). One year later the authors overcame briefly this shortcoming by offering in their 1993 Harvard Business Review paper an eight-step process (Table 2) which is expected to enable managers to design a BSC system. Since then further changes have been inducted on both the macro and micro level.
On the macro level, the BSC evolved from a performance measurement system (Kaplan and Norton, 1992/1993) to a strategic management framework (Kaplan and Norton, 1996), then to a strategic change framework (Kaplan and Norton, 2000) and then to a framework to manage the readiness of intangibles (Kaplan and Norton, 2004). Their writings and consulting practice increasingly focused on the role of the scorecard in successful strategy execution rather than on its role as a performance-measurement system (Higgins and Currie, 2004).
table 2: Designing a BSC
illustration not visible in this excerpt
Source: Kaplan and Norton, 1993.
The alignment of the BSC over the year with the changing environment is generally positive, but re-defining fundamental concepts – such as intangible assets – causes confusion (Marr and Adams, 2004, p.24). The fundamental changes within the BSC make it increasingly difficult to implement the system since there is no common understanding of what is meant by a BSC.
Even if Kaplan and Norton steadily made the attempt to adapt their framework to contemporary needs one is still under the impression that the model is far from being fully developed. Many organisations use the term “Balanced Scorecard” for their performance management system “[...] rather for the tenets of Kaplan and Norton’s framework” (Marr and Schiuma, 2003).
1.2 KAPLAN AND NORTON ’ SUSE OF “SUCCESS STORIES ”
Since their first publication managers have to be content with field reports and articles which attempt to outline some of its advantages and disadvantages (compare Mooraj, Oyon and Hostettler, 1999). This supposes that the academia is enhanced by the authors’ claim that the BSC has been developed in interaction with practical business situations and that it has proved applicable in many companies. However, these “success stories” (e.g. Mobil North, Cigna Property and Rockwater) have only limited value. They are highly complex examples and based on empiricism.
Also Kaplan and Norton said that “[...] the companies capitalized on capabilities and assets – tangible and intangible – that existed already within their organizations” (2001, p.10). Each scorecard is unique; care must be taken in generalizing the findings.
Be that as it may, the reference on such “success stories” shows that the gap which has been built between the empirical world and the theory developed in the BSC is wide and it seems that there is a lack of large scale empirical testing of the whole concept (compare: Marr and Schiuma, 2003).
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