Literature Review Chapter: Balanced Balanced Scorecard

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Balanced Scorecard (BSC)

The concept of Balanced Scorecard (BSC) is noted to be rapidly evolving in its nature. This is because since its launch, it has seen a series of transformation.

Definition of Balanced Scorecard (BSC)

The Balanced Scorecard (BSC) is defined by the Balanced Scorecard Institute (2010) as a system of strategic planning and management that is extensively employed in business as well as industry. The same system is pointed out by the same institute to be used in government as well as non-governmental organizations all over the world in order to align their business activities with to their organizational vision and strategy in an effort of improving the internal and the external communications while effectively monitoring the performance of the organization against the laid down strategic goals.

In defining the balance scorecard, analysts have debated whether it is an instrument, tool, framework or a system. Ahn (2000) refers to it as a comprehensive management tool, Hueng (2000) sees it as a strategic management instrument while Pforsich (2005) refers to it as a strategic management tool. However, certain scholars refer to Balanced Scorecard as a technique of measuring performance. It has also been opined to be a system of organizational management (Butler et al.,1997). Other authors also employ both opinions. As an example Hassan and Tibbits (2000) define it as a formal technique of management and a formal system of management.Hanson and Towle (2000) on the other hand regard it as a management philosophy and a system of managing organizational performance.

The creators of Balance Scorecard, Robert Kaplan and David Norton defined it as a performance measurement system that is important for providing executives with a comprehensive framework for translating the strategic objectives of an organization into a performance measure which is coherent. They pointed out that BSC complements the traditional financial indicators with better measures of performance for innovations, internal processes, improvements and customer activities (Kaplan and Norton,1993,p143). The effectiveness of the Balanced Scorecard system is indicated by Kaplan and Norton (2001) to be dependent on the ability of the mission and strategy of an organization to be translated into a comprehensive set of measures of performance. They defended BSC as a tool for overcoming the problems that are related to the measurement of financial outcomes only.

The evolution of the concept of Balanced Scorecard

The evolution of the concept of Balanced Scorecard as a measure of strategic performance can be traced to articles written by Kaplan and Norton (Kaplan and Norton,1993; Kaplan,1994).

The development of the concept of BSC was developed in order to act as an innovative tool for performance measurement systems that basically relied on measures of financial measures were deemed obsolete (Kaplan and Norton,1996b). The BSC was considered to be an innovative approach was able to take into account the intangible factors with little value. The term was actually coined in order to reflect the balance that existed between the long-term and the short-term objectives, financial and non-financial measures, external as well as internal perspectives of performance. The lagging as well as leading indicators are also included.

The successful applications of the Balanced Scorecard in various transformational projects have highlighted the fact that it can be used a medium of communicating as well as aligning new strategic approaches. The success has been attributed to the fact that BSC can be used in the identification of the linkages that exists between the four main areas that are responsible for the observed success. Hoffecker and Goldberg (1994) discussed the linkages as well as the holistic approach that is responsible for better performance. Kaplan (2004) indicated that the balanced scorecard has rapidly evolved from being an innovative system of performance measurement to one that has been proven to be effective in organizational management. The success of BSC is evident form various case studies (Vitale et al.,1994;McWilliams,1996;Jensen and Gerr,1995).

The theory and application of Balanced Scorecard

Tonge (1996) indicated that the balanced scorecard has successfully been employed in various industries as well as public sectors in the United States. Tonge (1996) specifically discussed its application in the pubic sector. Norton (1996b) indicated that there have been positive reports on the success of BSC system with no failures being indicated. The pitfalls as well as the problems that are involved in its application have been indicated (Kaplan and Norton,1996b).The accountancy elements of the Balance Scorecard has been widely discussed (Booth,1996;McWilliams,1994)

A lot of interest as well as attention have been dedicated to the Balanced Scorecard's ability to measure performance (Brown,1994;Birchard,1995).Cartada (1994) pointed out that one of the consideration of the measurement utility was improved by linking BSC with the concept of quality management. The performance measurement capabilities of Balance Scorecard can be considered for a variety of viewpoints (Davis,1996;Smith,1993).

Bainbridge (1996) however came up with a comprehensive framework that considered all of the main aspects of the concept of BSC.

Effectiveness of Balanced Scorecard

Extant literature is dedicated to the examination of the effectiveness of the concept of Balanced Scorecard in both the private and public sectors. The finding have however been mixed. Several empirical studies have indicated that the appropriate employment of Balanced Scorecard leads to an improvement in financial performance (Ittner and Larcker,2003;Evans and Jack,2003;Davis and Albright, 2004). Yet again, other studies have indicated that the application of the concept of Balance Scorecard has led to positive improvements in employee satisfaction as well as the general understanding of business (Dumond,1994; Forza and Salvado,2000).

On the contrary other empirical investigations have found no level of improvement as a result of employing the balanced scorecard concept (Handfield and Ghosh,1995;Martinez,2004;Malina, Norreklit and Selto, 2005).The key principles of Balance Scorecard have also been questioned by the work of Marr and Adams (2004) as well as Norreklit (2000).

Most of the existing studies on BSC have a sharp focus on its application to the private and yet for-profit servoice-oriented and manufacturing enterprises. On the contrary, other studies have focused on its application in the effective use in the public sector (Andersen and Lawrie,2002;Szcrycz,2004).

The main pillars of Balanced Scorecard

The balanced scorecard has been noted to be supported by four main pillars. Kaplan ad Norton (1992) indicated that the balanced scorecard can be employed within the four main measures that include the achievement of a balanced between internal and external current as well as future performance and financial and non-financial performance. The four main pillars are presented in form of perspectives and include; financial, processes, customer as well as learning and growth (Kaplan and Norton,1996).

The financial perspective

This perspective is important since it is the one that monitors the organization's implementation as well as the execution of the strategies. This perspective represents the objectives of the organization that are long-term and therefore it incorporates the outcomes that are intangible in the traditional financial terms. There are three stages involved. These are; rapid growth, sustenance and harvest (Kaplan and Newton,1996).

The customer perspective

This perspective defines the specific value propositions that an organization will employ in the satisfaction of its customers and thereby generate sales to the customer groups that are noed to be desired.

The internal perspective

This perspectives deals with the processes that are important in the creation as well as the delivery of the customer value proposition. It has a focus on the activities as well as processes that are important for an organization to prosper in the provision of value that is expected by the clients.

The innovation as well the leaning perspective

This is the foundation of all the strategy as has a focus on all the intangible assets of a given organizations. It focuses mainly on the internals skills as well as capabilities that are necessary for creating values in the internal processes.

The Balanced Score card is the fundamental measurement system that is customized to look beyond traditional measurements of financial capability of an organization and is mostly based on that particular organization's strategies. Pink et al. (2001) state that measurement of performance can be done at three levels namely, measurement of an individual's performance, measurement if a systems performance and the measurement of the relationship between the environment and the performance measurement system. This system according to the Joint Commission on Accreditation of Healthcare Organization is composed of a set of process that measure outcomes; collection analysis and dissemination of these measurements from different organizations as well as a database that is automated and can be used to facilitate the improvement of service delivery in the service industry. Radnor and Lovell (2003) define performance measurement as the process of collecting data to help support and facilitate coordination of decision making process and implementation of the same decision in an organization. They continue to posit that the a system of measurement is very significant in the executing the new strategies identified to help the organization achieve its targets and objectives. On the other hand Pink et al. ( 2001) argue that the measurement of performance give an organization an opportunity of measuring and quantifying past… [END OF PREVIEW]

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