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The Balanced Scorecard

Extracts from this document...

Introduction

Abstract The Balanced Scorecard is a management tool that supports the successful implementation of corporate strategies. It translates an organization's strategy into clear objectives, measures, targets and initiatives organized by four different but inter-related perspectives: financial, customer, internal and learning and growth perspectives. By linking financial and non financial measures with causal chains to the organization's strategy, the Balanced Scorecard supports the alignment and management of all organizational activities according to their strategic relevance. The manner in which the measures of the Balanced Scorecard are developed and communicated in the corporate world (i.e. how the Balanced Scorecard is practiced) is discussed by taking the case of Metro Bank and Asia Telecom. Metro Bank is a case adapted from Kaplan and Norton (1996) while Asia Telecom is based on a telecommunication company whose name is disguised to preserve confidentiality. The Balanced Scorecard is also used as a central framework for a company's management processes. The manner in which the strategic framework is put into action is discussed by using the case of Asia Telecom. When used in this manner, the Balanced Scorecard enables the company to become aligned and focused on implementing the long term strategy. The Balanced Scorecard allows the strategy to evolve as competitive, market and technological conditions change. Introduction Business organizations are facing increasingly complex markets, customers and suppliers, and fierce global competitive pressures. In such competitive environment, access to the right information is important to ensure high quality decision making and thus, the success of the organization. Resulting from the changing needs of information in a competitive environment, pressure was put on accounting information to increase its relevance. Extensive and exclusive use of financial measures has been criticised due to their historic nature. Financial measures reveal a great deal about an organisation's past actions but nothing about its future alertness. Exclusive reliance on financial indicators could promote behaviour that sacrifices long term value creation for short term performance (Dearden, 1969). ...read more.

Middle

Metro Bank's case adapted from Kaplan and Norton (1996) is used to illustrate revenue growth strategy whilst Asia Telecom is used to illustrate both revenue growth and productivity strategy. Metro Bank case Metro Bank, a retail banking division of a major bank was facing problem of excessive reliance on a single product. The revenue growth strategy is undertaken to resolve this problem, that is, to reduce earning volatility by broadening sources of revenue with additional products for current customers. In the process of developing the Balanced Scorecard, the strategy is translated into objectives and measures in the four perspectives. * The financial objective to support revenue growth strategy was to broaden the mix of revenue. The financial measure is the percentage increase in year to year revenue (lag indicator) and revenue mix (lead indicator). * The existing customers of the bank however do not view their banker as the logical source for a broader array of products such as mutual funds, credit cards and financial advice. The bank's executive concluded that if the bank's new strategy were to be successful, they must shift customers' perception of the bank from that of a transactions processor of checks and deposits to a financial adviser. With this, the customer objective was to increase customer confidence in the bank's financial advice and increase customer satisfaction. This is done by building long term relationship with targeted customers so that the bank can sell them multiple financial products and services. The measures are share of customer segment i.e. number of Metro's customers in targeted segment (lag indicator) and depth of relationship (lead indicator). * Internal activities that need to be mastered if the strategy were to succeed were identified as 1) understand customers, 2) develop new products and services and 3) cross-sell multiple products and services. Each business process would have to be redesigned to reflect the demands of the new strategy. ...read more.

Conclusion

Now, the failure to achieve the expected outcome - higher return from new business - is an important signal. Theory embodied in Asia Telecom's growth strategy may not be valid. Such disconfirming evidence should be taken seriously. Managers must engage in an intense dialogue to review market conditions, the value propositions they are delivering to customers, competitor behaviour and internal capabilities. The result may be to reaffirm belief in the current strategy but to adjust the quantitative relationship among the strategic measures on the Balanced Scorecard. Alternatively, the intensive strategic reviews may reveal that an entirely new strategy is required (a double loop learning outcome) in light of the new knowledge about market conditions and internal capabilities. The scorecard thus stimulates learning among key executives about the viability and validity of their strategy. When the Balanced Scorecard is used as a central framework for a company's management processes, it enables the company to become aligned and focused on implementing the long term strategy. The scorecard is a systematic process to implement and obtain feedback about strategy. With strategic rather than tactical feedback, the company is prompted to cycle back to the first management process - clarifying and gaining consensus on vision and strategy - thus, allowing the strategy to evolve as competitive, market and technological conditions change. Indeed, the Balanced Scorecard yields many benefits to companies. As discussed above, the scorecard measures when integrated into the management system can facilitate strategic formulation and execution and accelerate continuous performance improvement. It is more than mere balanced measurement system that tracks an organization's performance. Conclusion The benefits of the implementing the Balanced Scorecard are increasingly recognized by companies leading to increased adoption of the Balanced Scorecard. With the shift of value creation strategies from managing tangible assets to knowledge-based strategies that create and deploy an organization's intangible assets, the relevance of the Balanced Scorecard increased in the corporate world. This is particularly relevant in a competitive environment where strategies must continually evolve to reflect changes in the competitive landscape. ...read more.

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