In the Balanced Scorecard approach, the financial perspective is supplemented with three others: the customer, internal business and the learning and growth perspective. These three perspectives are more forward-looking in that they provide indicators of how operations will perform in the future. For example, achieving strategic objectives within the customer perspective should ultimately provide enhanced financial performance. Therefore, the balanced scorecard provides a balanced picture of current operating performance as well as the drivers of future performance (Kaplan and Norton, 1996)
The Evolution of the Concept
The Balanced Scorecard was developed by Robert Kaplan, an accounting professor at Harvard University, and David Norton, a consultant from the Boston area. In 1992 they first introduced the Balanced Scorecard concept as a result of growing concern regarding traditional performance measures and advanced to measure organization performance from not only financial perspective but also customer, internal and organizational perspectives.
Over the next four years, a number of organizations adopted the Balanced Scorecard and achieved immediate results. Kaplan and Norton discovered these organizations were not only using the Scorecard to complement financial measures with the drivers of future performance, but they were also communicating their strategies through the measures they selected for their Balanced Scorecard. The Balanced Scorecard had now evolved from an innovative measurement system into a proven management system (Kaplan, 1994). As the Scorecard gained prominence with organizations around the globe as a key tool in the implementation of strategy, Kaplan and Norton summarized the concept and the learning to that point in their 1996 book, The Balanced Scorecard.
Since that time, the Balanced Scorecard has been adopted by nearly half of the Fortune 1000 organizations, and the momentum continues unabated. So widely accepted and effective has the Scorecard become that the Harvard Business Review recently hailed it as one of the 75 most influential ideas of the twentieth century. (Paul, 2001)
2.3 The Balanced Scorecard as a Strategic Management System
2.3.1 The significance of strategy implementation
Appropriate and strong strategy has been recognized as the cornerstone of the success of organization nowadays, however, an effectively developed strategy is completely worthless if it could be not be implemented as expected.
Many factors make it difficult to implement strategy today. Kaplan and Norton(1996) have identified four specific barriers for organizations to successfully implement their strategies.
- Visions and strategies that not actionable
- Strategies that are not linked to departmental, team, and individual goals
- Strategies that not linked to long- and short- term resource allocation
- Feedback that is tactical, not strategic
Moreover, Organizations are facing a corporate world in which the pace of change continues to accelerate, technology develops fast and the workforce is more diverse and mobile than ever before (Mclemore, 1999). Therefore it is difficult to implement strategy today because business and business strategy are forced to undergoing continuous change in coping with their changing external environment.
A study in Fortune magazine found that less than 10 percent of strategies effectively developed were effectively implemented. In another study, Fortune further found that in more than seventy percent of the cases when CEOs fail, it's not because the strategy was wrong, but because the execution was not successful. (Miyake, 2002).
2.3.2 Balanced scorecard helps strategy execution
Developed to solve measurement problem, the balanced scorecard has been proved that it could significantly help organization to implement their strategies. Since its development in 1992 by Drs. Kaplan, professor at Harvard Business School and Norton, president of BSCol, the balanced scorecard has been implemented in thousands of corporations, organizations and government agencies worldwide to help them in implement corporate strategy. Adopting organizations were able to use the Balanced Scorecard to align their business units, shared services units, teams, and individuals around overall organization goals( McLemore, 1998).
Among numerous experiences in adopting balanced scorecard, two impressive well-documented case studies are Mobil U.S. Marketing and Refining and Cigna Property and Casualty (McLemore, 1998). At Mobil USM&R, the Balanced Scorecard was used to rapidly implement a novel customer segmentation strategy that drove Mobil's profitability from last in the industry to first in the industry. Cigna P&C used the Balanced Scorecard to make the strategic transformation from an industry-lagging and negative cash flow generalist insurer to a $3B specialty insurer.
2.3.3 How does the balanced scorecard help to implement strategy?
The secret of the balanced scorecard and the reason it has gained such wide acceptance is quite simple: It helps organizations reach their full potential. The breakthrough results of the successful adopting organizations were created not by new strategies, new people or new processes. Such achievement was created by focusing the entire organization on the strategy and rewarding people for executing on the strategy with balanced scorecard (Leahy, 2000)
With balanced scorecard, adopting organizations could be able to focus and align their executive teams, business units, human resources team, information technology and financial resources to their corporate strategy. Kaplan and Norton (2001) have observed certain consistent pattern of achieving such strategic focus and alignment, they refer such pattern as “principles” of successful strategy-focused organizations adopting balanced scorecard (Figure 1).
Figure 1: Five Principles for Strategy Implementation
Translate the strategy into operational terms
Balanced scorecard provides a framework to describe and communicate strategy in a consistent and insightful approach. If the strategy could not be described, it is almost impossible to be implemented! The new framework takes the corporate strategy and translates it into terms that the organization can understand and act upon. Using quantitative, but non-financial measures – such as cycle time, market share, innovation, satisfaction and competencies – the balanced scorecard allows the value-creating process within organization to be understood, described and most importantly, measured. A critical part of this step in the process is determining the key objectives, measures, targets and initiatives to drive the strategy and provide a common and consistent for all units and employees.
- Align the organization to the strategy
Once a balanced scorecard has been prepared at the top level, it then could be cascaded operating and support units. Each unit and function of the organization would be able to understand how they could contribute to the organizational strategy. Additionally, best-practice organizations try to develop external alignment with customers and partner’s balanced scorecards. Besides aligning the business units and external customers and partners, successful organizations use the balanced cards in a coordinated approach across the company to achieve potential synergy
- Make strategy everyone's job
Strategy must be executed at the front lines, therefore, communication and education are critical to executing strategy. Organisations need to translate vision into action from the business-unit level down to the individual employee. People need to understand the corporate vision in the context of their own responsibilities. Otherwise organizations can't really expect them to contribute to the company's success. Aligning incentives and personal objectives is also important for success. Leading organizations have found that personal balanced scorecards are very important to further link the personal development process to the strategic management process.
- Make strategy a continual process
Unlike an annual strategy review session of traditional approach, the balanced scorecard allows strategy to happen continually. Monthly or quarterly management meetings will provide opportunity to review and adjust strategy. Linking the balanced scorecard to planning and budgeting systems, and best practice and knowledge management systems are critical ensure that the organization is continually reviewing strategy.
- Mobilize Leadership for change
Active involvement of the executive team could be the most important factor for success in implementing strategy. Successful leadership should recognize balanced scorecard program as a change project. During the initial stage, they need to mobilize the organization to start the program across the organization. Once the process is launched, their focus should shift to governance. Finally, a strategic management system should be formed to institutionalize the new cultural value and new structures into a new system to manage.
2.4 Implementation Issues of the Balanced Scorecard
- For some organizations, the investment could be too expensive. In a February 1998 Tower Group report, researchers estimated that the current cost of implementing a balanced scorecard averages around $400,000 but can easily cost in the millions for large organizations (Young, 2000).
- For the scorecard to work, everyone from the top executives down needs to spend considerable time reaching consensus on the key performance indicators and then providing, collecting, collating and analyzing feedback on the measurements that the corporation deems critical to its success (McLemore, 1999).
- The implementation process may involve a lot of people from top management down to the staff level. The commitment at different levels is important not only in building the balanced scorecard but especially in implementing and using it. Although a balanced scorecard may be well designed, lack of participation and commitment on the part of staff will result in process failure.
- Leahy (2000) states that sometimes organization will adopt “unbalanced” balanced scorecard in real life. Lack of time and budget to implement a full balanced scorecard, they identify the key drivers of their business and build their performance measurement system around those key areas.
3 Conclusion
The challenge of strategy execution has been more relevant and important today than ever before. Organizations are facing uncertain equity markets, an accelerating pace of change and increased expectations for productivity and results (Mclemore,1999). These increased demands could be both threats and opportunities for organizations. To coping such changing external environment and utilize opportunities for development, organizations should be strategy-focused and focus on the key drivers of success and execute their strategies for results. Balanced Scorecard has provided such opportunities for organizations.
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