The Balanced Scorecard

Academic Paper

Ana Maria Tudose 87604

5/5/2008

ABSTRACT

The purpose of this paper is to analyze and identify key elements related to Balanced Scorecard, which is an actual subject' in b-to-b environment at the moment.

Nowadays most of the firms in the world actively adopt new approaches to their performance measurement systems. A new approach to strategic management was developed in the early 1990's by Kaplan and Norton. They named this system the 'balanced scorecard'. The balanced scorecard (BSC) is one of the major developments in management accounting in the past decade (Ittner and Larcker, 2001).

Many organizations have invested substantial resources in recent years to implement a balanced scorecard of performance metrics (Banker et al., 2004).

The paper shows that the most important factors that could encourage firms to adopt Balanced Scorecard are the following: it helps companies to assess the application of its vision and strategy; enables managers to translate business unit strategies into a measurement system; provides executives with a comprehensive framework to translate the company's strategic objectives into a coherent set of performance measures; enables managers to see the breadth and totality of company operations; and it helps companies to assess the importance of its vision and strategy. A set of development steps are presented and also some implementation tips. The balanced scorecard evolved a lot by now and continues to evolve and mature, illustrating the concept's flexibility. This should encourage all accountants to consider how to utilize the effective insights gained on the journey so far. In conclusion, the success of the balanced scorecard will depend on the clear identification of non-financial and financial variables and their accurate and objective measurement and linking the performance to rewards and penalties.

INTRODUCTION

The main goal of all profit companies is achieving profit then maximizes it. A company should continually search for new tools to improve profitability. Measuring organizational performance and success is a continuous challenge for both managers and researchers.

The choice of performance indicators is one of the most critical challenges facing firms. Performance reporting is important in motivating employees to enhance performance and is an essential element of an organization's control system (Ittner and Larcker, 1998a; Ittner and Larcker, 1998b; Malina and Selto, 2001).

To measure performance most organizations use traditional financial scorecards such as the Income Statements and Balance Sheet. However, recently there has been increasing criticism of financial scorecards (Kaplan and Norton, 1992, 1996, 2001a, 2001b, Shields, 1997, Atkinson et al., 1997, Ittner and Larcker, 1998b, Banker et al., 2000, Hoque and James, 2000). The major criticisms are that current financial scorecards are historical in nature and are not a reliable predictor of future financial performance.

A BRIEF HISTORY

The idea of the balanced scorecard was highly attractive when it first appeared. Companies were increasingly frustrated with traditional measures of performance that related only to the shareholders' point of view. Many felt that this was unduly short-termist and too concerned with stockmarket twitches; it prevented boardrooms and managers from considering longer-term opportunities. The balanced scorecard not only broadens the organisation's perception of where it stands today, but it also helps it to identify things that will ensure its success in the future.

Kaplan and Norton themselves saw some of the benefits of the balanced scorecard as follows:

? It helps companies to focus on what needs to be done in order to create a "breakthrough performance".

? It acts as an integrating device for a variety of often disconnected corporate programmes, such as quality, re-engineering, process redesign and customer service.

? It translates strategy into performance measures and targets.

? It helps break down corporate-wide measures so that local managers and employees can see what they need to do to improve organizational effectiveness.

? It provides a comprehensive view that overturns the traditional idea of the organization as a collection of isolated, independent functions and departments.

The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance.

While the phrase balanced scorecard was coined in the early 1990s, the roots of the this type of approach are deep, and include the pioneering work of General Electric on performance measurement reporting in the 1950's and the work of French process engineers (who created the Tableau de Bord - literally, a "dashboard" of performance measures) in the early part of the 20th century.
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The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The "new" balanced scorecard transforms an organization's strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. It provides a framework that not only determines performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies.

This new approach to strategic management was first detailed in a series of articles and books by Drs. Kaplan and ...

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