Balanced scorecard: A rising trend in strategic performance measurement

Khim Ling Sim, Hian Chye Koh. Measuring Business Excellence. Bradford: 2001. Vol. 5, Iss. 2; pg. 18, 9 pgs

 

Abstract

The long-term survival of a business is dependent upon meeting market needs through a long-term value creation process. Traditional performance measurement systems have been criticized as being too narrowly focused on financial figures and functional level performance such that they often fail to capture organizational long-term business success. In contrast, the balanced scorecard calls on managers to first make a commitment to introduce an array of measures or scorecards that will guide their decisions away from the narrowly focused financial measures. These scorecards, in turn, serve as dials on a dashboard and guide businesses into greater profitability as managers position themselves to better serve their employees, customers, and shareholders at large. Using information collected from 83 electronics companies located within the US, results from the study provide support for the balanced scorecard.

 

Do your performance measurement systems measure up?

 The pressure of reporting corporate performance based on non-financial as well as financial measures has intensified over the last few years. For example, the Conference Board of the Canadian Institute of Chartered Accountants (CICA) reported that traditional accounting-based performance measures are excessively historical; they lack predictive power and reward the wrong behavior and do not capture key business changes until it is too late. The Conference Board also concludes that these measures give inadequate consideration to such resources as intellectual capital (Waterhouse, 1999). Accordingly, the Board suggests that strategically oriented performance measurement systems should measure non-financial as well as financial outcomes. Likewise, a report by the American Institute of Certified Public Accountants (AICPA) recommends that companies should disclose leading, non-financial measures on key business processes such as product quality, cycle time, innovation, and employee satisfaction (AICPA Report, 1994, p. 143).

 Coincidentally, a survey conducted by the Institute of Management Accounting in the USA, lends some support for the recommendations made by the CICA and AICPA (IMA, 1996). For example, the survey shows that only 15 percent of the respondents indicated that their measurement systems supported top management's business objectives well, while 43 percent of the respondents rated their measurement systems as less than adequate or poor. On the other hand, 60 percent of these respondents reported that they were undertaking a major overhaul or were planning to replace their current performance measurement systems.

 It is generally believed that the best performance measures are those linked to a business' strategy. In addition, performance measures should be focused, and should reward behavior that contributes to business success (see Kaplan and Norton, 1992; 1996a; 1996b; Atkinson and Epstein, 2000). Given recent development in the performance measurement literature (see above), more executives around the world have begun to question whether their performance measurement systems measure up. There is also a growing interest in whether non-financial measures such as customer satisfaction, employee satisfaction, or innovation, are useful indicators of a firm's future performance. Likewise, practitioners have begun to look into the implementation of balanced scorecards as a means to overcome the limitations of the traditional performance measurement system. Accordingly, the purpose of this study is to investigate whether there are any linkages between business success and the use of strategically linked performance measures, which include both non-financial and financial performance measures.

 

What Is a balanced scorecard?

 Proponents of the balanced scorecard (see Kaplan and Norton 1992; 1996a; 1996b) have long suggested the use of non-financial performance measures via three additional perspectives (i.e. customer, internal business process, and learning and innovation) to supplement traditional financial measures. According to Kaplan and Norton (1996b, p. 75), "Used this way, the scorecard addresses a serious deficiency in traditional management systems: their inability to link a company's long-term strategy with its short-term actions". According to a recent balanced scorecard report, various surveys estimate that 40-50 percent of large organizations have begun implementing this concept (Balanced Scorecard Report, 1999a). So, what is a balanced scorecard?

Robert Kaplan, of the Harvard Business School, and David Norton, the president of a Massachusetts consulting firm, developed the balanced scorecard (BSC) in the early 1990s. It was built around the premise that companies can no longer gain sustainable competitive advantage solely by developing tangible assets. To phrase it differently, the ability of a company to build its "intangible assets" or "intellectual capital" has become a critical success factor in creating and sustaining competitive advantage (see also Mobilizing Invisible Assets by Hiroyuki Itami, 1987). According to Kaplan and Norton (1996a; 1996b), the four perspectives of the BSC, as presented in Figure 1, will enable companies to track financial results and simultaneously monitor progress in building the capabilities that are necessary for acquiring the "intellectual capital" or "intangible assets" needed for future business growth and for providing keener competition (Kaplan and Norton (1992; 1996a; 1996b) provide further discussion on the balanced scorecard).

 Many big corporations in the USA have implemented the BSC. Although the satisfaction rate varies across companies, many have achieved some phenomenal results. These companies include the Mobil US Marketing and Refining (Mobil USM&R) Division, Chadwick Inc., the City of Charlotte (see Harvard Business School Publishing, cases number 9-197-025, 9-196-124, and 9-199-036, respectively), and Sears Roebuck and Company, among others. For example, within two years after the implementation of the BSC, Mobil's growth and productivity strategy has dramatically improved Mobil USM&R division's position from the last place (in 1992 and 1993) to first place in the industry with profits of 56 percent above the industry average. The productivity strategy also created a 20 percent reduction in the cost to refine, market, and deliver a gallon of gasoline. With better utilization of the existing resources, Mobil showed an annual improvement in cash flow of almost $1.2 billion in 1996. According to Brian Baker (the president of the North America Marketing and Refining Division), six years later, the company remains on course towards its strategic vision (Balanced Scorecard Report, 1999b).

 The experience of Sears Roebuck and Company was equally encouraging. During the early 1990s, Sears Roebuck and Company had some of the worst performance in its history. For example, the company net loss was $3.9 billion in 1992. Within two years after the implementation of the BSC, Sears reported a 4 percent increase in employee satisfaction and customer satisfaction. The increase in customer satisfaction led to an estimated $200 million increase in revenue. The extra revenues also increase Sears' market capitalization by almost $250 million (Rucci et al., 1998).

Despite an increased interest from practitioners in the implementation of the BSC, large scale empirical findings on BSC implementation remains scarce. In a 1996 survey conducted by Tower Perrin Consulting firm, 64 percent of the respondents rated "satisfaction or value received" from BSC implementation higher than that from performance measurement approaches used in the past. In contrast, only 37 percent of the respondents reported "employee understanding of performance measures and goals" from BSC implementation higher than that from performance measurement systems used in the past (Ittner and Larcker, 1998). However, a survey of vice presidents of quality for major US firms conducted by professors from the Wharton School fails to relate customer and quality measures to accounting and stock returns (Inner and Larcker, 1998).

 Figure 1 

 Because of the mixed findings, this study aims to provide additional information related to the use of nonfinancial performance measures. The findings are based on the experiences of 83 electronic companies that were located in the USA, with an annual sales ranging from $10 million to $2 billion. A survey instrument was used and a majority of the respondents in this study are toplevel executives or directors of manufacturing. The results of this study provide further evidence that manufacturing plants that have strategically linked their corporate goals or objectives to their performance measurement systems, via the scorecard in the four perspectives, performed better than those that do not.

 

Descriptive statistics of sample companies

 Table I (Panel A) provides information on the job title of the respondents in this study. As noted, a majority of the respondents belong to middle and upper management, who tend to be closely involved in strategic planning and decision making. Table I (Panel B) provides descriptive statistics of workplace practices of the sample companies. It is noted that 70 percent of the 83 sample companies have some kind of total quality management (TQM) program, 64 percent have implemented a justin-time (JIT) program, while about 75 percent are heavily involved in work team practices. Finally, more than half of the companies are using some kind of workers' incentive plans. Using this database, Sim et al. (1999) reported that companies that made use of incentive plans while focusing on the implementation of TQM, JIT, and work teams, were associated with better customer, delivery, and quality performance. Given this finding, the database is expected to be a good source to validate the BSC framework.

 

The theoretical framework

 Consistent with the latest developments in the performance measurement literature such as those advocated by proponents of the BSC, it is expected that companies that continuously improve their capabilities (e.g. by implementing advanced workplace practices, which are to be monitored via the innovation and learning perspective) should achieve better performance in their internal business process perspective which will, in turn, lead to better performance in their customer perspective. All such efforts should lead to improved financial performance. Accordingly, Figure 2 provides a BSC framework relevant to this study, keeping in mind that the focus of the scorecard is on business unit performance (i.e. performance of the manufacturing division)[1]. Finally, Table II provides detailed information or the scorecard (i.e. goals and measures) used in this study.

 

Are the analyses holding up?

Kaplan and Norton (1996b) suggest the use of correlation analysis to test the expected relationships in the scorecards. Accordingly, results of correlation are presented in Figure 3 as well as Table III. Figure 3 shows how the four perspectives are interrelated, while Table III presents results of inter-correlations among the scorecards (i.e. goals and measures). For example, innovative techniques and employee training are positively correlated to shorter product development time. In many instances, innovative techniques and shorter product development time are positively related to internal business process perspective (i.e. quality performance and lead time performance), while quality performance is positively related to the customer perspective (customer and delivery performance). Finally, customer performance is negatively related to manufacturing costs (i.e. lower manufacturing costs are associated with higher customer satisfaction), while manufacturing costs are negatively related to sales

 

 

 

(i.e. lower manufacturing costs are associated with higher sales) and market share (i.e. lower manufacturing costs are associated with higher market share). Accordingly, the results are consistent with many of the expectations outlined in Figure 2, the theoretical model. Nevertheless, what appear to be equally if not more interesting are the correlations of the innovation and learning perspective with the other perspectives. Given the importance of the innovation and learning perspective, the next section discusses these relationships.

 

Core competencies - Innovation and continuous employee training

Long-term survival of a business is dependent upon meeting market needs through long-term value creation process. Historically, the operations process, or operational excellence, has been the focus of this value creation process. In contrast, recent developments in the literature have called for a shift in emphasis to the "innovation process" (see Kaplan and Norton, 1996a; Simons, 2000). In the innovation process, managers identify new customers, new markets, and the emerging needs of the existing and future customers. With intense competition, current technology and employee skills often quickly become obsolete or inadequate to keep pace with the changing needs of the customers. Accordingly, businesses continue to invest in employee training while searching for breakthrough technology in order to excel. Proponents for BSC have suggested that the innovation and learning perspective could be used to monitor this long-term value creation process. Surprisingly, few organizations have maintained a good scorecard that is relevant to this important process. For example, Frigo and Krumwiede (1999) reported that the majority of BSC users in their study rate the effectiveness of their organization's performance measures in the innovation perspective as "less than adequate to poor".

 

Contributions

One major contribution of this study lies in the identification of the performance measures for the innovation and learning perspective. Consistent with the BSC literature (e.g. Kaplan and Norton, 1992; 1996a; 1996b; Atkinson and Epstein, 2000), employee training is included as one of the performance measures. However, it must also be borne in mind that a good scorecard should not lead to "information overload". Thus, this study includes only techniques that are truly innovative (see Table II for the three techniques selected for this study). Finally, product development time is included as the third measure for the innovation and learning perspective, because both empirical and anecdotal evidence have increasingly viewed "time to market" as a key to success and profitability (Cooper and Kleinschmidt, 1994; Choperana, 1996; Droge et aL, 2000) [2].

 

Our results as presented in Figure 3 show that employee training is positively related to delivery and customer performance; it is also related to lower manufacturing costs. Similarly, innovative techniques are related to lower manufacturing costs, higher sales, and greater market share, while shorter product development time[3] is related to lower manufacturing costs, higher sales, and greater market share. These results are further illustrated in Table IV. For example, companies that reported that their manufacturing costs "decreased tremendously" also scored higher in the scale of 1-7 in employee training and innovative techniques; they also reported better improvement in product development time as compared to companies that reported that their manufacturing costs only "increased slightly". These results were statistically significant. Likewise, companies that reported "tremendous increase" in their market share and sales also reported a higher score in innovative techniques as well as a better improvement in product development time as compared to companies that reported only "slightly decrease" in market share and sales. Again, except for one result which is marginally supported, the remaining results are statistically significant.

 Although many of the results are consistent with theories in the performance literature, a correlation test does not allow us to make statements about cause and effect. Accordingly, additional analysis that allows us to make better inferences was conducted. When collecting the above data, we were also interested in whether advanced workplace practices add value to businesses. Thus, we asked questions related to these issues. Results of regression analysis are presented in Table V.

 

 

 

In the above analysis, we predicted that the implementation of advanced workplace practices (i.e. years of implementing TQM and JIT, the use of incentive plans, work team, TQM and JIT) are positively related to business performance, such as higher market share, higher sales and lower manufacturing costs. Results of regression analysis provide support for our expectations. For example, findings show that "years of implementing TQM" and "years of implementing JIT" are positively related to greater market share. In addition, the implementation of work team is also positively related to greater marker share. Similarly, results indicate that work team and TQM are positively related to lower manufacturing costs. On the other hand, it appears that companies in their early stage of JIT implementation show greater reduction in manufacturing costs than companies that had implemented JIT for a longer period. It is plausible that these results are due to "diminishing returns" after implementing JIT for a longer period of time. Although not directly related to the primary objective of this study, results of regression analysis enhance the current study by providing important insights into business strategy (i.e. the implementation of advanced workplace practices), performance measures, and business success.

 

Conclusion

 Using information collected from 83 companies, correlation and regression results provide support for the BSC. Specifically, findings suggest that the BSC can be used as a tool for monitoring the long-term value creation process. Undoubtedly, providing training to employees or implementing innovative techniques consumes a significant amount of resources. Top management often wonders about the payback of this type of investment. The findings of this study provide useful information in this regard. Finally, the significant correlations of product development time with the three financial indicators are consistent with the current body of literature. For example, prior research studies have shown that first-to-market products often command higher initial prices and then garner dominant market share and greater customer loyalty. Significant cost benefits are also associated with compressing the new product development process (Droge et al., 2000). Accordingly, managers may want to closely monitor their time to market new products. A slack in this indicator often signals retarding sales or a sluggish market share ahead.

 

One limitation of our study is the small sample size. Nevertheless, results in this study have shown that manufacturing plants that have strategically linked their corporate goals or objectives to their performance measurement systems, via the scorecard in the four perspectives, performed better than those that do not. Consistent with the current body of literature, this study has also demonstrated that non-financial measures are often useful indicators of financial performance for manufacturing companies. Most important, it is hoped that the study will encourage more managers to strategically link their long-term value creation process to the performance measurement system. Last but not least, it should be added that the model presented in this study should be considered as a template and not a "cure-all" solution.

 [Footnote]

1. Although return on investment is an important performance measure for a business unit, it is not captured in our study due to perceived difficulties in getting this information from the respondents, a majority of whom are plant managers or directors of operations. 

2. Employee satisfaction is a good measure for the innovation and learning perspective. Its exclusion from this study is mainly due to the perceived difficulties in collecting this information, since the questionnaire was sent to the director of manufacturing. 

3. Shorter product development time is often the end results of increased employee training and the use of innovative techniques. 

 

[References]