Balanced Score Card
The balanced scorecard is a measurement of performance reaching beyond financial statements
and into nonfinancial measurements used to motivate, measure, and evaluate company
performance. Discuss how the four perspectives within the balanced scorecard can help drive
profitability, market share, productivity, product leadership, and corporate social
responsibility. Also include the conflicts arising from the Principle-??Agent relationship.
Abstract
The initial purpose of the scorecard was not to advocate for the non-financial means to measure,
motivate or to evaluate the performance of a company.
Strategic performance scorecard is a system is utilized within an organization to integrate the
strategic planning, manage and measure the performance of the system. They critically align the
work that the employees perform with the company’s corporate vision, its strategy and also
communicate the objective of the management’s strategic intent while the measurement based
organization scorecards report on the performance of the company operations.
Using the balanced score card (BSC) as the framework for strategic planning and also as a tool
for management makes it convenient to evaluate such issues that create value for the company’s
customers and also the stakeholders on such operations such as the financial performance,
operations efficiencies and organizations development capacities and readiness. The importance
of BSC in improving productivity can be viewed from the perspective of value creation for
customers as the scorecard links the business strategy to what needs to be done for the company
to succeed. The best BSC systems focus on the critical performance measures that are essential
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to the success of the business such as business and operational intelligence, employee and
business excellence. The building blocks of business strategies are the objectives of the business.
To improve the company’s profitability, the scorecard helps the management team to develop
and validate components of the management system. These components are the company’s
mission, vision, strategic perspectives and the core values. The BSC incorporates the company’s
strategic themes, strategic objectives, desired strategic results, strategic initiatives, targets and the
performance measures. The scorecard system acts as the common thread for effective company
communication and the basis for gaining the competitive advantage and also improving the
effectiveness of the stakeholder’s mission. The scorecard translates the needs of the customers,
mission and core values into the goals of the organization, objectives, strategy, new initiatives
and performance measures.
The strategy based BSC system evaluates the four performance perspectives: Financial, business
processes, customer/stakeholder and organization capacity that can be applied to drive the
Productivity, profitability, corporate social responsibility and eventually product leadership.
Financial
To have financial success Objectives Measures
how do we identify ourselves
to our own shareholders. Targets Initiatives
Customer Vision
and
Internal Business Processes
How do we appear to
all our
Objectiv
es
Targets Strateg
y
What business processes
do we
Objectiv
es
Measur
es
customers in order to
succeed
adopt to satisfy the
shareholder
in achieving our vision. Measure
s
Initiativ
es
and also the customers Targets Initiative
s
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Learning and Growth
How can we sustain our
efforts &
Objectives Measures
abilities in order to change &
achieve our vision Targets Initiatives
The following are the processes in BSC that can drive the Productivity, profitability, corporate
social responsibility and eventually product leadership.
There are number of basic steps that are realizable over several phases.
- The Strategic Foundation
To achieve sustainable productivity that drives the product leadership and eventually the
profitability of the company then the company must adopt the processes of strategic alignment.
The basic strategy of driving the processes is to understand how the construction of the strategic
is done. The strategic plan must be very clear on the specific objectives that all the employees
need to work on and also be aware of the targets set by the management by communicating
effectively on the needs expected from them. (Kaplan and Norton, 2003)
The objectives must communicate the real actions needed from the employees and which have to
be slightly different from the competitors. These activities have to be defined in a way that every
employee is certain on the requirements on his part. The following are the examples of strategic
objectives that a company can set in order to improve its productivity and also improve its
productivity.
Examples of Strategic Objectives
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- In the next three months, the customers lead times will be reduced by 30%
i.e. from nine days to six days.
- In the next one year, customer turnover will reduce by 50% through
effective
Communication and prompt delivery of orders.
- The operating downtimes will reduce by 50% through improved
performance
due to efficiency training and merging of different departments into more
effective and manageable teams.
The second item to consider in order to increase the productivity of the firm that may also lead to
product leadership is to set the targets for the various objectives that have been defined. These
targets provide the teeth needed to achieve the needs that have been identified and which can
drive the company in the direction it wants to take. The market share, the introduction of new
products and the expected revenue growths and other expected results by the end of a particular
financial period have to be set and the appropriate measurements attached to the targets. The
company has also to adopt a clear communication plan that will describe the strategies adapted to
the different company stakeholders. The following are some of the communication strategies that
a company can use to effectively communicate to its staff.
Stakeholders Form of
Communication
Shareholders Press conference
Senior Managers Seminars and
Retreats
Middle level
managers
Handouts and site
visits
Operating staff Handouts and site
visits
General staff Handouts and site
visits
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Suppliers Personal contact or
Distributors Personal contacts
- Effective communication system is critical to the success of the company. It should be
extensive and continuous. All the operations have to be re-aligned and also re-configured with
the objectives and targets of the strategies adopted. It may require the sales of unproductive
assets and also introduce a productive culture of operations efficiency.
The second step is to define the scope needed by the company to turn around its production
systems to be more efficient. These will require the involvement of the stakeholders like the
shareholders, employees and the customers. Large corporations will settle for increased
shareholder’s value as the primary strategy for its existence. (Kaplan and Norton, 2001) The
balance score card has to focus on the primary objective of the company which must also flow
through all the four perspectives of the BSC which are Financial, Customer, the Internal
Processes and also the learning and Growth process as shown below.
Shareholders
value
Financial Revenue growth
Customers Increased number of customers
Processes More customer marketing
Learning Support systems
Each of the processes anchors the perspective above it. For example, the efficient support
systems will improve the productivity of the marketing department which will lead to product
leadership and increased number of customers and eventually it will result into increased
profitability and more revenue growth for the company. (Kaplan and Norton, 2000) The BSC
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leads to improved customer service, more shareholder value, overall operation efficiency, more
product innovation and improved corporate social responsibility. The strategic goals are always
connected to the strategic areas. The following is an example.
Strategic Goal By 2015, the company will have the
most advanced mobile phones in
the market.
Strategic Area Product advancement through
Research and Development
- In the third step all the four perspectives are linked together in the BSC through a strategic
grid, a process known as straw modeling. (Kaplan and Norton, 1996a) This process helps the
company to improve the shareholders value while the company improves its revenue collection
through operation efficiency. The following is an example of how the BSC can improve
productivity and efficiency in the financial perspective.
Shareholder value
Growth revenues Operating
Improvements
Identify new Increased
customer
Lower costs Higher utilization of
sources of
revenues
Profitability company assets
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The next grid is the customer perspective. In order to increase the chances of the product in the
market, it’s necessary to understand the values that the company provides for its esteemed
customers. For example, the Federal Express company efficiency in handling and timely delivery
of their parcels is what drives its competitive advantage over its rivals. A company whose
operational efficiency is high attracts value attributes that also tag along its pricing policy which
may be favorable to its customers though it may be higher than the industry’s average. Other
companies create value by providing products of very high quality or create good working
relationships with their customers. These values create customer loyalty which improves the
company’s profitability. The customer’s objectives can be linked to the financial objectives by
utilizing a favorable pricing policy to acquire more customers in order to grow more revenues for
the company and improve the shareholders value. To maintain a reliable and sustainable product
leadership in the market, the competitive pricing policy has to attract more customers. These will
lead us to the next perspective which is the internal processes. The internal processes help the
company to improve its efficiencies in its production requirements in order for it to improve its
image to the customers as well as its overall corporate social responsibility. The company can
improve its productivity and increased its market share by improving its operational efficiency
and creating value through competitive pricing and provision of superior quality products.
Improving customer relationships is also another aspect of increasing value to the company’s
products hence creating customer loyalty through provision of customized solutions. The
company can also improve its sales through the introduction of more innovative products and
services which may also lead to expansion of its products market.
The following is a summary of the four perspective and their targets for improved performance.
Financial Shareholder value
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Grow revenues
Customer Acquire More Customers
Become price leader
Internal
processes
Improve operational efficiency
Through cost reduction, use of
knowledge based systems and
reduction of non core business processes
Learning and Training on best practices, utilization of
Growth data networks on the company’s overall
operational performance and realignment
of the company with its core competencies.
The summary above shows the BSC processes and perspectives that may lead to more
profitability, product leadership, increased market share and improved corporate social
responsibility because of improved product quality and increased customer personal
relationships. The processes results in increased revenues for company.
Principal-Agent Framework and the Shareholder value
The principal agent theory (Harris-Raviv, 1979, Holmstrom, 1979, Jensen-Mecklin, 1976)
introduces the conflict between the interests of the company shareholders and the hired
managerial teams. The proponents of the principal-agent theory suggests that firm’s should
provide more motivation in terms of financial incentives to the executive management teams
especially the rewards that are directly related to their financial performance as measured by the
principal agent models. Elaborate market research suggests that the performance of stock prices
in the financial markets reflects the information that the public has about the general
performance of the company. The interests of the shareholders can be aligned with the interest of
the executives by providing stock options to the senior company executives together with other
equity incentives. (Jensen-Meckling, 1976) Similarly, other proponents of principal-agent
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relationships prefer aligning improved accounting standards to stock market operations or in
another economic value added techniques (Stewart, 1991)
From the onset of the years’ 1980s and beyond, a large increase in executive compensation and
motivation payments started being registered in connection to financial performance of most
multinational companies. All the focus for most business executives shifted to the financial
aspects of the company’s performance and the question of nonfinancial performance was out of
question. Michael Jensen (2001) stated that the theory of the balanced score card was flawed as
it presented a score card that cannot record any scores on the records of the managers, that’s it
has no single value that can literally measure the actual performance of the executives. It results
in an evaluation where the managers have no actual basis to make principled decisions. Paying
managers based on unweighted performance calculations or metrics is not plausible. If a
company needs to reward its executives, a proper system of compensation has to be identified
and it should be based on a single valuation measure that the company has agreed on. These
measures can be the stock options or the normal accounting or financially based metrics. A
manager can also be allowed to choose a weighting option among several others that are
convenient to him. Linking the performance of mangers to their pay is the only way that a
comprehensive management system can be progressive.
Multi-period Optimization and Uncertainty
Most of the business models developed by famous finance scholars and economists are single
periods where the total output of the firm is largely revealed at the end of the financial period and
no intervention from the management team can change any of the results.
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Using the final output as a contracting target for financial performance measurement is mostly
optimal. The use of the end of period total stock price or the economic added in calculating the
optimal added value created for the financial period is also optimal. But the non financial actions
taken by the managers during the financial period are sparingly revealed to the investors so that
their input can also be incorporated to the end of year stock prices. These are actions like
advanced product production standards, motivated staff whose skills have been upgraded,
improved production processes, quality standards and enhanced trusted relationship with most
customers and suppliers. This information hardly reaches the shareholders or the customers ears.
To conclude, most managers are aware of the costs incurred on enhancing the quality of the end
product but they are mostly unaware of the additional value created by their non financial inputs
in the short run. These values created can either increase or decrease depending on the future
generated value but they are mostly not included in the residual value or the end of period stock
prices. The BSC processes and perspectives lead to more profitability, product leadership,
increased market share and improved corporate social responsibility because of improved
product quality and increased customer personal relationships. These processes results in
increased revenues for company and profitability.
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References
Harris, M.., and A. Raviv, (1979). Optimal Incentive Contracts with Imperfect Information,
Journal of Economic Theory 20: (2) 231 – 259,
Holmstrom, B. (1979) Moral Hazard and Observability, Bell Journal of Economics, 10(1): 74-
91, (Spring)
M. Jensen (2001) “Value Maximization, Stakeholder Theory, and the Corporate Objective
Function,” Journal of Applied Corporate Finance, (Fall): 8-21.
Jensen, M.J., and W.R. Meckling (1976) Theory of the Firm: Managerial Behavior, Agency Cost
and Ownership Structure, Journal of Financial Economics 3, 305 – 360.
Stewart, G. B. (1991). The Quest for Value. New York. HarperCollins
Kaplan, R. S. and D.P. Norton (2003) Strategy Maps, Boston: HBS Press.
Kaplan, R. S. and D.P. Norton (2001) The Strategy-Focused Organization: How Balanced
Scorecard Companies Thrive in the New Competitive Environment, Boston: HBS Press.
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Kaplan, R.S. and D.P. Norton (2000) The Strategy-Focused Organization: How Balanced
Scorecard Companies Thrive in the New Business Environment, Harvard Business
School Press
Kaplan, R. S. and D.P. Norton (1996a) The Balanced Scorecard: Translating Strategy into
Action, Boston: HBS Press.
Kaplan, R. S. and D.P. Norton (1996b) Using the Balanced Scorecard as a Strategic Management
System,” Harvard Business Review (January-February):75-85.
Kaplan, R. S. and D.P. Norton (1993) Putting the Balanced Scorecard to Work, Harvard
Business Review (September-October).
Kaplan, R. S. and D.P. Norton (1992) The Balanced Scorecard: Measures that Drive
Performance, Harvard Business Review, (January-February): 71-79.
