History Class XII Ch. 3 Kinship, Caste and Class (1).pptx
Advantages And Limitations Of Performance Measurement Tools The Balanced Scorecard
1. ADVANTAGES AND LIMITATIONS OF PERFORMANCE
MEASUREMENT TOOLS: THE BALANCED SCORECARD
Jorge Gomes and Mário Romão
ISEG, School of Economics and Management, Lisbon University - Rua Miguel Lúpi 20, 1249, Lisboa, Portugal
ABSTRACT
In rapidly changing environments that characterize most industries today, organizations face intense competitive pressure
to do things better, faster and cheaper. The business environment of this new century has undergone rapid and
accelerating change, creating more and more uncertainty and complexity. Most markets are becoming increasingly
dynamic. Companies compete in this fierce environment to achieve a sustainable competitive advantage, positioning
itself strategically in their industries or developing durable and distinctive firm capabilities and resources or through
knowledge and innovation. Organizations can no longer rely on traditional analytical approach to understanding their
industry or market, since the economic landscape is changing quickly and unexpectedly. Organizations are challenged to
develop new organizational characteristics such as flexibility or expertise in order to quickly respond to changes in
technology, competition and customer preferences. The use of large investments in information systems and technology
(IS/IT) has been one of the solutions found by organizations to deal with these challenges. These investments, which in
most cases represent a significant spending of financial resources, have failed to bring the expected benefits. Nowadays,
the importance of intangible assets is higher than traditional physical assets and performance measurement tools need to
capture this new reality. Balanced Scorecard (BSC) is an innovative approach that considers the financial and non-
financial perspectives in determining the performance level of organization. Not only represents a measurement tool, but
it is also a multi-dimensional system of performance management. Although it’s worldwide dissemination, BSC has
demonstrated some inadequacy in certain circumstances, namely, in dynamic environments. The authors advocate a
combination of various tools and approaches to set up and align the firm´s strategy instead of being statically hostage of
an evaluation framework.
KEYWORDS
Balanced Scorecard, Strategy Map, Resource-Based View, Performance Measurements, IS/IT Investments.
1. INTRODUCTION
Organizations are under tremendous pressure to justify the enormous financial resources invested in IS/IT.
The greater the competition as a result of globalization and other market factors, it becomes even more
important for organizations to act in the best of their capabilities (Ashurst & Doherty, 2003). According to
Gomes and Romão (2012) successful organizations, to respond to the constraints of the new business
environment, developed basically three major strategies: (1) Train employees in the use of systems and
technologies in order to provide organizations of knowledge and responsiveness to answer the pressures to
change. (2) Choose for collaborative platforms involving all relevant stakeholders (customers, suppliers and
employees) in the business process. (3) Find ways of obtaining superior performance using the frameworks to
assist management processes. The decision process for the acquisition of IS/IT assets has become less
objective and transparent contrary to the statements made by the decision makers, giving rise to significant
shortcomings in the objectives achievement and consequently in obtaining benefits (Berghout et al., 2005).
Even though there is available a wide variety of assessment methods but, decision-making continues to be
carried out largely by "instinct". Henderson and Venkatraman (1999) argue that the inability to realize the
“true” value of investments in IS/IT is partly due to the lack of alignment between the business and the
strategies for IS/IT. From the perspective of IS/IT, the problems of non-alignment with the business strategy
typically result in reactive postures against IS/IT technologies being seen as a cost center and not as a
strategic “business partner”. From the point of view of business, the non-alignment of IS/IT result in a
decreasing income arising from investments in technology and a reduction of competitive capabilities for the
2. organization (Tallon, Kraemer, & Gurbaxani, 2000). With the shift from traditional industrial economy to
this new business environment with great predominance of intangible assets such as knowledge or
innovation, organizations have to manage increasing levels of complexity, mobility and uncertainty (Voelpel
et al., 2005). The ability to manage knowledge is of fundamental importance in this new business
environment (Quinn, 1992). For many companies the competitive advantage is seen as a continuous process
of performance improvement, looking for best practices and enhancing new capabilities. Including the search
for new products or services and for more efficiently processes and procedures developing the dynamic
capabilities (Teece, Pisano & Shuen, 1997), to quickly respond to the external challenges and effectively
continuous changes, adapting to new industry trends. Prahalad and Hamel (1990) argue that sustainable
competitive advantage depends on the construction and operation of a set of “core competencies”. Porter
(1992) emphasizes the need for companies to expand and upgrade its internal advantages, with the target to
sustain and ensure future competitive advantage. Companies gain sustainable competitive advantage by
implementing strategies that exploit their internal forces, responding to environmental opportunities and
reinforcing the organizational strengthens, improving internal processes and eliminating external threats
(Barney, 1991). For managers, the challenge is to identify, develop, protect and provide resources and
capabilities in a way that gives the organization a future competitive advantage and, thus, a higher return on
capital (Amit & Schoemaker, 1993). In this paper the authors address the BSC and compare it with other
performance management systems/tools. We also promote a discussion about the strengths and the
limitations of the BSC, pointing out new developments to overcome some of those limitations.
2. ORGANIZATIONAL PERFORMANCE MEASURING TOOLS
According to Kaplan & Norton (2000) strategy is the movement of an organization towards a desired but
uncertain future position. With the help of performance measurement tools, companies can monitor the
implementation of their business plans and strategies, thereby contributing to their organizational success.
According to Atkinson et al, (1997) a performance measurement system must essentially do four things: (1)
Help the company assess whether you are receiving the expected contribution of employees and suppliers. (2)
Help assess whether the company is giving each stakeholder group you need to continue to support the
company achieve its main objectives. (3) Assist the company in building and implementing processes that
contribute to achieving the strategic objectives. (4) Help the company assesses and monitor strategic planning
in accordance with the agreements negotiated with key stakeholders. Some authors argue that non-financial
indicators better reflect the investment and the performance of the more intangible aspects, which are so good
at predicting the future financial performance (Eccles, 1991), (Epstein & Manzoni, 1998), (Kaplan & Norton,
2004). These intangibles can be a source of sustainable competitive advantage and are the resources that the
organization owns that are not easily imitable (Prahalad & Hamel, 1990), (Barney, 1991), (Peteraf, 1993),
(Marr et al., 2004). Ittner and Larcker (2003) point out the mistakes that companies make when trying to
measure the non-financial performance: (1) Lack of alignment between measurements with strategy - a key
challenge for companies is to determine which non-financial measures need to implement. (2) Validate the
measurements - do not validate the model, which leads to measure many things, and most of them are
irrelevant. (3) Set up the right goals and measures. (4) Wrong measurements - research indicates that 70% of
companies used metrics that have no statistical validity. According to Atkinson et al. (1997) most companies
use formal performance measurement systems that are extensions of their financial reports. The traditional
financial accounting measures can give misleading signals for continuous improvement and innovation in
organizations, and are generally non- aligned with the capabilities and skills required for today's
organizations in the preparation of their future (Maltz et al., 2003). The measurement systems have been
recognized as crucial elements to improving business performance and organizations (Sharma et al., 2005).
3. BSC AND THE OTHER PERFORMANCE MANAGEMENT
SYSTEMS
“Management control systems provide information that is intended to be useful to managers in performing
their jobs and to assist organizations in developing and maintaining viable patterns of behavior.” (Otley,
3. 1999: 364). With performance measurement tools, companies can monitor the implementation of their
business plans, thereby contributing to their organizational success. We highlight the following aspects when
comparing BSC with other performance management systems (Salem et al., 2012): (1) Total Quality
Management (TQM) - More focuses on the system of the organization. BSC more emphasizes on financial
objects. Both used to integrate the performance management and control systems, focusing on
communication, reducing the cost, and emphasizing the importance of organizations to manage the system
and not the people and both tools need to be supported by the top management. (2) ISO14001 - The main
difference between BSC and ISO14001 is that BSC is a strategy management tool, which focuses on whole
of the organization, Whereas, ISO14001 is system that focuses on environmental issues, with regardless to
the other aspects that may affected by the environmental aspects. In brief, ISO14001 is run on the operating
level, and does not linked to the strategic planning and management of the company. (3) European
Foundation Quality Management (EFQM) - The EFQM is a practical tool to help organization determining
where they are on the path of excellence and assessing the current health of the organization. The BSC and
the EFQM are tools that use measures of organizational performance for the purpose of the improvement,
and both have been widely adopted and addressed broadly similar issues. The BSC design processes starts
with the articulation of a shared strategic vision and backwards to define the priority strategic activities and
outcomes. In contrary, the EFQM assesses performance against the activities standard. (4) Management by
Objectives (MBO) - In MBO, each goal is determined through agreement between managers and
subordinates. A total goal is composed of section’s goals, and each section’s goal is composed of individual’s
goals. It emphases on employees participation and takes the employees’ motivation into account. MBO
requires eight areas in business, what makes MBO more complex than BSC.
4. STRENGHTS AND LIMITATIONS OF TRADITIONAL
MEASURING SYSTEMS: THE BALANCED SCORECARD
The growing dynamism of the business environment has focused attention on resources and organizational
capabilities as the main source of sustainable competitive advantage and the basis for the formulation of
strategy (Grant, 1996). The manager should be able to analyze the external environment to seize
opportunities and address threats. There have been many studies and publications that call attention to the
financial indicators weaknesses and to the emergence of non-financial indicators (Kaplan & Norton, 1992;
Simons, 1995; Ittner & Larcker, 1998; Neely, 2005). The BSC emerges as an imperative need to fulfil the
traditional approach of measuring of the organizations success, so that the vision and strategy were converted
into goals, indicators and targets. In turn, these objectives, indicators and targets are translated through other
perspectives beyond the financial, according to an integrated scheme for monitoring and improving
(Speckbacker et al., 2003). In the past two decades has been emphasized the negative effect of the exclusive
use of financial indicators (Kaplan & Norton, 1992). BSC suggests a combination of financial performance
measures, with due attention to customer requirements, business processes and long-term sustainability. The
BSC is reflected by the balance between the lagging indicators that represent the results of measurements, the
past, and leading indicators representative of the future trends that will affect the results on the future (De
Haas, 2000). The BSC not only translates strategy into operational terms, as well as align organizations with
strategy. Focusing business units and employees about their role in performing tasks (Frigo & Krumwiede,
2000). The main target is the value creation and considering the intangible and intellectual capital as opposed
to the traditional systems of financial performance (Pandey, 2005). The BSC complements traditional
financial performance measures with three additional perspectives, customers, internal processes and learning
and growth, allowing matching the accompanying financial measures for monitoring progress in building the
capabilities and acquiring the intangible assets that are crucial for future growth. Using the BSC,
organizations no longer depend simply on the financial measures of performance indicators. The first step in
management processes creation for the implementation of the strategy involves the construction of a
consistent and reliable framework that represents the network of relationships that lead to the achievement of
objectives and the implementation of strategy. This framework is known as the “strategy map” which
describes the network of cause-and-effect relationships between the organization strategy and what
employees do daily (Kaplan & Norton 2000). The strategy map graphically displays the key variables for
each of the BSC perspectives, reflecting on the whole of the organization's strategy. At the bottom of the map
4. presents the key inducers of performance that enable the organization to achieve the desired future financial
results. The process of defining the strategy must be driven by a broad consensus among all stakeholders on
what the key performance factors must be considered. The BSC is a process of change in how tasks are
performed and the acceptance of this change has decisive influence on the course of the process
(Venkatraman & Gering, 2000). In this organizational dialogue process, the participation of top management
are key, so to achieve the required consensus as to legitimize and encourage the development and
implementation of the BSC (Richardson, 2004).
4.1 Balanced Scorecard Strengths
BSC is a multidimensional approach to measuring and managing performance that is specifically
linked to organizational strategy. The emphasis is on linking performance measures with the
strategies of the business units (Otley, 1999).
The BSC not only translates strategy into operational terms as the organization aligns its
strategy, focusing on the business units and employees about their role in fulfilling the
organization mission (Frigo & Krumwiede, 2000).
The BSC is a hierarchical system of strategic objectives spread over four prospects, less strategy
and aligned with the financial perspective (Figge et al., 2002).
The BSC is a framework for performance measurement that focuses the attention of management
in just a few steps and makes bridges between the different functional areas (Akkermans &
Oorschot, 2002).
The Balanced Scorecard is balanced in both internal and external aspects of the business. It
highlights the importance of internal processes to achieve business results, but also the external
view from customers and market position (Olve et al., 2003).
A well designed BSC should be able to describe your strategies through the objectives and
measures you have chosen (Niven, 2003).
BSC allows employees understand the strategy and objectives making the connection to your
company's day-to-day. Facilitates assessment and feedback on an ongoing basis (Pandey, 2005).
Clarifying the operational strategy and facilitating communication, BSC aims to serve as an
engine to efficiently align the company with the strategy of the foam that managers can align
their actions and efforts (Voelpel et al., 2005).
BSC can be applied in companies of any size to manage and evaluate business strategy, monitor
operation efficiency, and communicate related processes to all employees (Rohm, 2006).
The communication strategy of the BSC allows managers to understand how measurement
results are affected by their actions (Atkinson, 2006; Burney & Widener, 2007).
The development of the BSC was one of the answers to criticisms of traditional forms of
assessment accounting for knowledge-based companies (Bose & Thomas, K., 2007).
Once the BSC requires company concretely define a mission, a vision and an organizational
strategy, then the BSC can be seen as a means of communication and strategy implementation
(Tayler, 2010).
4.2 Balanced Scorecard Limitations
Not all stakeholders were included in the BSC, in particular, suppliers and public authorities,
which can be decisive for many organizations (Atkinson et al, 1997; Norreklit, 2000).
The suggested linear chain, where better trained employees build better business processes, and
in turn will lead to greater customer satisfaction and happy stakeholders. Although, there is some
logic in this sequence, it is still a simplification of reality (Otley, 1999).
The flaw in the process of cause-and-effect relationship is crucial, since invalid assumptions fed
the control system with incorrect information that will cause the anticipation of the results of the
performance indicators, resulting in dysfunctional organizational behaviors and sub-optimal
performance (De Haas & Kleingeld, 1999).
5. BSC makes invalid assumptions about causal relationships between performance indicators. The
invalid assumptions may actually cause dysfunctional organization behavior with negative
consequences on the organizational performance (Norreklit, 2000).
The BSC provides no mechanism to maintain the relevance of the initially defined measures
(Hudson et al. 2001; Platts & Tan, 2002).
The lack of focus on the human resources dimension of organizations is perhaps the greatest
weakness of the BSC (Maltz, Shenhar & Reilly, 2003).
The BSC contains a serious failure in their construction, once it focused management strictly on
a set of pre-defined indicators and measures and they are not able to respond to simple and
fundamental question, such as “what our competitors are doing ? " (Kennerley & Neely, 2003).
The BSC does not monitor competition or technological developments. This implies that does
not take into account the uncertainty inherent risks involved in the events that can threaten this
strategy. The effect of this control model can lead to serious dysfunctional behavior and loss of
control over the implementation of the strategy (Norreklit, 2003).
In practice organizations submerge in the task of generating indicators without devoting
sufficient time to the definition of the strategy and the results are indicators that are not aligned
with the strategic objectives (Richardson, 2004).
If establishing significant correlations between measures and casual chains was immediately
obvious then the need for strategy diminished dramatically (Bukh & Malmi, 2005).
Due to problems in the implementation of the strategy is difficult to achieve a balance between
financial and non-financial measures (Anand et al., 2005).
The difficulty in studying the BSC result of absence of consensus about what the BSC is all
about. BSC has had different meanings at different times (Othman et al., 2006).
Davies (2007) points out the danger of establishing "narrow goals", not realizing that to achieve
it is necessary to obtain adequate levels of organizational capabilities and competences.
Very often the organizations do not understand what exactly the BSC is and what its
implementation involves (Othman, 2009).
5. KEEPING BSC UPDATED AND ALIGNED WITH TODAY´S
NEEDS
These days, performance measurement systems are attracting more and more attention, both among
academics and practitioners. Many organizations have shown a complete disconnection between their
strategy and how they measure it. BSC through strategy maps became a powerful tool, allowing
organizations to convert its initiatives and resources – including intangible assets such as corporate cultures
and employee knowledge, into tangible outcomes. Following, we show several studies revealing the vitality
of BSC developments. The development of the BSC was one of the answers to criticisms of traditional forms
of assessment accounting for knowledge-based companies (Bose & Thomas, K., 2007).
Figge et al., (2002) formulate the sustainability BSC. This approach is a starting point for integration
of environmental and social issues within the management process.
Focusing the public administration, McAdam & Walker (2003) provide a framework for improving
the efficiency and effectiveness at all levels of public management.
Jiménez-Zarco et al., (2006) links BSC with product development and innovation. They proposed a
new performance dimension that allows measuring the performance and the quality.
Othman (2008) purpose the idea of linking the use of the BSC with Scenario Planning to reinforces
the process of formulation and strategy implementation.
Burney & Swanson (2010) study two characteristics of BSC and their impacts on manager´s job
satisfaction.
Yang, et al., (2010) propose the BSC to assign the attribute weight by an expert group in multiple
decision making.
Barnabe (2011) suggested the dynamic BSC for better strategic decision making.
6. Marcos et al., (2012) develop the design for an IT BSC that mix together with business environment,
balances and control of the IT strategy.
Abushaiba & Zainuddin (2012) claims that BSC allows the possibility of emergence of new ideas to
deal with the internal and external opportunities and threats.
Gomes et al., (2013) explore the linkage between the Benefits Dependency Network with Strategy
Maps.
6. CONCLUSIONS
Nowadays organizations operate and compete in a very dynamic environment, trying to make a careful and
effective management of their investments. To have more prosperous organizations it becomes necessary to
add more value to the business through projects and initiatives that incorporate changes in the way of
performing the work, changes in processes, adequacy of skills or acquiring new resources. These initiatives
should be increasingly strategic to ensure alignment with the organization's goals. Internally, the sharing of
responsibility is essential for everyone to be aware of the efforts made within the organizational puzzle. To
achieve the expected results it is necessary to continually improve so that they remain appropriate and
aligned with the organization's strategy measurement systems. A growing number of companies have been
using measurement tools that take into account non-financial indicators to assess the performance,
particularly in areas such as customer satisfaction and customer loyalty, anticipating the potential benefits
that these strategies usually promote in medium-long term. The BSC aims to address a major concern of
managers to monitor and ensure that the objectives of the organization's strategy will be implemented and
achieved. It also allows to monitoring the evolution of organizational decisions taking into account a set of
key indicators. Each person in the organization must understand each particular aspect of the strategy to help
the organizations to achieve full success. The BSC represents the natural evolution of management practices,
which began to take shape in the post-industrial era. It arises with the necessity to complete the traditional
approach of measuring the financial success of organizations in the way that organizational vision and
strategy are converted into goals, strategic indicators, targets and initiatives and that its unfolding occurs
through other perspectives beyond the financial, with the focus of maintaining long-term sustainability. In
addition to the BSC advantages, some criticism has also been presented. The aim is to highlight some rigidity
and immobility of the BSC, which advises its use in combination with other approaches, joining the best of
their potential. The BSC needs to be complemented with other less vertically integrated tools that enable
greater stakeholder participation in setting strategic objectives, so that everyone feels involved and
committed with the organizations destiny. The ability to react to the dynamic business environment,
interconnected with the necessary internal changes, is challenges that call for a particular attention, deserving
higher usefulness in a performance management tool. Competitive factors associated with innovation and
knowledge is now a challenge in the current business climate. The frameworks that ignore this new reality
may compromise the sustainable future of the organizations, and the BSC has to take it into account.
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