BALANCED SCORECARD:A RISING TREND IN STRATEGIC PERFORMANCE
MEASUREMENT
Khim Ling Sim and Hian Chye Koh
Khim L.Sim,PhD,is an Assistant Professor of Accountancy at Western New England College.Her research interests
include management control systems,organizational learning,organizational reengineering in new manufacturing
practices,performance measures and performance evaluations.She has published in journals such as Journal of
Management Accounting Research,International Review of Accounting,International Journal of Operations
and Production Management,among others.She is currently a member of Institute of Management Accounting,
American Accounting Association,and Institute of Decision Sciences.Dr Sim can be contacted at ksim@https://www.doczj.com/doc/8c17003852.html, or
tel:(413)7821506.Hian Chye Koh,PhD,a Certified Public Accountant,is an Associate Professor and Vice-Dean
(Business)of the Nanyang Business School(Singapore).He has published widely in international journals and
conferences and serves as a consultant to several statutory boards and organizations.His current interest is in strategic
data analysis.Dr Koh can be contacted at ahckoh@https://www.doczj.com/doc/8c17003852.html,.sg or tel:(65)7905646.
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 https://www.doczj.com/doc/8c17003852.html,ing information collected from83electronics companies located within the USA, results from the study provide support for the balanced scorecard. Specifically,findings show that manufacturing plants that have strategically linked their corporate goals or objectives to their performance measurement systems,via the scorecard,performed better than those that do not.
Keywords Balanced scorecard,Performance measurement, Just-in-time,TQM,Electronics industry,
Performance improvement
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 only15percent of the respondents indicated that their measurement systems supported top management's business objectives well,while43percent 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
Norton1992;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 40-50percent 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 early1990s.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 Figure1,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
number9-197-025,9-196-124,
and9-199-036,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(in1992and1993)to first
place in the industry with profits
of56percent above the industry
average.The productivity
strategy also created a
20percent 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$1.2billion 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 early1990s,Sears Roebuck and Company had some of the worst performance in its history.For example,the company net loss was$3.9billion in1992.Within two years after the implementation of the BSC,Sears reported a4 percent increase in employee satisfaction and customer satisfaction.The increase in customer satisfaction led to an estimated$200million increase in revenue.The extra revenues also increase Sears'market capitalization by almost$250million(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
``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.''
1996survey conducted by Tower Perrin Consulting firm,64percent of the respondents rated``satisfaction or value received''from BSC implementation higher than that from performance measurement approaches used in the past.In contrast,only37percent 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(Ittner and Larcker,1998). Because of the mixed findings,this study aims to provide additional information related to the use of non-financial performance measures.The findings are based on the experiences of83electronic companies that were located in the USA,with an annual sales ranging from $10million to$2billion.A survey instrument was used and a majority of the respondents in this study are top-level 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 that70percent of the83sample companies have some kind of total quality management (TQM)program,64percent have implemented a just-in-time(JIT)program,while about75percent are heavily involved in work team practices.Finally,more than half of the companies are using some kind of workers'incentive https://www.doczj.com/doc/8c17003852.html,ing 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,Figure2provides 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 Figure3as well as Table III.Figure3 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 Figure2,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;Droège
et al.,2000)[2].
Our results as presented in
Figure3show 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 of1-7in 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 from83companies, 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
``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.''
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(Droège 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 https://www.doczj.com/doc/8c17003852.html,st 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.MBE
Notes
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.
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