Critique of the Balanced Scorecard Approach

Abstract

The following paper offers a critique of the Balanced Scorecard approach to organizational strategy. The paper will also address the potential limitations of the approach,
while comparing emerging approaches to organizational strategy. The paper will also present an example where the Balanced Scorecard approach failed to reach expectations.

Introduction

            The Balanced Scorecard approach, as developed by Robert S. Kaplan and David P. Norton of the Harvard Business School, is a tool that can be used by organizations to take their strategy and help to convert that strategy into action (Kaplan & Norton, 2006).  The authors contend that for organizations to reach the goals delineated within their vision and/or mission statements they need to create value within their organization. Kaplan & Norton constructed the Balanced Scorecard approach to help organizations improve their enterprise-value proposition using a framework consisting of four key perspectives.

The Balanced Scorecard Structure

            The Balanced Scorecard is at its most basic level is a tool to help organizations arrive at a better understanding the cause-and-effect relationships that exists within the organizational structure (Kaplan & Norton, 2006). The four areas that encompass the Balanced Scorecard approach are financial, customer, internal process, and learning/growth as shown in figure 1. 

Figure 1

The goal of the four areas is to be able to have measurable objectives within each area based on drivers that can be evaluated against one another to determine cause-and-effect. This relationship between the four areas should help the organization determine where weak points between the four areas are and provide measurable way to create enterprise-value, and to strengthen the strategy within the organization. Kaplan (1996) sums up the Balanced Scorecard in this way, “(the Balance Scorecard) is a system that provides real insight into an organization’s operations, balances the historical accuracy of financial numbers, with the drivers of future performance, and assists us in implementing strategy. The Balanced Scorecard is the tool that answers all these challenges.”

Limitations of the Balanced Scorecard

            The Balanced Scorecard seems, on the surface, to be a good tool to help answer the questions Kaplan writes about, but there are some areas that an organization needs to address when deciding whether or not to implement the Balanced Scorecard approach.

            The primary issue with the Balanced Scorecard approach seems to be time. Although simple in format, using a single sheet to present the approach, the depth of the cause-and-effect relationships could take quite a while to develop. The approach does not appear to offer any “quick fix” measures to an organizational strategy. Time is crucial, and part of the approach heralds the need to make quicker adjustments to uphold the value of the organization, but the quickness of the approach seems to remain in question to some degree. For organizations like Global Financial Services, time was a factor in their decision concerning how to implement their strategy,

“The balanced scorecard system demanded more time than the PIP due in part to the large amount of required paperwork at the branch level. Under the PIP program, branch managers allocated bonus pools to other branch employees at their discretion. Under the scorecard process, branch managers prepare scorecards for all branch employees, including tellers, and make bonus recommendations to area directors based on their overall evaluation of the employee (“above par,” “at par,” “below par”). Branch managers typically spend two and a half to four days per quarter compiling scorecards and reviewing them with branch employees” (Ittner, Larcker, & Meyer, 1997).

The time factor is critical on many levels. As in the GFS example above, it is quite possible that when the implementation takes too long the strategy can change mainly due to changing indicators (Kaplan & Norton, 2001). If an organization is measuring with information that is out of date, the whole focus could have changed and now the measurement process has become a distraction.

            Kaplan & Norton discuss how having too few measures per perspective can become a limiting factor when using the Balanced Scorecard approach. They discuss how having the right mix of leading indicators (what drives the process) and lagging indicators (the outcome of the process) is the key to successful implementation of the Balanced Scorecard (Kaplan & Norton, 2001). The limitation here arises when the disparity between indicators makes the cause-and-effect relationship difficult to determine due to lack of balanced information. The opposite of this situation can also limit an organization’s implementation of strategy.

            There is a need to limit the number of indicators and select only the indicators that reflect the strategy and are the most critical (Kaplan & Norton, 2001). An over-abundance of indicators could, and according to Kaplan (2001), and will lead to a lack of focus trying to track too many indicators at the same time.

            It should go without mention, but an organization can eliminate their effective strategy implementation by selecting measures that are not linked to their organizational strategy. This can happen when an organization to list all of their key performance indicators without discerning which measures are actually linked to their strategy (Kaplan & Norton, 2001). Having measurements that are not part of the organizational strategy means that, when complete, the Balanced Scorecard is not translated into something that they can act upon and/or derive benefit from.

Alternative Approaches

The beginning level that might be used for implementing organizational strategy could be the basic vision or goal/s strategy. This type of approach is normally implemented by the top level management (McNamara, 2007). It usually entails a mission statement that gives a brief summary of why the organization exists, what services are provided, and how they will meet the client’s needs. This Approach would also include a vision statement explaining briefly what the preferred future of the organization should look like. With both of these items in place the top-level management team would formulate a strategic plan, and they would implement as well as oversee and update the plan as needed.

If an organization has limited resources or any number of troublesome issues, they may want to use the issue-oriented approach. This approach focuses on finding and implementing the remedy for 3-5 of their biggest challenges (McNamara, 2007). This is definitely more of a shot-range strategic approach. This approach can be determined by people other than the upper-level management as long as the plan meets their approval. This approach relies heavily on the feedback from their customers. Often when addressing issues that are hindering organizational success, the financial returns are the lagging indicators while the customer feedback is the leading indicator of whether or not the strategy is working.

The most “free-flowing” approach would be an “organic” approach. Some organizations function better using the more mechanistic (cause-and-effect) approaches, but for some the “organic” or more accurately described “value” approach might work better. This type of approach rallies around common values (McNamara, 2007). In the “organic” mode one would expect to find a more open dialog type environment, in which processes are discussed, and the strategy is more focused on learning and less on how it is measured.   

            The movement within the business arena seems to be geared more toward a real-time approach to strategy. As fast as things change these days it is easy to see how methods, measurements, and indicators could become out of date in a short span of time. By the time an organization defines their vision, mission, values, strategy, strategic plan, measurements, and implement all of these they might miss their window of opportunity to make needed changes in a timely manner. Instead of score-carding the plan, in the real-time approach the plan would change so often that having up-to-date research and evaluations might be more important than waiting to determine cause-and-effect.

Conclusion

            Having an organization that aligns itself with a vision and mission that are constantly and consistently evaluated seems to be the better foundation on which to build an organizational strategy. Like any good builder needs the right tools, an organization needs a “tool” as well to proved them the best possible information in order that they can make decisions that will improve their enterprise value proposition, board and shareholder alignment, main office to field office support, customer service, supplier relations, and corporate unity. Kaplan (2006) explains that, “The single most important component of the organizational alignment occurs at…the linkage of business unit strategies to the enterprise value proposition.” The Balanced Scorecard approach offers organizations a tool to help achieve just what Kaplan suggested.

           

References

Ittner, C., Larcker, D., & Meyer, M. (1997, November 1). Performance, Compensation, and The Balanced Scorecard Approach. Retrieved May 28, 2012, from Strategic Management: http://knowledge.wharton.upenn.edu/paper.cfm?paperid=405

Kaplan, R., & Norton, D. (2006). Alignment. Boston: Harvard Business School Press.

Kaplan, R., & Norton, D. (1996). The Balanced Scorecard. Boston: Harvard Business Press.

Kaplan, R., & Norton, D. (2001). The Strategy-Focused Organization. Boston: Harvard Business School Press.

Maltz, A., Shenhar, A., & Reilly, R. (2003). Beyond the Balanced Scorecard. Long Range Planning Journal , 187-204.

McNamara, D. C. (2007). Field Guide to Nonprofit Strategic Planning and Facilitation. Retrieved May 27, 2012, from Authenticity Consulting: http://www.authenticityconsulting.com

ORGANIZATIONAL STRATEGIES

Abstract

The following paper explores the dynamics between three differing forms of organizational strategies that exists within the current business framework. The paper will also address the significant associations that are present through the relationships of the strategies that have been developed over many years with newer, and more synthesized views presented by Kaplan and Norton labeled emergent views of organizational strategies. 

Overview

            Without a map it would be difficult to navigate a path from New York City to Los Angeles. Without knowing the costs of materials it would be difficult to build a house. Without someone to write, or direct deposit, payroll checks it would be difficult to meet the expectations of the employees. Without traffic signals driving would be a much bigger challenge. What do maps, knowing costs,  meeting payrolls, and employing traffic signals have to do with organizational strategies?  They are all based on strategic planning. Maps give direction, knowing costs is imperative when dealing with limited resources, meeting payrolls meets expectations, and traffic signals help manage challenging environments. A personal favorite definition of this concept is summed up in this quote, "Strategy is the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations" (Scholes, 1998).

Traditional Concepts of Organizational Strategy

            Business organizations come in all shapes and sizes. They run the gamut from sole proprietorships (owner-operator) to global corporations. The most basic organizational structure used by the early small business would need to have been focused on an owner-manager (who) ordered materials, hired and paid employees, supervised production, and performed marketing, sales, billing, and cash collections (Kaplan & Norton, Alignment, 2006). Businesses tended to evolve and grow larger over time, and with growth came complexity. With more complex organizations would come more elaborate organization (Kaplan & Norton, Alignment, 2006). With the growth the organizations came the increasing need for more staff and coordination between processes and products. The centralized functional organization (Kaplan & Norton, Alignment, 2006) would be the strategic solution in the typical late nineteenth-century industrial enterprise (Kaplan & Norton, Alignment, 2006).

            The centralized functional structure did have some advantages. Experience of the staff being the primary advantage. Having, "large clusters of people doing similar tasks provided excellent opportunities for coaching, mentoring, and promotion from within" (Kaplan & Norton, Alignment, 2006).

              The centralized functional structure had its share of disadvantages as well. As the big organizations began to expand their product lines, functions, and regions they would find challenges in sharing information, challenges with logistical situations, and the costs of doing business on the increase (Kaplan & Norton, Alignment, 2006). With all of these struggles a new organizational form would soon arise.

            The 1920s and 1930s saw a move from centralized companies to multidivisional companies. These companies had divisions focused on specific product lines and geographical regions (Kaplan & Norton, Alignment, 2006). Basically each division became its own version of the parent company within the region it was planted. Each division being represented by a divisional manger who reported to headquarters (Kaplan & Norton, Alignment, 2006). The big change from the centralized company was that the, "executives in the corporate office no longer ran the business" (Kaplan & Norton, Alignment, 2006). The executive filled more of an evaluative function, and were involved in, "the strategic planning and resource allocation of funds, facilities, and personnel to the divisions" (Kaplan & Norton, Alignment, 2006). Of the progress made from a centralized organization to multidivisional organizations, the drawbacks seemed to be just a plentiful from one to the other.

            Some of the problems with multidivisional organizations are human resource based, some are technologically based, and many are financially based. Having centralized decision-making in a decentralized environment will breed several problems. Corporate managers not on site can slow the problem-solving time to a crippling pace not being able to make timely decisions to keep production from becoming adversely effected. "On the other hand, if division managers are given too much freedom...they will have no incentive or motivation to operate...efficiently or cooperate with corporate managers" (Gutterman, 2008). The decentralization of multidivisional organizations make the more "costly to establish and operate" (Gutterman, 2008). In light of the fact that multidivisional organizations can be more responsive to local opportunities and threats (Kaplan & Norton, Alignment, 2006), it remains a seemingly inefficient way to operate.

Contemporary Organizational Strategy

            "The 1960s saw the birth of the conglomerate" (Kaplan & Norton, Alignment, 2006). In this strategical approach an organization, instead of dividing an organization into separate entities, acquires related businesses and merges them into one large organization. Diversification is the theme of this strategy. If organizations merge enough they hope to head off the economic ebb and flow by reducing the risks for the shareholders and executive team (Kaplan & Norton, Alignment, 2006). The conglomerate approach is based on the same type of premise as the insurance industry. If pooled resources are invested in diverse ways there tends to be a larger preservation element to their overall economic health. If one industry is not performing well, another may possibly be performing above average to help ensure larger economies of scale.

Emerging Organizational Strategies

            Moving into the emerging era many business are in the de-conglomeration mode. The trend seems to be organizations that used to be housed under one roof are (now being) separated (Rozeff, 2006). These former conglomerates are outsourcing many of the functions that used to be a part of the overall organization. Today we might see a business send its accounting, production, and marketing to outside organizations to help improve their own efficiencies (Rozeff, 2006) and we find, "decentralization has the upper hand at the moment" (Rozeff, 2006).

            One example that stands out in the conglomerate area is the Disney organization. They have been very successful by leveraging well known brands across diverse businesses (Kaplan & Norton, Alignment, 2006).   

Connecting Traditional Strategies to the Scoreboard Approach

            In the traditional organization success is measured in terms of market share, sales, profits, ROI, and growth. These are ways to measure, but are they the best? These measurements tend to focus on what has already happened. They act as a history lesson for those who are interested. The traditional measurements are not future focused. They are only half of the picture. To be more effective in developing organizational strategy having a full picture would be much more helpful.

            Kaplan and Norton (Alignment, 2006) introduced us to their balanced scorecard approach to organizational strategy. The approach is an attempt to rectify the weaknesses associated with using only financial based measures to determine an organizations ability to create a positive value position for itself in the future by determining what their key drivers are by employing a balanced scorecard. In its simplest form, the balanced scorecard is a tool that allows the management/executives a way to translate a company's strategy into a connected group of measurements that signifies the performance of the organization.  As defined by Kaplan, “The Balanced Scorecard translates an organization’s mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system” (Kaplan & Norton, The Balanced Scorecard, 1996). The balanced scorecard measures the organization's performance in this way,

Figure 1 (Kaplan & Norton, Using the Balanced Scorecard as a Strategic Management System, 2007)

*Financial – summarizes “the readily measurable economic consequences of actions already taken”.

*Customer – contains measures that “identify the customer and market segments in which the business unit will compete and the measures of the business unit’s performance in these targeted segments”.

*Internal Business Process – measures the “critical internal processes in which the organization must excel”.

*Learning & Growth – measures the “infrastructure that the organization must build to create long-term growth and improvement” (Knapp, 2001).

The balanced scorecard approach was developed to help rectify many of the problems associated with the way many traditional organizations were limited in how they measured their capabilities to create long-term value (MyStrategicPlan, 2012).

            Traditional organizational strategies usually lean on the idea that by making improvements in their operations the financial outflow and return would take care of themselves (MyStrategicPlan, 2012). Instead to the end-of-year financial being a history report that might be arriving too late to make the necessary changes to steer the organization in the right direction, the balanced scorecard approach takes the financials, customer relations, internal business processes, innovation and learning to help complete a balanced picture of how they are doing, and help them understand what drives their performance in order to aid in creating long-term value (MyStrategicPlan, 2012). The successful use of the balanced scorecard approach should result in the management team being able to implement four strategic processes that are key to the balanced scorecard strategy. Successful use should, clarify and translate vision and strategy, communicate and link strategic objectives and measures, plan, set targets, and align strategic initiatives, and enhance strategic feedback and learning (Knapp, 2001). The successful implementation of the processes should include five strategic principles. Those principles are translating the strategy to operational terms, aligning the organization to the strategy, making strategy everyone’s everyday job, making strategy a continual process, and mobilize change through executive leadership (Knapp, 2001).

            The main idea contained in the balanced scorecard approach is that, "Managers should develop financial and non-financial measures that are specifically ties to their firms' unique strategy" (MyStrategicPlan, 2012). The cause-and-effect relationship represented in Fig. 1 should be linked to specific targets to help improve customer relations, and ultimately financial performance (MyStrategicPlan, 2012). When looking at the balanced scorecard "You should be able to...infer the business strategy the company is intending to use to get breakthrough performance" (MyStrategicPlan, 2012). Not all is pie in the sky with the balanced scorecard approach, sometimes failure happens. When the balanced scorecard approach seems to not work, there is more than likely a design error or process failure. When an organization does a poor job of creating their scorecard, by possibly using too few measures, not properly balancing the outcomes with the drivers, to many measures, or too few measures the strategy may fail (Kaplan & Norton, The Strategy-Focused Organization, 2001). If the organization individual units are not aligned with the overall strategy. If each unit has its own scorecard, and they differ, problems are ultimately going to arise (Kaplan & Norton, The Strategy-Focused Organization, 2001). The most common reason that the implementation of the balanced scorecard approach doesn't perform as planned can be attributed to poor organizational processes (Kaplan & Norton, The Strategy-Focused Organization, 2001). Here are some of the main process issues to be aware of when implementing the balanced scorecard approach,

*Lack of senior management commitment. Senior management must articulate the organization’s strategy and bring about consensus if consensus about the strategy is difficult to achieve. They must also be emotionally committed to the strategy, investing time and resources

to see the strategy through.

*Too few individuals involved. Commitment must come from the appropriate decision-makers in an organization to keep business practices in line with strategic goals. The excuse that individuals (particularly key senior managers) “already attend too many meetings” is not a valid one.

*Keeping the scorecard at the top. The opposite error of not involving senior executives is to involve only senior executives. For the scorecard to be effective, it must be shared with everyone in the organization.

*An over-long development process (the Balanced Scorecard as a one-time measurement project). Some teams believe they only have one chance to launch the scorecard, so they want to produce the perfect scorecard, spending months refining it — so long, in fact, that it never gets implemented. The most successful implementations, however, start with missing measurements;

the organizations simply learn by doing.

*Treating the Balanced Scorecard as a systems project. Sometimes, the Balanced Scorecard is implemented by consultants that specialize in installing large systems. These consultants spend months and millions of dollars automating and facilitating access to thousands

and millions of data observations collected by the company. This has little to do with the engaging strategy that should be at the center of the Balanced Scorecard management system.

*Hiring inexperienced consultants. Using inexperienced consultants or consultants who deliver their favorite methodology under the rubric of the Balanced Scorecard is a recipe for failure.

*Introducing the Balanced Scorecard for compensation only. Linking strategy to compensation is a powerful lever to gain the attention and commitment of individuals to strategy. Some companies, however, forget that they must translate the strategy into terms each of their employees can understand and use in their everyday activities — a key component of implementation.

Conclusion

The balanced scorecard, when compared to more traditional ways of analyzing organizational effectiveness, is a much more important strategic management tool because it not only helps an organization to measure its performance, but also helps the organizational leadership decide/manage the strategies that need to be adopted or modified to insure the long-term goals are achieved. By using the balanced scorecard approach as a tool the consistency of vision and mission can be better gauges and adhered to which is an important first step in the development of a successful organization. Proper implementation of the balanced scorecard approach can also help enhance the development of competencies within an organization that will help it develop a competitive advantage which is key to being the best and out-performing the rest.

References

Gutterman, D. A. (2008, March 10). Disadvantages of Multidivisional Structures. Retrieved May 17, 2012, from Center for Management of Emerging Companies: http://alangutterman.typepad.com/emergingcompanies/2008/03/disadvantages-o.html

Kaplan, R., & Norton, D. (2006). Alignment. Boston: Harvard Business School Press.

Kaplan, R., & Norton, D. (2006, March). How to Impliment a New Strategy Without Disrupting Your Organization. Harvard Business Review , 100-109.

Kaplan, R., & Norton, D. (1996). The Balanced Scorecard. Boston: Harvard Business Press.

Kaplan, R., & Norton, D. (2001). The Strategy-Focused Organization. Boston: Harvard Business School Press.

Kaplan, R., & Norton, D. (2007). Using the Balanced Scorecard as a Strategic Managment System. Harvard Business Review , 1-14.

Knapp, K. R. (2001). The Balanced Scorecard: Historical Development and Context, As Developed by Robert Kaplan & David Norton. Foundations of Management, Anderson University , 1-12.

MyStrategicPlan. (2012). Balanced Scorecard. Retrieved May 17, 2012, from M3.

Rozeff, M. S. (2006, August 8). Remembering the Conglomerates. Retrieved May 17, 2012, from LewRockwell.com: http://www.lewrockwell.com/rozeff/rozeff89.html

Scholes, J. a. (1998). Exploring Corporate Strategy. Norfolk: Prentice Hall.