Assignment 2

Total Quality Management

Roddy McGuinn (s00093607)
12/12/2009

Balanced Score Card Methodologies and Discussion

Introduction

The balanced scorecard is a method of performance measurement devised by Robert Kaplan

and David Norton in 1992. This method is a way of monitoring how well an organisation
implements its strategic plan and differs from more tradition methods in a number of ways.
Traditional methods focused on financial performance and as stated by Almqvist et al. (2006)
page 842 these traditional measures did not seek to monitor the critical value creating aspects
of an organistaion, focusing instead on the results of the critical value creating aspects which
are financial in nature.

These value creating aspects such as learning and growth, customer satisfaction and internal
measures are key features which allow a business to compete successfully in the market
place. The balanced scorecard seeks to measure strategic performance in 4 areas.
Kippenberger (1996) page 8 describes these as:

1. The customer
2. The Internal
3. Innovation and Leaning
4. Financial

Chavan (2009) lists similar performance measures for the balanced scorecard approach which
are related to the customer, internal processes, learning and growth and financial.

Balanced Scorecard Methodologies

The traditional approach of measuring strategic performance focused on the financial aspects
of the organisation which results in short term measures of performance. These traditional
methods give no indication of how well the organisation is performing in the long term.
Based on these older performance measures a business has no structured way of determining
how well they are likely to perform in the future and confines measures of success to a
particular point in time in a narrow area that is present financial health. This can be
problematic for example if a business is profitable but with a very dissatisfied workforce,
financially in the short term all appears fine but in the longer term disaster is looming through
high turnover in staff, loss of good will, lack of willingness to show initiative and low levels
of innovation.

Atkinson (2006) page 1448 refers to traditional financial performance metrics as “lag
financial metrics” that is these indicators are retrospective in nature and display the results of
past strategic decisions and actions. The author argues that the balanced scorecard gives an
overall measure of the performance of the business at different stages for example, better
learning and growth can result in better internal processes which will result in more satisfied
customers which then results in an improved financial performance. Chavan (2009) page 395
describes this relationship between the 4 groups as a cause and effect relationship, it is
learning and growth, efficient and effective internal processes combined with excellent
customer knowledge and satisfaction that are the causes of good financial performance
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(Effect). The use of the balanced scorecard method includes both short term financial
measures and more long term measures such as learning and growth and internal processes.
The balanced scorecard aims to provide a more holistic overview of the strategic heath of an
organisation. Chavan (2009) page 395 defines the objectives of the balanced scorecard as:

1. Clarify and translate vision into strategy

2. Communicate and link strategic objectives and measures
3. Plan, set targets and align strategic initiatives
4. Enhance strategic feedback and learning.

Cobbold and Lawrie (2004) page 612 state that Kaplan and Norton do not themselves provide
a clear definition of what a balanced scorecard is but state that measures should be clustered
into the 4 main groups mentioned previously which are financial, customer, internal process
and innovation and learning. This lack of clear definition has resulted in variation and
adaptation of the balanced scorecard method over time with varying levels of success. For
any business considering the implementation of the balanced scorecard method a crucial
question that they must answer is what to measure? Atkinson (2006) page 1442 states that the
balanced scorecard is a positive method linking an organisations strategy with everyday
operational actions. Chavan (2009) page 394 states quite simply “Measure the strategy”. The
strategy is derived from an organisation’s mission and vision which is derived from the
factors critical for success which is derived from customer expectations. According to
Cobbold and Lawrie (2004) page 612 Kaplan and Norton recommend using a limited
number of measures which must be linked be linked to specific strategic goals.

It is of critical importance that the actual measures selected come from a range of areas
namely Customer Knowledge, Learning and growth, internal processes and financial
performance. This order of groupings is I believe significant and should be considered in that
order. The measures selected must be linked to factors critical for success, must be
quantifiable and critically they must be applied throughout the different levels of the
organisation. That is the goals of individuals must be linked to department goals which are in
turn linked to the Strategic goals set by the organisation. Organisations must be careful that in
adopting performance measures in the balanced scorecard that they do not just select that
which is easier to measure.

The Balanced scorecard method has not remained a static template for a business or
organisation to follow but has evolved since its original design in 1992. Cobbold and Lawrie
(2004) emphasise in their article that there are different generations of balanced scorecard,
each one a refinement of the preceding generation. So ironically the balanced scorecard
which seeks to accomplish continuous improvement by measuring strategy implantation has
itself been continuously improved over time. The first generation of balanced scorecards
lacked a clear definition of what measures should be included, initially Kaplan and Norton
merely stated companies must remain sensitive to factors such as Quality, time, service,
performance and cost when selecting measures but did not provide specific instructions on
the selection process. There was also the difficulty of how measures should be clustered
under a specific area e.g. internal process or learning and growth. The method was refined
and Kaplan and Norton went on to provide some guidance on measure selection stating that

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they must be linked to strategic goals and the causality between different measures i.e. which
measures represent a cause and which are the effect e.g. financial measures.

The third generation of balanced scorecards have adopted an approach of validating the
selected measures of performance and are more flexible in choosing what 4 groups measures
will be selected from. This refined model is therefore less rigid in that organisations are free
to choose what they regard as being relevant. An example of this approach is provided by
Cobbold and Lawrie (2004) page 617 where the 4 groups selected are financial & market
characteristics, activities & processes, external relationships and organisation & culture. This
encourages for example organisations to consider areas such as supplier capability and
development or business partners that are not considered in the original scorecard design.

Discussion of Disadvantages of the Balanced Scorecard.

There have been many criticisms of the balanced scorecard as a method of measuring
performance. Rich (2007) asks an interesting question which is do managers display bias
when interpreting the results of the performance measures in the balanced scorecard method?
In the absence of guidance in how to interpret the performance measures of the balanced
scorecard, managers are free to interpret the findings as they choose. This introduces a level
of subjectivity which is contrary to the entire concept of management by facts. The author
conducted an experiment involving 48 managers at IBM. The mean age for the managerial
group was 41.7 years and 90% of the group were described by the author as having
experience in assessing performance. The managers were asked to rate the importance of 24
different performance measures on a scale of 1-6 (1 being the least important and 6 being the
most important). The 24 different performance measures were divided into the 4 different
groups associated with the balanced scorecard which are Financial, Customer, Internal
processes and development and innovation. Some of the performance measures were
common to a number of different business processes; some were linked to strategy some were
not. The 24 different performance measures could for the purpose of the experiment be
classed as follows.

1. Common Linked (Measure common to different processes and linked to strategy)

2. Common Unlinked(Measure common to different processes but not linked to strategy)
3. Uncommon Linked (Measure unique to a single process and linked to strategy)
4. Uncommon Unlinked(Measure unique to a single process and linked to strategy)

The results of the experiment showed that mangers tended to rate common measures with
strategic linkage more highly than uncommon measures with a strategic linkage. The findings
also revealed an ongoing reliance on financial measures. This Only 7% of participants choose
to operate a mathematical approach (Scores verses targets) in deciding which measures were
the most important. This raises the question as to how successful the balanced scorecard
really has been in ending the dominance of financial measures in interpreting strategic
performance. Chavan (2007) page 398 is in agreement with Rich (2007) in stating that the
favouring of common measures is a potential risk.

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Almqvist et al. (2006) criticises the balanced scorecard in a number of areas. The authors
state that on page 844 that more than 70% of scorecard initiatives fail. The authors concur
with Rich (2007) that there remains an ongoing reliance on financial measures and they list
this as a major reason why the balanced scorecard has failed so often. Almqvist et al. (2006)
page 845 are critical of the balanced scorecard because of the top down method of strategy
implantation, they argue that there is no real effort to involve all employees in the process
and that the method proposes a single top down way of measuring performance.

The balanced scorecard method is more suited to large organisations and is more difficult for
small to medium sized businesses. Almqvist et al. (2006) page 847 states that Kaplan and
Norton used large corporations as examples in early papers and that this was in actual fact
their target audience. Smaller organisations need to be more flexible in their strategy
therefore the balanced scorecard may not be the most suitable. Add to this the considerable
cost of the method and it becomes more evident the smaller the organisation the more
difficult the task will be if the balance scorecard is to be successfully implemented.

Neither is the balanced scorecard (BSC) particularly well suited to public bodies. Almqvist et
al. (2006) page 850 states that this is the case because public bodies may face rapidly
changing strategies as they are subject to political authority. A change in government may
result in a change in policy with a resultant change in strategy so the scorecard could become
meaningless in the long term. The authors also make the case that if BSC is applied to say a
public body such as a hospital then there is a risk of conflict between skilled professionals
and management as to how an organistion should measure progress. Almqvist et al. (2006)
state that in poor financial conditions that financial performance measures will always be
dominant regardless of the other objectives.

Atkinson (2006) page 1442 states that the balanced scorecard is “Deficient in the empirical
testing of its benefits” and also questions if BSC alone can effectively implement strategy or
should it be combined with other methods such as budgeting and forecasts. The author states
that BSC does not give sufficient consideration all the stakeholders that interact with an
organisation and places too much emphasis on shareholder concerns. Atkinson (2007) page
1450 continues by criticising BSC for being somewhat contradictory in nature, it claims to
support learning yet it is very much a hierarchical top down type method this mitigates
against a learning environment. In this regard Atkinson (2006) is in agreement with Almqvist
et al. (2006).

Chavan ( 2009) page 398 criticises BSC for being “ relatively costly to develop”
and the benefits of BSC is very much dependant of the cognitive ability of
managers to interpret performance results.

Reasons for failure of the Balanced Scorecard

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Both Atkinson (2006) and Almqvist et al. (2006) state that more than 70% of performance
measures fail using the BSC method. There are many reasons why these failures
occur. Atkinson (2006) page 1445 lists the “six silent killers of strategy
implantation” these are:

1. A top down hierarchical management style

2. Strategic intentions which are not clearly defined
3. Conflicting priorities within the different performance measures
4. An ineffective senior management team
5. Deficient vertical communication (this is compounded by a top down
management style)
6. Poor coordination of efforts across different functions within an
organisation

• Kippenberger, T (1996) recognised that the BSC method was not simply a
template that could be applied to every operation and stated that different
industries will require different types of scorecards. An inappropriate
model of a scorecard being applied to an organisation is more likely to
result in the failure of performance measures.
• Cobbold, I.(2004) page 620 argues that early scorecards failed primarily
because of poor design which was cause by deficient characterisation of
the key measures which need to be monitored.

Conclusions

Despite the obvious shortcomings of the balanced scorecard method it is a

significant improvement on the more tradition methods of performance
measurement which have a very narrow interpretation of how success is defined.
The Balanced scorecard remains a very widely used measure of performance,
60% of fortune 1000 companies claim to use BSC to measure performance
(Atkinson, H. 2006). To maximise the probability of BSC being successful for a
particular organisation it is vital that the following areas be addressed :

• Consider the 3RD BSC generation approach outlined by Cobbold, I. (2004)

• Before performance measures are devised care must be taken to gain
customer knowledge, to define the correct strategy which in turn will aid in
the choice of what factors need to be measured.
• To avoid managers placing too much emphasis on financial measures
organisations should consider attaching a weighting to particular
performance measures.
• Organisations should consider if the balanced scorecard is suitable for
their business model, if they are very small or have rapidly changing
environments the this method will not be suitable.
• Involve all staff in defining strategy, this will make implementation much
easier.

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