To what extent does the balance scorecard approach influence both performance appraisal and strategic management?
Strategic management is a systematic process intended to maximize the absorption of firm resources in line with its objectives and demands of the business environment (Ansoff, 2016). Often, strategic management goes beyond the day to day operations of a business and focus on its long term success. Strategic managers aim at creation of a good future for the business without ignoring the present. Therefore, strategic management provides an appropriate platform that can help businesses to react to the changes in the business environment. Particularly, businesses should be able to measure how it responds to environmental challenges in a bid to achieve its strategic objectives. In 1992, Kaplan and Norton developed the concept of Balanced Scorecard (BSC) who aim was to help organisations alleviate the inadequacies associated with most of the existing financial-based performance measurement tools (Kaplan & Norton, 1992). Currently, most of the Fortune 1000 companies have implemented BSC. The widespread adoption of BSC is associated with performance measurement. Flamholtz (2003) indicated that integration of BSC into firm’s performance management system has enhanced objectivity of measurement tools thus improving their effectiveness. Hence, this paper explores the extent to which balance scorecard approach influence both performance appraisal and strategic management.
Notably, the field of strategic management is not only about survival and growth of businesses but also understanding how specific aspects of business i.e. financial and non-financial variables combine to attain the ultimate goal. Fago (2010) showed that successful companies use strategic performance measurement tools such as BSC. BSC is basically defined as a performance measurement tool that managers use to track execution of various tasks by staff within their control and monitor the outcomes that arise from management actions (Moulin, 2017). Unlike conventional performance measurement tools that focused on financial metrics alone, BSC also evaluate customers, internal processes and learning and growth within the firm thus providing a holistic outlook of the firm. Though BSC has been widely adopted, the results of BSC implementation vary from success to negligible change to outright failure. A growing body of scholarly literature has found BSC to be limited in several areas including conceptualization, application and the practice. The literature contends that the limitations of BSC undermine its effectiveness and causing many firms to abandon for alternative performance measurement tools. Motivated by the above arguments, this paper contributes to the body of literature by providing a critical evaluation of BSC usage, application, benefits and the need for non-financial measures. The paper also aims to guide recommendations for alternative performance measurements as well as further research on BSC effectiveness.
The researcher acknowledges that there are several studies that have been conducted to identify relevant determinants of firm’s performance within various competitive business environments. The findings of these past studies can be useful for the guiding the current study to get accurate results on the effectiveness of BSC as a performance measurement tool (Ansoff, 2016). The current research is based on appropriateness of non-financial metrics in examining firm performance. Therefore, the paper focuses on critical analysis of BSC as a performance measurement tool. That is, the researcher intends to answer the following primary research question:
- To what extent does the balance scorecard (BSC) approach influence both performance appraisal and strategic management?
Specifically, the paper reviews what BSC is and how it is applied in various firms. The paper also attempts to link performance appraisal and strategic management. In doing so, it answers the following study sub questions:
i. How effective is the application of the balance scorecard?
ii. What importance does performance appraisal have to the growth of a firm?
iii. What are the consequences of notimplementing non-financial measures within an organisation?
To answer the questions, the researcher conducts a critical literature review of past studies and theories on performance management, strategic management and BSC. The goal of the review is to explain the impact of BSC as a firm performance management tool on the strategic success of the firm. The rest of the paper is, therefore, organized in two sections i.e. literature review and conclusion and recommendations. Literature review section presents a critical evaluation of past studies and theories on BSC and performance management and appraisal. The conclusion and recommendations section summarises the findings and make suggestions for practice and future studies.
Balanced scorecard is basically defined as a performance management report that the management team use to monitor implementation of strategy and operational activities (Fago, 2010). BSC is largely used for strategy implementation management and operational management. Muralidharan (2004) indicated that managers use BSC to track individual performances of employees. The managers can also use this tool to inform their personal goal setting and calculate incentives. Some of the critical features of BSC as a strategic management tool include focus on the organisation’s strategic agenda, unique measure to monitor performance against objectives and ability to mix financial and non-financial data items. BSC also consists of a portfolio of initiatives designed to influence performance of various measures and objectives. Nevertheless, BSC is not always implemented as a replacement to financial-based performance measurements but to offer an objective evaluation of data which are relevant to its readers (Srivastava & Verma, 2012). That is, it provides a useful insight into the organisation’s strategy that requires consistency with the overall mission and vision statements of the firm.
Kaplan and Norton introduced BSC in the 1990s as a framework that offers structure to multiple measures of organizational performance. BSC has since evolved and become highly recognized as one of the most used innovations in management accounting (Kaplan & Norton, 1993). Kaplan and Norton (1993) stated that BSC performance measurement systems revolutionized performance measurement from a manager’s checklist to a more comprehensive strategic performance measurement and management system. Muralidharan (2004) highlighted that firms apply BSC to assist them in achieving their goals though other studies have raised concerns regarding its effectiveness and the extent to which organisations can use it. Most importantly, BSC is hailed for measuring firm performance from both financial and non-financial perspectives i.e. financial, customers, internal business processes, and learning and growth. Malina and Selto (2001) highlighted that BSC was distinct from other traditional performance measurements as it is able to measure performance by translating the organisation’s mission, objectives and corresponding strategies and its ability to link measurements under a causal chain. Nonetheless, Ansoff (2016) indicated that it is still difficult to understand the extent of BSC applications in practice even among organisations that have implemented their scorecards based on both strategy and causal links.
Effectiveness of application of the balance scorecard
Performance measurement was the original use for which BSC was created. According to Kaplan and Norton, when BSC is used to measure performance, the user must focus on its four performance metrics of financial, customer, internal process, and learning and growth metrics. De Waal (2013) indicated that measuring these four metrics help firms to track all the essential metrics of the firm’s strategy and attain the continuous improvement of teamwork and partnerships. Though BSC retains financial metrics as the primary measure of firm’s performance, it also assesses qualitative elements which are necessary in supporting the overall mission of the firm. Among private and for-profit organisations, the financial metric focuses on profitability and market share while for government and non-governmental organisations, the financial metric focus on projected result-oriented measures. Elsewhere, BSC measures customer perception of the organization as customers directly contribute to revenues via sales and perceptions which are vital for increasing and sustaining sales. Under the customer perspective, BSC can also measure time, quality and cost (Srivastava & Verma, 2012). Besides, BSC measures internal processes that can improve the level of customer satisfaction while learning and growth perspectives focuses on the skills of the employees to attain superior customer value from the internal processes.
BSC as a performance measurement tool is effective in overcoming the inadequacies of the traditional financial-based performance measurement tools. Kaplan and Norton (2001) indicated that traditional performance measurement methods such as net present value and return on investment and internal rate of rate which solely relied on financial metrics suffered from limitations such as measuring past performances and not accounting for the current environmental changes. These measures were also periodic implying that the company had to wait for a given period of time in order to evaluate its performance and develop new strategies. BSC overcomes these inadequacies by providing managers with three additional performance metrics which effectively evaluate past and present organization performance while predicting future performance. Due to this, Lawrie, Abdullah, Bragg and Varlet (2016) suggested that BSC has at least three benefits to management. These benefits included (1) assisting management to focus on strategy, structure and vision, (2) integrating financial and non-financial based metrics assisting to managers to evaluate the entire business process and (3) contributing to customer values and long-term organizational strategy. Significantly, BSC is more than just a performance measurement tool but is a management system that motivates organisations to invest in improvements in their critical performance areas such as product, customer, and process and market development (Anicic, Petrovic, & Anicic, 2016).
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- University of Nairobi