HA2011 Managerial Accounting

Executive Summary

The measurement of performance of the organization is one of the most difficult and important

tasks of management team. While there are many performance measurement tools available, it is

necessary to use the tool that targets all the aspects of the organization and aligns with the

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dynamic and competitive outside environment. Balance Score Card (BSC) is the performance

measurement tool which uses the four perspectives to evaluate the performance of the

organization. The system is very flexible and can be adopted by any organization. The report

discusses the BSC and its key features. The report also discusses why BSC is better than other

traditional performance measurement tools. It reflects the suitability of the BSC for the

measurement of performance of Simplify Kitchen Ltd.

Table of Contents

Balance Score Card – Effective tool for Performance Management...............................................4

About Business................................................................................................................................4

Introduction to Balance Score Card.................................................................................................4

Key Features of BSC.......................................................................................................................6

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Difference between BSC and Traditional Performance Measurement Systems...........................11

Suitability of BSC to Business......................................................................................................13

Conclusion.....................................................................................................................................15

References:....................................................................................................................................16

Balance Score Card – Effective tool for Performance Management

About Business

The business under review for implementation of the Balance Score Card as the performance

management system is ‘Simplify Kitchen Ltd.’. The business is the manufacturer and retailer of

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kitchen supporting electronic goods. The products include the electric mixer, grinder, copper,

microwave, oven, fryer, etc. The business has its own retail shops all across the country and

even supplies the products to other retailers. Though the demand of the automatic kitchen

products is increasing it is observed that the sales and revenues of the business are declining.

Increasing competition is of course one of the reasons of the decline, but it is observed that the

company is losing its market share gradually. The cost of products is competitive to other

products and so should not be the reason for decrease in sales.

The company measures the performance on the financial basis only and uses revenues, profits,

sales volume and net earnings per share as their performance measurement tools. It is a well

known fact that the financial measures are not enough to measure the performance of the

company in this dynamic and competitive world and thus the firm needs more comprehensive

performance measurement tool to improve its performance and sustain. The use of BSC as a tool

to measure the performance of the organization is being evaluated in the report.

Introduction to Balance Score Card

Balance Score Card is the modern strategic planning and managing system. The system gives the

management a perspective to look at the company as a whole. The system provides the higher

management clarity in the strategic goals that are to be achieved by the company and helps them

in identifying the key performance indicators (KPIs) to achieve the strategic goals. BSC was

first developed by Dr. Robert Kaplan and Dr. David Norton as a means to measure the

performance of the organization with the help of balanced set of performances.

Presently BSC is used by large number of organization all across the world to measure the

performance of the organization. The system helps in management by using the problem solving

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approach towards the performance issues of the organization. The steps involved in the approach

are:

Identify the goals that the organization wants to achieve

Align the operations towards achieving those goals

Prioritize the processes, activities and services which are important to achieve the goals

and

Measure the progress towards achieving the strategic goals and targets from time to time

In this way the BSC system helps in connecting the various subsystems of the organization

towards the overall organizational goals. This way the organization is able to clearly identify and

understand the following objectives:

- Mission of the firm – the purpose

- Vision- where to reach

- Core values – what to concentrate upon as the basic belief

- Strategic areas – the themes to be followed

- Operational elements – the objectives of the activities

- Measures – identify the key indicators to measure the strategic performance

- Targets – sets the level of performance desired to achieve

- Initiatives – the projects and actions that should be taken to achieve the targets

The connection between the various aspects of the firm can be diagrammatically represented

as follows:

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(Source: www.balancedscorecard.org)

Since the BSC lays down the connections between the strategic goals and the means to achieve

them, it is suitable for all the business, industries, government organizations and even nonprofit

organizations. The system breaks down the high-level strategies into small measurable activities.

The studies show that BSC is among the top ten management tools used by the organizations

around the world (balancescoreacrd.org).

Key Features of BSC

The BSC system views the organization and its progress in terms of four major perspectives. The

objectives and performance indicators revolve around theses four perspectives. Each of the four

perfectives focuses a different side of the organization and thus balances all the aspects for

sustainable performance. These four perspectives are:

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(Source: www.balancedscorecard.org)

i. Financial Perspective – the perspective considers the financial performance of the

organization. The measures in this perspective show if the overall company strategy is

contributing to the bottom line in the income statement. In cannot be denied that in order

to survive and sustain the firm needs cash flows and profits in the income statements

(Kaplan, R & Norton, D., 1992). The objective of every business is to earn profit and if it

is a nonprofit organization still it needs to make money in order to pay salaries to its staff

and management and expand its operations. The shareholders, management, employees

all want to invest in and work with profitable organizations as they provide them with

good returns. Thus financial perspective remains the main perspective in measuring the

performance of the organization.

ii. Customer/Stakeholder Perspective - this perspective views the performance of the

organization from the stakeholders and customer views. Focus on customers and

stakeholders are an important part of the mission of the organization in order to deliver

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overall value. This perspective requires that the management considers it important to

fulfill the needs and requirements of the customers and stakeholders of the firm. The

major concerns of the customers are timeliness of the service, quality, service and cost

(balancescorecard.org). It can be understood from the case that even if a company is

providing low cost products to the customers, they will not be preferred in the market

unless to fulfill the needs of the customers. On the other side if the products/services

fulfill the needs of the customers, they will be willing to shell out some extra bucks to

procure them. Similarly customers prefer to buy some goods over others due to the good

after sales services provided by the companies. Thus the organization should consider all

these measures to gauge their performance form the customers’ perspective.

iii. Internal Process Perspective: this perspective looks at the business processes and sees

how smoothly the business is running. Improving the efficiency of the business by

reducing the idle time, waste and doing more value adding activities in the supply chain

is the main objective of this perspective. Adapting to the changes and having operating

flexibility is the core principle behind this perspective. Thus it is important that the

management keeps it focus on the critical internal operations which are necessary to

provide goods/services to the customers according to their needs and improves the

profitability of the firm (Kaplan, R & Norton, D., 1992). The perspective helps the

organization in identifying its core competencies and helps in identifying the important

technologies that are required to maintain the leadership. Thus the company needs to

identify the process and competencies that want to excel in and select the performance

measures to gauge the progress in the area.

iv. Learning & Growth/Innovation Perspective – The targets for success are changing in

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competitive environment and hence the firms need to make continuous improvements to

their existing processes in light of changes in the environment. Thus the company must

be ready and eager to introduce new services/products and use new technologies for the

existing products of the firms. Global competition requires continuous improvements and

changes into the products and services provided by the firm. The employees of the firm

must be having the knowledge and technology to the latest developments. In the

innovative world and continuous developments era, technology drives the growth and

progress of the firm. Thus learning and growth in internal processes of the firm is of

paramount importance (balancedscorecards.com). It requires that the firm must be aware

of the trends and technology in the industry. The customer satisfaction and the

profitability can be ensured when the operating process of the firm are equipped with

latest up gradations and the employees are imparted required skill and knowledge. The

ability to adapt to the latest technologies and introduce them in the internal process adds

the value to the company keeps it equipped for new markets and challenges in the

existing markets (Kaplan, R & Norton, D., 1992). The biggest example of the learning

and growth as a necessity is the mobile phones manufacturing industry. With the

introduction of Android software and smart technologies the mobile phone manufacturers

adapted to the latest technologies and came up smart phones. The companies which

incorporate latest technological changes reap the benefits of the higher sales in the

market. Samsung and Apple being the leaders are able to sustain the changing

technological environments. While Nokia and Motorola lacked quick adaptations to the

new technology and hence are left behind in market share.

Thus the four perspectives of the BSC are designed to cover all the organizational activities

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both internally and externally. The strategy once formulated is then translated into specific

objectives which can be classified into the above four perspectives. Some common measures

to monitor the performance and success of an organization under the four perspectives can be

summarized as follows (Mackay, A., 2004):

Table: Examples of some Objectives and Measures under each perspective

Learning & Growth Internal Business Processes

Objectives Measures Objectives Measures

‘To value our staff’ Employee Retention Index

‘To continually challenge competitor

products in the market place’

Time to Market for Next Generation of

Products

‘To maximize productivity’

Output per Head ‘To compete on product reliability’

Production Defect Rates

‘To develop a skilled workforce’

Number of Training Hours Completed Per

Head

‘To compete on competitive logistics

capabilities’

Stock Replenishment Cycle Times

‘To provide internal information

Information Availability Survey

Index

‘To compete on product delivery

channel mix’

Volumes of Transactions

Conducted Through Each of Our

Delivery Channels

‘To create organizational

alignment’

Peer Evaluation Measures Within / Between Teams

‘To capture a unique supply Chain’

Percentage of Supplier’s Revenue Dependent on Us

‘To cultivate a core competence in …’

Skill and Technology Measures Related to Desired Competence

‘To reinvent our value Creation System’

Benchmarking Index for Supplier of Outsourced Activities

Financial Customer

Objectives Measures Objectives Measures

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‘To achieve a higher return on investment’ ROI, ROCE

‘To dominate our major markets’ Market Share

‘To see significant revenue from our new

product launch’Revenue Growth on

Selected product Lines‘To delight our

targeted Customers

Customer Satisfaction Survey

Results

‘To maximize profitability per

transaction’ Unit Costs

‘To increase revenue through repeat

purchases’Customer Retention

Over Time

‘To minimize our cost of obtaining funds’ Credit Rating

‘To grow our business in a selected target

group’

Customer Acquisition From

Target Group

‘To delight our shareholders’

Value Added Measures

‘To add margin through image or

fashion’

Marketing Spend as a Percentage of

Sales

‘To improve our cash flow’ Creditor Days

‘To build customer recognition’

Corporate Image or Brand Awareness

Polls

Source: (Mackay, A., 2004)

Difference between BSC and Traditional Performance Measurement Systems

The success of the BSC lies in its ability to consider all the aspects of an organization and not

just targeting few areas as was in the traditional performance measurement systems.

The traditional performance measurement systems were concerned mostly with the financial

performance of the organization. The sole measurement criteria for the performance of the

organization were the financial measures like the profitability, revenue , cash flows, earnings per

share, Return on assets, etc (Suvarna, V., 2012). However, the dynamic environment and global

competition requires the organization to improve their performance management systems to look

beyond the financial measures. The traditional performance measures took into account the

financial cost and revenues of the past periods and used them to forecast the future performance

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of the organizations. These indicators are referred to as the lag indicators. The measurement of

performance on the basis of lag indicators is not reliable and does not assure of the future success

and performance of the organization. The financial performance is not suitable for measuring

the performance of the organization in the modern times because of the changing focus of the

stakeholders and the change in the external environment. The new economy is more complex

and just the financial reports are not indicative of the true shareholders value. The sustainable

shareholders value depends upon a number of non-financial factors such as the loyalty of

customers, the satisfaction of employees, the use of latest technologies in the operations and

internal processes and the ability of the organization to innovate (Striteska & Spickova, 2012).

Thus the new performance management system should be able to incorporate the changing

objectives of the business, should consider non-financial factors as well as key success factors,

should identify with the strategy of the business, should be based upon the objectives of the

organization, should be flexible, cover all the sides of the business and should link the

performance to the reward system (Striteska & Spickova, 2012).

Balance Score Card (BSC) as developed by Kaplan and Norton, considers all the levels in the

organization. It is a better performance management system because it is not dependent only on

the financial measures. The BSC is not only the measurement system but also helps in strategic

management and is an effective communication tool (Striteska & Spickova, 2012). Another nig

strength of the BSC is its ability to adapt to different organizations and to different environment.

The system contains a set of inert-linked steps to be followed by the organization while

designing the performance management system. The system does provide table of some

important measurement indicators, but they are very flexible and can be easily modified by

linking them to the objectives and goals of the organization (Macay, A., 2004).

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Suitability of BSC to Business

BSC can be implemented for any business because of the flexibility it offers. It can be effectively

implemented for the Simplify Kitchen Ltd. as well. The first step in implementing the BSC is the

development of the business strategy. The operational objectives and measuring criterion can

then be linked with the strategy. The organization needs commitment from all the management

levels towards the BSC approach. The objectives and the measurement criterions, the KPIs (Key

Performance Indicators) are very important and needs to be identified in consultation with the

operations head and the field management personnel. The KPIs identified by the management

should be SMART indicators – specific, measurable, achievable, relevant and time bound.

Framing the BSC is one of the most important tasks because it the KPIs identified are not correct

and not aligned with the strategy of the company the whole system might fail. The BSC team

needs to target each perspective and quadrant at a time and identify the KPIs . The organization

can also use the cascading BSC for each level of management with their individual and

departmental strategies. However, it is necessary that the departmental strategies are aligned to

the over organizational goals. The basic questions that should be answered while identifying the

KPI can be summarized as follows:

i. What does out customers expect from us? (Customer perspective)

- As cost leaders, quality products, good after sales service, latest technological products,

etc

ii. What should be out core competence? (Internal perspective)

- Reducing cost of products, develop new products, etc

iii. Should we improve or innovate? (Innovation and learning perspective)

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- Use new technologies to add value to existing products, innovate new products, etc

iv. What are shareholders think about us? (Financial perspective)

- Provide high dividends initially by limiting the growth, retain earnings for expansion, etc

It is important that the KPIs identified in the all the four perspectives must be aligned towards

the organizational strategy and should not contradict with each other. Communication of the

KPIs and sharing of the balance score card across the management is also very important part of

implementing the system. The lack of communication might lead to confusion and lead to

different KPIs being followed by different levels of management or departments. The Simplify

Kitchen Ltd management team can use the below template once it identifies its organizational

strategy.

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Conclusion

The Balanced Scorecard Links Performance Measures with each other and with the goals and

mission of the organization. Thus the system is helpful in aligning the various actions of the

organization towards achieving the single goal. By identifying the KPIs the BSC also helps in

reducing the load of information on the lower management and file workers by limiting the

performance measures n which they are to be evaluated. It is most of the time to many

performance measures that confuse the employees on which to concentrate upon. It is rare that

the companies have too few measures. The BSC can be upgraded for deleting of existing

measures and adding new measures according to the changing environment and competition. The

Balance score card motivates the employees by targeting on the few measures which are very

critical.

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