The Use of Balanced Scorecard in Management Control Systems
Topic : The use of balanced scorecard in management control systems. Specifically, what are the issues and risks that organizations face in building and implementing balanced scorecards and what is the suggested or proposed methodology to implement a balanced score card.
12 pages should include- abstract, introduction, literature review, data analysis and conclusion.
Include a problem statement and research questions (3/4) in the introduction. The problem statement and research questions will guide the study. The literature review should be the bulk of the paper. Be sure to include headings in the literature review.
The Use of Balanced Scorecard in Management Control Systems
Performance management is the most challenging aspect of most organizations to realize their purpose for establishment. Most companies do well in their first few years of operations only to record dwindling performance. The emergence of the covid-19 pandemic in most countries globally added to the pressure companies face (Kaplan & McMillan, 2020). The need to deal with the uncertainties such as covid-19 pandemic raised the need for a balanced scorecard for management controls. Organizations need a strategy that will enable them to compare their past performance with the present and devise strategic ways of dealing with management challenges that come their way (Camilleri, 2021). Generally, a balanced scorecard helps companies monitor their performance, identify challenges, and mitigate risks that come with the internal factors that affect the external outcomes of the business.
Establishing a balanced scorecard can be approached from three different perspectives. That is, customer, internal business, and innovation and learning perspective. Organizations generally strive to meet their customers' expectations, achieve their business objectives, and adapt to changes in the external environment (Hansen & Schaltegger, 2018). Therefore, a balanced scorecard is needed for management controls to ensure the use of past performance to assess current challenges and develop strategies to improve performance. Generally, most organizations measure their performance and challenges in customer satisfaction and financial achievements (Albuhisi & Addallah, 2018). When an organization realizes that its financial achievements for previous years are better than the current year, they think of the next course of action to improve the situation and avert any possible risks.
The balanced scorecard is a management strategy to improve performance measurement by analyzing and improving internal functions and expected external outcomes (Eklund, 2020). Most organizations find it challenging to establish a clear path that will enable them to achieve their overall objective amid internal and external challenges (Rahimi, Bahmaei, Shojaei, Kavosi, & Khavasi, 2018). The constantly changing business environment challenges managers to consider strategies that will make them relevant and remain competitive in their industry. Lack of performance measurement and control strategies has left many organizations at the mercy of their industries and customers, and when nothing gets done, they get forced to shut down.
Customer perspective is the center of most performance measurement strategies. Organizations strive to identify gaps and loopholes that might be responsible for the drop in customer value that they used to offer (Aryani & Setiawan, 2020). Without realizing the root cause of decreasing sales, most companies end up doing trial and error to try and maintain their customers. Unfortunately, most customers tend to shift their loyalty to other enterprises that can provide consistent value to their needs in specific products (Hansen & Schaltegger, 2018). Poorly defined metrics for meeting customer expectations are among the challenges that a balanced scorecard gets expected to solve. Furthermore, a lack of internal perspectives that align with customers' needs tends to be a significant stumbling block for companies to meet their objectives and achieve their general performance expectations (Kaplan & McMillan, 2020). Organizations that focus on profits at the expense of customers' needs find it challenging to be relevant for long in their industries.
The changing business environment requires organizations to be innovative to gain a competitive advantage to survive in their industries. Poorly defined metrics on coping with the changing business dynamics have left most organizations on the verge of collapse (Erawan, 2020). The big question is whether a balanced scorecard can help such organizations set their priorities right in as far as innovation is concerned. Organizations need to define a process improvement methodology to help them cope with the evolving business world (Hansen & Schaltegger, 2018). Most organizations are too focused on their internal environment, forgetting the essential building blogs of their businesses such as customers, suppliers, government policies, and suppliers.
A balanced scorecard helps businesses define their performance measurement metrics that can get used to analyzing past and current performance. It is time for implementation after an organization has established its balanced scorecard strategies (Massigham, Massingham, & Dumay, 2018). Generally, organizations face several issues in establishing a balanced scorecard, including lack of sufficient data collection and reporting, poorly defined metrics of implementation, lack of strategic review structure, more emphasis on internal factors, and lack of process improvement methods. However, there is room for improvement if the organization can establish a step-by-step methodology for creating a balanced scorecard.
A balanced scorecard serves as a strategic tool that organizations require for performance measurement and improvement. Generally, this review gets based on the following research questions;
a) How can an organization use the balanced scorecard to monitor its performance?
b) What are the issues in creating a balanced scorecard for the business?
c) What are the risks associated with balanced scorecard implementation?
Organizations majorly use a balanced scorecard to address their goals, couple daily operations with strategy, assess previous and current performance, and measure and monitor the progress of strategic goals. Managers tend to set targets for their organization to achieve per time (Erawan, 2020). However, a lack of adequate performance measurement has rendered most organizations ineffective after a few years of operations. The balanced score card is a management strategy that businesses can use to set performance targets and strive to achieve them through strategic objectives. Management control systems in an organization are essential to achieve its purpose for existence without many struggles. Most organizations create their balanced scorecard in key performance indicators (KPIs) (Camilleri, 2021). These refer to set targets that organizations use to measure their achievements in the long run.
Some organizations rely only on financial accounting as the primary tool for performance measurement. Financial accounting helps organizations evaluate their profitability and forecast future outcomes (Aryani & Setiawan, 2020). Most organizations conduct financial accounting that incorporates sales revenues, donations, grants, and loans as sources of income. On the other hand, they use general expenses such as electricity, salaries, loan repayments, and insurance, among others, to measure their expenditure (Erawan, 2020). Managers and other organizational stakeholders get excited when the company consistently makes profits. However, managers get concerned when there is a trend of losses stretched over time. Therefore, financial accounting plays a significant role in defining the yardstick of performance measurement. Over time, enterprises have learned to incorporate other business aspects for performance measurement (Kaplan & McMillan, 2020). They include customers, suppliers, competitors, and IT innovations.
How organizations use a balanced scorecard for performance measurement
Organizations rely on their previous performance to predict their next performance based on the prevailing circumstances. By increasing sales, profit growth, losses, reduced expenses, and improved innovations, organizations can determine their performance (Aryani & Schaltegger, 2018). However, additional performance determinants are not limited to internal processes alone. For example, a competitive advantage can also boost sales performance. When companies realize that their sales are growing daily, they attribute this to an increased customer base.
On the other hand, reduced sales imply that customers have decreased. Customers can shift their allegiance to the company for several reasons: reduced product quality increased prices, change in taste and preferences, and emerging trends in the market (Rahimi et al., 2018). An organization can also either experience decrease or increase in its profits due to sales performance. Generally, a balanced scorecard can get used for performance measurement based on three main perspectives. That is, internal operations, customer, innovation, and learning perspectives.
Internal operations perspectives
Effective managers help their company monitor internal factors that could determine the success or failure of the company. An organization's internal operations include finances, business culture, objectives, and structures (Massingham et al., 2018). Managers can establish a balanced scorecard in the form of KPIs to help the company monitor how each of the internal factors affects its operations. The balanced scorecard is set by evaluating previous performance, weighing against current goals, and determining future outcomes (Eklund, 2020). For example, managers can establish KPIs to help operation units achieve the company's objectives based on the performance target. The failure of the company to meet its performance target sends managers back to the drawing board to evaluate the challenges of not achieving the performance targets (Benkova, Gallo, Balogova, & Nemec, 2020). Therefore, using a balanced scorecard helps the organization set strategies to ensure continuous improvement and established performance metrics.
Customers play an essential role in the existence and growth of any enterprise. The existence of any business enterprise gets primarily driven by the need to meet customers' expectations (Rahimi et al., 2018). Therefore, sales growth and performance of any enterprise depend on the customer base they can attract and maintain. A balanced scorecard helps organizations set performance measurement metrics based on customers' perspectives (Kaplan & McMillan, 2020). Some variables that can get used to create a balanced scorecard based on customers include customers' satisfaction, referrals, number of new customers, market share, and number of constant customers.
In addition, organizations can determine their performance based on customers' feedback on their product quality, consistency with customer service, and customer growth. Finally, balanced scorecards help managers to determine areas of improvement that they need to incorporate into their decision-making concerning future operations (Erawan, 2020). Generally, established organizations have mastered standardizing their performance using evaluation results from customers' perspectives.
Innovation and learning perspectives
Global market trends in business continue to push organizations to embrace technology as the only to remain relevant in this digital age. Organizations can establish their scorecard based on their strides towards innovation and learning (Rahimi et al., 2018). Companies that lag in innovation find it challenging to compete favorably with others that have transformed their services to be technology-driven. For example, most retail stores such as Walmart and eBay have adopted technology to reach a wide range of customers worldwide without necessarily physical contact (Hansen & Schaltegger, 2018). The business world is constantly evolving, requiring every business to move with the trend. An organization can use a balanced score to establish its effectiveness in blending with technology and learning. Managers can evaluate the rate at which their organizations integrate with technology to enable them to set quality improvement strategies for the future.
Challenges in creating a balanced scorecard for the business
Business strategies need to align with the mission and vision of the company. However, the changing business environment causes most managers to deviate from their companies' mission statement and strive to conform to current trends. They operate in an environment where innovations and ideas keep emerging, making it challenging for enterprises to focus on their core missions (Benkova et al., 2020). Implementing a balanced scorecard in most organizations faces the challenge of lacking the clear and critical path they need to follow. Implementing a balanced scorecard is meant to help organizations establish effective frameworks for continuous improvement (Eklund, 2020). However, implementing a balanced scorecard is faced with various challenges from the internal and external environment of the business. Generally, challenges to implementing a balanced scorecard include a lack of effective metrics, inefficient data collection and reporting strategies, ineffective formal review structure, and excessive focus on internal factors.
The primary essence of performance metrics is to determine practical quality improvements after the necessary assessment. Poorly defined metrics make implementing a balanced scorecard strategy in the management control system face challenges (Benkova et al., 2020). Some organizations define metrics that are not clear, thus, making it challenging for operations staff to follow when implementing their balanced scorecard. A balanced scorecard needs to define straightforward ways of evaluating performance to let decision-makers know precisely the next step (Albuhisi & Abdallah, 2018). Therefore, the lack of well-defined metrics makes using a balanced scorecard for performance measurement challenging.
Inefficient data collection and reporting strategy
Companies with a well-defined system for data collection find it easy to define their performance metrics through a balanced scorecard. Most organizations prefer to use financial reporting tools because they are readily established systems (Aryani & Setiawan, 2020). Without a well-defined data collection platform for performance measurement, an organization finds it challenging to develop a balanced scorecard strategy for their business. People that want to avoid accountability will be against any dubious method applied by the management to collect and report data (Hansen & Schaltegger, 2020). Therefore, implementing a balanced scorecard is likely to face obstacles where there is no efficient data collection and reporting system. Established organizations strive to create systems such as customer relations management (CRM) and Enterprise resource planning (ERP) that ease the process of data collection and reporting.
Inefficient formal review structure
Managers need to establish effective timelines for reviews of the set balanced scorecards in an organization. There is a need for well-defined roles for everyone involved in reviewing a balanced scorecard (Hansen & Schaltegger, 2018). Unfortunately, most organizations have no defined structure in which performance measurement and evaluation need to get done. Some managers prefer a weekly review, while others might prefer monthly reviews. A lack of an effective review structure is a significant challenge to the ineffective implementation of a balanced scorecard (Erawan, 2020). Organizations need to involve cross-functional departments in reviews of the scorecards to be effective. However, organizations with authoritarian managers find it challenging to establish a formal review structure because such managers believe they have the final say on all management matters.
Excessive focus on internal factors
Most organizations consider internal factors that affect their performance as financial-driven. Performance measurement can never be effective if based on the business's internal environment (Aryani & Setiawan, 2020). Managers need to understand that several external factors such as suppliers, competitors, and customers significantly affect the performance of an enterprise. Unfortunately, some managers focus much on internal factors, especially finances, and forget the need for diversity (Camilleri, 2021). Therefore, creating a balanced scorecard based on internal factors alone may not provide the results used for decision-making. In addition, much internal focus hurts the process of implementing continuous improvement strategies (Hansen & Schaltegger, 2018). Generally, the primary objective of establishing a balanced scorecard is to help the organization identify areas of weakness and suggest improvement strategies.
Risks associated with balanced scorecard implementation
Balanced scorecard implementation can face various risks that managers must identify and avoid. Most companies seem to focus only on the financial challenges they will face in implementing a balanced scorecard. However, balanced scorecard implementation risks are majorly non-financial setbacks that most managers might not identify early (Benkova et al., 2020). Generally, a balanced scorecard can get influenced by external indicators, lack of technological support, and parallel systems. External indicators of performance have little significance on organizational performance. Some managers might suffer the risk of incorporating external indicators like market trends to measure the performance of their enterprises (Eklund, 2020). External indicators are general perspectives that can mislead a company that wants to define its performance measurement.
IT support is essential for effective management and implementation of a balanced scorecard. Organizations without up-to-date software for data collection might suffer the risk of operating with manipulated data (Albuhisi & Abdallah, 2018). For example, most companies still use Microsoft office excel in collecting, evaluating, and presenting their data. Such applications can easily get manipulated hence interfering with the integrity of the data (Benkova et al., 2020). Therefore, organizations need to acquire tailored applications for collecting, analyzing, and storing data specifically for performance measurement. In addition, the inclusion of parallel systems in performance measurement in an organization poses the risk of controversial results. Therefore, organizations need to use only a balanced scorecard as the primary tool for performance measurement. Using parallel tools for performance measurement might jeopardize the expected results.
Suggested methodology for BSC implementation
Implementing an effective balanced scorecard requires an organization to develop a strategy that will be sustainable. Every organization can choose a method that suits its needs and align with its strategic objectives. Kaplan and Norton recommend a nine-step process for BSC implementation in an enterprise (Kaplan & McMillan, 2020). They are as follows; first, conduct a general assessment of the organization. The evaluation aims to determine areas that need monitoring to measure their subsequent performance. The next step involves establishing strategic aspects that make up the scorecard (Camilleri, 2021). They include financial, customer, internal process, and innovation and learning perspectives. Thirdly, describe each perspective and strategic objective. Each perspective identified in step two is defined to enable the allocation of roles for each person involved in the implementation process. Fourthly, establish an implementation road map (Rahimi et al., 2018). Consequently, there is a need to develop a strategy in which the BSC process will get implemented effectively. The fifth step is the definition of performance metrics by identifying some of the indicators for measuring performance.
The sixth step involves redefining and prioritizing strategic initiatives. The implementation team will prioritize the organization's needs based on the effects of various performance metrics (Kaplan & McMillan, 2020). Some company issues affect performance directly, and others contribute to other factors affecting performance. Step seven involves automation of the system to be used to implement the BSC methodology. After system automation, formal communication gets done to all employees and other affected parties (Eklund, 2020). In addition, the eighth stage is the implementation of the BSC throughout the organization. Finally, collect data, analyze, and revise where possible. After successful implementation, there is a need to examine the BSC and suggest areas of improvement that lead to effective decision-making.
Kaplan and Norton developed a balanced scorecard in exploring new performance measurement methods. Most organizations narrowed their performance measurement based on financial measures (Eklund, 2020). The discovery of the balanced scored card solved the challenge that most companies had due to the ineffectiveness of financial measures adopted in the past. A balanced scorecard analyzes the performance of various aspects of the organization contrary to the old financial measurements (Erawan, 2020). Organizations can apply various methodologies for BSC implementation, but the one suggested by Kaplan and Norton seems universally accepted. They include financial, customers, internal process, and innovation and learning perspectives (Rahimi et al., 2018). These perspectives apply to the internal and external environment of a business.
Most organizations have been focusing their attention on financial measures as a tool for performance measurement. However, the ever-evolving business environment has challenged the use of financial measures, requiring more strategic efforts (Massingham et al., 2018). Today, the business world faces various challenges that interfere with the visions and objectives set by organizations. As a result, there has been a need for tools that can get used to ensure continuous quality improvement decisions get made (Albuhisi & Abdallah, 2018). Generally, a balanced score is a strategic tool that has helped many organizations measure and monitors their performance. The performance evaluation results help managers make critical decisions that will improve their organizational performance in the short and long run (Hansen & Schaltegger, 2018). The main essence of a balanced scorecard is to help an organization establish competitive strategies that will strengthen its internal processes for external outcomes.
Focusing on the results of a balanced scorecard enables organizations to redefine their value proposition to ensure stakeholders get value from the organizations' business. Managers can inject various suggestions for continuous improvement to better their business (Erawan, 2020). Such injections include competitive prices, improved quality levels, and speed in delivering goods to customers. After the management reviews the financial performance evaluation based on the BSC report, they can set competitive prices that will cause the company to compete favorably with others in the industry (Aryani & Setiawan, 2020). Competitive prices set the company for fair competition with rivals since customers will not have a reason to complain. Secondly, departments that have performed dismally can use the BSC report to develop new strategies to improve their operations. Additionally, improvements in machines and human resources will enhance an organization's quality of goods and services.
Small and medium-sized enterprises dominate the global business arena and form over 90% of businesses (Aryani & Setiawan, 2020). Due to a challenging business environment, most SMEs tend to bow out of business within five years of their commencement. Adequate, balanced scorecard implementation might inject new light into these businesses and enable them to develop sustainability goals. SMEs are mainly sole proprietors or partnerships; that is easy for their owners to decide on the effective implementation of BSC for their performance measurement (Massingham et al., 2018). Generally, BSC is a strategic management tool that all businesses can use to revive their performance. The knowledge of a balanced scorecard opens trades to various aspects of performance beyond financial measures used for years (Benkova et al., 2020). Therefore, BSC implementation is of significant benefit to all businesses since it helps them measure performance from multiple perspectives of business operation.
The business world has evolved due to new trends and strategies used by companies and customers. Most of these trends and innovations have been driven by changing customers' needs and preferences. Organizations have made efforts to conform to the changing business dynamics over time. However, most organizations have struggled to maintain consistent performance due to internal and external forces that affect their operations. Lack of effective performance measurement has been the reason for struggle by many companies globally today. Most organizations rely on financial measures as the only tool for performance measurement, which has become ineffective. The development of a balanced scorecard came in handy for organizations because they can now measure and monitor their performance from various perspectives. Generally, BSC has enabled businesses to improve on their operational strategies and set attainable goals that lead to improved internal performance for external outcomes. Therefore, BSC should get adopted by organizations of all levels to ensure business performance continuity.
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