Thesis on "Pitfalls of Balance Scorecard"

Thesis 7 pages (2048 words) Sources: 13 Style: Harvard

[EXCERPT] . . . .

Balanced Scorecard within application of strategic decision making. It first examines the nature of the Balanced Scorecard as a unit of performance measurement. The practice does have several benefits construed through dividing business actions into four separate, yet compatible categories that give individual attention to individual problems within productivity. However, despite its successful implementation and practice has shown that there are several pitfalls that in many cases limit the success of the creation of such strategies and their effective implementation.

Within the midst of a continuously developing global economy and business context is the incessant search for an effective and reliable performance measurement standard. Businesses want to see the results of newly implemented strategies, just as they need to measure current performance in order to focus on potential problem areas to increase in terms of productivity. Thus, the basic principle of the Balanced Scorecard is essential to the maintenance of maximum productivity. It helps organizations target individual and universal underlying problem areas. However, this method, which has been glorified over the years, does have its potential downfalls. There are several pitfalls that severely threaten the success of the created strategies to be tested through the implementation of the essential necessary changes.

Research

The Balanced Scorecard is an impressive system for setting out goals and guidelines in terms of performance measurement. It was first introduced and published by Robert Kaplan and David Norton I 1992 (U.S. Office of Personal Management 2009).

It is crucial as a measurable system that evaluates performance based on financial, customer, business perspective, and the innovation and learning perspective (U.S. Office of Personnel Management 2009). When problem areas have been identified, the model proves beneficial in many cases in terms of directing creative strategies to help increase overall productivity. Real life practice has shown the positive aspects implanting a Balanced Scorecard within the context of a major change in business strategy. According to research, "Performance measurement has been touted as a way to quantify and improve organizational effectiveness," (Malone 2002). It includes typical measurable variables, such as financial and physical financial assets, but then expands to include more abstract and previously unmeasured variables within the business context. It also includes element of the customer's perspective. In this view, an organization is forced to as "How do customers see us?" (U.S. Office of Personal Management 2009). Thus, the customer's perspective is a measurable, and adjustable variables that play into factor when determining current levels of productivity and how they can be increased. Thus, this portion of a Balanced Scorecard focuses on how customers respond to interaction, quality, and timeliness (Hopf 2001). Also incorporating internal business variables including such factors as human capitol and labor force issues. There is additionally a learning phase which allocates time to adjust to performance objectives and results. This time is strategically planned to the tee in comparison to determined time allocated to competitors. According to this model, managers "need to focus on those critical internal operations that enable them to satisfy customer needs," (U.S. Office of Personal Management 2009). It divides the strategies of an organization based on four separate elements, allowing it to appropriately handle individualized problems within each area with more individual attention. This then measures both internal and external performance issues and processes, (Hopf 2001). The practice allows for a reliable method to measure a plethora of areas at once. This then includes finances and monetary success, but also goes beyond finances to include more abstract elements of business on a day-to-day basis, (Ahn 2001). Both objective and subjective variables are used within the formulation of applicable strategies (Hopf 2001). Thus, the practice aims to combine the clearly measurable with the more abstractly conceived notions of the current business market. According to research, "Scorecards assist with alignment of leadership and staff for the completion of strategic processes, including roll out and sustaining goals," (Roberts & Yeager 2004). Therefore, they help drive performance results in the future based on the following of created strategies. They incorporate objectives, measures, targets, and initiatives. Objectives include major goals set aside to be achieved, measures which include the measurable methods of measuring process and performance of a company on its way to achieving its goal, specific target goals, and initiatives to drive future plans needing implementation to achieve both target and larger goals (Hopf 2001).

Spelling out each element and strategy to be implemented on a detailed and solid time line structure has had success in driving up productivity. According to research, "These measures give top managers a fast but comprehensive view of the organization's performance and include both process and results measures," (U.S. Office of Personal Management 2009). Thus, Balanced Scorecards have been popularized as an effective methods to measure performance.

Within the individual perspectives outlined in the four sections of the Balanced Scorecard, it is clear that an effective balanced scorecard would have underlying patterns running concurrently within each. Therefore, the strategies created from the creative process of the scorecard not only clarify individual strategies to meet department target goals, but also more cohesive ones that integrate all areas together and meet common goals, (Atkins 2006). The balanced scorecard is said to provide cohesive strategies that work together in synergy to fulfill both levels of goals set. It also helps provide strong future directives, driving changes and new implementations to adjust productivity levels (Kaplan & Norton 1996).

Yet not perfect, nothing in business is ever as good as it seems, and the Balanced Scorecard method does have several disadvantages that threaten the success of such implementations. Because the Balanced Scorecard relies on the cooperation of the entire organization, there are a ton of different directions that could pose threats to its success in actual execution. Anything seems clever enough on paper, but true effectiveness in execution is much harder. Even the popularized Balanced Scorecard method has its disadvantages; "More than anything else, the Balanced Scorecard represents a major change initiative and as such can fall prey to" key change agents (Niven 2002).

"For every tool, there are pitfalls, and the balanced scorecard is no different," (Pangarkar & Kirkwood 2009). There are numerous pitfalls that threaten the success of implementations of strategies compiled through the Balanced Scorecard measurement process (Niven 2002). The next step is to examine these pitfalls individually.

The first major disadvantage experienced by businesses in the design and implementation of the Balanced Scorecard method is that of correctly assessing financial assets and conditions. Current financial assessment used in typical Balanced Scorecard exercises fails to take intangible assets into consideration, and instead focuses primarily on physical assets. Intangible assets can come to include things like the customer base as a financial asset, to be potentially used for leveraging within company acquisition discussions. Such intangible assets can play a big role in the formation of strategies, especially dealing with customer satisfaction. Therefore, by not allowing such tangible assets to reign into the Balanced Scorecard, it shows a pitfall in the initial design of the model. Additionally, current financial assessments primarily use historical data to replicate financial environments; "financial performance measures only demonstrate past or historical performance and do not provide any guidance for long-term objectives," (Pangarkar & Kirkwood 2000). Relying on past financial data can be detrimental in the event of a large fluctuation in the external financial environment. For instance, this recent recession has interrupted countless strategy implementation initiatives (Pangarkar 2009). Yet, the financial information is not the only pitfall.

Within the creation of strategies, many organizations compile ambiguous strategies that are not directed or tailored enough to fit the specific problems that organization is facing. In the instance that the strategy created within the context of the Balanced Scorecard is weak or ineffective, it will completely devastate attempts to implement the limp strategy in real world practice. According to research, "Many managers confuse daily activities and tactical objectives with the organization's strategic imperative or, worse, believe they have a strategy where none actually exists," (Pangarkar & Kirkwood 2000). Therefore there is the potential for the managers that are in charge of creating new strategies actually slow the process down by thinking in too small of terms.

Additionally, real life practices of Balanced Scorecard implementations have shown a lack of commitment within the organization to work on developing the strategies to increase productivity. Initiatives set within the Scorecard depend on the strength of managerial support for success in real practical applications. Unfortunately, many cases see a lack of commitment on the senior level, which can then be devastating to initiative implementation (Pham-Gia 2009). Thus, even after strategic planning, many businesses find it difficult to implement, many "could not implement the new measurement and management framework," (Kaplan & Norton 2000). Good intentions of a well developed and planned strategy sometimes fall by the wayside as there is a lack of determination and commitment to change internally; "even successful companies, well along in their Balanced Scorecard management system, can experience this source of failure," (Kaplan & Norton 2000). Lack of commitment can… READ MORE

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