The Balanced Score Card: A Solution to Improving Strategic Performance
The numerous corporate financial fraud cases that have popped up recently have given us reason to question the accuracy of the current financial reporting system. The average person may know very little about the different aspects of financial accounting but, they can still see the current system has serious flaws. A lot of companies follow the rules of financial reporting however; they still can avoid providing clear statements about the financial health of their organization. Knowing that companies willingly practice this type of reporting has gotten the attention of their investors. These investors now realize that the current financial reporting system does not require that they be provided with a precise financial report of the company they have invested capital. The financial reporting system has never been perfect however; the flaws in the system became a major issue when companies like Enron started exploiting those flaws for personal gain.
Let's take a look at some flaws within financial accounting that place limitation on it being a more effective system. One flaw is that financial accounting is influenced by personal judgment. This type of judgment is often referred to as 'Convention of objectivity' which is considered an acceptable and respected practice in accounting. Accountants have no other alternative but to use personal judgment in recording certain events and making estimates. However, it becomes nearly impossible "to maintain accuracy in future estimates and as a result objectivity suffers" (Vish, 2010).A major flaw is that financial accounting does not pay attention to intangible assets or simply explained non-monetary transactions. Intangible assets are becoming a bigger part of a company's market value, therefore top level executives are looking for ways to effectively report assets such as customer loyalty, employee efficiency and the status of all current or future competitors. One could argue that eventhough financial accounting does not pay attention to intangible assets; there are effective accounting software packages on the market that can partly overcome this limitation (Vish, 2010).In order to overcome the limitations of financial accounting companies are using the balanced score card as a better way of predicting future performance and controlling the company's strategic plan. So what exactly is a balanced score card?
The balanced score card developed by Dr.'s Robert Kaplan and David Norton, is a "management system that maps an organization's strategic objectives into performance metrics in four perspectives: learning and growth, the internal business process, customers and financials" (Miller, 2009).
The learning and growth perspective involves the way employees, technology, and the corporate cultural climate combine to support strategy. Dr.'s Kaplan and Norton believed that learning should be about more than just training; it should involve employees having unlimited access to mentors within the company to quickly solve problems and develop the confidence to use technological tools to create "high performance work systems" (Miller, 2009).The objectives in the learning and growth perspective provide the foundation for ambitious goals to be set and achieved in the other three perspectives.
The internal business process perspective gives the manager an idea how well the company is running and whether their goods and services meet customers' expectations. The measures for this perspective should be developed by people within the company who have access to information that will allow them make an intelligent decision.
The customer perspective is basically how does the customer view the company? Generally speaking customers measure a company's value to them in terms of time, quality, and performance and cost (Niven, 2006). If the company they currently conduct business with cannot satisfy all of their needs they will eventually take their services to another company. Poor customer satisfaction can be the leading indicator of whether a company will have success in the future even if their current financial situation looks to be in excellent shape.
This perspective is generally the first priority of the company, it is known as the financial perspective. The financial perspective usually involves the shareholders' view of the company's financial performance. A company is always looking for ways to achieve their two primary goals; maximizing shareholders' investments and improving their financial returns. The company normally achieves their goals by creating new products, building a strong technological infrastructure and providing excellent customer service. "The financial perspective will always be linked to the other perspectives through the relationships between cost and the results in achieving the other scorecard objectives" (Niven, 2006).
About half of major companies in the U.S. now use the balanced score card, this concept has come a long way since its development in 1992. The Lighting Business Group (LBG) of GE is one of those major companies who has maximize the benefits of implementing the balanced score card as part of their business model. LBG primary reason for implementing an employee balanced scorecard was to successfully compete against their top foreign competitor, Osram. LBG set very high standards for its employee balanced scorecard. Those standards involve the following four goals:
Making customer satisfaction the company's top priority.
All departments are instructed to reduce inventory levels and increase inventory turns (which is the number of times that a company's inventory turns per year).
Increase their brand globally by developing new products that would appeal to customers worldwide.
To be ranked number one or two in their industry in sales and profits (Davis, 1996).
LBG's employee balanced scorecard system has proved to be a successful program for the company. In the last year LBG reported significant increases in revenue, volume of production, brand expansion and customer satisfaction (Davis, 1996). If companies want to duplicate the success of LBG's employee scorecard they must do the following; provide unlimited access to their scorecard results, consult with union officials, and facilitate employee participation (Davis, 1996).
In conclusion, the balanced scorecard can be a valuable tool
for any company, it allows all company employees to focus on a defined number of business goals. The balanced scorecard is "a vital link to upper level, corporate and divisional scorecards being translated into frontline measures that any employee can easily achieve" (Abell, 1999).