Interrelationships among four Perspectives of BSC

Kaplan and Norton (1996) contend that employee moral would be positively affected on customer satisfaction and employee’s suggestion. Employee’s suggestion, however, would be negatively related to rework of internal business process. And customer satisfaction would be negatively related to account receivable which in turn positively related to return on capital employed. The rework of internal business process will be positively related to operating expense, which in turn would be negatively related to capital employee.

Fletcher and Smith (2004) suggest that learning and growth perspective is the leading indicator of internal business process, which is in turn the leading indicator of customer satisfaction. And degree of improvement of internal business process and level of customer satisfaction will in turn affect financial perspective. They develop a complemented system of matrices linking economic value added system to the BSC. These scholars suggest that BSC should be used as a vehicle for identifying value driver and drilling down interoperation of the firm. The BSC takes a balanced look at the firm because it focuses on leading and lagging indicators of performance measurement, financial management, and quantitative and qualitative measures of performance.

To achieve a synergetic effect, firms should emphasize on the cause and effect relationship among the BSC measures. Olve, Roy and Wetter (2000) argue that improved value in Human Resource and development capital should be the leading indicators of improvement in customer capital and also profitability. These authors develop a cause and effect relationship among the BSC measures. Their cause and effect model indicate that the measures of Human Resource development would influence on internal business process of the firm. The internal business process will influence on customer perspective and, eventually financial perspective. In addition, these authors also suggest that the measurement indicators of each perspective are also interrelated.

However, scholars seem do not reach a consistent agreement on the interrelationship among the four perspective of the BSC. This study would like to go further by integrating the opinions of previous studies to evaluate more specifically about the interrelationship among four perspectives of the BSC. These interrelationships are as follows: (1) the learning & growth perspective of the balanced scorecard impacts on the internal business process perspective of the balanced scorecard; (2) the internal business process perspective of the balanced scorecard has the influence on the customer perspective of the balanced scorecard; (3) the learning & growth, internal business process, and customer perspective of the balanced scorecard will significantly impact on the financial perspective of the balanced scorecard.

Read More......

Growth and Learning Perspective of BSC

Olve, Roy and Wetter (2000) argue that in order to achieve long term and short term objectives, the company should try to maintain and develop the necessary know-how and infrastructure required for understanding and satisfying customers. The company should also develop necessary technical management skills to sustain efficiency and productivity of the processes, which create value for customers.

Kaplan and Norton (1996) suggest that it is very important to achieve and maintain competitive advantages of the learning and growth perspective of BSC for survival of the company. Thus, accumulating innovation forces and creating the learning organization to extent that the company would be able to grow with learning and innovation will be the critical factors to fulfill customer needs.

Denton and White (1996) state that by majoring the learning and growth perspective, the variables that the company should be considered are personal growth of associates, internal promotion levels, associate satisfaction, associate retention, associate empowerment, strategic skills of associates, managers and the organization, training levels and cycle times, cross-training levels of associates and line managers, information technology use, access to strategic information, new initiatives explored or implemented, and community participation and knowledge exhibited by general managers.

As summary, previous studies have revealed a plenty of management variables for measuring the learning and growth perspective of BSC, most of these studies are concerns about efforts that a company could be done to improve the learning and growth perspective.

Read More......

Internal-Business-Process Perspective of BSC

To satisfy customer needs and to achieve better competitive advantages, many firms have concentrated their efforts on the improvement of internal business process. Denton and White (2000) state that the improvement of internal business process is most critical for achieving customer and ownership objectives. It is believed that internal activities affect the company’s long term performance, ranging from training and services to community environment.

Olve, Roy and Wetter (2000) contend that in order to create the value for customers and fulfill the expectations of shareholders, the companies need to identify its process at all levels. This means that the company needs to involve in all process for delivering its products and services. Based on Porter (1985), internal business process including primary and supporting activities should be clearly identified to create competitive advantages for the company and value for the customers. The identification of internal business process often includes the commitment of resources and capabilities, which the company needs to upgrade.

Denton and White (2000) suggest that the number of internal process measurement, including associate-productivity rates, service errors and failure rate, brand recognition, maintenance of physical assets, capital-expenditure efficiency, accounting and internal-control practices, life-safety and ADA compliance, cross-selling, quality of market share and profitability by segment and time required to complete key processes and task (e.g., check-in, maintenance calls, breakfast seating and servicing).

Recent scholars on SCM have recommended that collaborations between suppliers and manufacturers are very critical to create value for the customers. It is argued that in collaborating to create values for customers, we must cultivate relationships in several directions simultaneously. Thus, firms should emphasize not only internal focus but also external focus to improve internal business process.

As summary, previous studies have generated some management variables for measuring the internal business process perspective of BSC, most of these studies are related to efforts that a company could be done to improve internal business process.

Read More......

Customer Perspective of The Balanced Scorecard (BSC)

Denton and White (200) argue that customer-perspective indicator represents the company’s sources of demand. They further identify the following indicators for customer perspective:

(1) customer satisfaction,
(2) customer retention and loyalty,
(3) new customer acquisition,
(4) market segments,
(5) market share,
(6) customer profitability,
(7) responsiveness,
(8) associate knowledge and service levels, and
(9) mystery-guest assessments.

According to these authors, firms with higher customer-related scorecard indicators will result in higher profitability of the firm. Olve, Roy and Wetter (1999) prose an alternative model and suggest that customer perspective should concern on (1) superior lead time, (2) low defect levels, (3) on time delivery, (4) responsiveness, and (5) superior price/ cost.

Read More......

Financial Perspective of The Balanced Scorecard (BSC)

According to Kaplan (1996), building a BSC should encourage firms to link their financial objectives to corporate strategy. The financial objectives serve as the focus for the measures in all other scorecard perspectives. The BSC approach should be started from long-term strategy and financial objectives, and then link to customers, internal-business processes, employees and systems. Financial objectives can be different if firms implementing different kinds of business strategy, e.g., growth, sustain, and harvest.

Kaplan (1996) further contends that for each of the above three strategies of growth, sustain, and harvest; there are three financial themes that drive the business strategy. These are revenue growth and mix, cost reduction/ productivity improvement and asset utilization/ investment strategy.

The most common revenue growth measure would be sales growth rate and market share for targeted markets. They are the percentage of revenue from new products or services introduced within a specified period and existing products or services to new markets. These measures would emphasize the importance of investigating the source of revenue enhancement. Besides objectives for revenue growth and mix, Kaplan (1996) states that a business might wish to improve its cost and productivity performance. The success of cost reducing efforts can be measured by tracking the absolute amount of selling, general and administrative expenses or their percentage to total costs or revenues. Objectives to reduce spending and expenses levels, however, should be balanced by other measures as customer responsiveness, quality and performance, so that cost cutting does not interfere with achieving important customer and internal business process objectives. Finally, according to Kaplan and Norton (1996), companies may wish to identify the specific drivers they would use to increase asset intensity. Common measures of assets utilization may focus on improving capital investment projects and accelerate the capital investment process so that the cash returns from these investments are realized earlier.

In order to achieve objectives in the financial perspective, all objectives and measures in other perspectives should be linked. For most organizations, the financial themes of increasing revenues, improving productivity, enhancing assets utilization could provide the necessary linkages. As summary, previous studies have offered several management variables for measuring the financial perspective of BSC, most of these studies are concerns about what efforts that could be done to enhance revenue growth and mix; cost reduction/ productivity improvement and asset utilization/investment.

In BSC approach, firms are required to identify the customer and market segments to compute. The emphasis of customers should take care of satisfaction, loyalty, retention, and acquisition of customer (Kaplan, 1996). According to Kotler (2002), in order to satisfy the needs of customer, firms have to create values and core competence to compete with competitors and win the customers. Identifying the value propositions that will be delivered to targeted segments is the key for customer perspective. Thus, the customer perspective of BSC translates a firm’s mission and strategy into specific objectives about targeted customers and market segments that can be communicated throughout the firm.

Kaplan and Norton (1192) argue that customers tend to fall into four categories: time, quality, performance and service, and cost. Time may be referred to the time the company receives an order to the time it actually delivers the products or service to the customer. Quality measures not only the defect level of the incoming product, but also on time delivery, the accuracy of the company’s delivery forecasts. The combination of performance and service measures how the company’s products or services contribute to creating value for its customers.

Read More......

The Balanced Scorecard (BSC)

The balanced-scorecard approach offered by Kaplan and Norton (1992) addresses the issues of divergent stakeholder goals and gauging managers’ effectives. These authors argue that existing performance measures are basically too much relied on financial-accounting measures. It is necessary to develop a monitoring system that communicates both financial and nonfinancial measures using two combinations of lagging and leading indicators to address a firm’s long-term and short term objectives. Kaplan and Norton (1992) propose four balanced perspectives: financial, customer, internal business processes, and learning and growth perspective. They contend that the balanced scorecard retains not only an emphasis on achieving financial objectives but also includes the performance drivers of these financial objectives. It is argued that the scorecard enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets for future growth.

Denton and White (2000) contend that the basic premise of a firm should try to attract and retain top associates, which enables the execution of best practices in the internal-business process. The competitiveness of internal-business process will then increase customer satisfaction, which will eventually result in better financial success.

Balanced scorecard approach should be implemented at all levels of the organization and need to focus on the key indicators for each of the four perspectives. Senior executives should decide to focus on single most-important variable or multiple variables for each of the four perspectives.

It seems that firms in different industry and different competitive position tend to focus on different variables on each perspective of BSC. Fletcher and Smith (2004) suggest that, based on BSC, managers must evaluate their business from the above four perspectives. These four perspectives encourage management to ask the following four questions: (1) How do customer view the firm? (2) What business processes must the firm improve or exceed at? (3) Can the firm continue to learn and innovate? And (4) how does the firm appear to its shareholders? Fletcher and Smith (2004) further argue that BSC is an excellence management framework to help managers track many factors that influence performance. The ability to the BSC to provide this view depends upon the construction of a set of performance measures that track how successfully a firm is carrying out its strategies, objectives, and overall mission”.

Since the measurement items of BSC are industry and company specifying analytical hierarchy processing (AHP) may be appropriate to identify key measuring variables for firms in implementing BSC. AHP has been increasingly used to link qualitative and quantitative measures in an integrating framework (Saaty, 1996 and Pineno, 200).

Read More......