The study reports an evidence of the efficiency and usefulness of the Balanced Score Card (BSC) as a management control and communication strategy. This paper firstly examines the available literature on management control and communication which has identified elements of strategic control and effective communication. Secondly, this study presents a model of control and communication significant to the Balanced Score Card. Thirdly, the study further investigates archival and practical interviews data to represent the utilization and also evaluates the effectiveness of control and communication of the Balanced Score Card.
The study incorporates data collected from the various departments of a large, international manufacturing company. Data is collected from Indian administrators, managers and the Balanced Score Card designers whose divisions are the purpose of Balanced Score Card. The study congregates evidences in respect to the challenges encountered by many and as in this case even by a large, well financed multinational corporation associated with the implementation and designing the Balanced Score Card. These results may be broadly suitable to other companies planning to adopt or adopting the Balanced Score Card as a management and strategic control tool.
The data points out that this particular Balanced Score Card, as applied and designed, is definitely an effective tool for managing corporate strategy. Obtained results also illustrate stress and divergence amongst the top and the middle level management concerning the suitability of certain aspects of the Balanced Score Card as an evaluation, communication and control mechanism. Certain aspects include conformation of laid-back relations amongst successful management control, positive effects, motivation and strategic alignment of the Balanced Score Card. These positive effects include the changes in development and implementation of both the customer focused services and the Balanced Score Card. In contrary, unsuccessful management control and communication originate conflicts and acts as a source of poor motivation in respect of the use of Balanced Score Card as an assessment device.
All the data gathered for this research is regulated and supplied under a strict non-disclosure agreement, which necessitates the researcher to safeguard the company’s proprietary information and identity.
The available academic and professional strategy literature asserts that numerous multi-nationals have discovered time-honoured performance measures (e.g., profits, return on investment, and ex post costs) to be inadequate strategies for judgmental action in today’s speedily changing, super-competitive environment. Solitary dependence on present, financial performance measures does not perhaps mirror the significance of present resource verdicts for upcoming financial performance (e.g., Dearden, 1969).
However, several years ago, some organisations identified the significance of non-financial performance measures (e.g., General Electric during 1950’s), budding global competition and the mounting up of the TQM movement has broadened the appeal for non-financial measures of performance. Authors have piled up, both the academic and professional literature with suggestions to believe more on non-financial performance measures for both evaluating and managing organisations since the 1980’s (Berliner and Brimson 1988; Dixon et al. 1990; Johnson and Kaplan 1987; Nanni et al. 1988; Rappaport 1999).
Along with the normative arguments, empirical research studies can also help in establishing the effectiveness and roles of non-financial measures of performance. Numerous studies have attempted to relate some specific non-financial performance measures to the financial performance (Ittner and Larcker 1998a; Behn and Riley 1999; Foster and Gupta 1999; Banker et al. 2000).1 Results of numerous human resources literature illustrates that, it’s the systems of non-financial performance measures that seems to be comparatively more reliable determinant of firm’s performance than the individual measures themselves. (Huselid 1995; Huselid et al. 1997; Becker and Huselid 1998). The purpose of this research is to study the impact and process of administering an organisation using the non-financial measures of
1 The ever rising body of research study which has examined empirical associations amongst the financial and the non-financial performance measures in a variety of industries and firms also includes Foster and Gupta (1990, 1999), Banker et al. (1993), Barth and McNichols (1994), Banker et al. (1995), Amir and Lev (1996), Banker et al.(1996), Ittner and Larcker (1997, 1998a), Perera et al. (1997), Behn and Riley (1999), Banker et al. (2000), Ghosh and Lusch (2000), Hughes (2000).
These research studies repeatedly found significant associations the financial and non-financial measures of performance, although research studies of the effects of performance of including the non-financial measures in the compensation plans are comparatively less steady and consistent. Given the growing empirical and extensive theoretical support, it is not at-all astonishing that several companies report that they are switching to non-financial, forward-looking information for both evaluating present performance as well as for guiding decisions (Ittner and Larcker, 1998b). Performance, particularly in the context of Balanced Scorecard (BSC), a comprehensive structure of performance measurement system.
The Balanced Score Card, popularized by Kaplan and Norton (1992, 1993, 1996a, 1996b, 1996c) and also accepted extensively across the globe, has been presented as a better and superior blend of financial and the non-financial measures of performance. 2 Balanced Score Card is projected to direct strategy growth, execution and communication because it clearly focuses on the financial as well as the non-financial measures of performance. Moreover, a well designed Balanced Score Card could also provide some unfailing feedback for performance evaluation and management control.
Atkinson et al. (1997) regarded Balanced Score Card as one of the most momentous developments in the field of management accounting, justifiably attaining a strong research attention. Silk (1998) assessed that approximately 60 percent of the U.S. Fortune 500 companies are experimenting or have by now implemented a Balanced Score Card. Despite its elevated profile, astonishingly very little academic research has actually focused on either the outcomes or the claims of the Balanced Score Card (Ittner and Larcker 1998b).
An expected question that arise is: does the Balanced Score Card’s use, content, implementation or format have recognizable effects on either the outcomes or the business decisions that could not be achieved with existing ways, in combination or alone? In the very first study of its category, Lipe and Salterio(2000) identified effects in decision making connected with the format of the Balanced Score Card. The layout of the performance measures in four associated groups appears to communicate decision-related information to subjects presenting a laboratory assessment task. Most of the other previous and current studies, however, are comparatively uncritical explanations of Balanced Score Card adoptions.
Kaplan and Norton (1996b) debates that the Balanced Score Card is not principally an evaluation process, but it is a communication and strategic planning device to (1) explain links amongst leading and lagging measures of non-financial and financial performance and (2) offer some strategic assistance to the divisional managers. The Balanced Score Card asserts to describe the necessary steps for reaching financial success; for example, investment in some particular types of knowledge to improve the processes. If these links are valid replications of a company’s economic opportunities and productive and administrative
2 An identical approach for merging the numerous performance measures, the tableau de bord, has been implemented by certain French organisations for numerous years (Epstein and Manzoni 1997).
processes, then the Balanced Score Card symbolizes and can also communicate the company’s working strategy. Moreover, communicating these links effectively throughout the company can be decisive to implementing that strategy fruitfully (Tucker et al. 1996; West and Meyer 1997). Some organisations may possibly also use non-financial measures as a basis of performance measurement. On the other hand, they might judicially use the financial performance measures for the purpose of evaluation or they can also enhance the performance by using the Balanced Score Card as a vade mecum to financial success (e.g., Rappaport 1999).
The present research is aimed at investigating the management-control and communication attributes and the efficacy of a successful, large, multi-national company’s Balanced Score Card model. The research comprises of qualitative and archival data gathered through interviews with the managers, Balanced Score Card designers, and users to (1) measure the observed attributes of the Balanced Score Card as both a control and strategic communication device and (2) find confirmation of the Balanced Score Card’s evaluation impacts. The present research does not test as to if the company’s Balanced Score Card is a statistically suitable model of the company’s performance and activities. This attribute of the Balanced Score Card shall be tested in succeeding research (Malina 2001).
The company commenced using the Balanced Score Card to enhance its strategy. The Balanced Score Card has largely affected the view point and the action of users, both adversely and beneficially. When all segments of the Balanced Score Card are effectively communicated and well designed (as per the criteria mentioned in the study), the Balanced Score Card appears to persuade and inspire the lower-level managers to correspond their activities to the company’s strategy. Additionally, as per managers beliefs these changes result in enhanced sub-unit performance.
In spite of this, there is also a consistent confirmation that the weaknesses in strategic communication and the flaws and imperfections of the Balanced Score Card design have affected the relationships amongst some middle and top level managers adversely. The stress survives because the Balanced Score Card design aggravated strong differences amongst their views of upcoming future opportunities. Gaps and weaknesses in communication generate unwillingness and mistrust to change. While certain specific shortcomings and flaws could be exceptionally unique to the company studied, these results appear to reflect largely on the issues of the Balanced Score Card uses and its design.
The second section of this research study builds up a research question on the basis of reviewing the literature on communication standing by the features of effectual communication of strategy. The third section then builds up another research question with a synopsis of the attributes of management control tools that successfully control strategy. The fourth section later illustrates the company’s Balanced Score Card and the research site. Then the fifth section discusses about the practices used to analyze and obtain the qualitative and archival interview data.
This part also displays a theoretical model for describing the effectiveness of the Balanced Score Card. The following sixth section then derives an empirical model for the effectiveness of the Balanced Score Card and also addresses the raised research questions. Lastly, the final section of this study encapsulates the conclusions and also offers certain suggestion for future research.
The Balanced Score Card and Communication of the Strategy
Kaplan and Norton (1996 c) states that, “by articulating the outcomes the organization desires as well as the drivers of those outcomes (by using the Balanced Score Card), senior executive can channel the energies, the abilities, and the specific knowledge held by people throughout the organisation towards achieving the business’s long-term goals.” Therefore, Kaplan and Norton (1996 c) claims that not merely just the Balanced Score Card exemplifies or helps to create organizational knowledge and strategy, however even the Balanced Score Card itself effectively communicates knowledge and strategy.
Merchant (1989) contends that failure in communication is one of the main reasons for poor organizational performance. Because neither the organization’s strategy nor its knowledge succeeds or exists apart from its chief human actors, the capability to communicate effectively may itself be a basis of competitive benefit (Amit and Shoemaker 1990; Grant 1991; Schulze 1992; Daft and Lewin 1993; Tucker et al. 1996). If the Balanced Score Card does articulate the organizations strategy and knowledge in a better manner, then it could act as a foundation of competitive advantage, at-least until all other competitors implement it equally well. However, the organisational communiqué literature recognizes an intricate set of features that influence the effectiveness or quality of communication in the organisations.
Based upon a review of the present literature, an organisations communication system or device could be characterized with the elements of its (1) exchange and creation of knowledge, (2) support of the organisational culture, and (3) messages and processes. These communication characteristics have been briefly reviewed below:
- Exchange and Creation of Knowledge
Knowledge, which could be a tactic or an objective, is the foundation of strategy implementation and formulation.3 Thus, an effectual system of communication holds up an organisations strategy by fostering both tactic and objective knowledge. An effective system
3 Objective knowledge is expressible and observable in the normal language – outcomes and production processes, for instance. However, unspoken language is understood and known but it is not easy to convey in language – an individual’s insights or experiences, for instance. This subsection draws greatly from Tucker et al. (1996).
of communication exchanges the objectives (observable) of knowledge amongst the most important individuals so that everyone is aware of the organisations present status. Organisations construct objective knowledge from the integration and development of the new knowledge by individual experts. Objective knowledge generally derives itself from the sharing and refining of the individuals tactic knowledge, which is recognized but not yet usable or articulated by the organisation.
Thus, a system of effective communication enables and encourages the individuals to share their experiences and also gathers those shared experiences. This may best possibly be accomplished by frequent and intense sharing, and might also be by dialogue rather than a one-dimensional reporting. Perhaps significantly for the effectiveness of the Balanced Score Card, de Haas and Kleingeld (1999) further debates that participating in the design of the performance measurement system is an essential element of an effective communication of strategy.
- Support of Values, Beliefs and Culture
As per the traditional sight of an effective organisational communication, it supports individual interests and the organisational culture by focusing on certain desired patterns of beliefs, shared values, and behaviour. Effectual communication exhibits that the organisation accomplishes its promises and that group or individual rewards are predicted based upon their actions (Goodman 1998; Tucker et al. 1996). Communiqué by leaders which steadily articulates shared values, beliefs and goals (Goodman 1998; Tucker et al. 1996) is also efficient in directing behaviour and reinforcing culture. Moreover, effectual communication ought to encourage behaviour coherent with organisational values, beliefs and goals (Goodman 1998).
Kaplan and Norton (2000), the proponents of the Balanced Score Card, debates that it can also be a tool of strategic and cultural change. Coherent with Kotter’s (1995) study of change processes, the Balanced Score Card could facilitate change by effectively communicating and creating a convincing realistic vision of and also a method for attaining change.
- Communication Messages and Processes
Individuals make use of and rely on communication only if its messages and processes are observed as trustworthy and understandable. Other features of effectual organisational communication procedures are reliability, predictability, completeness, and routineness (Tucker et al. 1996; Goodman 1998; Barker and Camarata 1998). Besides this, communication is also more successful if it applies well defined terms and concise messages (Goodman 1998). Moreover, effectual communications system prevents misrepresentation of performance or repression of truth.
There should be no equivocation concerning the differences between “looking good” and truthfulness or coherence with winning. An effective system of communication and its operators will be indignant of “spin, deniability, and truth by assertion” (Goodman 1998). As a result, organisational communication shall be effectual if the messages and processes are a valid and convincing representation of the performance.
In a nutshell, effectual organisational communication strategies should hold the recognizable attributes of:
- Knowledge sharing – including participation and dialogue
- Support and assistance of organisational culture – changing or existing
- Valid messages – trustworthy, understandable and reliable
The organisational communication literature foresees that a Balanced Score Card, which comprises of these above mentioned attributes, shall create positive organisational outcomes, positive motivation, and strategic alignment. The foremost research area shall be:
Question 1: Is the Balanced Score Card an (in) effective device for communication, creating (negative) positive organisational outcomes, (in) effective motivation, and (non) alignment?
The Balanced Score Card and The Management Control of The Strategy
general condemnation of managing the organisations on the basis of financial performance measures is that these measures persuade the managers to make short-run, myopic decisions. The financial measures incline to emphasise on the present impacts of the decisions, lacking an obvious link between long run strategy and the short run actions (current criticisms include Luft and Shields , McKenizie and Schilling ). Moreover, the traditional financial performance measures could work in opposition to the knowledge based strategies by considering the enrichment of resources like human capital, which might be crucial to implementing a strategy, such as current expenses (e.g., Johnson 1992).
Dixon et al (1990) debates that the time-honoured financial measures, by dispensing costs of many developments, as well work opposing to the strategies based on reduction of manufacturing time, flexibility and quality. For numerous lower level employees, most of the financial measures of performance are excessively comprehensive and also very far isolated from their actions to offer helpful feedback or guidance on their decisions.
They may need certain measures that relate more accurately and directly to the outcomes that they can persuade. (McKenize and Schilling 1998). A numerous studies have found proof that the financial, traditional performance measures are utmost helpful in conditions of low complexity and relative uncertainty; and not in the conditions faced by many trans-national organisations today (e.g., Abernethy and Brownwell 1997; Govindarajan and Gupta 1985; Govindarajan 1984; Gordon and Naranyan 1984).
Lynch and Cross (1995) debates that all set performance measures should motivate the behaviour contributing to constant improvement and development in certain vital areas of competition, such as productivity, flexibility, and customer satisfaction. Therefore, they should replicate a cause and effect amongst strategic outcomes and operational behaviour (Keegan et al. 1989; Ittner and Larcker 1998a).4 Moreover, as and how an organisation recognizes new strategic goals, it shall also comprehend a requirement for new measures of performance to persuade and supervise its new actions (Dixon et al. 1990).
4 Contemplation of the time lags might be really important for illustrating these cause and effect relationships (e.g., Norreklit 2000, Banker et al. 2000).
Hence, organisations optimally and perhaps sensibly might implement a varied set of measures of performance to demonstrate the diversity of management efforts and decisions (e.g., Ittner and Larcker 1998b; Feltham and Xie 1994; Banker and Datar 1989; Homstrom 1979). The empirical evidences in support of these propositions is narrow and limited but growing.5
The Case of Management Control For The Balanced Score Card
Kaplan and Norton (1996 b) had organized various measures of performance into the Balanced Score Card, which is itself a admissible expression in most of the Western business management models.6 Indeed, the Balanced Score Card might have diffused extensively throughout the globe on the power of its internal logic and intuition. Kaplan and Norton (1996b) asserts that the Balanced Score Card offers two noteworthy improvements over the traditional non financial or even the financial performance measures.
Firstly, the Balanced Score Card discovers four associated fields of activity that might be crucial to almost all organisations and also to all levels inside the organisation:
- Increasing financial success
- Providing Customer value
- Improving the effectiveness of internal processes
- Investing in growth and learning capabilities
Following the rationale of the Balanced Score Card and disregarding the cost benefit considerations, almost every organisation can implement measures in all the four areas to persuade and supervise actions suitable to organisational strategy. An appropriately constructed Balanced Score Card in its utmost basic use, can offer a complete picture of the status of an organisation, similar to a vehicle’s dashboard showing temperature, oil pressure, fuel levels, speed, engine RPM and coolant.
5 For instance, Banker et al. Offers empirical support with the help of widespread time series data in a service firm for the relations amongst lagging financial performance and principal non-financial measures. Moreover, they employ an event-learning method to locate beneficial performance results from incorporating these non-financial measures in the management performance assessments.
6 The advocates of EVA® or economic value added, also assert improvements over the traditional financial performance measures, but that is also a synopsis of the financial measure, even though the one that rectifies for the claimed financial reporting faults and errors. EVA® do not integrate the non-financial, complementary performance measures.
Therefore, the Balanced Score Card could encourage positive and constructive organisational outcomes like improvements and developments in all the four areas of organisational activity, which comprises of administrative activities and the Balanced Score Card itself. Evaluating this first level of usefulness and effectiveness is the major objective of this study. Moreover, the Balanced Score Card also seeks to connect these measures into one model so as to accurately replicate the cause and effect relationship amongst the individual measures and the categories.
Employing the automobile correspondence, the Balanced Score Card encourages a change in the car’s performance (e.g., speed) specified a designed increase in the engine RPM and fuel consumption (and maybe other factors). A model like this may back-up operational decisions, provide trustworthy feedback for performance evaluation and learning, and make forecasts of results given environmental conditions and the decisions.7
The Role of The Balanced Score Card for Performance Measurement and Strategy Implementation
The proponents of the Balanced Score Card emphasise its alliance of the critical measures with the links and the strategy of the measures to the valued outcomes. Additionally, the literature on management control recognizes other features of the control systems that might be crucial for the successful operation and implementation of the strategy and shall apply to the Balanced Score Card.8 To be efficient and effective, Balanced Score Card measures ought to be verifiable, objective, and accurate.
7 Whereas the primary claim for value of the various performance measures would create few debates beyond the considerations of benefit and costs, the secondary claim is a rigorous and bold hypothesis. A potentially testable and literal explanation of the balanced score card is that, it explains lagging, leading, or contemporaneous relations amongst the performance measures. For instance, improvements in growth and learning like reduced time of cycle (e.g., Luft and Shields 1999). Similarly, progress in the in-house processes will predictably result in an enhanced customer value (e.g., market share and satisfaction).
Lastly, progress in the customer value shall lead to some predictable increment in the financial success (e.g., profits). Generating such a coherent and comprehensive model is an inspirational objective which is similar to imitating the business model of the company itself. Achieving such an experiential result shall not establish any causality amongst the balanced score card elements because (1) factors absent from this model might be correlated alongwith both effects and causes, (2) the causes of earnings might not be generalizable further beyond the context of a particular firm (Norreklit 2000), and (3) few of the proposed measures might not be self-governing and independent.
8 Unless otherwise mentioned, this particular section draws from the summaries in Merchant (1989, Chapter 2) and Simon (2000, Chapter 11).
If not, the measures shall be manipulated and will not be able to replicate the performance, or even the managers could in good belief attain good quality measured performance but in-turn cause harm to the organisation. Even if the managers can attain high measured performance by fraud, cheating or any other method, then the system shall lose its required motivational effect and credibility rapidly.
Moreover, the combination of Balanced Score Card measures should entirely illustrate the organisations crucial performance variables; instead it should be restricted in number so as to maintain the measurement system administratively and cognitively simple. A comprehensive set of measures of performance shall accurately replicate the difficulty of the organisations tasks and responsibilities, but a lot of measures might be costly, confusing, and distracting to administer. Nevertheless, Lipe and Salterio (2000) failed to find confirmation of any information overload from the various measures used in their experimental study of the Balanced Score Card.
Optimistic motivational impact persuades managers to put forth effort for achieving the organisational goals. While enlightening but not manageable the performance measures might be essential, optimistic motivation demands that in some way or the other few of the Balanced Score Card measures should replicate manager’s conduct and actions. For instance, relative performance assessment (e.g., across alike business units), which is capable of identifying “influenceable” however, not absolutely controllable results, can be an essential constituent of the Balanced Score Card (e.g., Antle and Demski 1988), but it shall not be adequate by itself. Widespread goal setting researchers validate that the performance should be correlated to demanding but achievable targets (e.g., Locke and Laltham 1990).
Without such unequivocal Balanced Score Card targets, the performance would likely be comparatively lower than what could be realistically achieved. Finally to fabricate the goal commitments, the Balanced Score Card shall be linked to well understood and prompt penalties and rewards. Rewards which are ambiguous, uncertain, or delayed shall be unsuccessful motivational devices.
Consequently, even if an organisation’s Balanced Score Card replicates its crucial performance variables and the links to valued and appreciated outcomes, it might be unproductive and disastrous as a successful management control tool if it lacks the other attributes. For instance, Ittner et al (2000) asserts that bias in a bank’s Balanced Score Card escorted it to both the bank’s deterioration to its interim financial measures of performance and little advantageous impact. To recapitulate, an effective and successful management control device, which is competent to promote required organisational results, shall have the subsequent, apparent management control elements to, firstly, achieve strategic alignment:
- A complete but economical combination of the measures of crucial performance variables, correlated with strategy;
- Crucial performance measures just casually correlated to valued organisational results; and
- Successful and effective – accurate, purpose, and confirmable – measures of performance, which seems to be associated to effectual communication.
Secondly, to further encourage positive motivation, an efficient management control tool should have the attributes of:
- Measures of performance reflecting the managers influenceable actions or/and controllable actions, e.g., measured by relative or/and absolute performance;
- Appropriate standards or performance targets that are demanding but attainable; and
- Performance measures which are associated to meaningful and significant rewards.
The Management control theory forecasts that, if the Balanced Score Card contains these attributes, then it becomes probable that the Balanced Score Card shall encourage positive outcomes and motivation and strategic alignment as well. Consequently, the secondary research area/question which complements the first is:
Question 2: Is the Balanced Score Card an (in) effective device for management control, creating (negative) positive organisational outcomes, (in) effective motivation, and (non) alignment?
Subsequent explanation unfolds the information of a model which replicates the two stated research questions. This model, supported and based on the review of all literature, demonstrates that the Balanced Score Card’s communication characteristics and management control generate results by creating motivation (or not) and strategic alignment. This research also explains about the labour and efforts put in for collecting the data on an applied Balanced Score Card’s organisational communication attributes and management control, along with the facts confirming the Balanced Score Card’s effects on organisational outcomes, motivation, and strategic alignment.
It is audacious to judge the efficiency and the efficacy of the Balanced Score Card against the facts from a non experimental, single Balanced Score Card implementation. Though, a careful and detailed assessment of a crucial case could be generalizable to the theory and instructive (i.e., analytical generalisation, Yin [1994, 10-32]), which in this particular case is that the Balanced Score Card could be an effective management control and strategy communication device.
The Characteristics of Balanced Score Card and The Research Site
Synopsis of The Research Site
The research site is an Indian Economic Times 500 company having over 15000
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