List of Abbreviations
Chapter 3: Chapter 3: Exploring the Concept and Practices of the BSC: A Literature Review
3.3 BSC concept
According to Kaplan and Norton’s (1992) definition, the BSC is “a set of measures that gives top managers a fast but comprehensive view of business performance which include financial measures, and its complement with operational measures on customer satisfaction, internal process and the organisation innovation and improvement activities-operational measures that are the drivers of the future of the financial performance, later these factors are known as perspectives”.
The BSC concept has evolved greatly since its first introduction (Braam and Nijssen 2004; Madsen and Stenheim 2015). With regard to its development process, Kaplan (2009) explained that the development of the BSC can be divided into three stages. In stage one, the BSC was used merely as a measurement tool; what distinguishes it from other measurement methods is that the BSC introduces a comprehensive view of organisational performance based on a broader set of values than financial indicators. Meanwhile, in stage two, the BSC concept emphasizes the importance of strategic objectives and how to construct those strategic objectives in a framework called ‘strategy maps’. With the strategic objectives constructed coherently (a causal-effect relationship) on a strategy map, people in the organisation can easily understand the link between one strategic objective and another. The last stage is the strategy management system, in which the BSC reaches a broader scope of management. In this stage, every strategy cascades to managers or staffs proportionately so that everyone knows directly or indirectly how he or she is to contribute to the organisation’s strategic objectives.
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The BSC concept was first developed by Kaplan and Norton (1992) as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to provide managers with a balanced view of OP. Numerous other authors have contributed to the BSC concept, leading to its evolution from a performance measurement tool to a PMS (Perkin et al. 2013). Kaplan and Norton (1992) formulated a BSC that comprises four perspectives, namely: the financial perspective, the customer perspective, the internal business perspective and the innovation and learning perspective.
These four perspectives are common and inter-related. Figure 3.1 below describes the relationships of the four factors.
Figure 3.1 BSC linking of performance measures
Source: Kaplan and Norton (1992, p. 72)
Kaplan and Norton (1992) explained that the BSC puts strategy and vision at the centre of an organisation. Hence, members of the organisation are encouraged to work accordingly, leading to the achievement of the organisation’s goals. The authors further claimed that the introduction of the BSC concept provided a breakthrough in terms of how a company look at their achievements, given that the BSC concept provides more insight and effectiveness for OP, linking performance directly to organisational strategy.
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With regards to the operationalisation of perspectives in the BSC, Aidemark (2001, p. 25) explained the idea that three different perspectives—customer, internal business processes and learning and growth—are of vital importance to a fourth:
the financial perspective. Aidemark further described the BSC as linking customers, internal processes, employees and system performance to long-term financial success. If the first three perspectives are developed in the right direction, then the fourth overarching financial perspective follows suit. The innovation and learning perspective is intended to strengthen competence among staff members. This supports the development of internal business processes, which in turn leads to better customer relations. Growth in customer loyalty translates to financial prosperity. The BSC is, in other words, more of a strategic management system than an informational structure, and it has its greatest impact when it is used to implement strategy and to drive organisational change (Kaplan and Norton 1996b). At this point, however, the concept does not support clear methods as to how strategy and vision can successfully link to organisational measures: the authors did not provide a logical explanation of how each perspective can relate to the others or an account of the relationships among organisational vision, perspectives and strategic objectives.
The latest development of BSC is the idea of making BSC into a strategy management system. Kaplan (2009), using Simons’ (1995) definition to explain the development of the strategy management system, transformed the BSC from an extended diagnostic system to an interactive system with three distinct characteristics: first, information generated by the system is an important and recurring agenda addressed by the highest levels of management. Second, the interactive control system demands frequent and regular attention from operating managers at all levels of the organisation. Third, data generated by the system are interpreted and discussed in face-to-face meetings of superiors, subordinates, and peers.
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The idea of a causal relationship between the four perspectives is not without criticism. For instance, Nørreklit (2000) concluded in her research that a causal relationship along the lines suggested by Kaplan and Norton (1996a) is clearly not valid. She further emphasized that an evaluation system that does not integrate all relevant variables cannot be expected to show valid results. In a later article, Nørreklit (2003) used stylistic text analysis and argumentation theory to conclude that the popularity of the BSC is based on persuasive rhetoric rather than solid academic argumentation. A similar critique stems from a study by Nørreklit et al.
(2012), in which the authors applied discourse analysis and concluded that the BSC concept not only lacks realistic scholarly characteristics but also shows some characteristics of a myth speech genre. Responding to criticisms of BSC concept, Kaplan (2012) argued that most criticism of the BSC focused too much on these aspects of the BSC and largely overlooked the role that the BSC can play as a tool for the execution of strategy. With regard to Nørreklit’s (2000, 2003 and 2012) criticism in particular, Madsen and Stenheim (2015) stated that Bukh & Malmi (2005) and Kaplan (2012) have moderated Nørreklit’s criticisms and argued that they focus largely on the older version of the BSC set out in Kaplan and Norton’s 1996 book. Madsen and Stenheim (2015) underscored that the BSC concept has developed considerably since its introduction in 1992 and that the criticism was leveled at an outdated version of the BSC version.
Another example of BSC criticism comes from Kasurinen (2002), who applied action research in the strategic business unit of a multinational Finnish-based metals group. Kasurinen claimed that the BSC concept does not pay enough explicit attention to the context of change implementation. He argued that the BSC’s lack of this contextual analysis at the early stages of a project may lead to understatement of structural barriers and to only limited implementation.
Kasurinen added that some of the advancing forces may ‘push’ the project in the wrong direction given that the BSC system involves many levels of organisational
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hierarchy and that the issues under consideration range from strategic transformation to operational improvements. He further suggested that before implementing the BSC within an organisation, it should be decided whether the primary purpose of using the BSC is as a measurement system or a management system (strategic focus). However, the BSC concept has developed from a performance measurement system into a management system, and it has a positive effect on the organisation when it is related to organisational strategy (Braam and Nijssen 2004; Paplexandris et al. 2004). According to Braam and Nijssen (2004) and Paplexandris et al. (2004), implementing BSC withi n the organisation is a question of the management system.
Another strong criticism of the BSC came from a study by Voelpel et al. (2006, p.
49-54). The authors claimed that five major categories of problems arise when applying BSC in the innovation economy and that these have the potential to jeopardize the organisation. First, the BSC is a relatively rigid measurement tool.
The authors thus argue that given the BSC’s four perspectives as the main categories according to which key success factors are defined, the BSC tends to force indicators into one of the four perspectives. They claim that doing so limits perspectives on the company, leaving little room for cross-perspectives that might have simultaneous impact. Second, the BSC creates a static-ism that tends to struggle with the challenges of a highly competitive and changing business world.
Within the BSC approach, a centrally defined strategy is translated into certain measures that align all company activities with the achievement of the company’s BSC goals. As a consequence, the optimal implementation of the BSC leads to a high level of uniformity and goal orientation. Voelpel et al. further argue that this condition increases and possibly maximizes the focus on the given goal, but it also limits any further activities and initiatives that might go beyond the originally set targets. Third, the external innovative connectivity of an organisation is hampered by the BSC, which is mostly an internal document; this is a critical limitation in its ability to account for the external environment and systemic linkages. The authors
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argue that the BSC widely ignores the needs of an interlinked and highly networked innovation economy in which companies co-evolve and where competition is partly giving way to co-opetition. Fourth, the BSC follows the traditional logic of innovation through internal R&D, which works on an innovation from its beginning to its end, keeping it secret from the external environment and especially from competitors. The authors provide reasoning for this opinion in referring to the nature of innovation today as similarly changing from incremental to disruptive, from closed to open, and by positing that innovation is likewise becoming increasingly networked.
Fifth, the BSC is grounded in a mechanistic mindset. Voelpel et al. stated that companies with a bureaucratic and hierarchical structure, in which job responsibilities are still clearly defined and in which deviations from the standard and routine processes are treated as problems of a temporary nature before going back to the norm, might very well benefit from the BSC given that it provides a rationalistic, systematic approach to measurement. However, as business processes become more complex, an understanding of most of the key success factors within a firm needs to take cross-perspectives into account. In a knowledge-driven company, simple cause-and-effect relationships are no longer sufficient for an understanding of the complex relationships that the BSC tries to reduce to a linear, one-way relationship. In their explanation, the authors took customer satisfaction as an example of an element that might be linked to various factors such as employee satisfaction, quality, and delivery time. However, as an example, customer satisfaction might also enhance employee satisfaction, which in turn might positively influence product quality. The authors proceeded to highlight that the predominant mindset connected to the application of the BSC is that of mechanistic and linear thinking, making it difficult to deal with an interconnected and networked world. Voelpel et al. (2006) appear to have been lacking some fundamental information when they compiled the five limitations set out above. For instance, in their first claim, that BSC is relatively rigid, the authors
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refer to the number of perspectives; however, the BSC concept is actually flexible as proposed by Kaplan and Norton (1996), who clearly stated that the four perspectives should be considered a template, not a straitjacket. The second note is that they strangely use Encyclopaedia Britannica as a case company, but Encyclopaedia Britannica never applied the BSC concept (Kaplan and Norton 2006c). Similarly, the next four limitations of the BSC concept as outlined by Voelpel et al. (2006) strongly indicated that they had not performed a broad review of other researchers’ literature on BSC. For instance, an ambiguous statement appears in the admission that the BSC maximizes the focus on a given goal but that it at the same time limits any further activities and initiatives that might go beyond the originally set targets (Voelpel et al. 2006). In contrast, the BSC concept opens up an opportunity to learn, to adapt organisational strategies to dynamic conditions and to become more responsive to new ideas emerging from within the organisation (Kaplan 2001c).
Kaplan and Norton (2001c) noted that, despite their different ways of achieving strategic alignment and focus, all organisations are believed to apply relatively similar principles to which the authors refer to as the ‘SFO model’. These are divided into five classifications. The first of these is translation of the strategy into operational terms, a process during which the organisation builds a strategy map interpreting their strategy for units and the employees within those units. This encourages employees to share the same understanding of the strategy. Second is the alignment of the organisation with the strategy, which emphasizes the importance of linking and integrating individual strategies so that the OP exceeds the sum of the individual parts. Third is the principle of making strategy everyone’s daily responsibility. This principle reveals the importance of employees’
understanding of the organisation’s strategy, which allows them to carry out their daily tasks in such a way that they are contributing to the accomplishment of the strategy. This is referred to as a top-down communication. The fourth principle is the making of strategy into a continuous process. Kaplan and Norton stated that
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companies using BSC illustrate three important processes in managing strategy, namely linking strategy to the budgeting process, engaging management in meetings to review strategy, and learning and adapting as the strategy evolves.
The fifth principle is the mobilization of leadership for change. Unlike the other four other principles, which focus on tools, processes and frameworks, Kaplan and Norton believed that ownership and active involvement of the executive team is the single most important condition for success. In 2008, Kaplan and Norton proposed a management system tool kit that uses BSC concepts in its cycle. The management system toolkit cycle is a five-stage system that begins with developing the strategy, followed by translating the strategy, planning operations, monitoring and learning and lastly testing and adapting the strategy. Kaplan and Norton posited that this management system toolkit cycle would enable an organisation’s executives to link strategy and execution.
According to a review of the BSC literature conducted by Perkins et al. (2014) BSC development is categorized into three generations which are in turn divided into eight versions. The first generation is divided into four different versions: the first lays the groundwork for the scorecard framework, the second begins to focus on strategy, the third introduces specific targets, develops the strategy and introduces causality, and the fourth highlights the role that the scorecard plays as part of a PMS. The second generation of the BSC has two versions. The first of these is the introduction of strategy maps and the second involves furthering the development of this framework alongside the change to a bottom-up, ongoing approach to the scorecard framework. The third generation has two versions, with the first characterized by the addition of the ‘destination statement’ to the BSC and a greater focus on the strategic linkage model and the second simplifying the scorecard by removing many of the perspectives that are considered in earlier versions. Overall, the development stages of the BSC proposed by Perkins et al.
(2014) are much more detailed than the elucidations offered by Kaplan (2009).
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In sum, the BSC framework has developed significantly since its original introduction. The milestone of each development was recorded in a series of publications by Kaplan and Norton since 1992. Table 3.1 below identifies the key aspects that the BSC introduced based on the literature written by Kaplan and Norton.
Table 3.1 Summary of BSC development Publication
Year Publication Title Key Areas Covered
1992 The BSC measures
that drive
performance
• Introduction of BSC as a foundation for development
• BSC is a superior performance measurement that uses both financial and non-financial measures
• Identification of the four perspectives: financial;
customer; internal business; innovation and learning
• BSC is forward-looking (long-term performance) 1993 Putting the BSC to
work
• BSC is not only a measurement exercise, it is also a management system to motivate breakthrough improvement
• BSC has greatest impact when used to drive a change process
• Identification that transparency is critical to a successful BSC
• Measures on BSC must be specifically designed to fit firm’s mission, strategy, technology, and culture 1996 The BSC: Translating
strategy into action
• BSC has evolved from a measurement system to a strategic management system
• Identification of four major steps in successful BSC implementation
• Reclassification of “internal business process” and
“learning and growth”,
• Shifting innovation to internal business processes and adding growth element to employee learning
• Measures are linked to each other in a causal relationship, unlike before, linked to strategy and vision 2001 The strategy-
focused organization:
How BSC companies thrive in the new competitive environment
• Translating the strategy to operational terms: building strategy maps
• Aligning the organization to create synergies: creating business unit synergy
• Making strategy everyone’s everyday job: creating strategic awareness, defining personal and team objectives, the balanced paycheck
• Making strategy a continuous process
• Mobilizing change through executive leadership 2004 Strategy maps:
Converting
intangible assets
• Visually map strategy
• A visual cause-and-effect explanation of what’s working and what’s not, in a way that everyone in the company can understand
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outcomes
2005 The office of strategy
management
Establishing a new unit to orchestrate strategy and execution within an organization
2006 Alignment: Using the BSC to create corporate synergies
• Helps get the entire organization involved in strategy scorecard to create corporate synergies
• Alignment: a source of economic value
• Corporate strategy and structure
• Aligning financial and customer strategies
• Aligning internal process and learning and growth strategies: integrated
• Strategic themes
• Cascading: the process
• Aligning boards and investors
• Aligning external partners
• Managing the alignment process
• Total strategic alignment 2008 The execution
premium
• Develop the strategy
• Plan the strategy
• Align the organization
• Plan operations
• Monitor and learn
• Test and adapt 2010 Managing Alliances
with the Balanced Scorecard
The balanced scorecard management system can help companies switch their alliance management focus from contributions and operations to strategy and commitment 2015 Formal Measures in
Informal
Management: Can a Balanced Scorecard Change a Culture?
The collaboration to create a "balanced scorecard" of performance measures can help change an organization's culture
Sources: Kaplan et al. (2005), Kaplan et al. (2010), Dechow (2012), Hoque (2014) and Gibbons and Kaplan (2015).
Organisations using the BSC are not limited to merely focusing on financial measures; in fact, the BSC enables organisations to measure their progress in four new management processes that link the organisation’s long-term strategic objectives with short-term actions (Kaplan and Norton 1996a). Kaplan and Norton highlighted that there are four processes of managing strategies, namely translating the vision, communicating and linking, business planning and feedback and learning. Furthermore, Kaplan and Norton (1996b) suggested that translating
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the vision, communicating and linking, and business planning are vital for implementing strategy but that they are not sufficient in an unpredictable world.
Together, they form an important single-loop learning process in the sense that the objective remains constant, and any departure from the planned trajectory is seen as a defect to be remedied. This single-loop process does not require or even facilitate re-evaluation of either the strategy or the techniques used to implement it in light of current conditions.
Kaplan and Norton (1996b) stated that the BSC has three components that are substantial to strategic learning. The first component is articulation of the vision, according to which the BSC articulates the vision clearly as well as, in operational terms, the goals that the organisation as a team is trying to achieve. In other words, it links individual performance to business unit objectives. The second component is the BSC concept’s introduction of a strategic feedback system that tests, validates and modifies the hypotheses embedded in a business’ unit strategy. The third component is the enabling through the BSC of strategy review, which mainly occurs in the form of review meetings conducted monthly or quarterly. The review meetings are also used as periodic review sessions of strategy and its execution. Kaplan and Norton (2004) introduced the strategy map as a strategic instrument to operationalize the linkage between perspectives in the BSC framework. The authors posited that the benefits of strategy mapping can be seen in terms of a smaller perspective and a larger perspective. From the smaller perspective, a strategy map offers a clear picture for employees in which they can visualise their contribution to organizational performance. In terms of the larger perspective, a strategy map functions as a tool to demonstrate how an organisation plans to convert its initiatives and resources, including elusive assets such as organisational culture and employee knowledge, into real outcomes. The BSC strategy map contains four specific layers: financial, customer, internal process, and learning and growth. These resemble the four perspectives of the BSC