The limitations of a balanced scorecard approach to performance measurement

(1) The balanced scorecard attempts to identify the chain of cause and effect relationships which will provide the stimulus for the future success of an organisation. Advocates of a balanced scorecard approach to performance measurement suggest that it can constitute a vital component of the strategic management process.

However, Robert Kaplan and David Norton, the authors of the balanced scorecard concept concede that it may not be suitable for all firms.

Norton suggests that it is most suitable for firms which have a long lead time between management action and financial benefit and that it will be less suitable for firms with a short-term focus. However, other flaws can be detected in the balanced scorecard.

(2) The balanced scorecard promises to outline the theory of the firm by clearly linking the driver/outcome measures in a cause and effect chain, but this will be difficult if not impossible to achieve.

The precise cause and effect relationships between measures for each of the perspectives on the balanced scorecard will be complex because the driver and outcome measures for the various perspectives are interlinked. For example, customer satisfaction may be seen to be a function of several drivers, such as employee satisfaction, manufacturing cycle time and quality. However, employee satisfaction may in turn be partially driven by customer satisfaction and employee satisfaction may partially drive manufacturing cycle time. A consequence of this non-linearity of the cause and effect chain (i.e., there is non-linear relationship between an individual driver and a single outcome measure), is that there must be a question mark as to the accuracy of any calculated correlations between driver and outcome measures. Allied to this point, any calculated correlations will be historic. This implies that it will only be possible to determine the accuracy of cause and effect linkages after the event, which could make the use of the balanced scorecard in dynamic industries questionable. If the market is undergoing rapid evolution, for example, how meaningful are current measures of customer satisfaction or market share?
^^^^^^^^^^^^^^^^^^^^^^^


These criticisms do not necessarily undermine the usefulness of the balanced scorecard in presenting a more comprehensive picture of organisational performance but they do raise doubts concerning claims that a balanced scorecard can be constructed which will outline a clear cause and effect chain between driver and outcome measures and the firm’s financial objectives.

****************

The potential benefits and limitations that may arise from the adoption of a balanced scorecard approach to performance measurement

(1) A broader business perspective
Financial measures invariably have an inward-looking perspective. The balanced scorecard is wider in its scope and application. It has an external focus and looks at comparisons with competitors in order to establish what constitutes best practice and ensures that required changes are made in order to achieve it. The use of the balanced scorecard requires a balance of both financial and non-financial measures and goals.


(2) A greater strategic focus
The use of the balanced scorecard focuses to a much greater extent on the longer term. There is a far greater emphasis on strategic considerations. It attempts to identify the needs and wants of customers and the new products and markets. Hence it requires a balance between short term and long term performance measures.


(3) A greater focus on qualitative aspects
The use of the balanced scorecard attempts to overcome the over-emphasis of traditional measures on the quantifiable aspects of the internal operations of an organisation expressed in purely financial terms. Its use requires a balance between quantitative and qualitative performance measures. For example, customer satisfaction is a qualitative performance measure which is given prominence under the balanced scorecard approach.


(4) A greater focus on longer term performance
The use of traditional financial measures is often dominated by financial accounting requirements, for example, the need to show fixed assets at their historic cost. Also, they are primarily focused on short-term profitability and return on capital employed in order to gain stakeholder approval of short term financial reports, the longer term or whole life cycle often being ignored.


*********************

JIT Backflusing Example

********************

JIT - Types of Time (Waste)

*****************

JIT Backflusing

********************

ABC Cost Hierarchy - Example

*********************

Activity Based Costing (ABC) - Concept

**********************

JIT Philosophy

***********************

Another Interesting Value Chain Analysis Video

There are opportunities for improvement in all organisations and all value chains. The problem is that all too often organisations (or at least the people that manage them) are reluctant to accept the principle of continuous improvement, or believe it applies only to other organisations with whom they interact and not themselves! Value chain analysis (VCA) is a DIAGNOSTIC TOOL that provides a mechanism for drawing the attention of different stakeholders to the opportunities for improvement at different stages in the value chain, and can be an effective catalyst for change.

*************************





(University of Kent)


*****************************

Market Segmentation - a case study

Ansoff Matrix -Product-Market Strategy

**********************

Michael Porter on long-term strategy in a downturn

************************

Porter's 5 Forces Explained

Porter’s Five Forces analysis applies to industry sectors.

All businesses in a particular industry are likely to be subject to similar pressures that determine how attractive the sector is.

As with PEST analysis, Porter’s five forces model can be used to identify critical success factors (CSF) and for ongoing monitoring of key issues affecting competitive advantage.

If businesses are able to, they should:

• Avoid business sectors which are unattractive because of the five forces.

• Try to mitigate the effects of the five forces. For example, supplier power is lessened if a long-term contract is negotiated; competition is reduced by taking over a rival.


(source: Kaplan Publishing)



****************

Decison Analyis Video 5

**********************

Decison Analyis Video 4

********************

Decison Analyis Video 3

******************

Decison Analyis Video 2

**********************

Decison Analyis - Maximin, Maximax & Minimax Regret Video

********************

Maximin, Maximax and Minimax Regret Decision Criteria/Rules

Decision makers may use any one of the above criteria to make decisions in the following situations:

• Where probabilities are available but the decision maker is not interested in average, long-run values (expected values) but on actual one-off outcomes.

• Where it is not possible to assign meaningful probabilities to alternative courses of action.


The criterion used by the decision maker will be dependent upon his risk attitude:

• Risk seeker management will use maximax rule
• Risk averter management will use maximin rule
• Risk neutral management will use minimax regret rule

**********************

(1) Maximax Rule

It is a strategy which maximizes the maximum gain.

A risk seeker manager using the rule will select the option with the largest payoff based on the assumption that the best possible outcome will occur for all the available options.



(2) Maximin Rule

It is a strategy which maximizes the minimum gain (or minimizes the maximum loss)

A risk averse manager using this rule will select the option with the largest payoff based on the assumption that the worst possible outcome will occur for all the available options.



(3) Minimax Regret Rule

It is a strategy which seeks to minimize the maximum possible regret ie opportunity cost that will be incurred as a result of having made the wrong decision (e.g. contribution/profit/cost savings forgone). The opportunity cost associated with each decision option will be summarized in a regret matrix (opportunity cost table).

A risk neutral manager using this rule will select the option with the lowest regret/opportunity cost based on the assumption that the maximum regret will occur for all the available decision options.




***********************