Benefits and Limitations of Balanced Scorecard and the Traditional Measures

Question:
“The widespread adoption of the balanced scorecard is the result of its ability to address the shortcomings of traditional performance measures like Return on Investment.”
Critically discuss this statement with reference to relevant literature.
Must dos:
For this piece of writing, you must only use the two powerpoints I will attach as a source of information, there will also be one external source which is an article that you may use as extra information/quotes if needed.
We are only given these pieces of information thus it has all the knowledge you require within them to write this piece and critcally dicuss what the question asks.
We are strictly not allowed to use any more external sources so if you could just use what is attached and answer the question to the highest standard this will be in line with what I have been tasked to do.
In the two powerpoints one is on Balanced scorecards and the other on thr ROI which both are within the question.
This means it should be more straightforward as no extra research or referencing is required, just what is attached.
I am coming to you as i need this to be a high quality piece of work and i am sure that is what you will produce.

Final Year Assessment Submission Form - 2020 

Student ID Number(s):  

Programme:  BSc Accounting and Finance

Module:  Advanced Management Accounting

Name of Tutor:

Assessment Question Number: 2   

Date and Time of Submission: 

Since the early 20^th century, firms have implemented traditional financial performance measures (FPMs) in their management control systems. In particular, through decentralisation, the creation of responsibility centres and responsibility accounting, firms have allowed for divisional performance measures. In particular, the traditional performance measure of Return on Investment (ROI) has been used to measure the performance of a division or the division’s manager, expressing this in a simple ratio relating divisional profits to the investment or assets in the division. However, such a traditional FPM has been criticised for having several important limitations and dysfunctional behavioural effects. As a result, Kaplan and Norton (1992) created the management accounting innovation of the Balanced Scorecard (BSC) intending to address and solve such shortcomings of traditional FPMs. Since the 1990s, the BSC has been widely adopted by organisations to assess management performance, instead of the traditional ROI.  

This essay will provide a discussion into if indeed due to the BSC addressing shortcomings of traditional FPMs, it has been widely adopted. This is an important topic to address due to the BSC being seen as an innovation in management accounting and has attracted attention from both practitioners and academics questioning whether this is a suitable model for performance measurement (Norreklit, 2000). Throughout this essay, an argument will be provided supporting that the BSC has been widely adopted due to the model indeed addressing the shortcomings of traditional FPMs. However, the essay will conclude with alternative explanations for the BSC’s widespread adoption.

The BSC attempts to align performance measurement to organisational strategy due to the importance of comprehensive corporate strategies developed by managers and executives, with an emphasis being placed on what an organisation is trying to achieve for the shareholders. This serves as the foundation for addressing the deficiencies of traditional FPMs. Often, traditional FPM systems such as ROI are entirely financial in their nature and fail to take account of non-financial measures, solely measuring the financial performance of an organisation and their managers. As a result, traditional FPMs don’t reflect the diverse nature of corporate objectives and strategies which have been implemented by the executives and management of an organisation, resulting in a limitation of such FPMs. Kaplan and Norton (1996) aimed to address this in their BSC model by integrating both non-financial measures and financial measures.

The BSC model integrates both financial and non-financial measures to form a strategic management system which describes strategy by using cause-and-effect relationships (Norreklit, 2003). The cause-and-effect relationships within the BSC assume there are four perspectives all linked to each other; learnings and growth, internal business processes, customer experiences and financial performance which encompass the strategic objectives of an organisation. Of these four perspectives, the BSC involves the articulation of 4-5 specific measures for each, with each perspective reflecting the strategic objectives of an organisation. As a result, rather than managers performance being measured by one financial/ ROI target in traditional FPMs, managers are assessed using 20 financial and non-financial performance measures in the BSC, consequently, providing a more comprehensive picture of their performance.

Moreover, an example of a dysfunctional behaviour which may result from organisations using traditional FPMs is game playing. In game playing, employees of an organisation perform actions which align with achieving both; traditional performance measuring targets as well as outcomes. Hence, such employees commonly fail to intrinsically complete their job to the best of their ability, as to a certain extent such performance measures are imperfect. The BSC addresses this shortcoming via the use of a greater number of performance measures as stated than traditional FPMs which are both financial and non-financial and thus reduces game playing from occurring in the organisation and ensure for employee and company success. 

Another shortcoming of traditional FPMs which the BSC addresses are the recognition of intangible assets within its financial measures. As organisations in the 21^st century such as Amazon, Apple and Google have moved to incorporate a greater emphasis on intangible assets e.g. knowledge, brands, etc. than their tangible assets, traditional FPMs have become outdated as traditional measures such as ROI were created to solely measure the performance of tangible assets of an organisation. Due to the BSC’s performance measures satisfying the criteria of the four perspectives, organisations are enabled to track financial results whilst simultaneously monitor progress in improving both the capabilities and acquiring of intangible assets required for their future growth. 

Traditional FPMs solely incorporate lag indicators in their performance measures which are used to provide outcome measures from past performance, facing criticism for being backwards-looking and not including lag indicators. The BSC addresses this by having a mix of both lag and lead indicators which provide not only outcome measures (lag indicators) but also performance drivers (lead indicators). Both lag and lead indicators are applied to the four strategic objectives and this links to as previously mentioned, the BSC using both non-financial and financial measures in performance measurement techniques. Kaplan and Norton theorise financial measures provide past performance data while non-financial measures are used as the drivers of future performance as they can predict future occurrences. For example, an organisation who has adopted the BSC may have a financial performance objective of improving returns and will use both; strategic measurement of ROI (lag indicator) to indicate previous performance, before using the revenue mix (lead indicator) to predict their future performance.

Furthermore, by incorporating both lag and lead indicators alongside financial and non-financial measures, BSC addresses and provides a solution to short-termism arising from organisations using traditional FPMs. Short-termism is another example of a dysfunctional behavioural effect for organisations resulting from their use of traditional FPMs as these solely measure financial performance, which leads to organisations and their employees potentially maximising short-term results at the expense of long-term profitability, known as short-termism. Moreover, Norreklit’s (2000) study identifies that due to focusing on performance measures such as ROI, managers may refuse to invest in areas such as growth and innovation potential due to them wanting to present acceptable short-term results. However, such actions by managers could lead to; low efficiency, loss of customer loyalty and customer satisfaction. On the other hand, the BSC takes into account both the short-term and long-term benefits of investments and ensure relevant strategic measurements are completed i.e. in such a situation for customer experiences, to ensure beneficial investments are secured and prevent potential competitor attacks.

On the other hand, the reason for the BSC becoming widely adopted is not solely a result of it addressing the shortcomings of traditional FPMs. Axa and Bjornenak (2005) found from their study into the BSC concept’s integration into management control systems in major Swedish companies, not only had 27% of them already implemented BSC but 61% of the major organisations were expected to have implemented the BSC within two years. The study found the BSC’s wide adoption in Sweden is a result of the model’s adaptability. Furthermore, the BSC’s success was resultant of its adaptation with already fashionable management techniques and also the Swedish stakeholder business culture to attract the potential Swedish adopter market. Axa and Bjornenak found propagators of the BSC communicated three elements to represent the Swedish BSC package due to the element’s prior positive reputation for companies in Sweden. These three elements are; non-budget management, intellectual capital (IC) model and the employee perspective (stakeholder model).

The BSC model is transformed using these three elements, which when combined with the BSC, transform into creating the Swedish BSC package, diffusing this package to potential adopters in the country through its attraction. Two of the three elements (non-budget control system and IC model) are management techniques which are claimed as leaders of management progress for organisations. This is supported by the performance of major Swedish bank Svenska Handelsbanken who found from using a non-budget management control system, they outperformed rival banks. Furthermore, the final element of employee perspective (stakeholder model) being combined with the BSC and the other two elements, represents an integral tool for reinforcing the diffusion process of the BSC in Sweden. Although in the original BSC concept, the emphasis has been placed on the BSC from a shareholder's view, major Swedish companies; ABB, Electrolux and SKF have developed their own employee perspective as part of their BSC package, further indicating of the adoption of BSC, in this case, is due to its adaptability.

To conclude, although there is sufficient evidence of the diffusion of the BSC in Swedish companies being a result of the innovation’s adaptability capabilities, the BSC’s widespread adoption is mainly due to it addressing the shortcomings of traditional FPMs i.e. ROI, via linking performance measurement to organisational strategy. The BSC provides organisations with a strategic management system which addresses several factors not measured by traditional FPMs such as intangible assets, non-financial measures, game playing and lead indicators, allowing organisations performance measures to link their long-term strategy with their short-term actions. In particular, with modern 21^st-century organisations such as Apple and Amazon now placing a greater emphasis on their intangible assets rather than their tangible assets, traditional FPMs have become outdated and the requirements for the BSC is inevitable to measure performance. All in all, by ensuring the shortcomings which arise from traditional FPMs are eradicated, the BSC has indeed been widely adopted by organisations.