accounting

With reference to appendix 1, the balanced scorecard (BSC) is a performance management strategy (PMS) (Niven, 2002: 3) that is now used by businesses all over the world to combine business vision and strategy to the activities of organisations (Pandey, 2005; Atkinson, 2006). Created by Kaplan and Norton in 1990 (Niven, 2002: 4) the BSC’s goal is to improve internal and external communications, and monitor performance against strategic goals (Pandey, 2005). However, there have been issues regarding the BSC for small-to-medium enterprises (SMEs) where questions have been raised about the BSC’s suitability for SMEs as opposed to larger corporations (Johanson, 2006; Rompho, 2011). This paper aims to explore the debate of how good the BSC is as a PMS for SMEs by investigating a number of case studies about the BSC in SMEs while comparing the factors that influenced conclusions.

There is a debate about the BSC’s validity where there are a number of advantages and limitations seen in the use of the model. The BSC’s popularity is influenced by the way in which it supports the strategic relevance of corporate activities by linking them to long-term goals, basing measurements on relevant activities (Figge, 2002; Atkinson, 2006). Nevertheless, it was still cited in a 1998 KPMG report that the failure rate of the BSC was nearly 70% (Johanson, 2006) which could question some reasons behind the popularity of it. Another advantage in the use of the BSC is that it combines financial and non-financial factors, recognising a relationship between them and responding to the desire of both being included in PMSs (Atkinson, 2006; Pandey, 2005). However, this casual relationship across the four dimensions has come under scrutiny because it has been said that this is only an assumption e.g. customer satisfaction might not always increase customer loyalty and financial gain due to neo-classical economic analysis where customers are satisfied due to lower prices which negatively affect profits (Salem, 2012; Pandey, 2005). Another advantage is that the BSC recognises employee satisfaction unlike other PMSs (Salem, 2012). However there has also been a debate about whether or not measures actually support strategies. There was also a study with a Greek software company that concluded with measures not achieving a satisfactory level of affect that also supports the view of measures only being assumptions (Johanson, 2006).

SMEs have found challenges in using the BSC (Manville, 2007). Large corporations are unlike SMEs regarding three main factors; evolution, uncertainty and innovation (Rompho, 2011). SMEs are exposed to market changes that affect them greater than larger corporations, driving their needs for drastic changes more frequently. The problem with this issue is that a BSC for a SME can end up with new measures that require more time and planning to create, while old measures become obsolete forms of wastage (Rompho, 2011). Furthermore, constant changes can also be too complex for employees and managers to follow (Rompho, 2011). Another limitation regards the customer perspective of the BSC in SMEs where complexity can arise because it focuses on operations in response to customer needs, impacting the resources of SMEs more than large corporations (Marques, 2012). In some cases, entrepreneurs of SMEs may not feel the need to use the BSC because they are naturally concerned and closely involved in their business, giving them the ability to lead operations using their skills to create a greater visibility and proximity to customers (Marques, 2012).

Although SMEs have found difficulties with the BSC, there are some benefits that SMEs can have using this model. The BSC can help define strategies in SMEs (Marques, 2012) and they have different benefits to be gained regarding the BSC when compared to large corporations. SMEs benefit from descriptive prioritised objectives in their strategies that influence enhanced strategic management processes and large corporations gain from the effective communication of their strategies (Rompho, 2011). However, there are issues regarding the BSC’s efficiency that have been raised as a link to failures (Atkinson, 2006). Although, Atkinson mentions about another PMS tool, created in 2006 by De Waal and Gerritsen-Medema, evaluating the efficiency of PMS tools and can enhance use of the BSC (Atkinson, 2006). This is a sign of innovation and growth for the BSC showing that although it has failed numerously; strategists are still creating new ways to strengthen their results with the use of other PMSs.

The BSC has been described as a top-down model and has characteristics that are different to bottom-up models (Johanson, 2006). Bottom-up structures tend to be suited towards learning and exploration whereas top-down structures relate to dictation and have been criticised for being unambiguous, while supporting management exploitation over exploration strategies (Mom et al, 2007). Due to the BSC’s top-down structure, it has also been criticised for spreading paradigmatic understandings that can cause problems at the lower ends of a company (Johanson, 2006) and has been suggested as unsuitable for extra top-down control by Professor Claude Lewy (Atkinson, 2006). Authors believe that the BSC can be implemented at different levels or divisions of a company to strengthen the communication of strategies, to avoid top-down structure limitations (Agostino, 2012). However, smaller companies should be affected less by these challenges meaning some smaller SMEs may have an advantage in having closer business operations and less people.

There are four case studies that will be explored in this paper (Rompho, 2011; Gumbus, 2006) to gain a further understanding of the BSC in SMEs with reference to appendix 2. All the case studies are based on a set of interviews and observations. Out of the four case studies, SAQ is a failed attempt (Rompho, 2011) and Hyde Park Electronics (HPE), Futura and Southern Gardens Citrus (SGC) are successful attempts (Gumbus, 2006) at implementing the BSC approach in a SME.

With reference to appendix 2, in SAQ a major factor that is highlighted as a reason for failure is the effect from changing market conditions. In the case of SAQ the company’s distribution channel was changed to boost sales; however this factor affected the customer perspective of the BSC, resulting in measure transformations. Furthermore, due to the relationship between the internal business process perspective and the customer perspective, measures for internal business processes were also adapted to reflect the customer perspective. The changes created confusion among the employees and even the manager/owner, and cause/effect linkages could not be established due to all the changes which ended up in a waste of effort (Rompho, 2011).

As for the three companies that had success from the BSC (HPE, Futura and SGC) there are major similarities between all of them. HPE and Futura had been operating for over 30 years which could indicate that they had a strategy that was unlikely to change majorly. And as for SGC, although they started in 1995, the industry that they operate in is quite focused (being an orange grove juice factory) which could indicate a strategy that was also unlikely to change considerably. The companies were able to create long term cost reducing or quality improving benefits from the BSC that gave them a competitive advantage against their competitors, enabling them all to grow into larger organisations (Gumbus, 2006).

Simple version of the BSC

Different adaptations of the BSC have been created to aid the use of it for SMEs. One is adopting a simplified version of the BSC where the four perspectives are converted into three new view points; work fluency, productivity and safety. The economic/financial perspective is covered by productivity, internal processes are covered by work fluency and safety overlooks the two viewpoints, reducing the risks of deviations. The customer and learning and growth perspectives are essentially ignored under the assumption that they will improve as long as the three viewpoints are developed (Sinisammal, 2012).This could eliminate the complexity that the customer perspective has created in the past with SMEs, especially in the case of SAQ (Rompho, 2011).

Circular approach

Another adaptation of the implementation of the BSC is the use of a circular approach where the creation of the scorecard starts with examining the Key Performance Indicators that are already available, and aligning them to the suitable measures and perspectives. This approach is a bottom-up strategy that tries to tailor the scorecard to the different realities that SMEs are faced with by combating the challenges they have met, with regards to measures becoming too complex to pursue (Garengo, 2012). This theory was implemented by a company that wanted a PMS that was not too complex for them, and it succeeded. This theory reflects a comment made by the CEO of another SME when he discussed the success of the BSC in his company, expressing that the BSC should not be a “monster” that his company is “worshiping” but rather an empowering tool (Manville, 2007).

Unfortunately, there seems to be a lack of literature directly focusing on the implementation of the BSC in SMEs (Johanson, 2006; Garengo, 2012; Manville, 2007) highlighting an area that is open to more research. All of the case studies were based on a set of interviews and although interviews can generate data that is rich in information about perceptions and individual feelings, there are a number of limitations that should be considered when examining this study (Cameron, 2009:368). Results from interviews were created using different structures meaning they were challenging to compare, hence why a table has been created comparing the different critical factors of the case studies in appendix 2. Furthermore, the sample size is small, focusing on only four companies to give a reflection of the BSC in SMEs as a whole and interviews are generally susceptible to influences, creating biased conclusions and misinterpretations (Cameron, 2009:369).

The main discussion of this paper has been around the debate of the BSC and how suitable it is for SMEs. After looking at a number of case studies and comparing their results, with one failing to implement the BSC and the rest succeeding, one can see that there are factors that affect the results of the BSC in SMEs. A main factor seems to be how an SME can adapt the implementation of the BSC to change. The SMEs that were successful in implementing the BSC had enough resources to adapt to changes for example; in the forms of increased monitoring measures such as customer feedback tools (Gumbus, 2006). And as for SAQ, their strategy was not mature enough and their decision to change their distributors affected the outcomes of their BSC approach (Rompho, 2011). It seems that SMEs that are looking to use the BSC should assess how steady their business strategy is before implementing it and how able they are to implement their measures with the resources they have, considering further changes that may be needed to ensure that the measures are implemented correctly. Furthermore, it was also said by Manville (2007) that SMEs have significant barriers with the BSC due to “resource issues and the fact that it can be too strategically orientated” which supports this main view. Companies that are more likely to change their main strategies should act with more caution in the use of the BSC by using it as a strategic guide to aid decision making, without putting too much effort and resource into the BSC’s measures. This is because a long time can go by before results are seen from the BSC, hence why it is built to improve long-term strategy. The BSC cannot be effective when the strategy it is built upon changes, because a new BSC needs to be created to reflect the new strategy. Additionally, two new approaches to the BSC have been outlined; the circular approach and simplified method. These methods can also be used as a way for SMEs to act more cautiously, aiding the adaptation of the BSC to the realities that they are faced with (Sinisammal, 2012; Garengo, 2012). Overall the BSC is a tool that SMEs are able to use successfully, with advantages over larger corporations by having closer operations to ease the communication of strategy through their organisations. However SMEs should use it with caution, understanding their business to see if they are at risk to business changes that could affect the BSC, reducing their chance of failure from inadequate analysis. Furthermore, they need to assess the degree to which they can adapt to changes that may be needed to implement the BSC, assessing what they can gain from it against what it may cost to avoid wasted efforts.

Appendix 1

Balanced scorecard (BSC) definitions:

The BSC is a strategic planning and management structure that is now used by businesses all over the world to combine business vision and strategy to the activities of the organisations (Pandey, 2005; Niven, 2002: 17). The goal of the BSC is to improve internal and external communications, and monitor performance against strategic goals (Pandey, 2005).

The BSC’s 4 perspectives:

Financial: a Shareholder’s perspective of a strategy for profitability and risk where classic lagging indicators are normally situated e.g. sales revenue growth (Kaplan, 2001: 23; Niven, 2002: 17).

Customer: a customer’s perspective for the creation of customer value and differentiation e.g. customer satisfaction (Kaplan, 2001: 23; Niven, 2002: 15).

Internal business processes: the strategic priorities for various business processes to support shareholder and customer satisfaction e.g. product development (Kaplan, 2001: 23; Niven, 2002: 15-16).

Learning and growth: these measures are the priorities that influence innovation and organisational change that support the three perspectives e.g. Employee skills (Kaplan, 2001: 23; Niven, 2002: 16).

(Balancedscorecard.org, 2014)

The logic behind the BSC tool:

Performance measures inside the BSC:

Lag indicators: The consequences of actions taken that are indicated from lead indicators e.g. Market share. These are normally easily identifiable however, they do not reflect present activities and they are harder to predict (Niven, 2002: 116).

Lead indicators: The consequences from actions that drive lag indicators e.g. Hours spent with customers. These are predictive in nature, allowing businesses to make changes that are based on them but, they may be difficult to identify and new to the company as a measure (Niven, 2002: 116).

Key performance indicators/drivers: The lagging indicators/drivers that influence the achievement of core strategic goals (Figge, 2002) e.g. customer satisfaction (Pandey, 2005).

Strategy Mapping: These are communication tools that explain how value is created in a business through the relationships of objectives. In the BSC, strategy maps are used to explain logical connections in the cause-effect chain (Niven, 2002: 164).

The cause-effect chain relationship: The hypothesis that a measure in the BSC correlates with another measure, particularly in another perspective of the BSC. This is seen as important to help describe and understand strategic direction when implementing the balanced scorecard according to Kaplan and Norton (Niven, 2002: 164)

Appendix 2

Company profiles and a critical success factor comparative table

Hyde Park Electronics: Manufacturer of Ultrasonic proximity sensors (Gumbus, 2006).

Futura: Operating aluminium extruding, finishing, fabricating, machining and designing (Gumbus, 2006).

Southern Gardens Citrus: A subsidiary of the United States Sugar Corporation that competes in the not-from-concentrate orange juice market (Gumbus, 2006).

SAQ: A producer of air purifiers in the retail electrical appliance sector (Rompho, 2011).

Critical success factor comparative table (Rompho, 2011).

1. Kaplan, R.S. and Norton, D.P. (2001) The strategy-focused organization. Boston, MA: Harvard Business School Press.

2. Niven, P. (2002) Balanced scorecard step by step. 1st edn. New York: Wiley.

3. Cameron, S. and Price, D. (2009) Business research methods. London: Chartered Institute of Personnel and Development.

4. Agostino, D. and Arnaboldi, M. (2012) ‘Design issues in Balanced Scorecards: The “what” and “how” of control’, European Management Journal, 30(4), pp.327-339.

5. Atkinson, H. (2006) ‘Strategy implementation: a role for the balanced scorecard?’, Management Decision, 44(10), pp.1441-1460.

6. Pandey, I.M. (2005) ‘Balanced Scorecard: Myth and Reality’, The Journal for Decision Makers, 30(1).

7. Salem, M., Hasnan, N. and Osman, N. (2012) ‘Balanced Scorecard: Weaknesses, strengths and its ability as a performance management system versus other performance management systems’, Journal of Environment & Earth Science, 2(9).

8. Johanson, U., Skoog, M., Backlund, A. and Almqvist, R. (2006) Balancing dilemmas of the balanced scorecard. Accounting, Auditing & Accountability Journal, 19(6), pp.842-857.

9. Mom, T. J., Van Den Bosch, F. A. and Volberda, H. W. (2007) ‘Investigating Managers' Exploration and Exploitation Activities: The Influence of Top-Down, Bottom-Up, and Horizontal Knowledge Inflows*’, Journal of Management Studies, 44 (6), pp.910-931.

10. Jayashree, P. and Hussain, S. (2011) ‘Aligning change deployment: a Balanced Scorecard approach’, Measuring Business Excellence, 15(3), pp.63-85.

11. Figge, F., Hahn, T., Schaltegger, S. and Wagner, M. (2002) ‘The sustainability balanced scorecard-linking sustainability management to business strategy’, Business strategy and the environment, 11(5), pp.269-284.

12. Garengo, P. and Biazzo, S. (2012) ‘Unveiling strategy in SMEs through balanced scorecard implementation: A circular methodology’, Total Quality Management & Business Excellence, 23(1), pp.79-102.

13. Manville, G. (2007) ‘Implementing a balanced scorecard framework in a not for profit SME’, International Journal of Productivity and Performance Management, 56(2), pp.162-169.

14. Marques, C. and others, (2012) ‘Strategic Management and Balanced Scorecard: The Particular Case of Small and Medium Enterprises (SMEs) In Portugal’, Business & Management Review, 2(1).

15. Rompho, N. (2011) ‘Why the Balanced Scorecard Fails in SMEs: A Case Study’, International Journal of Business & Management, 6(11).

16. Sinisammal, J., Belt, P., Harkonen, J., Mottonen, M. and Vayrynen, S. (2012) ‘Successful Performance Measurement in SMEs through Personnel Participation’, American Journal of Industrial and Business Management, 2, pp.30-38.

17. Biazzo, S. and Garengo, P. (2012). ‘Unveiling strategy in SMEs through balanced scorecard implementation: A circular methodology’,Total Quality Management, 23(1), pp.79-102

18. Gumbus, A. and Lussier, R. (2006) ‘Entrepreneurs use a balanced scorecard to translate strategy into performance measures’, Journal of Small Business Management, 44(3), pp.407-425.

19. Balancedscorecard.org. (2014) What is the Balanced Scorecard? [online] Available at: http://balancedscorecard.org/Resources/AbouttheBalancedScorecard/tabid/55/Default.aspx [Accessed: 09 May 2014].

1. Balancedscorecard.org (2014) What is the Balanced Scorecard? [online] Available at: http://balancedscorecard.org/Resources/AbouttheBalancedScorecard/tabid/55/Default.aspx [Accessed: 09 May 2014].

2. Wikipedia (2014) Balanced scorecard [online] Available at: http://en.wikipedia.org/wiki/Balanced_scorecard [Accessed: 11 May 2014].

My Reflective Statement

I chose two subjects for my presentations and I chose them because I thought they would be good subjects for my final report but choosing the topic for my report was still a challenge for me. Originally I wanted to base the report on my second presentation that was about problems in valuation that included intangible assets and mark-to-market accounting; however I realised that the subject was too broad. After this realisation I was forced to do the balanced scorecard (BSC).

I started by looking for 10-15 peer-reviewed journal articles that were about the BSC and wrote 500 words of my report for my tutor to check. When I saw him he told me that my work was too broad and that I had to narrow down my subject which was when I decided to do the BSC in small-to-medium enterprises. I did more research to find articles that focused on the BSC in SMEs however I found it difficult to research in because there were not a lot of articles in this subject area. I used Google.Scholar in conjunction with the university Metcat search engine to look for articles and found Google.Scholar very useful because it highlights a piece of text in the search results, making it quicker to find what one is looking for. Eventually I found enough articles and I was able to continue my report.

I really enjoyed working on the report because for the first time in my degree I was able to choose a topic and create a hypothesis for it, while showing a wide range of reading to support my hypothesis. This piece of work was a shorter version of a dissertation for me and I was thankful to do it. It did take me 2-3 weeks to finish however, I had a few hiccups on the way which did waste time but because I started the work early and proof read it I was able to correct any mistakes I made, learning important lessons along the way. A lesson I learned was to be careful when choosing sources to reference, especially from Google.Scholar because it is not as safe as the Metcafe search engine. I accidently mistook a discussion paper that I found on Google.Scholar for a peer-reviewed journal article and used it in my report, however I noticed the mistake and I changed my work. This taught me that I need to be careful when using Google.Scholar, ensuring that everything I use is certified.

Overall I found this module very helpful and interesting because it gave me the freedom to choose what I wanted to learn about and that was refreshing to me. I feel like this module was more of a test of character, rather than a test of how much one can remember which is what I believe a lot of university subjects have been based on. Students were able to show their stand-alone presenting and critical thinking skills and I really enjoyed being challenged in this way because, I believe the skills that are assessed in this module are skills that I will be assessed in throughout my career. Furthermore I was able to gain researching techniques and an understanding of critical thinking that I believe has helped me in other assignments. However, the confidence that I feel I have gained from doing this module has been the most rewarding and I feel that anything can be achieved, depending on how much effort is put into it.

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