Discuss about the Balanced Scorecard and Supply Chain Performance.
This report is an overview of the balance scorecard approach and features it possess. It explains in detail all the aspects of the new performance measurement tool adopted by the companies. The report provides a brief summary of BSC approach and its characteristics. This new approach of balance scorecard measures the performance of company based on its four perspectives called learning & growth, customer, financial, and internal process. The main objective of preparing this report was to check the suitability of BSC in the firm’s client. The first part deals with the detail description of the client which is Rockwater Limited, a wholly owned subsidiary of Brown & Root/Halliburton which is a global engineering and construction company.
The second part of the report deals with the introduction of BSC approach and explains its features in detail. The later part contains a difference between the traditional performance measurement tools and the new balance scorecard approach. The differences reveal that BSC covers up all the weaknesses of the earlier used systems and provide greater insights to the management. In the last section, report includes a brief discussion of sustainability of BSC to Rockwater Limited and followed by the conclusion that suggests that the BSC is one of the most beneficial strategic tools which is used to measure the performance of company. Also it is best suitable for Rockwater because it helps the company to achieve its strategic goals.
A fully owned subsidiary of Halliburton Company, named as Rockwater Limited is an UK based underwater Engineering and Construction Company. It was founded in 1990 and is situated in Dyce, United Kingdom (Bloomberg.com. 2018). The company is a global leader within its industry. It offers variety of services that include commercial diving, scour and erosion, installation of marine structures and underwater coatings. The targeted customer base of Rockwater are the oil companies whose deep-sea oil rigs are been serviced by Rockwater Limited. The major clients of the company are oil, gas and offshore construction companies. It has its headquarters in Aberdeen, Scotland and is an operating division of Brown & Root Energy Services, which is also a part of Halliburton Corporation (Kaplan and Norton, 1996).
The vision and mission of the company is to great services to its customers, enhance its profitability and focus on increasing its growth in near future. The company was formed by merging two independent construction companies which is focused on improving his strategic management system and achieving its predetermined objectives.
Today all the companies have adopted BSC as a new strategic tool used for performance measurement, to keep safe and check regularly their daily activity records which is essential to achieve company’s long term goals.It helps the management in controlling the actions of staff members and to monitor the consequences of the same. It is also explained as a performance metrics which is used in strategic management with an objective to improve and enhance the internal control measure of an organization. This new approach of balance scorecard was first introduced to the world by Dr. Robert Kalpan and Dr. David Norton which was published in one of the Harvard Business Articlesin 1992 (Niven, 2011).
If we consider the definition of balance scorecard given by Balance Scorecard Institute then it is defined as a tool or system used for strategic planning and implementation of the management that can be used to interlink several elements of the strategy of the company for long term run. This includes the interlinking of target areas, core values, vision and mission of the company, results and outcomes of the strategy. Moreover, the approach also focuses on the key goals of the companies and their Key performance indicators which are used to measure the strategic performance (Balancedscorecard.org. 2018). As per the institute, following are the reasons why organizations use BSC in their business.
There are many industries, business, government and non-government organizations which uses Balance Scorecard in their business worldwide. Now days, it the most common measurement tool used by most of the companies. According to a research, it was found out that over 50% of the companies that are operating in United States has used BSC in their operations. Also, major companies of Asia and Europe are looking forward to do the same. The global study of Brain & Co. ranked balance scorecard fifth in the list of top ten most used tool for management by the organizations around the world. Also according to the Harvard Business Review, BSc is the most influential business idea of past 75 years (Biazzo and (Garengo, 2012).
The four major perspectives are given by this approach which suggested that organisations should also consider the non-financial aspect of the company, while measuring its performance on the basis of its strategic objectives. According to BSC, an entity is viewed from the four main standpoints which cover all the aspects of an organization and make it successful in the future (Pham-Gia, 2009).
It contains all that indicators which are related to the profitability and financial goals of the company. This perspective measure the overall financial performance of an entity by critically analysing the financial measures. These measures include total revenue, net profit margin, cash flow, return on assets, return on investment, operating profit margin and many other which are generally used by every company to evaluate its performance (Keyes, 2016). In case of non-profit organizations, this perspective covers their budget and cost saving targets. For the managers, it is very important to track the financial health of their organization to keep all the financial data up to date. They are required to deliver the correct information on time so that they can enhance and maintain their performance in financial aspect (Joshi, et. al., 2015).
While evaluating the performance, BSC allows the managers to reduce their cost data by deploying appropriate corporate systems and to derive the relevant financial information which is to be used for making forecast. According to the balance scorecard methodology the improved financial performance of an organization is the outcome of its better performance in other three perspectives of the scorecard.
This perspective allows the company to measure its performance through the perception of its customers. It wanted them to focus on their performance targets as they are related to their clients and the market. It covers company’s customer growth and service targets along with its market share and objectives related to the branding. According to this terminology, managers are required to determine their targeted customers and market segments in which the company is going to compete. It consists of several strategic outcomes which are the result of a well implemented strategy. The main KPIs of this perspective are customer satisfaction, net promoter scores, market share, service labels, client retention, stakeholders’ needs and brand awareness.
It focuses on evaluating the performance of a business through the standpoint of quality and efficiency of products and services offered. By measuring on the basis of this criteria, companies are able to attract their customers in the targeted markets and can also fulfil and satisfy the need of its stakeholders. This perspective mainly focus on internal operation goals of an organization and covers the objectives which are related to the process followed for delivering the customer goals (Pramudita, 2016).
It allows the entities to outline their internal control process and the strategies to improve and enhance the same. Wastage of the resources is of much concern and for this management must focus on controlling the input of resources and producing reliable products. The main key performance indicators used by this perspective are process improvements, optimization of the quality and utilization of capacity (Schmeisser, et. al., 2011).
It considers the intangible aspects of an organization and is mainly divided into following components:
All these components are been taken into account by this perspective and the management of the company has to measure the performance by keeping these points in mind. The measures or KPIs include employee satisfaction, assessment of skills, corporate culture audit and performance management scores (Makhijani and Creelman, 2011).
Features of BSC
BSC approach has possess the following characteristics
The need of adopting BSC in the business was to overcome the weakness of the traditional approach to performance measurements. There were many issues and variances in them, due to which companies were not able to achieve their strategic goals and objectives. In the beginning, a Performance Measurement Action Team (PMAT) was created to its eyes on the different companies to observe their pattern or tool used, and it was observed that most of the companies used top-down approach in order to evaluate the activities and actions of the company. However, later on PMAT suggested that this top-down approach was not enough sufficient for their efficiency enhancement and also resulting in poor progress of the processes.
To deal with the above issues, BSC approach was introduced and is widely used by many companies across the world. However, Traditional measurement tools and BSC approach have many differences. The major difference is that the earlier used systems tracks only the financial performance of the business which takes into account the points related to net profit earned and capital needed. Different financial matrices like, revenue, return on equity, and cash flow, were the main focus of these tools as reported in the annual report of company. These metrics are known as lag indicators as they only shows the past historical data of the business and cannot be used for predicting its future (Kaplan and Norton, 2015).
Another difference was that traditional systems make the management ignore the benefit of value creation for the organization in long run. It only focuses on the financial aspect. These tools have also been used by other companies which were dealing with mass production and having several tangible assets like plant, equipment, and property. Moreover, the earlier approaches were not aligned to the strategic objectives of the organizations(Griff, 2014). These goals or objectives of the companies were mainly focused on benefit of the company in long term and an efficient allocation of their resources as per the requirement of business. These objectives were also accounting the value and expectations of shareholders. Traditional systems basically concerned at short term financial performance and does not completely comply the business operations with its strategic goals. This results in making these not fit for the dynamic environment of completely change world for business (Suri, Ratnam and Gupta, 2004).
However, now, instead of mass production companies are switching on knowledge based production. This requires them to cover each and every aspect whether financial or non-financial. Also they have to consider the value of intangible assets along with their tangibles such as customer relationships, human and intellectual capital and many others (Ashioya, 2015).In this way companies have adopted new performance measuring tools that allow them to assess all the measurement aspects related to both quality and quantity of the production. It also enables them to achieve their strategic goals and objectives. The tool adopted was Balance Scorecard approach (Hoag and Cooper, 2006).
This new performance measurement tool is the best alternative for traditional tools as it overcomes all the deficiencies and focuses on both the financial and non-financial aspects of the company’s business. It takes into account the qualitative metrics and addresses the changes in the modern business world. It allows the companies to align their actions with their strategic goals and objectives. This new tool measures the performance of company on the basis of different perspectives as, internal process, customer, financial, and learning and growth of the company. BSC helps the companies to take correct decisions regarding their strategies as it includes both the lag and lead indicators. These indicators or parameters completely align business’s activities with its objectives (Nair, 2004).
Summarising the differences
|
Traditional systems |
Balance Scorecard |
|
Only financial aspects are covered. |
Both the financial and non-financial aspects are considered. |
|
Different metrics like profit margins, ROA and ROE are preferred. |
Both the qualitative and quantitative matrices are considered including customer, finance, internal process, and learning & growth of company. |
|
Failed in establishing a proper link between strategic goals and daily activities. |
Do set a link between the activities and company’s goals. |
|
Only financial performance measures. |
Overall performance measures. |
|
No perspectives are there and only financial measures are used. |
Four different perspectives used as the main criteria. |
Rockwater Limited, being the worldwide leader in underwater engineering and construction applied the BSC approach to its business in order to improve its performance and enhance its overall growth. Norman Chambers was the CEO of the company in 1989, the year in which the industry’s competitive world has changed dramatically.
In order to overcome its problems, the company applied Balance scorecard in its business and formed a new vision statement which stated that it will provide high standards of quality and safety to its clients. In order to implement this, the company has created strategy which consists of five elements that are:
These elements are then converted in to the four perspectives of balance scorecard approach. Rockwater Limited’s management and CEO can transform their vision and strategies into a BSC approach which will appear like this:
It applies the approach in following manner:
For Rockwater, the financial standpoint include the measures like return on capital employed, cash flow, project profitability and forecast reliability and sales backing. All these matrices are of great importance to the shareholders. Short term results are reflected by ROCE and cash flow. On the other hand, rely on the forecast allows the parent company to reduce their historical uncertainty which is caused by variations in the performance. The other measures such as project profitability and sales backlog help in reducing the uncertainty of the performance (Harvard Business Review. n.d.,2018).
Rockwater can bifurcate its customers into two tiers. Tier 1 includes oil companies,which requires high value added relationship. Tier 2 customers are those that select supplies merely on the basis of price. For this, a price index was included which will provide the best available intelligence and competitive position. In addition to this, Tier 1 customers were asked to provide monthly satisfaction and ratings. On the basis of these ratings, Rockwater can easily tie up with its customers and deliver them the quality services.
In order to develop the measures of internal process, the company designs a life cycle of a project starting from its launch to completion and set the measures to evaluate all the phases of the project. This anyhow helps the company to redefine its metrics used in all the stages of the project. In addition to this, Rockwater also find out that safety was also an important competitive factor. The scorecard developed by company includes a safety index derived from a comprehensive safety measurement system. This can be used to identify and classify all the undesired events that can harm property and people (Harvard Business Review. n.d.)
The objectives, related to innovation and learning are focused on improving the customer, financial and internal process information. Rockwater make such improvements by innovating its products and services which will expand its market and increase its revenue. The first goal can be measured by percentage revenue and the second one by a continuous improvement index which measures the rate of several key operational indicators. So overall it can be said that balance scorecard can help the management of Rockwater Limited to achieve its strategic objectives by motivating its employees, taking client feedback and increasing operational efficiency (Harvard Business Review. n.d.,2018).
Conclusion
From the above report, it can be concluded that the new performance measurement approach is very useful for the companies in current scenario. It is pretty flexible and has a broader perspective than the previous approaches. The balance scorecard method covers all the aspects of an organization whether qualitative or quantitative and making more suitable approach for evaluating and measuring a company’s performance. The report also says that it removes the deficiencies of old systems and is way different from them. It has four major perspectives on the basis of which it measures the performance of an organization.
The other parts of the report conclude that BSC is best suitable or Rockwater Limited, which is a leading company in underwater construction. By applying this approach the company can easily achieve its strategic objectives and focus on its new mission or vision statement. It can provide best quality services and fulfil its customers’ needs and expectations. Also by measuring its performance according to BSC criteria, Rockwater Limited can improve its internal process and overall operation efficiency. Overall, it can be said that the balance scorecard is the key factor for the success of the company as it makes its management more efficient and capable of working in a dynamic environment.
References
Ashioya, B. (2015). Balanced Scorecard and Supply Chain Performance. The Case of the Kenya Nut Company.Germany: GRIN Verlag.
Balancedscorecard.org. (2018).Balanced Scorecard: What It Is and Why So Many Organizations Have One. [Online] Available at: https://www.balancedscorecard.org/Balanced-Scorecard-Basics [Accessed 13 May 2018].
Balancedscorecard.org. (2018). What is the Balanced Scorecard? [Online] Available at: https://www.balancedscorecard.org/BSC-Basics/About-the-Balanced-Scorecard [Accessed 13 May 2018].
Biazzo, S. and Garengo, P. (2012).Performance measurement with the balanced scorecard: a practical approach to implementation within SMEs. New York: Springer Science & Business Media.
Bloomberg.com. (2018). Company Overview of Rockwater ltd. [Online] Available at: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=5526269 [Accessed 13 May 2018].
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Kaplan, R.S. and Norton, D.P., (2015). Balanced Scorecard Success: The Kaplan-Norton Collection (4 Books). Harvard Business Review Press.
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Pramudita, C.D. (2016). The Balanced Scorecard as Strategic Controlling Instrument.Introducing the Indicators-based BSC for Implementation of a Corporate Strategy from Four Different Perspectives. Hamburg: Anchor Academic Publishing.
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