The Balanced Scorecard

Discuss about the Creating and the Sustaining Superior Performance.

The company selected for the purpose of this assignment is Woolworth’s group.  It is engaged in the business of retailing and is listed on the Australian Stock Exchange. In terms of revenue, it is the second largest company in the country. The main operations of the entity is the chain of supermarkets, hotel business, home improvements, general merchandise and liquor business. Having founded on the 22nd of September, 1924, it also happens to be one of the oldest corporate houses in Australia. The company is headquartered at south Wales and employees a whopping 202000 number of employees.  The customer base of the company is quite impressive as it caters to around 28 million customers across the lengths and breadths of the nation. Not only has the company grabbed a big market size in the Australian market, but has impressive market presence in New Zealand as well. The company is highly committed towards meeting the needs and desires of the customers. This is evident from the fact that the customer satisfaction level was at 78 %. The company also believes in keeping a youthful employee mix. And therefore it has employed around 77000 young employees. This orientation toward the youth provides a vibrant working environment to the business. Woolworths believes in setting a five key priority index. The first priority is obviously “Customer and store-led culture and team”. The second one focuses on “Generating sustainable performance in Food”. “Evolving our Drinks business” comes thereafter, followed by the fourth priority which is “Empowering our portfolio businesses”. The last priority is that of “Becoming a lean retailer through end-to-end process and systems excellence”. It isn’t just financial results that Woolworths is concerned about. It pays back to the society as well. As a part of its corporate governance practices, the entity has launched a Corporate Responsibility Strategy 2020 that gives stress on the issue of setting targets under the basic pillars of Prosperity, Planet and People.

The Balanced Scorecard provides an organization with a framework within which it needs to align all its elements and activities, so that the overall corporate objectives and strategic goals can be achieved. The balanced scorecard is pervasive to all the levels of the organization, i.e. it considers every vital activity or task. It serves as a link between the objectives to be achieved, the performance measures and the initiates that the Organisation takes for excellent performance.  The scorecard provides an overall organizational performance view. Not only does it take into consideration the financial parameters, but it links those financial parameters with other key performance indicators like perspective of the customers, the growth direction of the entity, the internal business processes, creativity, improvisation and innovation. The main idea behind Balanced Scorecard is to identify a few financial and non-financial objectives, which are connected to strategy. It then devises plans to meet the strategies. After the plan is developed, measures are looked into and targets are set. Thereafter the actual implementation begins, whereby pragmatic shape is given to the developed plan. The achieved performance is then compared against the set targets and the deviations are identified. This regular monitor of performance and detection of deviations helps to determine failure or success. Only when the performance is at par with the targets, after allowing a threshold for deviation can strategic initiatives or projects be considered. Key Performance Indicators serves as the input to a Balanced Scorecard. A KPI gives the report as to whether the organization is performing well or not. It reduces the complicated organizational performance into small number of tasks. These tasks then become easily understandable and the organizational staffs ensure prompt and quick action on matters related to these performance index (“What is a Balanced Scorecard? A short and simple guide for 2018.” 2015).

Perspectives of a Balanced Scorecard

The ‘balance’ that a Balanced Scorecard intends to achieve, revolves around four core areas, which are termed as perspectives, namely   Financial, Customer, Learning & Growth and Internal Business Processes. These perspectives follow a traditional approach and the entity has full flexibility in placing the level of emphasis on each one of them. The four perspectives are briefly described below:

1. Financial Perspective – the prime objective of this perspective is on how the organization is performing financially. It normally considers the revenue that is generated and how well do they fair against the set profit targets. It also looks into the ability of inability of the entity to stick to its budgets and the savings in cost that the company has managed to achieve. The management seems to place utmost emphasis on this perspective because it is generally believed that good financial performance is outcome of performance better in all the other aspects. In short the question that this perspective tries to answer is “how do the shareholders perceive us?”
2. Customer Perspective – this perspective revolves around providing immense level of satisfaction to the customers, expanding the customer base and maintaining customer patronage towards the products or services of the entity. Performance targets under this perspective are set in accordance with the needs and desires of the customers and the forces of the market. It usually covers the ability to identify and attract potential customers, the growth with respect to customer base, capturing the market share and the branding objectives. The key performance areas in this perspective is measured in terms of customer satisfaction, service levels, net promoter scores, market share and brand awareness. This perspective tries to find an answer to the question “How do our customers see us?”
3. Internal Business Process Perspective – This perspective has a direct connection with the customer perspective, in the sense that it focuses on those activities and processes that are needed to achieve very high standards of customer satisfaction. The management here identifies processes which are incidental to push performance towards meeting the hopes and aspirations of the customers and also see how well these fit in the overall organizational goals. It is mainly concerned about the processes that make the product or service available to the market. The question that this perspective wishes to answer is “what should we be best at?” Typical example measures and KPIs include process improvements, quality optimization and capacity utilization.
4. Learning and Growth Perspective –this perspective emphasizes on the intangible assets of the organization and its The three pillars of this perspective are human capital, information capital and organizational capital. Learning refers to the skills and talents of the people who will be formulating the strategy and also people who will be involved in the task of implementing those strategic decisions. It can be achieved when the employees are highly productive and are given ample opportunities of personal development and growth. The contribution of information technology, particularly, data bases and networking cannot be neglected while assessing the growth direction of the organization. Organizational capital means the corporate culture, the kind of leadership and motivation given to the employees, and also on team spirit and knowledge management. The question under this perspective is “How can we improve and create value?” (Intrafocus.com, 2014).

To conclude the above discussion it becomes very evident that the balanced scorecard is a useful tool for the Management to evaluate the performance of an organization. The main advantage of this tool is that instead of focusing on a single criterion of performance evaluation, it places equal weightage on all the four perspectives of performance. In fact these four perspectives cover within their ambit all the factors of performance that one can even think of. This necessarily implies that if the business is successful, it is doing well in almost all the core business areas.

Over the years the traditional system of performance evaluation has faced several criticism because of it’s over emphasis on financial factors alone (Dichev, 2017). This overdependence on short term financial goals leads the company into over investing in short term profit generating areas and completely overlooking the long term value creation opportunities, especially in assets which are intangible. These intellectual assets are drivers of future growth and neglecting them would lead to corporate death. For example; short term profits can be increased by cost reduction but at the same time there may arise a situation of loss of quality and expertise or may even result in loss of customers. These factors put together may have fatal consequences. Balanced scorecard approach differs from the traditional measurement system because it places equal importance on financial as well as non-financial parameters. This loophole made the management take loss making decisions and the task of cost allocation was also done poorly. Under the traditional system strategic planning is done by considering and analytically reviewing historical data and events whereas on the other hand, BSC approach believes in starting from the scratch. No or almost negligible consideration is given to past plans and data. New plans are devised as if the company has come into existence for the very first time. This promotes innovative thinking and the planning is done in accordance with the changes that has taken place in the business environment. Considering the dynamics of the business world, the traditional system of performance evaluation failed miserably. It failed to tap the changes and respond creatively to them. The traditional system followed a procedure where the results were first achieved and then they were compared with the objectives of profit making. The above mentioned points depict that balanced scorecard differs from the traditional strategies. If gives an organization to set the correct path for achieving the objectives and then taking steps to achieve the same. Traditional performance measures are often not in sync with the overall organizational strategy. Strategy is nothing but the long term goal of the entity, i.e. the place where the management wants to see the entity in. since the Traditional performance systems focused only on achievement of short-term performances and that too from financial aspect only, it also failed to establish a firm linkage between the long-term and short-term goals and actions. Organizations should understand the need to measure performance in ways that not shows the past performances, but also gives a way to improve the future results.

Advantages of a Balanced Scorecard

One of the most striking features of today’s business environment is the intense level of competition. To frame a proper response to the intense rivalry, firms have to be flexible and adaptable (Belton, 2017). Only then would the firm be in a position to gain competitive advantage and eventually become successful. Along with sound financial performance, the entity must also fare well in other critical areas such as the quality of the product or the service provided, after sales service, flexibility in the organizational structure, relationships with the customers, suppliers, creditors and technological know-how. Therefore, modern organization need to spend handsome amounts in intangible assets that generate long term value like Customer relationship, development of human capital and employee as a whole.  Therefore, it becomes important to measure these assets as they indicate towards the organizational performance. Unfortunately, traditional performance systems do not pay consideration towards the measurement of such intellectual assets. As a result, the long term development perspective of the firm is forgone at the expense of short term financial results (“Comparing Balanced Scorecard (BSC) with Traditional Performance Measurement”, 2012).

A study of the above comparison makes it very clear that focussing only on financial-measures is a futile task because a singular performance metric would definitely fail in assessing the overall organization’s performance.  The system of evaluation should be such which links performance to long term strategy, and includes within its scope both financial and non-financial measures. Among the available options, balance score card appears to be one such evaluation tool.

Though, Woolworths doing quite well in the domestic market, it needs to adapt to the ever changing business environment for its survival well as for attaining sustainability. The managers need to ask the questions addressed in the balance scorecard to ensure the maximum level of productivity and performance. Besides adding the above mentioned four critical and important perspectives of balanced scorecard, companies have also added other perspectives as well like such as health and safety of employees, corporate social responsibility and environmental performance to their focus areas. BSC would be equally suitable to each and every organisation. The magnitude of their contribution towards the organizational success cannot be overlooked. Having said that, it is to be borne in mind that there isn’t a particular balance scorecard that suits the interests of all the organizations (Chron, 2017). It has to be formulated in the light of the given situation. Since Woolworths is engaged in the retailing industry, the significance of non-financial factors multiples manifold. Customer is the king here and to meet their aspirations even internal processes are to be fine-tuned. Newer way of doing things has to be thought of along with creative branding strategies. A look into the four perspective of BSC, particularly from the point of view of Woolworths would help us assess the suitability of adopting this approach.

Limitations of Traditional Performance Systems

Financial Perspective. : Balance scorecard would help the company to determine the sales target that it wishes to achieve. It would also assign a quantifiable amount to the growth direction, say 20 percent, or 2 points etc. In attempt to achieve these figures, the company would generate profits and maximize shareholders wealth.

 Customer Perspective: This part of the balanced scorecard would necessarily revolve around customer satisfaction, after sales services and market penetration. The objectives set under this category can be measured by studying customer feedbacks, frequency and amount of sales return. The strengths and weaknesses of the sales and distribution channel also comes under the ambit of this aspect (Boccia & Leonardi, 2016).

Internal Operations Perspective: Woolworths would wish to increase the efficiency of its machineries so that the overall number of defects is reduced to a minimum. The cost of rework or repairing (if covered by warranty) would also be reduced. This can be achieved by developing newer and innovative ways of doing things.

Learning and Growth Perspective: the main area of concern here would be to reduce the employee turnover and increase their satisfaction and productivity levels. Spending appropriately on research and development programmes and training programs for employees would ensure the achievement of objectives set from this perspective (Sharma, 2012).

The above mentioned factors would definitely help Woolworths to align its day to day activities with the overall strategy. Thus, the BSC approach is highly recommended. Not only would it identify key areas of performance, it would also determine the measures to be taken to achieve those. It will present the deliverables in a highly simplified manner which leaves no room for ambiguity. Adopting the BSC approach would bring the following benefits to Woolworths:

• Better Strategic Planning
• Improved Strategy Communication & Execution
• Better Alignment of Projects and Initiatives
• Better Management Information
• Improved Performance Reporting
• Better Organisational Alignment
• Better Process Alignment

Given the benefits that follows from a balanced scorecard method, it would not be wrong to say that with some changes and modification, this approach is suitable to all the entities, irrespective of the nature, size or objective (“The 7 Key Benefits of Using a Balanced Scorecard”, 2015).

The key is all these aspects need not be seen in isolation but as an integrated goal that aims to support each other. The best way in which the same can be achieved is to map these goals against the respective strategies to achieve them one on one (Alexander, 2016). Traditional methods of performance evaluation would not be of any good to an entity like Woolworths or any other entity for that matter. Relying on traditional methods would only take the company towards negative growth and loss of revenue. Therefore Woolworths should definitely adopt a balanced scorecard approach so that it is able to carve a niche for itself among the competitors.

Conclusion

From the above discussion and analysis, comparison of the Balanced scorecard approach with the traditional approach, and the checking it suitability for one of the telecommunication giants in Australia, it can be concluded that BSC is one of the best approaches present today which is meet almost all the criteria’s of performance management and help the company in achieving strategic and operational excellence. To summarize, a balanced scorecard may seem confusing at first, but over a period of time, the organization understands that it isn’t that complicated after all.  It is a way of looking at the big picture and it actually provides a balanced approach towards the achievement of strategic goals.

References

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

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Balanced Scorecard: Traditional Performance Measurement | Bartleby. (2010). Retrieved from https://www.bartleby.com/essay/Balanced-Scorecard-Traditional-Performance-Measurement-FKY6GSXHKUEZ

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd

Boccia, F. & Leonardi, R., 2016. The Challenge of the Digital Economy: Markets, Taxation and Appropriate Economic Models. s.l.:Springer.

Comparing Balanced Scorecard (BSC) with Traditional Performance Measurement. (2012). Retrieved from https://vaishaksuvarna-bizzscribes.blogspot.in/2012/12/comparing-balanced-scorecardbsc-with.html

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[Accessed 07 december 2017].

Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.

Intrafocus.com. (2014). [Online] Available at: https://www.intrafocus.com/wpcontent/uploads/2014/06/What-is-a-Balanced-Scorecard-Intrafocus.pdf [Accessed 18 May 2018].

Sharma, G. (2012). Balanced Scorecard. Presentation.

The 7 Key Benefits of Using a Balanced Scorecard. (2015). Retrieved from https://www.bernardmarr.com/default.asp?contentID=972

What is a Balanced Scorecard? A short and simple guide for 2018. (2015). Retrieved from https://balancedscorecards.com/balanced-scorecard/#learn-overview