Balanced Scorecard

Balanced Scorecard

Abstract

According to the article, the balanced scorecard framework has been given greater attention which tends to be a mean of translation of core strategies in an organization to balanced set of interconnected financial and non-financial measures. Despite this being the case, such measures have chances of creating element of confusion to the managers in an organization. In other situations, managers in an organization are expected to have an understanding of when they need to emphasize on certain metrics.

Introduction

Generally, the balanced scorecard framework is applied when it comes to measuring of organization’s overall performance where it incorporates the financial and nonfinancial measures in four main dimensions focused by an organization (Saaty, 1990). These dimensions are essential in an organization and comprise financial, customers, learning and growth and internal business processes (Baddeley, 1994). Mainly, the methodology was developed due to overabundance on the overall financial based performance indicators that provided little or no direction to the firm’s managers on the operational process in connection to the execution of strategy. However, the balanced scorecard framework has potentiality of eradicating the traditional singular focus for financial metrics as well as encouraging a more balanced set of core measures. Despite this being the case, there are various arguments that have been developed in relation to scorecard but tends to complicate the process of decision making as well as performance evaluation process (Saaty & Vargas, 1994).

This paper will summarize article on “Prioritizing Performance Measures within the Balanced Scorecard Framework.”

Literature Review

According to the argument in the article, a typical balanced scorecard may consist of 20-25 measures where managers applying the framework are more likely to benefit from ways measures are prioritized. As well, the balanced scorecard framework may be essential when it comes to reduction of initial set of measures for a group of 20-25 via means of prioritization. Application of priorities allows managers in an organization to focus mainly on the strategic initiatives that do offer promising avenues to improve on performance (Saaty, 1990).

According to Kaplan and Norton, the scorecard framework needs to be used as a process of communication, informing as well as a learning system and not a controlling system. It is evident that the multifunctional aspects associated with the balanced scorecard have chances of presenting conflicts to the users of the framework (Saaty & Vargas, 1994). In case managers are confronted by various measures, they do receive signals showing that all measures tend to be significant (Saaty, 1990). Such measures are essential and are related to each other. Despite this, average scorecard contains four to seven measures for all the four perspectives indicated. However, the final balanced scorecard incorporates almost 28 measures. According to Kaplan and Norton, a number of measures need not to be an issue since they are all related and focuses on ways of achieving same organization’s core strategies.

According to Saaty (1990), theoretical notion of various interrelated measures has remarkable appeals, operations where it may be challenging when it comes to appreciation. According to study in information processing and decision making, there are indications that it tends to be challenging for persons to have the capacity of processing larger amount of information (Saaty, 1990). In case the balanced scorecard offers a framework that do distill various metrics in four main groups with less measures for every group, then the balanced scorecard tends to filter various metrics to what is most significant. With contrary information, managers are more likely to assume that measures are interrelated and have similar primary objectives and they should all be equally considered. As cited by Saaty & Vargas, (1994), despite this being the case, the balanced scorecard format tends to be a template and having such interpretation might not be correct for the managers in all types of companies as well as strategy situations. In addition, if the measures will be more important on total pursuit for single strategy, then it can be assumed that they are equally significant (Saaty, 1990). There is the need to emphasize on various activities over others and this may have to focus on distinct subset of measures over the entire lifecycle of an organization. Despite this, managers would require various core activities in which they would be able to prioritize the metrics. The aspect of prioritizing the metrics offers means of assessing changes in the priorities over a given time without creation of new balanced scorecard (Saaty & Vargas, 1994).

Comparison

Slater, Olson and Reddy (1997), notes that there are needs for prioritization of various balanced scorecard metrics. Such strategies of the firm compel development of the “unbalanced” scorecard. According to their argument, they highlight three firm core strategies of product leadership, customer intimacy as well as brand champions and how these strategies may assist in concentration of distinct types of measures (Saaty & Vargas, 1994). However, many organizations consider ways of emphasizing on financial metrics to certain degree; hence it tends to be more effective when an organization offers additional consideration on measures that are tailored on one of the other three perspectives. Hence, in some instances, the product leaders are expected to concentrate on aspects of innovation all through the metrics as a way of learning and maintaining growth perspective (Saaty & Vargas, 1994). Generally, unbalanced scorecard has a nature that considers that all the four perspectives are present but with an additional metric on some perspectives that do offer emphasis on the key areas in relation to company strategies (Saaty & Vargas, 1994).

In connection to the practice of prioritizing measures of every perspective within the balanced scorecard, there are two options that are involved. The first option relates to prioritization of measures that are within the perspectives separately. Under the option, the aspect of relative significance is assumed, despite being crucial in a firm that takes focus strategies. Such approach in a firm tends to be desirable in the way that it is interrelated via creation of balanced scorecard then comes in the prioritization of all other metrics that preserve more of the relationship (Saaty, 1990).

According to Saaty (1995), he proposes that application of analytical hierarchy process in prioritization of all metrics within the balanced scorecard is essential. Using the method allows prioritization of all other metrics that do not have individual decision makers with consideration of 28 metrics. Additionally, the aspect of ranking considering the decision makers tends to be aggregated with an aim to create scores on prioritization of other metrics within the group decision making. According to Saaty, (1990), the AHP has the capacity of offering mechanistic of reconciliation in case of inconsistence inherent managerial decision process. The main character of AHP considers the fact that comparison may be made in case of pair wise combination to ensure that decision makers need to consider only a pair of metric at a time. As cited by Saaty & Vargas, (1994), there is the use of numerical scale when it comes to comparison process. Hence, information provided from each pair may be easily converted to numerical scores while being ranked in accordance to the judgment made by the decision makers (Saaty & Vargas, 1994).

Quality and Relevance Findings

Generally, the AHP in a firm considers five main phases of construction of hierarchies, determination of the pair wise comparisons, synthesis, consistency check as well as evaluation of results. Mainly, the construction of hierarchies in the metrics tends to be based upon process of building homogenous set of core elements with use of single elements as part of overall purpose (Saaty, 1990). When it comes to application of AHP in the balanced scorecard, overall purpose of this aspect tends to be development of single element of firm strategy. Conversely, subsequent hierarchies in a firm are based upon the specified objectives under each of the four perspectives. The step of considering pair wise comparison relates with the balanced scorecard aspect where there is incorporation of comparison of two metrics in a given perspective such as internal business process against certain criteria’s of establishing relative weight. According to Saaty (1995), such comparisons are easily made in terms of significance, preferences and likelihood. Hence, the aspect of balanced scorecard metrics may be compared with certain sets in regard to importance as well as assisting in achievement of strategic objectives in terms of generation of financial performance (Kaplan & Norton, 1996).

The other steps involved in AHP are generically used and do not demand any type of modification of the balanced scorecard framework. Under the synthesis stage, there is combination of mathematical preference values for all measures with an aim to create priorities. This is easily achieved via construction of paired comparisons metrics as well as computation of the metrics values and vectors. Priorities of the measures are sourced from element of vector within the largest values (Saaty, 1990). Adjustment for the outcomes in case of normal solution ensures that all priorities are capable of summing up in a given perspective such as financial or customers. As well, there is consistency check that is performed by the aspect of calculating for the consistency ratio which tends to be an indicator of decision quality (Saaty, 1990). This is done well since the decision maker are capable of achieving consistency in case of the paired comparison matrix as well as consistency in case of random generated matrix consisting similar sizes (Saaty, 1990). In case of a consistency ratio that is too high (10 percent is normally used as the critical value) the judgment made may not be reliable and has to be reconsidered. Achieving consistent results, priorities are evaluated and interpreted well (Calantone, Di Benedetto & Schmidt, 1999).

Description of the Use of Balanced Scorecard

Generally, AHP may be applied in various situations for various decision making process. The applications are similar when it comes to the use of AHP in determination of priorities for the balanced scorecard framework. According to Wind (1994), the process can be applied when it comes to evaluation of best alternatives in marketing strategies in connection to relative significant of copious components within the marketing mix. Generally, AHP has been applied in developing priorities among other sets of new products that are available for development (Saaty, 1990). There is recommendation on the use of AHP since the main feature in case of a new product decision making process tends to be consideration of introduction of product that coordinate with the firm’s mission as well as objectives.

According to Min, Mitra and Oswald, (1997), AHP was applied in competitive benchmarking of healthcare quality. As well, the AHP was applied in developing priorities of deriving optimal set of metrics among various metrics that are applied in evaluation of quality healthcare. In such environment, the environment tends to be similar to the balanced scorecard framework where decision makers are capable of prioritizing positive measures on success or performance for large potential measures (Min, Mitra & Oswald, 1997).

AHP is applied to the balanced scorecard that was developed for use in European management consultation firm where the core competencies were based upon the customer satisfaction management, total quality management and human resource management. In the recent times, the firm has experienced steady and rapid growth with establishment of European network with other subsidiaries as well as partner companies in almost more than 14 European countries (Butler, Letza & Neale, 1997). In such, the application has offered interesting contexts where proprieties are formulated to fit balanced scorecard metrics as well as information in regards to adaptation process of balanced scorecard within the European environment. For confidentiality, there is application of the name Service Inc in identification of the firm which was first developed balanced scorecard by formulation of overall vision and strategy. This balanced scorecard process emerged with large metrics than the desired for the upper management. Hence, the AHP may be well applied in Service Inc to prioritize measures as well as getting indication that reduced number of elements in the balanced scorecard (Saaty, 1995).

Recommendations and Conclusion

Prioritizing metrics plays a core role when it comes to facilitation of the use of the balanced scorecard which is termed as a communication tool. Providing a better indication in relation to the relative significance of the measures tend to reduce likelihood of individuals in an organization in developing conflicting interpretation of such metrics. Prioritization of balanced scorecard results to various benefits but managers are as well expected to consider the aspect of its limitations when it comes to prioritization process. Assessment made from the aspect of decision makers may be used in determination of priorities. Due to such individual assessments, they are subjected to biases and influences.

Reference List:

Baddeley, A., (1994 April). The Magical Number Seven: Still Magic After All These Years? Psychological Review, pp. 353-356.

Butler, A., Letza, S. R., & Neale, B., (1997). Linking the Balanced Scorecard to Strategy. Long Range Planning, 30, (2), pp. 242-253.

Calantone, R. J., Di Benedetto, C. A., & Schmidt, J. B., (1999). Using the Analytic Hierarchy Process in New Product Screening. The Journal of Product Innovation Management, 16, pp. 65-76.

Kaplan, R., & Norton, D., (1996). The Balanced Scorecard. Boston, M A: Harvard Business School Press.

Min, H., Mitra, A., & Oswald, S., (1997). Competitive Benchmarking of Health Care Quality Using the Analytic Hierarchy Process: an Example From Korean Cancer Clinics, Socio-Economies Planning, 31, (2), pp. 147-159.

Saaty, T L., & Vargas, L. G., (1994). Decision Making in Economic, Political, Social and Technological Environments: The Analytic Hierarchy Process-Vol. VII, Pittsburgh, PA: RWS Publications.

Saaty, TL. (1990). Multi-criteria Decision Making: The Analytic Hierarchy Process: Pittsburgh, PA: RWS Publications.

Saaty, TL. (1995). Decision Making for Leaders: the Analytic Hierarchy Process for Decisions in a Complex World (3 rde d.), Pittsburgh, PA: RWS Publications.