The Application and Applicability of the Balanced Scorecard to San Diego Companies
April 1997
Authors: Dr. Chee Chow, Dr. James Williamson and Dr. Kamal Haddad
Chee Chow and James Williamson are Professors of Accountancy, and Kamal Haddad is Professor of Finance, all at San Diego State University in the College of Business Administration
Balanced Scorecard
American companies are making fundamental changes in responding to an increasingly competitive global economy. A major component of these changes is replacing the old "individual based task oriented" management concept with a "team based process oriented" approach.
The emphasis on restructuring, however, has created a new problem for management because traditional financial performance measures cannot fully reflect how the newly restructured organization is doing. Today's managers know that yesterday's accounting results tell little about what can actually help grow market share and profits--things like: employee development and turnover, innovative services that enhance customer values, the quality of vendor services, benefits from advancements in research and development. Therefore, for restructuring to be successful, it also needs innovation in the way organizations view and measure performance. For this purpose, the "balanced scorecard" may be just what organizations need to help them successfully meet the demands of the 21st Century.
Essentially, the balanced scorecard is a set of financial and non-financial measures relating to a company's critical success factors that put strategy, structure, and vision at the center of management's focus. This aspect is by no means new. What is innovative about it is the integration among components of the scorecard such that they reinforce each other in indicating both the current and future prospects of the company, ensuring that actual current operating performance is in line with long-term strategy and customer values.1
Because the specific objectives and measures of an organization's balanced scorecard are derived from its vision and strategy, the relevant perspectives and their relative importance can be expected to vary among firms. However, there is some agreement that the framework for a balanced scorecard will include to some extent the four major perspectives illustrated in Exhibit 1.
To achieve financial goals
The financial perspective serves as the focus for the objectives and measures in the other scorecard perspectives. This reflects the concern in for-profit enterprises that every action should culminate in improving short and long-run financial performance. To achieve its financial goals, a company needs to identify the customer and market segments in which it chooses to compete (thus the importance of the customer perspective). The internal business perspective focuses on those internal business processes that will deliver the objectives that the financial and customer perspectives have established for customers and shareholders. Finally, the learning and growth perspective focuses attention on continuous organizational learning and growth to support the other three perspectives.
To date, reported applications of the balanced scorecard have mostly been confined to large, international companies, such as KPMG Peat Marwick, Tenneco, Allstate, AT&T and Elf Atochem. These companies tend to face more turbulent and competitive environments, have more dispersed and varied products and process that they need to coordinate and monitor, and also have more resources for undertaking fundamental change. In comparison, small or local companies may have different needs such that what works for large companies may be ineffective or unnecessary for them. To gain some insights into the potential applicability of the balanced scorecard in small or local companies, we undertook a dialogue with either the CEO or a senior vice president of four such companies headquartered in San Diego, whose size ranged from 100 to 1200 employees. Each of the four firms was from a different industry: electronics manufacturing, food ingredients, banking, and biotechnology.
Only one of the senior executives said that his/her company had fully implemented such a system with the others reporting that their companies' current implementation status ranged from 3 to 7 on a scale of one (="not at all") to 10 (="completely"). However, all said that they thought such a system would be extremely beneficial, with the lowest score being 8 on a scale of one (=low) to 10 (=high) and half of the executives giving the value of the concept a perfect 10 rating.
Effective scorecard
We also asked each executive to identify up to five major components, along with the goals and associated performance measures, that might form the basis for an effective scorecard for his/her company. The electronics company selected the customer perspective, emphasizing the goals of quality, price, delivery, and development of new products, as of primary importance. In contrast, the food ingredient company said that it was most interested in the financial perspective but, then, proceeded to identify many goals and measures in the other perspectives that will enhance the financial goals along with the goals of that perspective. The responses from a commercial bank provided an interesting observation by setting out a separate community perspective. Finally, the biotechnology firm selected the customer perspective as of primary importance, placing the financial perspective after customers and technological leadership. Thus across the four types of companies considered, there is clear indication that the a tailored balanced scorecard can be an effective management tool for small companies as well as large companies.
If the experience of the companies that have already implemented the balanced scorecard is any guide, the designing and implementation process for a balanced scorecard may take two years or more. Because the process is so lengthy, managers should lose no time in evaluating the balanced scorecard concept to see if they want to implement it or other methods that will promote and support change to better measurement and reward systems. *** For further information:
Marsha Gear, APR Director of Communications College of Business Administration San Diego State University San Diego, CA 92182 619 594-4501 [email protected]
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