The application, usage and advancements of the Balanced Scorecard
|✅ Paper Type: Free Essay||✅ Subject: Business|
|✅ Wordcount: 4550 words||✅ Published: 1st Jan 2015|
The survival of organizations nowadays is exceedingly hard due to globalization; since there is a great expansion of the business world, and a rapid change in technology. Organizations must stay ahead and have superior competitive advantage so they can continue to exist in the wild world of competition. Due to the technological innovations organizations need to change their strategies and reform new tactics to be able to be existent (Chavan 2009: 393). The methods achieving success must be in accordance with both the internal and the external environment of the organization and the occurring changes (Horváthová 2010:34). Only an effective and efficient organization is the one that would be able to survive in the competition along with having a better market position (Horváthová 2010:34).
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Egypt is becoming more industrialized country; it has achieved a considerable success in industrialization ranking the second in the number of establishments and the second highest in contribution from industrialization to the Gross Domestic Product in the African continent (Barbour 1969:155). The textile production segment had been a major industry of production in Egypt since the last two centuries (Barbour 1969:155); since in Egypt the cotton is of very high quality and it is imported by many countries in Europe and America (El Batawi 1962: 126). In Egypt not only cotton is produced but also the manufacturing of cotton textiles and finished goods is present as well (El Batawi 1962: 126). In the textile production is based on two components the natural and man-made fibre; and this produces apparel, home fabrics and other consumer goods (Toyne et al. 1984:148). In the textile industry only an organization that focuses on various strategy components is an organization that is heading towards success. The various components are technology, production, marketing, and strategic planning (Toyne et al. 1984: 157). A strategic tool is the balanced scorecard which is an innovation that was introduced in order to grant organizations a better competitive advantage and a better strategy for survival (McDevitt et al. 2008: 32). This strategic tool is the subject of controversy in this research paper.
The motivation behind this paper was to find whether the new advancements in strategic management could be applied in an Egyptian company. Studying strategic management is very interesting but is it applicable in Egypt. Since the balanced scorecard is one the strategic methods it was chosen to test its efficiency and effectiveness in Nasiege Textiles company. As for the textile industry it was chosen since it is one of the main industries in Egypt and the change in the industry is very rapid due to the fashion fads. The industry is very unstable which leads to high uncertainty and a very high competition (Karabuk 2008: 510). Thus, the research question is to find whether the application of the Balanced Scorecard in an Egyptian textile company is efficient or not, and whether it will give the company a competitive advantage or not.
The organization of the paper starts with an introduction about the textile industry, and the globalization issue. Then the literature review starts with an introduction about the industry in Egypt and the company’s profile. The second section is about the balanced scorecard, the framework and the key indicators. The third section explains the application of the balanced scorecard. Then the fourth section explains the advantages and disadvantages of the BSC. The final section is a conclusion of the paper.
2.2 The Textile Industry in Egypt
2.2.1 The Textile industry
The textile industry is one of the main industries in the world, and it is one of the most important industries in Egypt. The textile production is divided into three different stages. First is the yarn production, then the fabric formation and finally the dyeing and finishing of the textile (Karabuk 2008: 510). The production cycle is thus very long and the production decisions should be made very wisely. The decision for production must be very accurate due to the high volatility of the industry and the rapid change in demand. The industry is highly unstable due to the fashion demands and changes (Karabuk 2008: 510). The industry is facing a radical change on the global dimension; technological changes, and the production is becoming more capital intensive (Toyne et al. 1984: 159). The textile industry is divided to cloth/apparel fabric production, and home textiles production. The apparel production is the mostly unstable due to the fashion changes. In the textile industry the production needs to be highly flexible in order to meet the various demands in the minimal time possible (Toyne et al. 1984: 159); thus the strategies of the company needs to be implemented in an efficient way. Consequently, the textile industry is highly volatile and a strategic approach needs to be implemented for the survival of organizations.
2.2.2 Company Profile
Nasiege Textiles Company is an Egyptian family business that was established in 1987. The company was found by Mr. Atef Nasr. Started with a retailing outlet in Alazhar Street. Al Azhar is known to be a very prominent street for fabrics in Cairo, Egypt. The company has now expanded and own a production line of textiles in the industrialization zone. Nasiege is specialized in the production and retailing of apparel and fashion fabrics. One of the major problems that the organisation is facing is the ever changing demand of the fashion stores, and the ups and downs of the fashion fads. The organization is not capable of implementing the best strategies in order to be ahead of the market. It does not focus on other aspects except the financial aspect which limits the organization from realizing other opportunities. Also, the organization does not create a linkage between its operations and employees thus low communication and bad performance is viable. The decision making is much centralized and the hierarchy of the organization is vertical. Therefore, the operational employees don’t have a validated input and all the decisions are being made through the top management alone. Consequently, a new strategy map needs to be implemented for the organization to succeed.
2.3 The Balanced Scorecard
2.3.1 The framework of BSC
The balanced scorecard is a strategic tool that was developed by Kaplan and Norton in the beginning of the 1990’s to help organizations face the rapidly changing environment effectively (McDevitt et al. 2008: 32, Chavan 2009:394). The balanced scorecard was developed to help organizations not to only be profit oriented by to also focus on other aspects that will help the organization survive with efficiency (Kaplan & Norton 2001: 87). In the 19th and 20th century organizations were only concerned with the organization’s tangible assets and that what made it gain a competitive advantage, with the rapid change in technology organizations acquire a competitive advantage with considering both the intangible and the tangible assets of the organization (Kaplan & Norton 2001: 87). The BSC approach was designed to help the organization on both the financial and non financial measures thus it can reach success thorough its goals and implement its strategies (Devine et al. 2010: 38). The BSC is a performance tool that sets the organization’s vision into measures; furthermore it creates a benchmark to identify the key components of the organizations and setting the appropriate measures to reach the goals of the organization (Tuan 2010:126, Stewart 2001:38). Consequently, implementing the balanced scorecard gives the organization the opportunity to put the goals and strategies into action (Yilmaz & Baral 2010: 40).
“The authors (Norton & Kaplan) proposed that financial measures alone were not sufficient to measure performance. Other factors in the new economy such as competence and knowledge, customer focus, and operational efficiency and innovation were missing from traditional financial reporting” (Gumbus 2005:619)
The balanced scorecard is a strategic tool that creates a link that delivers the company’s strategy into a clear vision that is implemented. The BSC is a measurement tool for four different areas; financial, customer, internal process, and growth and innovation (Ip & Koo 2004: 535; Devine et al. 2010: 38; Hui 2010:83). Those dimensions were chosen since the developers (Kaplan & Norton) believe that those are the factors that are essential for the implementation of the organization’s strategic goals (Devine et al. 2010: 38). The BSC allows the organization to have its strategic plans into operational terms from the management to the lower levels where it is translated in the day to day activities. It is a performance measurement tool that creates a linkage between the company’s strategies to short term plans; which enhances the company to operate efficiently (Kuvaas 2007:379). The BSC should not only be a measurement tool for the past performance but also a communication tool that will allow the management to review their performance and use the feedback as a learning process (Kaplan & Norton 1996).
2.3.2 Performance Indicators of the BSC
The BSC also transforms the qualitative strategy to a quantitative strategy by setting different indicators in every stage through the life cycle of the project, it then quantifies the strategy by giving different weights to each performance indicator measurement (Hui 2010: 83). In other words the BSC set various indicators on each strategic objective; those indicators are measurements. The measurements are used to evaluate the current performance on each of the four aspects. The designation of the performance indicator from the prospect of finance could be implemented in multiple ways. Objectives, measures, and targets that are defined in the project’s life cycle each should be on a scorecard for each perspective (Devine et al 2010:41; Hui 2010:84). These measures should be quantifiable and thus the managers and employees would be motivated to work towards the project success. Kaplan & Norton believes that everything must be quantifiable because if it cannot be measured, it won’t be manageable (Koppen et al.:364). Performance indicators must be present in order to manage and control the organization, furthermore accomplishing the organization’s strategy to the current status of the organization could be achieved through the BSC strategic tool (Koppen et al.:364). The measures should be clear and interconnected with each other thus the employees could see the company’s strategy in their day to day activities. Consequently, grasping the idea of the bigger picture and working towards its achievement (Gumbus 2005:621).
The financial performance of the organization is reflected through the financial perspective indicator. The financial indicator should be in compliance with the budget of the company, therefore the strategic planning will not exceed the specified budget. Thus the goals would be verifiable in the short term planning and they would be reachable (Bolivar et al.2010:128). A strategically set budget should be implemented for the future long term planning; it will allow the organization to set the strategic goals for the long run and create a clear vision. The nature of the relationship between the customers and the organization is indicated through the customer perspective. The customer prospective should be regarded from two different views; the relationship between the customer and the organization. In other words the customer satisfaction, because by creating customer satisfaction, loyalty is created. The second view is the company perceived image. Furthermore if the customer has a high image for the company then it is a main advantage for the organization (Bolivar et al.2010:127; Koppen et al.:365). The internal business perspective gives an overview of the major business operations. It should be more related to the work operations in the organization, and focus on the connection between the operational levels to pursue the goals (Bolivar et al.2010:127). Last but not least, the learning and growth perspective which indicates the level of learning and educational improvements in the human capital of the organization (Koppen et al.:365). The employee learning is one of the most essential indicators, because many of the other perspectives are based on the growth and learning. First, the employees must acquire the needed knowledge to perform their work tasks accordingly. Second, employee training must be enhanced thus the organization’s goals could be implemented easily (Bolivar et al.2010:127). Investing in the human capital is very crucial since it sets the direction of the whole business, because the employees and the people riding the business whether to success or to failure.
The following table shows the performance indicator system;
Table 1: Performance indicator system (Hui 2010:88).
1st Class indicator
2nd class indicator
Project Performance indicator system
Stability of finance
-Exchange rate stability.
-qualified rate at first check
-number of disputes
Inner business processes
-rationality of quality assurance program.
-supervision of materials testing
Study and Growth
-rationality of document management system.
– the degree of project information construction.
As shown in the above table from the finance perspective the stability of finance and the stability of the economy is the essential indicator. Since the value of the organization’s money is assessed through the exchange rate, and the inflation rate in the economy. High inflation leads to lower value of money, thus depreciating the organization’s asset valuation. The second perspective is the customer satisfactory and it is related to the owners’ satisfaction. Furthermore, the owners would be satisfied when there are more satisfied customers meaning a larger number of sales. The inner business processes are determined by the quality control indicator. The quality control is an examination that reveals the effectiveness and efficiency of the operational processes. The quality mainly relies on the work process itself; if the work process is efficient then the quality would be high and vice versa. Regarding the last perspective the learning and growth performance is measured by the knowledge management indicator. This indicator measures the degree of learning of the management employees. It checks the knowledge that the employees have that enables them to perform their jobs. In conclusion, each aspect has corresponding indicators in which they measure the work performance. These indicators are essential to the organization since they evaluate the organization’s performance and achievements. They also help the organization to set the indicators in accordance to the required measurement in performance.
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2.4 The application of the balanced scorecard
The application process of the Balances score card is being described by (Stewart, 2001). The first step is to initiate the project; each project must arise due to certain occurrences of problems. Thus the organization needs to indentify the problem clearly so it would be able to determine the main focus for implementing the balanced scorecard. During this step the organization needs to state the outcomes based on the organization’s vision. The project objectives need to be in alignment with the company’s vision in order to receive the desired output. As the output had been indentified the input must be stated as well. The managing people of the project, the required resources, the goal, the duration of the project and most importantly assign the project manager. The last phase of the first step is to consider the BSC measurements and decide on which measurements to use.
The second step is planning the project, it’s considered as on the success factors by managers of the project. As the author stated “failing to plan is planning to fail”, thus planning is one of the most important steps. As there was a problem identified in the first step, this step offers a solution for it. The complete plan will identify the work that is to be performed in the project, and the responsible heads for the work; in other words assigning each task of the desired output to the inputs available. The critical success factors of the project must be visible and clear to guarantee the overall success of the project. The balanced scorecard measurements are being explicitly described to fulfill full accuracy in the implementation process. The KPI’s should be defined at this step, in order for the management to recognize the key factors to evaluate the performance.
The third step is the execution of the plan, these steps puts the plan into action. In the execution process amendments and improvements are being made. The balanced scorecard is being adjusted according to the apparent problems. Obstacles in one of the four dimensions of the balanced scorecard that requires amendment is adjusted; in order to guarantee the success of the final project. The four dimensions are financial, customer, internal operations and growth and learning. The vision could be changed due to the scope limitation or short termed by managers.
The final stage is the closing of the project and this includes the identification of the required balanced scorecard measurements. Then, the management could conclude the results and check the previous problems to acknowledge them. However, the management is then aware of the common problems. The management has the balanced scorecard KPI’s defined and the work is being measured effectively. Consequently, the organization has all the key elements to elevate the position of the organization in addition to the implemented strategies and alignment with the mission.
2.5 The diverse effects of the BSC
2.5.1 The advantages of the BSC
The balanced scorecard provides the organizations with many benefits, and that is the reason behind organizations implementing it. The BSC not only allows the organization to implement its strategies into objectives and goals. It keeps the organizations moving towards a better position rather than focusing on pure financial returns. In which they are considered short time goals and scope limited (Hepworth 1998:561). In addition it helps the organization to be in alignment with its strategy by making the employees involved in the achievement of the mission objectives (Gumbus 2005:621). This allows the company to be in better position since the employees are oriented towards the company’s vision (Gumbus 2005:621). However, the BSC also allows the organization to have measures and reports towards its strategic goals. The measures allow the management to review the progress of the organization, in addition to assessing the organization’s position (McDevitt 2008:44). The BSC creates a better communication network among the employees. It enhances the communication between the employees by enforcing the various operational departments to work together cohesively. Furthermore, it creates a friendlier atmosphere for the employees and the value of the human capital increases (McDevitt 2008:44). The value of the human capital increases due to the more involvement of the employees and this grants the organization with the loyalty of employees and low turnover rates.
The BSC has transformed from being an innovative measurement tool, it had become a management strategic tool from the success that organizations had witnessed by implementing it (Hepworth 1998:560). It allows the organization with a very strong linkage between the departments. This connection enhances a better quality and more effectiveness. When departments are connected to each other the decision process is then more efficient. Since, having different outputs from different people and various opinions stretches the scope of the organization and makes it more innovative (Hepworth 1998:560; McDevitt 2008:44). In conclusion the BSC develops the intangible assets of the organization that ranks it higher in the competitive advantage and grants it the opportunity to implement their strategic objectives (Kaplan & Norton 2001:102). Thus, it’s an effective management tool that enhances the organization a better understanding and implementation of the business strategies.
2.5.2 The disadvantages of the BSC
Like any other management tool there are drawbacks or negative effects that are associated with the implementation of the BSC. It was reported that the measures of the balanced scorecard does not deliver the expected results. As mentioned by Krause that the study was conducted in German organizations and only 12% of them mentioned that their budget performance increased since the implementation of the BSC (2003: 4). The author also mentioned that the implementation lacked the operational qualities which make it difficult to implement in the organizations. Furthermore, the balanced scorecard is aiming at not only concentrating on the financial aspect but on other non-financial prospects. This method was argued by Koh & Teoh, where the authors mention that the nature of the human being is focusing on only the financial aspect. Thus, managers disregarded the idea of focusing on other aspects rather than the financial aspect and this is the realization in the applicable life (2010). Consequently, these were the counterarguments about the balanced scorecard, and the drawbacks of implementing it as a strategy in accordance to some authors.
2.5.3 The practical way to minimize the disadvantages
Although many companies have reported success of the BSC in the organization, there are certain requirements that need to be met for the success of the implementation process. According to Koh & Teoh the following steps have to be followed during the implementation process (2010):
Effective Communication of the strategic priorities: managers has two ways of achieving the priorities, its either by setting weights to every priority thus limiting the number of objectives and constraining on the most important one. The other way is by selecting Key Performance Indicators from the BSC module. The KPI’s provides a better focus and the priority over other BSC objectives. This allows the managers to be more oriented on the most important measures rather than being distracted with too many measures.
Keeping the number of BSC measures manageable: in order for the employees to be motivated the managers need to limit their measures. Having many measures makes the employees unmotivated and tends to lead them to low performance.
Link the BSC measures explicitly to compensation: individual rewarding and compensation motivates the employees to work better in order to get rewarded. Therefore, when the BSC measures are linked to the individual rewarding system the employees are motivated to work for the success of the BSC measures.
In conclusion, it is conducted that the drawbacks of the balanced scorecard can be avoided through going certain steps. Managers don’t need to explicitly detail every single strategy that would be implemented in the balanced scorecard. Instead they need to focus on the key strategies that will eventually lead to the organization’s success. The involvement of the employees could be motivated by offering incentives linked to the achievement of the balanced scorecard measures. Therefore, the balanced score card is a successful management tool only if implemented in the mentioned above way.
The main reason behind conducting this research is to find whether the strategic tools are applicable in the Egyptian textile industry. The strategic tool that was used to test the research question is the balanced scorecard. In the paper the globalization of the market were being discussed and the challenges facing the organizations. Then, the textile industry was described and the problems faced by organizations in this industry. Due to the high instability in the textile industry in Egypt it was suggested that strategic tools may be implemented to alleviate this instability. The balanced scorecard was then introduced and a description of its framework was analyzed.
The BSC is a strategic tool that aligns the organizations’ strategy with its short term objectives; attaining a better understating of the organization’s strategy by all the employees. Therefore, it creates an environment that encourages learning and the growth of human capital. The organization’s main scope then becomes the customer satisfaction, and the strategy to achieve it. The organization’s internal operations are being discussed and how do they relate to the organization’s goal achievement. There are different indicators for each of the mentioned dimensions that allow the management to measure the work performance.
Afterwards, it was analyzed that for a company to implement the BSC it must have a clear vision to act upon. This vision is reached by planning and analyzing the company’s resources and allocating them efficiently. After the planning the organization must then put the plan into action and start to measure the performance in accordance to the KPI’s. When the BSC is fully implemented the organization then acquires a competitive advantage with the achievement of the strategies and goals.
As any other thing, the BSC has its advantages and disadvantages. The main advantage is that it puts the company’s strategies in alliance with the short term goals. It makes the organization’s goals not only profit oriented but attaining a competitive advantage through other resources from inside the organization. On the other hand the disadvantages of the BSC is that some managers state that it is an unrealistic approach since as a human being only the financial aspect is the mostly considered. Another disadvantage is that the BSC does not provide the organization with the maximized efficiency and a huge difference in the process of operations.
Consequently, the research question is not yet answered, but a methodology and real application would be conducted in part two in order to answer the research question. However, a hypothesis from the indicated information is that the application of the BSC in Nasiege would be successful since it will allow the company to focus on other profitable aspects other than the finances only.
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