The Balanced Scorecard as Strategic Controlling Instrument. Introducing the Indicators-based BSC for Implementation of a Corporate Strategy from Four Different Perspectives

Pramudita, Christoper Dewangga

Title: The Balanced Scorecard as Strategic Controlling Instrument. Introducing the Indicators-based BSC for Implementation of a Corporate Strategy from Four Different Perspectives

The Balanced Scorecard as Strategic Controlling Instrument. Introducing the Indicators-based BSC for Implementation of a Corporate Strategy from Four Different Perspectives

by Christoper Dewangga Pramudita (Author)

Business economics - Business Management, Corporate Governance

Summary

Nowadays, many companies should not only discuss about how to obtain profits from their products. They should also be forced to use any other aspect that has the ability to increase the impact for their long-term success. Examples are: discussing about the quality of their products, the relationship between them and their customers and employees, the production process as well as marketing. Those are the challenges for all managers who are not only struggling to achieve their company’s targets - high profits - but also to achieve customers', employees' and stakeholders' satisfaction.
Therefore, managers need to seek out an approach which is able to help them finishing their tasks and involves all the aspects mentioned. Nevertheless, it is not easy to reconcile conflicting demands of individual interest groups. The concept of the balanced scorecard (BSC) is one of the modern approaches to handle these challenges. The balanced scorecard is the main topic of this book. More precisely, it explains the benefits of introducing the indicators-based balanced scorecard as a strategic controlling instrument for implementation of a corporate strategy from four different perspectives: financial, customer, internal business process as well as learning and growth perspective.

Excerpt

List of Symbols/Abbreviations

Aktiengesellschaft

BMW AG

Bayerische Motoren Werke Aktiengesellschaft

BSC

Balanced

Scorecard

CEO

Chief

Executive Officer

Cash

flow

e.g.

Exempli gratia/For example

EBIT

Earnings before Interest and Taxes

EBITDA

Earnings before Interest, Taxes, Depreciation and Amortization

EFQM

European Foundation for Quality Management

EVA

Economic Value Added

i.e.

id est/in other words/that is

p.a.

pro

Annum/per

year

R&D

Research

and

Development

ROA

Return on Asset

ROCE

Return on Capital Employed

ROE

Return on Equity

ROI

Return on Investment

ROS

Return on Sales

SAP SEM

SAP Strategic Enterprise Management

SAP

Systems, Applications & Products

SWOT

Strengths, Weakness, Opportunities and Threats

United

States

USD

Dollar

Working

Capital

ZVEI

Zentralverband der elektronischen Industrie

Chapter 1 Introduction

1.1. Problem Description

Nowadays, many companies should not only discuss about how to obtain profits from

their products, which are successfully sold to their customers, but also they should be

forced to use any other aspects that are able to give more impact for their long-term

success. For examples, discussing about quality of their products, relationship be-

tween them and their customers and employees, and the production process as well

as marketing. Those are the challenges for all managers who are not only struggling in

achieving company's targets - high profits but also in achieving customer, employees

and stakeholders satisfaction. Schermerhorn (2011, p. 16) generally sees the role of

managers in a company and stated that all managers, regardless of their titles, levels,

types, and organisational settings, are responsible for the four primary management

functions which are defined by Lewis, et al. (2007) as planning, organising, leading,

and controlling.

Figure 1 The Four Primary Management Functions.

(Source: according to Lewis, et al. 2007)

a) Planning should be described that managers have tasks in setting targets and

in defining actions that are necessary to achieve the targets of their companies.

b) Organizing involves determining the assignments to be done and how those

assignments would be managed and coordinated to reach the company's tar-

gets.

c) Leading should be defined that managers should be able to guide, to motivate,

and to lead the employees in order to effectively and efficiently achieve compa-

ny's targets.

d) Controlling requires the managers to monitor process of planning, leading and

organising whether its process may be able to help reaching the targets, tar-

gets have been achieved as expected and applied strategies have been effec-

tive or not.

It is difficult for managers to accept the challenges. Therefore, managers need to seek

out an approach which is able to help them finishing their tasks and involves not only

one aspect but any other aspects, such as customers, shareholders, internal business

processes and employees. For other aspects, Tesarovicova (2008) clarified that a

higher return on the funds and an increase of the company value is expected by

shareholders and owners since customers expect a higher value and quality of prod-

ucts. Nevertheless, the problem appears where to reconcile conflicting demands of in-

dividual interest groups are not easy. She also argued that modern approaches are

needed to be applied with an emphasis on their most important assets to the man-

agement of companies. In addition, the concept of balanced scorecard (BSC) is one of

modern approaches that she mentioned.

To further understand about balanced scorecard, Averson (1998) issued an argument

that the balanced scorecard is not only giving an alternative to the traditional financial

key figures, but also it may give a description as well as explanation of what should be

measured in order to assess whether applied strategies have been effective or not.

Not only Averson (1998) has argued regarding balanced scorecard, but Kaplan and

Norton (1996, p. 7) also have argued that:

"The balanced scorecard retains traditional financial measures. But financial measures tell the

story of past events, an adequate story for industrial age companies for which investments in

long-term capabilities and customer relationships were not critical for success. These financial

measures are inadequate, however, for guiding and evaluating the journey that information age

companies must make to create future value through investment in customers, suppliers, em-

ployees, processes, technology, and innovation".

There is another opinion regarding balanced scorecard from Asefaso (2013). He ar-

gued that it enables executives to implement their strategies for real. He also stated

that the balanced scorecard method gives a clear prescription as to what organisations

should indicate in order to "balance" the financial perspective. Balanced scorecard it-

self is applied with the help of indicators system. Nevertheless, Poureisa, Ahmadgour-

abi and Efteghar (2013) stated that performance of indicators system has dramatically

changed compared to the prior indicators. They argued that the indicator results are

real when the comparisons are used between similar items. Based on traditional per-

formance indicator method, they argued that the most significant targets of evaluation

are performance indicators while modern method has focused on evaluated growth

and development capacity. In other words, modern method should answer the ques-

tions. For examples, whether our customers are satisfied with our products, whether

our employees have been very well treated and whether our production process has

been efficient so that it increases our growth and development capacity, while the tra-

ditional performance indicators method focus on finance indicator such as Return on

Investment (ROI), Return on Capital Employed (ROCE), Earnings Before Interest and

Taxes (EBIT), Earnings Before Interest, Taxes, Depreciation and Amortization

(EBITDA), Profitability, Revenue, and other indicators.

1.2. Objectives

According to Asefaso (2013), the balanced scorecard has developed from its early use

as an easy performance indicator framework to a complete strategic planning as well

as management system. It provides a framework that is not only provides performance

indicators, but also gives a help for the planners to recognise what should be done and

measured. Due to a complete tool for manager to navigate the successful of the com-

pany, BSC would be thoroughly reviewed through some examples of two German

companies. The targets of this thesis are answering questions, for examples:

Whether BSC may help managers to achieve the challenges which are de-

scribed in the problem description.

Whether it is true that BSC as strategic controlling instrument should be defined

as a complete method which should increase performance of a company

through its four different perspectives.

Whether the positive impact of BSC usage may be clearly seen on the financial

statement of company.

Whether each company should pass the four different perspectives in imple-

menting of BSC.

1.3. Structure

The main topic of this book is the balanced scorecard. However, it would be more spe-

cifically explained about the benefits of introducing the indicators-based balanced

scorecard as a strategic controlling instrument for implementation of corporate strategy

from four different perspectives. Before the conclusion, this thesis would be started

from chapter 1 which is an introduction which would involve the problem description,

the targets and the structure of this thesis. In this section, the challenges for the man-

agers to manage their primary tasks and to achieve company goals linked to other as-

pects are introduced. Thus, chapter 1 contains problems which should be solved in the

next chapter.

Chapter 2 would explain the theories about BSC as a strategic controlling instrument.

It would also introduce the concept of BSC to solve the problems which are previously

described in chapter 1. In addition, how BSC appeared, what is BSC, how to use BSC,

what the four-perspectives of BSC are and how the concept of indicators system in

BSC works would be more clearly explained so that reader and especially managers

should well understand. All these explanations would be used in chapter 4 to analyse

how cause-and-effect correlations of implementing BSC in two German automobile in-

dustries so that the reader may evaluate whether BSC is a good strategic controlling

instrument which may give benefits for these two German companies if BSC is

applied.

Next, chapter 3 would present two examples of German automobile industries which

had been implementing the concept of BSC in their companies and directly or indirect-

ly stated that the concept of BSC had been properly applied in their strategy in achiev-

ing their objectives. Then, the facts shows BSC giving them more benefits in their

company strategies would be shown with their financial reports for five years period so

that it should clearly emphasis that this concept would deliver positive impacts espe-

cially for their financial reports.

In chapter 4, the analysis of using BSC is presented along with exploring out the

cause-and-effect correlations from the result of implementing BSC in two German

companies. Then, the analysis result of exploring out the advantages and disad-

vantages, which would probably happened, when this concept of BSC was applied or

when BSC would be still applied in the future, would be carried out and shown. Fur-

thermore, examining the chances and challenges of implementing BSC are two im-

portant themes since it shows the challenge for the managers if these are applied.

Finally, chapter 5 concludes and summarises this thesis

Chapter 2 BSC as A Strategic Controlling Instrument

2.1. Traditional Performance Measurement Concepts as Predecessor of BSC

According to Schmeisser, et al. (2011) the traditional concepts for the evaluation of

corporate performance development are primarily focussed on monetary planning and

controlling calculations which are able to express the company occurrences and gives

effects on the company's profit. Furthermore, Schmeisser et al (2011) argued that the

traditional performance measurement concepts (e.g., DuPont system, ZVEI-Ratio,

Profit-Liquidity-ratio system) have a target to show the capacity and value flows within

the company that deliver basic information for corporate management. They classified

these concepts into three systems, as follows:

a) DuPont system:

The oldest and most well-known ratio system.

Developed by the American Chemical Corporation E.I. DuPont de Nemours

and Company in 1919.

Illustrated as the pyramid which is Return on Investment (ROI) may be found

on the top and may be the most important company goal because the key

figure ROI is mathematically and practically broken down in its components

in accordance with the annual report in statement of financial position and

the profit and loss statement.

b) ZVEI-ratio system:

Developed by the Zentralverband der elektronischen Industrie (ZVEI) based

on the DuPont ratio system in 1969.

Used as an analytical actual instrument and as a planning instrument for

corporate management.

Involves the growth analysis (with four areas: sales activities, result, capital

commitment, and value creation/occupation - with nine absolute indicators:

sales, sales related result, period result, cash flow, inventories, fixed assets)

and the structural analysis, which is the core of the ZVEI-ratio system, re-

views the efficiency of a company.

Consists of 210 indicators, of which 88 ratios are used most of the time.

Most of the indicators are financial ratios, while non-financial ratios such as

employee turnover or headcount are not often applied.

Uses above all data from the financial statement, but does not fully re-

nounce the use of indicators from cost and activity accounting.

c) Profit-Liquidity-ratio system:

A multidimensional and operated more than the pure profit reasoning.

Consist of a general part and a special part.

The general part includes liquidity indicators such as CF, current surplus

revenue, surplus scheduled and working capital) and a profit part (indicators:

annual profit and deficit, ROA, ROI, rate of capital turnover, sales return,

etc.)

The special part involves indicators that are needed to complete the indica-

tors of the general part which is appropriate with the individual company in

dependence of the sector.

Furthermore, Schmeisser, et al. (2011) criticised that traditional Performance meas-

urement concept using financial ratios, have many weaknesses since the historical da-

ta from accounting financial ratios only assess the current situation so that the future

relevant actions and decisions of the management, e.g., innovations, quality and cus-

tomer's satisfaction, may not be measured by financial ratios. In other words, tradition-

al performance measurement systems may not be used to estimate long term success

potentials of a company.

2.2. Comparing BSC with Traditional Performance Measurement

Based on Schmeisser, et al. (2011), traditional finance oriented for performance

measurement instruments are not appropriate to the actual demands of the market

because traditional finance oriented performance measurement instruments are only

restricted to finance related targets so that they may be compared with modern, multi-

dimensional, future oriented instruments for performance measurement which are not

limited to measuring monetary targets only but also consider non-monetary, however,

quantitative goals. The concept of BSC should be considered as multidimensional in-

strument which is described above.

In 2013, Lohrmann and Reichert stated to emphasise argument of Schmeisser, et al.

(2011) after they compared BSC approach with traditional performance measurement

concepts and stated that the concept of BSC recognises the financials as backwards-

oriented and does not provide clarity on an organisation's future perspectives. Fur-

thermore, organisational targets are often contradictory. For example, when its targets

are maximising cash flow, it would be in contrast with the need for investment. Due to

this reason the concept of BSC measures and controls organisational performance

based on multiple perspectives. However, the concept of BSC does not only focus on

one single perspective. It would try bringing the organisational goals to be addressed

through its multiple dimensions. In other words, the organisational targets are com-

bined into four perspectives (Financial, Customer, Innovation & Learning and Internal

Business).

2.3. Controlling Instruments

2.3.1. Operational Instruments

Erichsen (2011, p. 9) defined operative instruments as a tool for an organisation to

achieve its targets (e.g., profit and liquidity) based on short-term period (i.g., timeframe

of one to two years) in order to ensure and to increase the profitability and efficiency of

producing and selling its products. To achieve these targets, variety of controlling in-

struments is provided for management and managers (executives).

The critical point of the operational work of a controller (i.g., accountant) consists of

planning; monitoring; controlling and the controller should be in cooperation and coor-

dination with the executive employees of a company. Accordingly, instruments, such

as operational planning, liquidity planning or calculation as well as instruments, such

as discount analysis or project management, belong to tools which are used by opera-

tional controller. By these tools, management and managers may be regularly and

promptly informed about the most important development which happens in company.

He also characterises that operational controlling is always oriented with detailed fig-

ures, for example, turnovers in total, customer sales, product turnovers and cost data,

for material and personnel or cost centre.

Then, we would be given the question, what actually the role of operational controlling

are when it is confronted with strategic controlling which is only concerned with the

question, how to efficiently and effectively exploit our new resources and provide addi-

tional resources?. Erichsen (2011, p. 9) argued that operational controlling is ideally

arranging long-term targets and strategies then implementing them in daily business.

Erichsen (2011, pp. 9-195) named the following selection of operational controlling in-

struments may be used to help achieving the short-term targets, as follows: the ABC

analysis, order-size analysis, reporting, break-even Analysis, product profitability cal-

culation, bottleneck analysis, investment appraisal methods, liquidity planning, opera-

tional planning, project controlling, discount analysis, sales territory analysis and XYZ-

Analysis.

2.3.2. Strategic instruments

Compared with operational controlling, strategic controlling applies different tools to

lead a company to achieve its long-term targets. According to Erichsen (2011, p. 199),

strategic controlling discusses about securing the existence of the company. It should

be checked whether and where there are new potentials and opportunities for a com-

pany to achieve its targets.

In addition, he also stated that in topic of strategic controlling, it is necessary to recog-

nise risk and how to prevent it. In other words, strategic controlling is considered for

long-terms goals containing with risks and people working in controlling should be able

to foresee effects which may happen and to prevent them so that it may give a positive

impact for company and help managers to determine which strategies should be ap-

plied for company's success in attaining strategic targets and tasks.

Based on Erichsen (2011, p. 199), strategic targets and tasks of a company involve,

as follows:

Product development: for example, it should be considered to develop the

product in order to be able to comply with dynamic customer expectation.

Development of new markets and customers: for example, it may be tried to

enter into global market after a company has successfully dominated local mar-

ket so that it may give more challenges to recognise new customers with differ-

ent request.

Improvement in productivity: for example, in producing 200.000 cars per an-

num a company may discuss how to produce more than the initial plan with im-

plementing the most sophisticated technologies in production.

Process improvement and organisational changes: for example, to satisfy

the customer request, companies need to review their production, sales, mar-

keting process whether it has given benefits for customer or not.

Reduction in cost: for example, reducing irrelevant costs may increase profit

of company.

Risk analysis and prevention: for example, as it has been described above.

Strategic controlling is reviewed for period of about one to five years in the future and

is not commonly operated with detailed figures (e.g., turnovers or liquidity), but it pro-

vides analysis which is able to give informative, precise and explicit statement that

may help managers in taking action for the further development of the company.

Although operational controlling and strategic controlling have different targets, they

should be capable to work together and need to synchronise their targets in their daily

work. For instance, when a company want to try entering new market with pointing the

target of turnovers which increases 20% (for example, from 200 million Euro to 240

million Euro) in five years, a manager may inform its employees to observe the market

first and especially to know what market wants and which products would be appropri-

ate with that market. Then, the employees may implement that observation. For in-

stance, they try producing and selling more than usual so that it may increase sales

every year and achieve the target. In this part, operational controlling has tasks, for ex-

ample, to plan which strategy should be applied, to control annually the turnovers

whether has reached the target or not, to monitor its employees and company's

development.

According to Erichsen (2011, pp. 199-389), instruments which may be used in strategic

controlling to achieve the long-term goals of company and to deliver guidelines for daily

operational business, are, as follows: Balanced Scorecard, Benchmarking, competitor

analysis, Life-Cycle Costing, Portfolio-Analysis, potential analysis, risk controlling, stra-

tegic gap analysis, SWOT-Analysis and target costs management.

This bachelor thesis would only focus on the one strategic controlling instrument which

is balanced scorecard. It would be completely explained and started from following

chapter.

2.4. Balanced Scorecard (BSC)

Disselkamp & Schüller (2004) stated that in the early 1990s, the concept of balanced

scorecard was developed by Robert S. Kaplan and David P. Norton who had closed

cooperation with twelve American companies. Then, Lehr (2010) argued that the con-

cept of balanced scorecard was introduced by Kaplan and Norton for the first time in

1992 in the journal of "Harvard Business Review".

Nowadays, BSC has been familiar for people who are working as a manager, a control-

ler, and an accountant. This concept provides simplicity for managers through its con-

cept which is multidimensional. Kaplan & Norton (1996, p. 2) argued that:

"The Balanced Scorecard (BSC) provides managers with the instrumentation they need to navi-

gate to future competitive success. Today, organizations are competing in complex environments

so that an accurate understanding of their goals and the methods for attaining those goals is vi-

tal". Additionally, "The scorecard measures organizational performance across four balanced

perspectives: financial, customers, internal business processes, and learning and growth. The

BSC enables companies to track financial results while simultaneously monitoring progress in

building the capabilities and acquiring the intangible assets they need for future growth".

Taguchi, Kaneko and Tabe (2009, p. 164) argued that balances in the BSC may be in-

dicated into the balance between short-term and long-term objectives, the balance be-

tween the past, present and future, the balance between financial and non-financial

perspectives, and the balance between internal and external perspectives. This argu-

ment stresses that BSC is a complete strategic controlling tool that should be imple-

mented in a company and may be trusted to bring other perspectives for a company.

Figure 2 Balanced Scorecard Illustrated as a Cockpit of an Airplane.

(Source: Nafatni, 2012)

Based on Kaplan & Norton (1996), the manager has role as a pilot, the company is

represented as an airplane and the cockpit is assumed as a tool for manager which is

BSC steering where the company would be brought and where to bring the company

to reach the intended objectives. They assumed that in the cockpit, there are a lot of

devices founded to navigate the airplane. Furthermore, through the cockpit the man-

ager may navigate not only one factor (for example, wind) but also there are many fac-

tors (for instance, temperature, speed, etc.) which are also necessary to be monitored

to bring the journey towards excellent future results. Kaplan & Norton's argument is

added by Poureisa, Ahmadgourabi and Efteghar (2013) who agreed that this concept

should be very helpful and appropriate for the top manager.

2.4.1. Implementation of BSC

According to Savkin (2011, p. 20), the company works usually with the strategy which

is made by CEO or top-management. CEO makes a specific business strategy and

then determines the particular targets to the lower level employees. The lower level

managers convert the global strategic targets into specific business works that are

necessary to be finished in order to achieve the strategic goal. In the end, these spe-

cific works are explained to the low level employee to be executed. In this part, the

concept of BSC may be used as systematic approach which may translate the global

target to the end-level employee. As a result, the idea of CEO may be easily under-

stood on each level. From this point of view, it may be argued that BSC has an ability

to explain the strategy to employees on each level and it is possible to be used to ex-

plain the strategy due to his opinion that BSC contains some indicators which would

be connected to the company's main goals.

Furthermore, Weber and Schäffer (2008, p. 149) stated that the concept of balanced

scorecard may be applied as a measurement system and then it may be used as a

tool to connect company's strategy with its operations. In other words, when a manag-

er has had a strategy for the company then the manager may insert BSC into its

strategy in order to help a manager implement its strategy or take action. They also

argued that this concept is reliable to connect between strategies with its operations.

The PEA in 1998 has also characterised the "Balanced Scorecard" approach as their

chosen approach for deploying strategic direction, communicating expectations, and

measuring progress towards agreed-to objectives.

According to PEA (1998, pp. 15-16), in the concept of BSC it is necessary to create vi-

sion, mission statement, and strategy for the company in order to ensure that the per-

formance measures may be developed in each perspective to support in achieving the

company's strategic targets and it also helps employees visualise and understand the

connection between the performance measures and successful accomplishment of

strategic targets.

Furthermore, PEA (1998, pp. 15-16) argued that it is necessary to identify what the

company should do well (i.e., the performance objectives) in order to achieve the vi-

sion which has been targeted. For each objective, it is important to know the measures

and to arrange goals relating to a reasonable period of time (for example, three to five

years). It does not sound complex, however many variables have impact how long this

exercise would take. For instance, how many employees that a company has and how

many of them who are involved in setting the vision, mission, measures, and goals.

BSC may be implemented to translate a company's vision into a set of performance

objectives related in four perspectives of BSC: Financial, Customer, Internal Business

Process, and Learning and Growth.

PEA (1998, pp. 15-16) explained that:

"Some objectives are maintained to measure an organization's progress toward achieving its vi-

sion. Other objectives are maintained to measure the long term drivers of success. Through the

use of the BSC, an organization monitors both its current performance (financial, customer sat-

isfaction, and business process results) and its efforts to improve processes, motivate and edu-

cate employees, and enhance information systems - its ability to learn and improve."

Figure 3 below provides matrices applied in the concept of BSC. It may help managers

to develop their objectives and measures. The matrices may be easily understood, but

PEA (1998, pp. 15-16) argued that developing the contents of each matrix was not

easy.

When creating performance measures, PEA (1998, pp. 15-16) recommended to en-

sure that performance measures should be connected to the strategic vision of the

company and the measurement should concentrate on the results necessary to reach

the company vision and the objectives of the strategic plan. Each objective within a

perspective needs to be supported by at least one measurement indicating a compa-

ny's performance against that objective. If a measure is executable and plausible, then

its implementation should be supported.

PEA (1998, pp. 15-16) argued that:

"When developing measures, it is important to include a mix of quantitative and

qualitative measures. Quantitative measures provide more objectivity than

qualitative measures. They may help to justify critical management decisions on

resource allocation (e.g., budget and staffing) or systems improvement".

Details

Pages
Type of Edition: Erstausgabe
Publication Year: 2016
ISBN (PDF): 9783960675419
ISBN (Softcover): 9783960670414
File size: 9.6 MB
Language: English
Institution / College: University of Applied Sciences Bremen
Publication date: 2016 (May)
Grade: 2,1
Keywords: Indicators-based Balanced Scorecard Performance Measurement Management Function Corporate strategy Financial perspective customer perspective internal business process perspective Learning and growth perspective

Author

Christoper Dewangga Pramudita (Author)

The Balanced Scorecard as Strategic Controlling Instrument. Introducing the Indicators-based BSC for Implementation of a Corporate Strategy from Four Different Perspectives

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Author

Christoper Dewangga Pramudita (Author)