Critical Review of the Balanced Scorecard Approach

Critical Review of the Balanced Scorecard Approach

Introduction

The Balanced Scorecard Approach (BSC) is a strategic tool that seeks to align objectives of the enterprise with its vision and strategy. As such, it focuses on four perspectives: financial, customer, internal business processes, and learning and growth. Measurable goals within each objective are set, monitored, and evaluated. It is balanced because it looks at financial and nonfinancial measures in reaching the company's objectives. It is integrated, as success in meeting goals of one perspective will result in improved performance in other perspectives. Balanced Scorecard Approach was developed in the early 1990s by Robert Kaplan and David Norton. It was developed to overcome the limitations of the traditional approaches.

This paper will develop critique of the Balanced Scorecard approach to organizational strategy and will address the potential limitations of the approach, while comparing emerging approaches to organizational strategy and performance management.

Discussion

Balanced Scorecard Approach

Studies demonstrate that one of the performance management systems most widely used by organizations is the balanced scorecard (Marr and Schiuma, 2003). The Balanced Scorecard (BSC) is a management system which presents the company vision and strategies in four perspectives.

Financial Perspective

The financial perspective incorporates at least three factors. The first of these factors is the cost of compliance, innovation, and the cost and risk of noncompliance. The cost of compliance should be easy to determine as the organization would be dealing in an area where costs are known or knowable. The cost of innovation parallels research and development costs as applied to sustainability. Thus, a methodology for estimating these costs is readily available. The cost/risk of noncompliance is not difficult to determine. It involves fines for lack of compliance or the extreme measure of closing the business if the cost of compliance becomes too excessive. The second factor includes the benefits of environmental processes, products, and services that create revenue. Sustainability carries a number of intangible benefits such as a conservation of resources and a healthier climate. Placing a price tag on these benefits is difficult, if not impossible. However, the focus is on actions the organization takes that create revenues. The third factor in the financial perspective is the increase in the market value of the company due to its sustainable activity. This amount is not known, but can be projected using cost of capital measures and added revenue streams.

Customer Perspective

The customer perspective identifies four types of customers in regard to sustainability. First are actual customers that buy the organization's products or services. This customer is normally the object of consideration in a traditional balanced scorecard. The community that would be affected by the actions taken by the organization is the second group of “customers.” This group bears social costs when an organization avoids its social responsibility. The third group is the government that levies fines for noncompliance with environmental regulations. Finally, investors are “customers” who may be influenced to lower the cost of capital when a company actively promotes ...