Linking: Alignment: Using the Balanced Scorecard to Create Corporate Synergies (中譯本:策略校準：應用平衡計分卡創造組織最佳綜效)
Authors: Robert S. Kaplan and David P. Norton
Hardcover: 302 pages
Publisher: Harvard Business School Press (April 24, 2006)
The traditional performance measurement tools designed for industrial-age economy, which emphasize on financial measures and tangible assets, are no longer able to capture the changing nature of today's business environment. Also, pressure from domestic and global competitors, demands for quality and reliable products from customers, high expectation from the stakeholders, and usage of new and advanced manufacturing technology contribute major impetus for devising and implementing a good performance measurement system for an organization. Given this scenario, it is a challenge for organizations to deemphasize the use of simple, aggregate, short-term financial measures and to develop indicators that are more consistent with long-term competitiveness and profitability (Kaplan, 1983).
According to Bruns (1992) and Bruns and McKinnon (1993), the use of multiple performance measures, both financial and non-financial, is very important for management as these measures have the added advantage of providing enhanced protection against the consequences of uncontrollable outside events. There is considerable interest in the role of strategic performance measurement systems (SPMS), such as balanced scorecard (or BSC in short), in assisting managers to develop competitive strategies (Chenhall, 2005). The BSC has been developed to provide a framework consisting of multiple performance measures that supplement financial measures with measures of customer, internal business process, and learning and growth (Kaplan & Norton, 1996). Also, the issue of alignment between strategy and performance measures provides another problem with the performance measures used in many organizations. According to Chenhall and Langfield-Smith (1998, p. 243) "strategic priorities should be supported by appropriate and effectively implemented manufacturing processes and information systems, including those providing management accounting information."
The strategy implementation literature has highlighted that different business strategies require different configurations of organizational practices to achieve optimal performance. Management control system or performance measurement system in particular, is a key organizational practice and should contribute to the successful implementation of business strategy. To date, relatively little research has examined the alignment between business strategy and performance measures, in particular, using the BSC framework. The purpose of this study is to evaluate empirically whether performance measures used by the Malaysian manufacturing firms are reflective of the multidimensional and integrated approach as proposed in the BSC framework and in turn aligned with the extent to which a business strategy is emphasized. The alignment will be assessed using the interaction approach to fit as proposed by Drazin and Van de Ven (1985). According to Ventkaratnam (1989), there has been a general lack of theoretical and empirical research related to the fit concept. Most of the previous researchers have limited themselves on studying fit related to strategy, structure, technology and environment. Thus, in the literature so far, still little research has directly addressed the issue of fit of business strategy and performance measurement system, in particular, the use of multiple performance measures. Therefore, the objective of this study is to gain some knowledge about fit in the contingency framework.
The remainder of this paper is organized as follows. First, a review of related literature on the need to have a multidimensional performance measurement system and the need to align performance measures with strategy is presented. This section will end up with the hypotheses development. second, the discussion on the sample and variable measurement is described. Third, the results of the study as well as hypotheses testing are presented. Finally, discussion on the findings and concluding comments are provided.
Multiple Performance Measures Usage
Performance measurement based on traditional cost or management accounting system that was introduced in early 1900s is more for fulfilling the requirement of external reporting and government (Johnson & Kaplan, 1987). Started in the late 1980s as a result of changes in the world market, basis of performance measurement has changed from the financial measures such as profit and return on investment towards non-financial measures such as quality, time of delivery, flexibility and innovation (Johnson & Kaplan, 1987). The traditional performance measurement system which relies heavily on the use of accounting or short-term performance measures seems unable to capture the value-creating activities of the intangible assets of an organization since these intangible assets could not be quantified in terms of monetary values (Kaplan & Norton, 2001). They argued that this happens because organizational strategies are changing but the tools for measuring strategies have not kept pace.
Hendricks et al.(1996) and Lynch and Cross (1995) pointed out that organizations need a balanced set of financial and non-financial performance measures that are customer-driven and with operational acceptance in order to remain competitive. In such a context, it is essential to have a range of performance measures, so called integrative strategic performance measurement systems (SPMSs) that focus on both financial and non-financial aspects of measures. A distinctive feature of these integrative SPMSs is that they focus both on financial and non-financial aspects of measures covering different perspectives which, in combination, provide a way of translating strategy into a coherent set of performance measures (Chenhall, 2005). It is claimed that SPMSs enhance organizations' strategic competitiveness and outcomes as well as promotes organizational learning.
The importance of non-financial measures in accounting and control systems, performance measurement systems and evaluation of managers has now been discussed widely in the management control system literature. According to Chapman (1997), the first work introduced the issue of non-financial information into accounting systems comes from Gordon and Miller (1976). Gordon and Miller (1976) suggested that as environmental dynamism increases, the effective accounting information system (AIS) begins to incorporate more non-financial data to provide managers with information on competitor actions, consumer tastes, and shifting demographic factors. Meanwhile, Ghalayani and Noble (1996) and Chenhall (2005) argued that non-financial measures are one of the characteristics of emerging integrative strategic performance measurement system. Non-financial measures are indicators of intangible assets and key drivers of firm value and may be better predictors of future financial performance than historical accounting measures, and thus should be disclosed (Ittner & Larcker, 1998; Kaplan & Norton, 1996; Wallman, 1995). Similarly, Banker and his friends (2000) noted that the primary reasons to use non-financial performance measures are that they provide better indicators of future financial performance than accounting measures and they are valuable in evaluating and motivating managerial performance. Also, studies by Droge's et al. (2000), Hoque and James (2000), and Maiga and Jacobs (2003) indicate that firms may perform better if multiple measures, in particular non-financial measures, are used for performance evaluation of the firms.
The Balanced Scorecard
According to Atkinson et al. (1997), BSC is regarded as one of the most significant developments in management accounting that deserves intense research attention. The BSC is a performance measurement tool which is an essentially multi-dimensional in nature that integrates both financial and non-financial performance measures. The BSC translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system (Kaplan & Norton, 1996, p. 2). Other than Kaplan and Norton (2001), Lynch and Cross (1995) and Chenhall (2005) also regarded balanced scorecard as a strategic performance measurement system that is comprehensive and multi-dimensional in nature and that links measures to organizational strategy. The BSC measures are categorized into four perspectives: financial, customer, internal business process, and learning and growth. All the four perspectives of the BSC are linked together by the cause-and-effect or means-end relationships. For example, by training and improving the skills of operating employees (learning and growth perspective), it will lead to shorter cycle times in operating processes (internal business processes perspective), and these will in turn lead to improved on-time delivery and higher customer loyalty (customers perspective), thus finally lead to improved return-on-investment (financial perspective).
Alignment of Strategy and Performance measures
Since strategy is a key element in the management control and performance measurement system frameworks (Otley, 1999; Simons, 1999), several researchers have expressed concerns over the importance of alignment between performance measures and strategy (e. g. Richardson & Gordon, 1980; Paladino, 2000; McAdam & Bailie, 2002). They feel that strategically driven performance measurement system seems far from reality when the measures used are not relevant to the current strategies being pursued. The seminal work in operations strategy produced by Skinner (1969) in which he found that manufacturing strategy and performance measurement were originally linked together. Chenhall's (1996) study supports the view that the association between strategies of manufacturing flexibility and performance is stronger where manufacturing performance measures are used as part of managerial evaluation. A study by Ittner and Larcker (1997) also found strong evidence that the choice of performance measures is a function of the firm's competitive strategy. Their findings indicate that non-financial measures have a positive relationship with innovation-oriented strategy, quality oriented strategy, regulatory requirement and competitive pressures.
The Alignment between Miles and Snow's Strategy and Performance Measures
This study is premised on the belief that BSC framework can provide a useful tool in translating strategic requirements of prospector strategy, defender strategy, and analyzer strategy into suitable and relevant performance measures. As Miles and Snow's strategic types address three dimensions of the "adaptive cycle" known as the entrepreneurial, the engineering, and the administrative, these dimensions seem to fit well with the four perspectives of the BSC measures: financial, customer, internal business process, and learning and growth. All the four perspectives of BSC measures would play an important role in providing solutions to the entrepreneurial, engineering, and administrative problems. This provides one of the reasons why Miles and Snow's strategy was chosen in this study. Entrepreneurial problem deals with how to choose a product-market domain: a narrow, broad or segmented domain. It seems that it is an attempt to satisfy the customer at large and thus requires customer and marketing orientation. Thus, in solving entrepreneurial problems, the customer perspective of the BSC would provide avenue for the solution as it makes sense to the marketplace customer. Engineering problem deals with the selection of an appropriate technology for production and distribution: cost-efficiencies, flexibility or innovation. This problem seems to focus on internal processes. Thus, internal business processes and learning and growth perspectives of the BSC would play an important role in providing solution to the engineering problem. This is because internal business processes perspective focuses on integrated business processes which encompass several cross-functional activities from several organizational departments such as order fulfillment, procurement, research and development, production planning and control, warranty and repair activities and the processing of payments while learning and growth perspective focuses on the capabilities of people (employees), systems and procedures used in achieving breakthrough performance in internal processes (Kaplan & Norton, 1996). According to Miles and Snow (1978), administrative problem deals with the selection of areas for future innovation (leading aspect) and rationalization of structure, control and process already developed (lagging aspect). For example, in the context of control, financial perspective of the BSC would play a pivotal role in maintaining stability and efficiency for a narrow and stable product-market strategy.
As each strategy is unique in its own way, it requires different types of performance measures and with different emphasis. The accounting literature suggests that firms will place more emphasis on particular accounting techniques or information, depending on which strategy they adopt. The literature seems to support proposition stating that firms emphasizing prospector strategy would use customer and learning and growth measures extensively. According to Shortell and Zajac (1990), prospectors would give their greatest attention to market research because they must continually scan their external environment to locate and exploit new product-market opportunities. Prospectors, being first-movers or pioneers, have the opportunity to achieve a sustainable cost advantage from learning or experience effects (Slater & Narver, 1993). Also, the prospector's focus is on solving entrepreneurial and administrative problems by emphasizing creativity and flexibility over efficiency in order to respond quickly to changing market conditions and take advantage of new market opportunities (Miles & Snow, 1978). Firms emphasizing prospector strategy are expected to be more marketing-driven and thus place considerable emphasis on customer measures as well. Miles and Snow contended that "the prospector draws its top managers mostly from the ranks of marketing and product development, the two areas of primary strategic importance (p. 60)." Meanwhile, Simon (1987) found that prospector firms placed a greater emphasis on forecast data and reduced importance on cost control. Studies by Thomas et al. (1991), Hambrick (1983), Snow and Hrebiniak (1980), and Connant et al. (1990) seem to provide a general and common conclusion that prospector strategy tends to be associated more with R&D, new product introduction, and marketing efforts compared to analyzer strategy and defender strategy. Also, Ittner et al. (1997) discovered that the use of non-financial measures for determining executive's bonuses increases with the extent to which firms follow an innovation-oriented prospector strategy.
The defender's focus is on solving engineering problem by looking at ways of how to produce and distribute goods or services as efficiently as possible through highly cost-efficient core technology and highly efficient administrative systems (Miles & Snow, 1978). This is supported by Slater and Narver's (1993) study where relative cost found to be significantly associated with profitability performance of defenders. Also, Walker and Ruekert (1987) noted that the defender's focus on low cost requires close attention to operational details, including the relentless pursuit of cost economies and productivity improvements through standardization of components and processes, routinization of procedures and the integration of functional activities across business units. From Miller's (1991) study, results appear similar to Hambrick's (1983) where it was found that defenders seem to focus on measures related to cost control, price cutting, capacity utilization, and production efficiency. Simon (1987) found that business units that follow a defender strategy tend to place a greater emphasis on the use of financial measures for compensating financial managers. On the whole, defender is geared toward the maximization of internal efficiency, thus, it is expected that firms emphasizing defender strategy would use financial and internal business process measures extensively.
According to Miles and Snow, analyzers being early followers, take an imitate approach to new product development and pursue effectiveness where marketing and applied research are the most influential members of the dominant coalition in an analyzer. They pointed out that "successful imitation by an analyzer is accomplished through extensive marketing surveillance systems" (p. 72). Later, Snow and Hrebiniak (1980) argued that analyzers, because of their tendency to imitate successful product and market innovations of prospectors, would tend to emphasize selling and have a distinctive competence in marketing/selling. Meanwhile, Slater and Narver (1993) found that market and customer orientation is also essential to the success (profitability) of both prospectors and analyzers.
Hence, similar to firms emphasizing prospector strategy, firms emphasizing analyzer strategy also are expected to view customer and learning and growth measures as being very important and in turn would use them extensively. Being a hybrid strategy, analyzer strategy greatly focuses both on aspects of innovation and efficiency. Therefore, information needs of analyzers will be some combination of those identified for prospectors and defenders (Miles & Snow, 1978). In fact, McDaniel and Kolari (1987) found no significant difference between prospectors' and analyzers emphasis on new product development, while Shortell and Zajac (1990) found no significant differences in the actual number of new services offered by health care organizations adopting prospector and analyzer strategy. It is expected that performance will be enhanced when there is an appropriate alignment between strategy and the extent of usage of the multiple performance measures conceptualized as the BSC measures. Studies by Abernethy and Guthrie (1994), Ittner and Larcker (1997), Buckmaster (2000), Badri et al. (2000) and Sim and Koh (2001), for example, can lend support for this relationship. Most of these studies do not specifically deal with BSC measures per se, but rather focus on management control systems and performance measures. Abernethy and Guthrie's (1994) study indicates that broad scope information had a more positive effect on performance in firms employing a strategy of continuous product/market development and innovation (prospectors) than in firms which were protecting a comparatively narrow and stable product-market (defenders). Both Miles and Snow, and Porter, suggest that effective implementation of any of their strategic types could lead to acceptable performance. Ittner and Larcker (1997) argued that performance is deteriorated when measures used not linked to the desired strategic outcome.
A study by Sim and Koh (2001) that specifically examines BSC does provide evidence on strategy-BSC-performance relationship. Results from Sim and Koh's (2001) study provide evidences that manufacturing plants that have strategically linked their corporate goals and objectives to their performance measurement systems, via the BSC, performed better than those that do not. As BSC focuses on non-financial measures, evidence from Buckmaster's (2000) study also lends support whereby the result indicates that high performing firms tend to use non-financial information extensively, are customer oriented and link performance measurement system with strategy, and low performers, on the other hand, tend to use financial information extensively, are sales oriented, and do not link performance measurement system with strategy. High performers tend to put less emphasis on cost reduction strategy as compared to low performers but more emphasis on flexibility, quality and delivery performance (Badri et al., 2000). Meanwhile, Oison and Slater (2002) found that the high performing analyzers placed greater emphasis on innovation and growth perspectives while low performers placed greater emphasis on financial perspective. The high-performing and low-cost defenders placed greater emphasis on financial perspective and lower emphasis on both customer and innovation and growth perspectives, while the high-performing differentiated defenders placed greater emphasis on the customer perspective. More recently, Ittner et al. (2003) found that a variation of the measurement diversity approach has the strongest association with stock market performance whereby firms that make more extensive use of a broad set of financial and non-financial measures than those with similar strategies or value drivers earn higher stock returns.
Hence, from the foregoing discussion, it implies that for firms to effectively implement their strategy, they need to more completely align their performance measures with the requirements of their strategies so that they will perform better than others that do not achieve such an alignment. There must be an appropriate alignment or "fit" between business strategy emphasized and the extent of the multiple performance measures in which, in this study, these multiple performance measures are conceptualized as the BSC measures.
In sum, the alignment or fit hypothesis that the interactive effects of firm's strategy and the BSC measures usage have implications for performance. The insignificant results are quite consistent with those of Ittner et al. (2003) where they found little support for the alignment hypothesis that more or less extensive measurement than predicted by the firm's strategy or value drivers adversely affect performance. Different product-market strategies have different requirements for performance measures in order to achieve superior performance. In fact, Slater, Olson, and Reddy (1997) argued that the scorecard should be "unbalanced" based on the strategy of the business. Therefore, the idea that all measures are equally important irrespective of the product-market strategies is not quite true.
As the strategy construct was limited to the Miles and Snow's typology, subsequent researchers might do well to extend this research by using other taxonomies of strategy. Another limitation is the relatively small sample size, which might have led to some instability in the factor analysis. Thus, further research should be conducted by studying larger samples from different industries or sectors such as non-profit and government organizations as well as the service industries in order to get better understanding of the BSC concepts of performance measures. In relation to other uncontrollable factors that may directly or indirectly influence performance, for example, the entry of foreign competitors into the market will make the local firms lose their market share and in turn impact their performance. Also, the current economic climate and the use of out-dated manufacturing technology may also lead to poor performance. This research also shares the same explanation as given by Aberneyth and Lilis (1995) about the dynamic nature of organizations. The attempt to measure the impact of fit on performance also ignores the dynamic nature of organizations. For example, perhaps, there are firms that only recently had changed, or were in the process of changing, either their strategy or usage of performance measures. These changes, however, may not be reflected in the firm's performance in the current period. Therefore, given the dynamic nature of organizations, it may be not possible to see the impact of fit on performance until the later periods. As such, no significant impact on performance in the cross-sectional data was found for some interaction terms. Perhaps, the use of longitudinal study may provide solutions to this problem.
Based on extensive field research in organizations worldwide, this book shows how companies can build an enterprise-level Strategy Map and Balanced Scorecard that clearly articulate the “enterprise value proposition”: how the enterprise creates value above that achieved by individual business units operating alone. The book provides case studies, actionable frameworks, and sample scorecards that show how to align business and support units, boards of directors, and external partners with the corporate strategy and create a governance process that will ensure that alignment is sustained.
The next breakthrough in strategy execution from the field’s premier thinkers, "Alignment" shows how today’s companies can unlock unrealized value from enterprise synergies.
~Cited from Ruzita Jusoh, Daing Nasir Ibrahim, Yuserrie Zainuddin. The Business Review, Cambridge. Hollywood: Sep 2006. Vol. 5, Iss. 1; p. 51-60.