The Concept of the Balanced Scorecard - Case Study Example

Running Head: STRATEGY EVALUATION Strategy Evaluation Is a Waste of Organizational Resources [The Writer’s Name] [The Name of the Institution] Strategy Evaluation Is a Waste of Organizational Resources Introduction Organizational resources and capabilities allow a company to achieve superior quality, innovation, customer responsiveness, which creates superior value change and helps to get competitive advantage upon their competitors. The resources and capabilities allow differentiate product with substantially lower cost than its competitors. It allows earning a profit rate substantially above the Industry's average rate. Example, Toyota has distinctive competencies in the development and operation of manufacturing process. Toyota has employed a whole range of manufacturing Techniques, such as Just in time (JIT) inventory system. Self-managing teams and reduced set up times for complex equipments. This complexity helps Toyota to attain superior efficiency and product quality which are the main factors of its competitive advantage in the global automobile industry (Johnson, & Scholes, 2001, 112-17) There are two types of organization resources. One is tangible resources such as land, buildings, plant and equipment and other is intangible resources such as brand name, reputations, patents, technology, and marketing Knowledge. To get distinctive competency company's resources should be both valuable and unique. Distinctive competence is defined as the unique strength that allows organization to achieve superior efficiency as well as competitive advantage. Example, Polaroid (Photography Company) able to get competitive advantage upon its competitor by using its higher technological efficiency (Johnson, & Scholes, 2001, 112-17).In response to a concern that many senior executives were focusing exclusively on financial measurements such as return on investment and earnings per share to run their businesses, Robert Kaplan and David Norton introduced the concept of the Balanced Scorecard (BSC) in 1992. While these metrics are undeniably important, it would be detrimental to the long-term success of a company to rely exclusively on these short-term metrics. Utilization of a BSC allows management to shift their focus away from short-term measurements and provides a method for performance metrics to be tied more closely to a firm's strategy and long-term vision. (Leauby & Wentzel, 2002, 56-60) Discussion Resources and capabilities both are interdependence, so these required a better analysis for an organization. A company may have unique and valuable resources but it has not the capabilities for well use of it, then it will be not easy for organization to achieve or sustain distinctive competence or vice versa. Companies may able to superior in the form of efficiency, quality production of goods, innovation and customer responsiveness by using its resources and capabilities. By using the capabilities company's able to differentiate and able to produce low cost product. This finally gives higher profit than their competitors. So from the above discussion analysis of resources and capabilities are important for an organization (Johnson, & Scholes, 2001, 112-17). Kaplan and Norton define the BSC as "a comprehensive set of performance measures that provides a framework for a strategic measurement and management system". The BSC consists of financial measures indicating the results of actions already taken as well as operational measures that drive future financial performance. The BSC gives managers information on four different perspectives: customer satisfaction, internal business process, innovation and learning, and financial. Using these operational measures drives future financial performance and allows a firm to simultaneously monitor their progress in building capabilities and acquiring necessary intangible assets needed for future growth. Acquiring the necessary intangible assets enables an organization to: “retain existing loyal customers while efficiently and effectively growing market share; introduce innovative products and services; produce high-quality products/services at a lower cost with shorter lead times; use employee skills and motivation for continuous process improvements; and deploy new technology, systems, and databases.” (Kaplan & Norton 1996, 22-23) In 1993, Kaplan and Norton reported in a Harvard Business Review article that each company's scorecard must contain a set of measures suited to improving business performance as judged by its own stakeholders. Scorecards must be customized to fit a company's mission, strategy, technology, and culture. It is important to understand that the scorecard is not a template that can be applied generally to businesses or industries. (Kaplan & Norton, 1993, 132-42) A successful scorecard limits the number of measures and prevents information overload. This allows management to see through to the company's competitive strategy. If an innovative suggestion is made, the scorecard may be modified. (Bruns, 1998, 150-54) Using a balanced scorecard can result in an improved bottom line by reducing process cost and improving productivity since performance measures may be linked with business strategy. Companies are able to align their strategic activities to their strategic plan. Strategy can be deployed and implemented on a continuous basis since feedback can be used to guide planning efforts. By measuring process efficiency, management can decide which improvements should be made first. In addition, best practices can be identified in a business and expanded and used elsewhere in the company. (Bruns, 1998, 150-54) The visibility provided by this type of measurement system supports better and faster budget decisions and control of processes in the organization, thereby reducing risk. In addition, a higher visibility rate provides accountability and incentives based on real data instead of subjective judgments. (Kaplan & Norton, 1993, 132-42) A limitation of the BSC that could impact its effectiveness would be the amount of time required identifying and collect the data needed in the proper form for this analysis. A detailed and accurate identification of all measurements considered relevant is necessary to develop a successful scorecard. Performance objectives may be too broad or misused and not weigh the relative importance of the metrics used. In addition, the danger always exists that management could divert their attention away from important financial goals. (Anthes, 2003, B4) Differences in opinion may also exist on how to give some performance metrics a higher importance than others when analyzing a system's overall performance. A systematic approach must be taken to correctly identify and address the trade-offs between metrics, with the trade-offs appropriately measured, and scores should be assigned to the various alternatives. (Youngblood & Collins, 2003, 19-20) To determine competitive rivalry an organization will look at the number of competitors already in the market, how fast the industry is growing, advertising expense, and brand equity. Power of suppliers can be determined by evaluating the importance of volume to the supplier, cost of supplies compared to the selling price of the product (profit or loss), and the degree of differentiation of the products. One of the most important aspects of the evaluation process is the bargaining power of the customers. Determining if there is a market for the product really governs whether or not an organization decides to produce a product (or service). Knowing buyer bargaining leverage and buyer volume will help an organization determine whether or not it is in the organizations best interest (is it profitable?) to produce the product or service. The threat of substitutes needs to be carefully evaluated. Are there competitors who can produce and market a product (of the same quality or value) at a lower price? Is there something about a competitor's product that makes it more desirable to the customer? Finally, the threat of new entrants to the market needs to be evaluated. Competitive intelligence gathering will help determine whether there is someone else out there that may want to enter the market and produce a product or service at a more competitive rate (cost). Staying competitive in the marketplace is not for the weak of heart. Careful evaluation of the market, competitors, suppliers, buyers, substitute products, and rivals will help an organization determine whether or not to enter, or stay, in a particular market and remain profitable. Market analysis is not a one time event. It is a continual process that is rewarded by profits for the organization if done properly. According to Michael Porter, operational efficiency (OE) as measured for example by financial management tools is necessary but not sufficient for firms to sustain viable superior returns. Firms that compete on OE can quickly imitate new technologies and management techniques of rivals, and feasibly reorient themselves when competition shifts the productivity frontier outwards. As Porter notes: "Although such competition produces absolute improvement in OE, it leads to relative improvement for no one." (Porter 1996, p.63) The dominant idea emerging from Porter's competitive forces approach developed in the 1980's is that superior returns are achieved when a company positions itself within its environment in way that creates a quasi-monopoly. By "environment" we refer to the industry in which the firm chooses to compete and by "position" we mean how the firm decides to compete in this industry. This framework provides a systematic way of thinking about how competitive forces determine the profitability of different industry segments. In the pursuit of a viable competitive advantage, a firm is confronted with a two dimensional consideration: it must identify an attractive industry and additionally it has to make a trade-off between alternative generic strategies in order to assume a clear position in the market. (Porter, 1980, 179-82) Industry attractiveness is determined by Porter's five industry-level competitive forces, namely the power of suppliers and buyers, the rivalry amongst existing firms, the entrance of new competitors and the development of substitute products. The way value is appropriated among suppliers, existing rivals and buyers is determined by their bargaining power. Other constraints on profitability include the threat posed by new entrants, which partly depends on the expected retaliation by existing firms, and the threat of substitute products. When many firms compete in the industry core, there is little product differentiation and no dominant players, excess capacity and low growth increase rivalry and dissipate profitability to others. To defend itself, a firm can raise appropriate barriers to entry or create unique competencies, which often represent different sides of the same coin. (Porter, 1980, 179-82) Once an attractive industry is identified, the firm must create a competitive advantage by assuming a unique and valuable position within it. This is sometimes called the "loose brick" strategy, because it refers to a section of the market that is somewhat neglected. Strategic positions mainly emerge from two distinct sources, which are not mutually exclusive and often overlap. Positioning may be variety-based, resting on the choice of products or services that the company will choose to offer rather than the customer segment, or it may be needs-based, resting on the choice to serve a particular segment of customers with differing needs. (Porter, 1996, 62) As stated earlier, being on an industry efficient frontier and having operational efficiency is not enough to guarantee a sustainable advantage. For a strategic position to be sustainable, the company must also make trade-offs in terms of the way with which it will choose to compete. It must decide both on the source of the competitive advantage it will develop and the competitive scope it will adopt. In this light, Porter provides two strategies for competitive positioning: cost leadership and differentiation. As he notes "Strategy is the creation of a unique and valuable position involving a different set of activities." (Porter 1996, p.68) Positioning trade-offs become essential to strategy by deterring straddling and repositioning, because competitors that follow those approaches lower the value of their existing activities and undermine their own strategy. (Porter, 1996, 71) Conclusion Development of a BSC method allows for shorter decision making time; thereby, optimal results are achieved. Senior managers have the ability to access, analyze, and act on data, participate in processes, and analyze and improve business performance. In order for an organization to maintain and improve their competitive advantage, it is a strategic requirement for companies to continuously monitor their performance improvement systems. A firm establishes its competitive building by investing scarce resources again and again in its value-added activities. By doing this the organizations will be able to give rise superior products and services that the buyer's desire. In addition, the firm's product and services (via resource allocations) should be difficult to imitate by competitors. The best way that firms can understand themselves is through a close examination of their past decisions, resource allocations, and behaviours. These, in turn, must be correlated with their competitive successes and failures. What are sought are enduring patterns of decisions, behaviours, thought processes, and resource allocations. Firms' identities are wound up in what and how they have made decisions, implemented their resource allocations, and undertaken their actions. Finally strategic analysis helps organizations to see the changes in the environment and adopt the strategy accordingly to the change to fit in the industry. References Anthes, Gary H., Balanced Scorecard. Computerworld., February 17, 2003, B4 Bruns, William J., Accounting for Managers: Text and Cases. (2nd Ed) Southwestern, 1998, 150-54 Johnson, G. & Scholes, K. (2001), Exploring Corporate Strategy, 4th edition, published by Prentice Hall of India Private Limited. New Delhi. 112-17 Kaplan, Robert S. & Norton, David P., 1993: Putting the Balanced Scorecard to Work, Harvard Business Review. September-October pp. 132-142 Kaplan, Robert S. & Norton, David P., The Balanced Scorecard-Translating Strategy into Action. Harvard Business School Press., 1996, 22-23 Leauby, Bruce A. & Wentzel, Kristin. Know the Score: The Balanced Scorecard Approach to Strategically Assist Clients., Pennsylvania CPA Journal Spring 2002. 56-60 Porter, M. E. (1980) Competitive Strategy, The Free Press. 179-82 Porter, M.E., "What is Strategy?", Harvard Business Review, November-December (1996) 61-78 Youngblood, Alisha D. & Collins, Terry R., Addressing Balanced Scorecard Trade-Off Issues Between Performance Metrics Using Multi-Attribute Utility Theory. Engineering Management Journal, March 2003: 19-20 Read More