The late 18th and the early 19th century saw the drastic shift from labor and animal manufactured products to machine based production systems. This Industrial Revolution brought changes not only in the way products were created but also the way businesses started planning for a more profitable growth. Measures such as high net profit, increasing cash flow from operations, number of products made per machine, economies of scale and economies of scope were given high significance for the success of a company.
Major firms concentrated most of their effort on amplifying their financial gains with little or no importance given to the service quality, convenience of the customer, or customer care. In the early 1980’s, when the Japanese started their operations in the United States of America, more focus was given to the operations dimension of the business: it became crucial to reduce the number of defects, to reduce the cycle time and work on the total quality management in a firm.
Moreover, in the later years the Internet Revolution brought further new methods of doing business and creating a profitable edge for companies in the business environment that had turned extremely competitive. Along with latest gadgetry, machines and measurements, companies started investing more in its human capital as the importance of a skillful human resource was uncovered. By this time the Industrial age converted into the Information Age.
In this era, businesses no longer can gain a sustainable competitive edge just through implementing financial models, but the importance of knowledge and information became the most sought out elements in a successful business. Management is now required to invest in their intangible resources as much as, if not more, in their tangible assets. However, with time other firms caught on with the leading businesses of the world, and thanks to globalization and the internet and transfer of technology, countries: both developed and developing nations got ahead of the race as well.
Thus, margins started reducing for huge corporations, especially those that were operating in the mature stages of the business life cycle. Therefore, businesses started rethinking their strategies: aligning them with their corporate goals and making them in lieu with their strengths and weaknesses. In this way, a good strategy became the most important element in the business plan in the 21st century.
The problem to the businesses arose when despite having excellent strategies laid out; the actual results did not match the expected results, and lagged behind. Various researchers found different reasons for this abnormal behavior, and the major point most agreed on was that firms did not give much significance to the implementation of the strategies; where proper implementation was crucial to the survival of the business.
Along with this theory, Kaplan and Norton (1996) gave the concept of a Balanced Scorecard; a performance management tool through which all the operations and activities of the business are aligned with the strategies, thus, making it easier for the management to keep a check on the actual performance of the company with respect to the expected results that would stem from the strategies implemented (Kaplan and Norton, 1993). This Scorecard is also explained as a myriad between the traditional financial model, which focuses on the financial measurements, and the new information age measurements.
These measurements are taken as the customer segmentation, links to these customers and suppliers, innovation and knowledge workers (Kaplan and Norton, 1996). Now, the Balanced Scorecard, along with the financial measures, that take into account the past performance of an organization; it also considers the drivers of the future performance, such as the loyal customers, skilled labor and innovation. This way, the management tool accounts for, not only the short-term financial perspective but also the long-term drivers of performance in a particular company (Kaplan and Norton, 2007).
This tool emphasizes the importance of using the financial and the non financial measures of a company in the information system that should be used by employees at all levels in the company; this would ensure that employees are aware of the impact their decisions would make on the measures of the company, in turn providing a system of continuous feedback and regular check. The Balanced Scorecard works on the theory of translating the company’s mission and strategy into measures that are objective and the effect of which can be tangibly seen in the organization.
Moreover, it also helps in linking the strategic objectives and measures; along with assisting in the planning process of the management and providing a feedback loop that encompasses the whole organization (See Exhibit 1). The Balanced Scorecard allows the organization to seek areas of improvement and processes that need more investment so to give the company a sustainable competitive advantage over rivals. This era witnesses how companies are investing more in their intangible assets such as human capital, information systems, customer relationship and culture.
The worthiness of the Balanced Scorecard management tool spurts up because as already explained, it includes these intangible drivers and converts them into measurable goals that are achievable (Kaplan and Norton, 2004). The Balanced Scorecard comprises of four perspectives as created by the original authors of the idea. These perspectives would be explained in detail in the upcoming sections; however Exhibit 2 shows the relationship between these perspectives in a diagram. These are the financial perspective; the Customer Perspective; Internal Business Process and Learning & Growth.
The last three are non-financial measures and act as a compliment to the financial measure of the company (Kaplan and Norton, 2007). This tool is the new phenomena that has taken the business world by a storm; a study surveyed shows that 70% of the Fortune 500 companies are now using this tool for their performance measurement and have seen increases in their cash flows, revenues, market shares, customer satisfaction and the like( Beiman and Johnson, n. d. ) . Therefore, it is safe to assume that the success rate of using this tool effectively is pretty high and would result in a positive growth of the company’s success measures.
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