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The balanced scorecard: Does it improve performance?

by Sulistio, Martin Julio; van Tol, Eric; Judoprawiro, Bobby

Abstract (Summary)
Introduction In this day and age of constant innovation, high competition and constant changing business environment, firms are continuously looking for ways to improve themselves. However, before you can find out where you can improve you first have to be able to measure the current performance. A fairly recent method for that is the Balanced Scorecard. Over the years more and more firms have turned to this method to measure their performance. This of course raises the question; Does implementing the balanced scorecard improve performance? In this paper the answer to this question is sought by means of a literature review. The paper consists of four parts, in the first part the balanced scorecard is discussed. What does it exactly consist of? What are the criticisms of it? What evolution has the balanced scorecard undergo? What are the required steps to implement balanced scorecard? And what are the advantages and disadvantages of balanced scorecard? The second part is focused on the general affect the balanced scorecard has on a business. This will be done by comparing two studies, which involved several companies. The first study focuses on 76 European firms and gathered their data by means of a survey. The second study provides a contrast argument of the first paper and uses data from 41 Dutch companies. The third part investigates the effects of the balanced scorecard on an individual level. Here two studies and a release by a company are used to find these. First the case of a two Spanish city councils and then followed by the implementation in a large Australian government authority. Looking at an firm individual is important, because even though BSC might improve performance in general, firms still need to know how to make that happen for them. The release of the company is used to see what they see as important in an implementation of a BSC. The fourth and last part of the paper consist of a conclusion of the paper and some recommendations for the successful implementation of the Balanced Scorecard.
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School:Erasmus Universiteit Rotterdam

School Location:Netherlands

Source Type:Other

Keywords:balanced scorecard and performance, organisational performance and BSC, BSC concept, General effect and individual level, The balanced scorecard: Does it improve performance?

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Date of Publication:04/12/2011

Document Text (Pages 1-10)

Table of contents
Introduction 2
1. Balanced Scorecard (BSC) 3
1.1 Theoretical Background 3
1.2 Four perspectives of Balanced Scorecard 3
1.2.1 Customer perspective 4
1.2.2 Internal business perspective 4
1.2.3 Innovation and learning perspective 4
1.2.4 Financial perspective 4
1.2.5 The cause and effect relationships of balanced scorecard perspectives 4
1.3 Evolution of Balanced Scorecard 5
1.4 Criticism of Balanced Scorecard 5
1.5 Steps to implement a Balanced Scorecard 6
1.5.1 The strategic planning process 6
1.5.2 Setting improvement priorities 8
1.5.3 Selecting scorecard metrics 8
1.6 Pros and Cons of Balanced Scorecard 8
1.7 Conclusion 9
2. General Effect (empirical studies) 9
2.1 The Positive Effects of the BSC on Organisational Performance: Survey of 76
Firms in Europe 10
2.1.1 Research Design and Hypothesis 10
2.1.2 Results 11
2.1.3 Conclusion 12
2.2 The Negative Effects of the BSC on Organisational Performance: Survey of 41
firms in The Netherlands 13
2.2.1 Research design and Hypothesis 13
2.2.2 Results 13
2.2.3 Conclusion 14
2.3 Chapters conclusion 14
3. Balanced scorecard on the individual level 15
3.1 Introduction 15
3.2 Two Spanish municipalities 15
3.2.1 Theoretical framework 15
3.2.2 Research method 16
3.2.3 Design 16
3.2.4 Implementation 17
3.2.5 Usage 17
3.2.6 Conclusion 18
3.3 Large Australian government authority 18
3.3.1 Situation pre-implementation 18
3.3.2 Implementation 19
3.3.3 Findings 19
3.4 UNUM Corporation 20
3.4.1 Pre-implementation 20
3.4.2 Implementation 20
3.4.3 Findings 21
3.5 Conclusion 21
4. Conclusion 22
References 23
Papers: 23
Websites: 23

Introduction
In this day and age of constant innovation, high competition and constant
changing business environment, firms are continuously looking for ways to improve
themselves. However, before you can find out where you can improve you first have
to be able to measure the current performance. A fairly recent method for that is
the Balanced Scorecard. Over the years more and more firms have turned to this


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method to measure their performance. This of course raises the question; Does
implementing the balanced scorecard improve performance? In this paper the answer
to this question is sought by means of a literature review.
The paper consists of four parts, in the first part the balanced scorecard is
discussed. What does it exactly consist of? What are the criticisms of it? What
evolution has the balanced scorecard undergo? What are the required steps to
implement balanced scorecard? And what are the advantages and disadvantages of
balanced scorecard?
The second part is focused on the general affect the balanced scorecard has
on a business. This will be done by comparing two studies, which involved several
companies. The first study focuses on 76 European firms and gathered their data by
means of a survey. The second study provides a contrast argument of the first paper
and uses data from 41 Dutch companies.
The third part investigates the effects of the balanced scorecard on an
individual level. Here two studies and a release by a company are used to find
these. First the case of a two Spanish city councils and then followed by the
implementation in a large Australian government authority. Looking at an firm
individual is important, because even though BSC might improve performance in
general, firms still need to know how to make that happen for them. The release of
the company is used to see what they see as important in an implementation of a
BSC.
The fourth and last part of the paper consist of a conclusion of the paper
and some recommendations for the successful implementation of the Balanced
Scorecard.

1. Balanced Scorecard (BSC)
1.1 Theoretical Background
The transformation of companies around the world for information competition, the
capability to exploit intangible assets has become more essential part than the
ability to invest in and managing physical assets. After a two-year research study,
Robert S. Kaplan and David P. Norton introduced the balanced scorecard in a
published article . It is defined as a set of measures that gives top managers a
fast but comprehensive view of the business. It is designed to assist firms that
have historically overemphasized short-term financial performance. A balanced
scorecard looks at performance of all or part of a firm towards strategic goals by
using financial and non-financial performance measures to point out areas in which
the firm is failing and improving those areas, so that it reaches their original
objectives. It has four different perspectives that would give answers to the
following questions: (i) how should we appear to our customers? (Customer
perspective), (ii) what should we excel at? (Internal business perspective), (iii)
How should we sustain our ability to change and improve? (Learning and growth or
Innovation and learning perspective) and (iv) How should we appear to our
shareholders? (Financial perspective).
1.2 Four perspectives of the Balanced Scorecard
Balanced scorecard proponents contend that the firms objectives should reflect
the interests of stakeholders. Objectives related to the stakeholders are shown in
the balanced scorecard as illustrated within this figure:

Source: smartkpis.com (adapted from Kaplan and Norton, 1996)
1.2.1 Customer perspective
The customer perspective is concerned with adding customer value. It mainly focuses
to deliver value to customers. It is achieved through innovative and high-quality
products and services for reasonable prices. Customers are concerned with four
perspectives of the product: time, quality, performance and service. The time
required to deliver the product to costumers determines the satisfaction of
customers. Quality determines the level of incoming defect products as perceived
and measured by customers. The performance and service measure how the companys
products or services contribute to creating value for its customers. Performance


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indicators for the customer perspective also include customer satisfaction surveys
and market share, on-time delivery and reduced defects .
1.2.2 Internal business perspective
The objectives of this perspective are concerned with issues of efficiency and
quality of the products or services. Analysis of activities is required to check
whether those activities add value and how those activities can be most efficiently
performed. Typical performance indicators for the internal perspective include
number of defects, throughput time and on-time delivery.
1.2.3 Innovation and learning perspective
It measures and identifies the parameters that the company considers most important
for competitive success. It mainly focuses on the infrastructure of the
organization. It requires the right people, systems and facilities to achieve the
goals. Performance indicators for this perspective include employee training
efforts, information system implementations and equipment and facility purchases.
1.2.4 Financial perspective
It indicates whether the companys strategy, implementation and execution are
contributing to bottom-line improvement. Its objectives are concerned with toward
delivering shareholders a return on their investment. Typical performance
indicators are profit, sales growth and risk measures.
1.2.5 The cause and effect relationships of balanced scorecard perspectives
Before the balanced scorecard was implemented, some companies already used
different financial and non-financial performance measures. Nevertheless, a welldesigned
balanced scorecard is different from such a system in that the four
perspectives form a chain of cause and effect relationships. For example, learning
and growth will lead to better business processes that result in higher customer
loyalty and thus a higher return on capital employed. Effectively, the cause and
effect relationships give the hypothesis behind the companys strategy. The
measures reflect a chain of performance drivers that determine the effectiveness of
the strategy implementation.

An illustration of cause and effect relationships of balanced scorecard
perspectives
1.3 Evolution of the Balanced Scorecard
The original design of balanced scorecard consists of four different perspectives
and to design those perspectives, it requires at least five or six measures for
every perspective. The original version of balanced scorecard was introduced as a
performance measurement framework, but the ever-changing environment pushes an
evolution within the balanced scorecard itself, and it was positioned as a
strategic performance measurement tool. Nowadays, it allows firms to translate
their strategy into a set of interrelated objectives and performance indicators.
Furthermore, the perspectives of balanced scorecard have been developed and
refined; one of them that was heavily-affected is the learning and growth
perspective. Kaplan and Norton named three principal components: (1) human capital
(employeesskills, talent and knowledge), (2) information capital (databases,
information systems, networks and technology infrastructure) and (3) organization
capital (culture, leadership, employee alignment, teamwork and knowledge
management). Within their article, Kaplan and Norton (1993) proposed an approach to
how managers could link the balanced scorecard to corporate strategies, as shown on
the figure:

Source: bptrends.com (Linking strategies to Balanced Scorecard measures)
1.4 Criticism of the Balanced Scorecard
Despite its success, the balanced scorecard has drawn numerous criticisms. There


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are several criticisms from people with different backgrounds. Most of them come
from people with academic background. Arthur M. Schneiderman (1999) focuses on
technical flaws within the original methods and design of balanced scorecard.
Another academic, Hanne Nrreklit (2000) argues that the paper is lacking support
from other theories.
From a business perspective (management related), some companies failed to yield a
positive result with balanced scorecard, despite considerable efforts and expenses.
The balanced scorecard forces managers to change and some top managers are
reluctant to change. Shortly after the implementation of balanced scorecard, top
management sometimes feels discouraged; by not showing interest to the balanced
scorecard itself and the project is closed. Failures are waiting for companies when
the developed balanced scorecard system leaves much to be desired; for instance,
there may be not enough indicators or balance between desired results and factors
for goal implementation. On the other hand, other balance scorecards have too many
indicators and the systems have no priorities. Most of the times, failure of a
balanced scorecard is caused by its improper implementation . Mooraj, Ojon and
Hostettler (1999) state within their case study on Tetra Pak that a balanced
scorecard will not bring any improvements in long-term competitiveness and
profitability.
1.5 Steps to implement a Balanced Scorecard
One of the pioneers of the balanced scorecard, Arthur M. Schneiderman explains that
there are several stages within the creation of a balanced scorecard. There are
three stages: (1) The strategic planning process, (2) Setting improvement
priorities and (3) Selecting scorecard metrics.
1.5.1 The strategic planning process
The objective of a strategic planning process is to identify opportunities where
the organizations current or potential capabilities can be successfully and
sustainably matched against the needs of its various stakeholder groups. Success
is defined by the objective (vision and mission) of each organization. It is
measured by the value that it actually delivers to these stakeholders, relative of
course, to that provided by their other alternatives. This stage is represented
with 9-step framework and the steps are defined as follows:
Choosing targeted stakeholder segments
This decision is sometimes referred to as strategic intent. To make our decision on
target market segments, a firm must understand the opportunity space (potential
market segments) and the competitive environment as well as our own organizational
competencies.
Identifying their requirements
Each customer segment is characterized by its own unique set of requirements.
Either objectively or subjectively potential customers test each candidate supplier
against these requirements. They choose the one that comes closest to meeting
their aggregate needs. They do not weigh each criterion equally, and that is what
makes them different from each other. One segment might weigh price more highly
than reliability. Another may have just the opposite weighing. Once the targeted
segments have been selected, it is important to determine their importance weighed
supplier selection criteria.
Determining performance gaps
By asking the targeted customers how the company is doing in meeting their various
requirements we can identify our performance gaps. Performance gaps will differ
from one targeted segment to another, so a company needs to apply this step
separately for each of the market segments that a company is currently serving or
considering.
Setting stakeholder improvement priorities
Improving requirements that are unimportant to a targeted customer segment is often
a waste of precious organizational resources that could better be used elsewhere.
Therefore it is essential that a company focuses on its improvement efforts on
major gaps in important customer requirements.

Linking stakeholder requirements to internal processes


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This step identifies the relationship of each process within the organization to
the key stakeholder requirements identified in step 2. It is the transition step
from the external to the internal perspective.
Establishing process improvement priorities
Within this step, a company sets the internal process improvement priorities. After
the completion, the company will identify the focal points for changes in the way
those involved should do their daily jobs.
Establishing metrics and goals for the process improvement priorities
Defining measures of the output of a process that relate directly to stakeholder
requirements is usually straightforward. But these results metrics are not
directly actionable. A company needs to identify the internal process metrics that
are the drivers of the desired improvement in these results. After the
identification, a company has to set time-based goals. In general, the company
will set goals: difficult but not impossible to achieve.
Improving critical processes
When teams or individuals do not have a clear role in strategic improvement
priorities, they should still spend a portion of their time improving the way that
they do their daily jobs. But they need to recognize and accept that scarce
resources, such as training and internal and external experts, as well as
management attention will go first to those who are working on improving the
critical processes.
Re-assess strategy
A company likes to plan and do, but have a natural reluctance to check subsequent
results against the original plan and take corrective action based on what we learn
from that diagnosis.

Source: scneiderman.com (The strategic planning process)
1.5.2 Setting improvement priorities
This stage describes a methodology for deriving process improvement priorities from
a companys strategy. It relies heavily on the framework used in Quality Function
Deployment (QFD). That framework uses a series of interrelated matrices to
numerically define the strength of the causal relationships that exist between the
whatsand howsof effective planning. It significantly extends the use
of simple casual-loop diagrams that only serve to identify major causal linkages.
By quantifying the strengths of these linkages and providing an aggregation
mechanism, this approach often uncovers pervasive process improvement opportunities
that would be missed when only the most obvious dependencies are considered.
1.5.3 Selecting scorecard metrics
A balanced scorecard contains a concise set of strategically important measures.
They capture the vital few drivers of the organizations future success. Arthur
M. Schneiderman called these as metrics
and defined them as: Metrics are a
subset of measures of those processes whose improvement is critical to the success
of the organization. After those processes are identified, the next challenge is
to select this subset from a seemingly endless list of possibilities. Usually this
decision is based on what measures are already available or can easily be obtained,
benchmarking studies, or executive edict.
If improving a particular result measure is a strategic goal, then improvement
efforts should be focused on the process measures that will have the highest impact
on its improvement. They are usually the process measures with the largest
influence coefficients. What does that imply about choosing scorecard metrics?
Most balanced scorecards are heavily populated with results metrics. Schneiderman
strongly believes that all scorecard metrics must be directly actionable by their
owner. Therefore, it is the underlying process metrics, not the results metrics
that belong on a scorecard. If the improvement goals for the process metrics are
achieved, then it is assured that the desired results will follow.
1.6 Pros and Cons of Balanced Scorecard
The benefits of balanced scorecard depend on what is it used for, how well is the
design and how it is applied. As an operation control, balanced scorecard draws
several benefits: (1) increased understanding, awareness and alignment about


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operations across the whole management team arising from the discussions during the
design process, (2) wider and more effective monitoring of performance improvement
initiatives, (3) improved understanding of the links between measures improves
understanding and makes target setting easier and (4) a single concise management
report describes operational performance across perspectives.
As a strategic management tool, balanced scorecard covers the following benefits:
(1) reaching consensus and articulation of a set of key strategic objectives
aligned to corporate version, (2) clarity concerning the links between
implementation activities and the strategic objectives of the organization and (3)
encouraging dialogue within the organization about strategic goals and
expectations.
Implementing a balanced scorecard will cost a lot of money in training time and
additional money for any consultants that are needed during the process. Because of
the high initial costs of the program mixed with the time spent on developing the
employees, balanced scorecard may make it appear as if the company is not
maximizing wealth. Shareholders who want the company to make as much money as
possible may feel that the balanced scorecard plan wastes money. While this can be
explained by saying that developed employees will create more results, this will
not be evident to shareholders in the short term.
The balanced scorecard is essentially a large chart that gives you a top-down
overview of your entire company. The scorecard does not provide ideas to improve
the performance of the company. The balanced scorecard acts as a fact sheet, but it
requires that all employees and top management analyse the facts and come up with
an evaluation and a strategy. The scorecard will not solve the companys entire
problem and it must be combined with a larger overall strategy to achieve its
potential benefits.
There are many different elements that go into creating a balanced scorecard. Once
it is created, the nature of the business can change over time, requiring you to
change the scorecard. There are several software programs that can manage the
scorecard upkeep, but choosing the wrong one may set back your companys ability
to evaluate employees.
1.7 Conclusion
The success of balanced scorecard implementation as a management tool is proved
with a reported users of almost 80% of global companies in 2008 (according to Bain
& Company) . Balanced scorecard will provide a broad consideration of all business
aspects, both financial and non-financial. It takes into consideration how each
part affects another, rather than just focusing on the performance of one aspect.
Once a balanced scorecard system is in place within a company, it allows for ongoing
monitoring of goals and objectives. However, not every company is able to
implement balanced scorecard due to high initial cost. Because the balanced
scorecard looks at the effect on the whole, there may be a chance of losing an
individuals performance and encouragement.
2. General Effect (empirical studies)
Published in the 1990s, Balanced Scorecard (BSC) caught the attention of many large
multinational corporations rapidly. It is widely implemented in insurance
companies, banking sectors, telecommunication companies, and public sector. It has
been recognised as one of the most powerful management tools for corporations
focusing on creating value not only in the short term but also in the future. This
part looks at some empirical research investigating the positive and negative
effects of the implementation of the balance scorecard on the organizations
performance in general view. Firstly, an empirical analysis on survey data
collected from 76 businesses in Europe. Geuser et al investigated the significance
of the balance scorecard implementation on the value creation process in large
companies. Using the five success measures according to the Kaplan and Norton
(2001) methodology, they specifically identify how BSC can positively impact the
organisational performance especially in the management processes integration and
employee empowerment. In contrast, the empirical research of Braam and Nijssen
which shows the negative relationship between the implementation BSC and
organisational performance in Dutch companies in the second part.


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2.1 The Positive Effects of the BSC on Organisational Performance: Survey of 76
Firms in Europe
After the initial publishing of Balance Scorecard (BSC), scholars and critics were
investigating what the BSC should do and how the BSC should be done. They conducted
numerous case studies to back up their findings However, few of them focused on
empirically showing the impact of the BSC on the organizational performance. The
very first case study was conducted by Kaplan and Norton. Their research identified
that the implementation of the BSC in companies created value to the company. The
BSC facilitates management to communicate the strategy to all individuals within
company and allow the organisations to receive feedback and ideas from employees.
(Geuser et al, 2009) Apart from the positive association pointed by Kaplan and
Norton, Geuser et al also add some more supporting arguments. They see the BSC as a
tool that facilitates and induces the integration of the management value chain in
the company. It provides relevant, balanced and concise information to managers,
therefore reducing the time for processing information and giving more time for
decision making. Additionally, since the BSC identifies the key success factors of
the company, Geuser et al also argued that the BSC also leads to a higher employee
empowerment level and facilitates the delegation of authority. In the analysis,
they used survey data collected from 76 European firms which were mainly large
international corporations.
2.1.1 Research Design and Hypothesis
In the research conducted by Geuser et al (2009), they sent out questionnaires to
164 companies in the Europe In return, 76 questionnaires were received and used for
the empirical analysis. The questionnaire asked companies to rate the perceived
organisational performance within the range of 0 to 4, 0 as the minimum and 4 as
the maximum. The sample data is mainly coming from large corporations in the
continental Europe, therefore, the cultural dimension differences is not expected
to be a significant problem assuming that most of the European countries are rooted
in a similar cultural dimension. The research has two main research problems. The
first research problem was analysing the overall effect of the implementation of
the BSC on the organisational as a whole (hypothesis 1) and the second research
problem was analysing the effect of five critical factors in implementing BSC on
the aggregate organisational performance (hypothesis 2). The five critical factors
in the development of the BSC are often named the strategy-Focused-organisation
Model (SFO) according to Kaplan and Norton. These factors are reflected by
support of top management, central role of BSC in developing and translating
strategy, the development of BSC in aligning organisations function
and
the BSC development in influencing management practices, processes and system on
a continuous basis. The hypotheses are as followed:
Hypothesis 1: The development of the balanced scorecard is positively associated
with the organisational performance of the firm.
Hypothesis 2 (a): The higher the support of top management to the balance
scorecard, the better the organisational performance.
Hypothesis 2 (b): The better the translation of the strategy through the balance
scorecard development, the better the organisational performance.
Hypothesis 2 (c): The more the organisation is aligned using the balance scorecard,
the better the organisational performance.
Hypothesis 2 (d): The more the balance scorecard encourages the strategic input
from all levels of organisation, the better the organisational performance.
Hypothesis 2 (e): The more strategy integrated into management system using the
balanced scorecard, the better the organisational performance.
(Geuser et al, 2009)
In this paper the organisational performance is measured based on several factors
which are quite subjectively measured. Instead of the quantitative figures, these
factors measured the perceived organisational performance, such as management
evaluation, cost/benefit, integration, autonomy and aggregate performance.
Management evaluation represents the perceived success of the BSC by managers.
Cost/benefit represents whether the cost of implementing the BSC exceeds the
perceived benefit. Moreover, the integration reflects how the BSC integrate the


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business and management process of the company. Finally the autonomy represents the
greater autonomy of the business units and the aggregate represents the weighted
aggregate measure of the global success of the BSC. In this second hypothesis,
Geuser et al employed regression analysis with aggregate organisational
performanceas a dependent variable and five sources of SFO.
2.1.2 Results
From the analysis for the first hypothesis, Geuser et al discovered that the
development of the BSC in 76 firms in Europe has a significantly positive impact on
the organisational performance. The research was analysing the survey data by means
of the average score of each variable and tested it against the null hypothesis.
The null hypothesis is that the actual mean score is equal to the mid-point mark of
2 (Ho: =2 and H1: >2). The figure 2.1 below summarises the results of this
analysis. As it is indicated by the table, the development of the BSC is perceived
to be positively associated with the organisational performance. In more detail,
the management evaluation score amounts to 2.28 and significantly different from 2
at 0.01 confidence level. This means that BSC helps to monitor and manage the
business as a whole and perceived as effective. Cost/benefits mean score is also
exceeding mid-point mark, 2.83. Consequently, the benefits of implementing BSC are
perceived more than the cost. Integration and autonomy variables also show figures
which are above the mid-point mark of 2. Therefore, the implementation of balanced
scorecard leads to integrated management processes and empowered employees which in
return contribute to organisational performance. The increase in autonomy is
associated to the increase in the organisational performance.

Figure 2.1 (Geuser et al, 2009)
Overall, we have seen that based on the survey conducted from 76 firms, the BSC is
impacting positively the organisational performance. However, it does not say
anything about how the BSC creates value to the company. In order to see how the
BSC creates value on the organisational performance, Geuser et al employed
regression analysis on the five success factors of BSC as independent variable and
the weighted average of the organisational performance as dependent variable. From
this regression analysis, they discovered that the BSC impacts the organisational
performance significantly when it is used as a tool for translating strategy and
influencing management process. This is coherent with the idea of using the BSC as
a framework for translating strategy in order to provide a better understanding and
view of the strategy. The regression analysis also proved that BSC is an effective
tool in strategy diffusion and communicating the strategy to all levels in the
organisation.
2.1.3 Conclusion
The paper of Geuser et al (2009) provided an empirical analysis of the overall
effect of the development of the BSC and also the effect of the five success
factors supporting the BSC on the organisational performance. The first analysis
tested the significance of the development of the BSC on the organisational
performance. They discovered that the development of BSC is positively impacting
the organisational performances which are represented by the management evaluation
of the BSC, perceived cost and benefit of the BSC, integration of the management
process and increase in the delegation of authority.
The second analysis focuses more on the particular factors which drive the success
of the balance scorecard. Among five factors, only the two of them are
significantly contributing a positive effect to the organisational performance. The
first factor is the ability of the BSC in translating strategy. For instance, it is
often used to achieve a clear understanding of the vision and its strategic and
operational implications, to discover the major cause-and-effect links between the
various strategic objectives, to develop a strategy map that reinforces the
translation of strategy, and to facilitate its communication (Geuser et al, 2009).
The second factor is the ability of the BSC in influencing the management
practices, processes and system on the continuous basis. In other words, the more
the BSC is developed as an attention-driving instrument the higher the
organisational performance of the firm.(Geuser et al, 2009) Summing up all of the


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above, the balance scorecard is perceived as a good strategic management tool which
gives a significant positive impact on the organisational performance. A good
strategic management toolis mainly represented by its ability to translate the
strategy, facilitate the communication of the strategy to all stakeholders and
influence the management function on a continuous basis.
2.2 The Negative Effects of the BSC on Organisational Performance: Survey of 41
firms in The Netherlands
In contrast to the previous part, this part is looking more at how the
implementation of the balance scorecard (BSC) can negatively impact the firms
performance and how we can cope with this problem. Braam and Nijssen (2004)
conducted research on the performance effect of using the BSC in Dutch companies.
They provide empirical evidence which suggests that the implementation of BSC will
not automatically improve company performance. Moreover, they found that the
implementation of BSC has positive and negative effects on the organisational
performance. The use of BSC as a performance management tool is impacting the
company positively; however, the extensive focus on BSC as a performance
measurement will hinder the firms performance or even decrease it.
2.2.1 Research design and Hypothesis
Braam and Nijssen (2004) use sample data from a 100 companies in the Netherlands.
The data was taken from companies that participated in the benchmarking study of
Cap Gemini and Ernst & Young. Out of 100 firms, 41 firms responded to the
questionnaire which means the research has a 41% response rate. The questionnaire
consisted of several questions related to what the managers in companies perceived
regarding the effectiveness and performance of the BSC. The authors distinguish the
use of the BSC into two categories, i.e. measurement-focused-BSC use and Strategyfocused-BSC
use. They started with two hypotheses:
H1: Measurement-focused-BSC use will be positively related to company performance.
H2: Strategy-focused-BSC use will be positively related to company performance.
The company performance was regressed as a dependent variable. They evaluated the
companys performance with two performance measures which include financial and
non-financial performance measures of the firm. The financial perspective is
measured based on the firms change in return on investment over the past three
years. On the other hand, the non-financial performance measure is based on the
managements overall assessment of the companys performance. The independent
variable of measurement-focused-BSC use and strategy-focused-BSC use are measured
by multiple items. These multiple items, unfortunately, were not enclosed in the
paper. However, we assume that these multiple items are the average of several
scores from the survey data related to measurement-focused and strategy-focused
questions.
2.2.2 Results
The results of the analysis show positive and negative effects. They discovered
that when the BSC is used as a strategic management tool, it brings a positive
effect to the company performance. However, when BSC is used as a measurement tool,
the company performance is negatively impacted. In numerical terms, when the score
of the measurement-focused-strategy BSC use increases by 1 unit, the change in
return of Investment (ROI) and perceived company performance will decrease by 0.68%
and 0.65% respectively. There are several explanations regarding the negative
effects of the use of the BSC as a measurement tool. The use of BSC as a
measurement tool might be too instrumental and it is dangerous when the management
sees the BSC as an endrather than a means
to a goal. (Braam et al, 2004)
This is a critical issue when the management put too much focus on details rather
than on the overall picture and strategic direction, consequently, over
bureaucratization occurs and the management loses direction in achieving the most
important goal of the company. In order to overcome this problem, the development
of BSC in company can be accompanied with a good enterprise resource planning (ERP)
system. As a reminder, most of the sample data is from large corporations.
Therefore, the scale of information traffic in the company could be already quite
heavy and implementing the BSC with a good ERP system might increase the
communication quality within the firm and reduce this problem. Furthermore, the


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implementation of BSC also creates the psychological pressure. Some respondents
mentioned that the implementation of BSC creates a feeling of being overly
monitored and this lead to feelings of distrust towards the companys top
management. However, this problem can be mitigated by engaging in trust building
behaviour, increasing openness and transparency of the in the overall company
performance.
2.2.3 Conclusion
In the empirical study of 41 firms in the Netherlands, Braam and Nijssen discovered
that the implementation of the BSC does not necessarily lead to positive effects.
Based on their regression analysis, the implementation of BSC in companies can
impact the companies negatively when the BSC is used as a measurement tool. This is
quite surprising since Kaplan and Norton initially intended the BSC as a
performance measure. Braam and Nijssen also provided some reasons for the negative
impact of the implementation of the BSC. For example, the implementation of the
balance scorecard leads to over bureaucratization in which the management focuses
more on details instead of on the big picture and the strategic direction. (Braam
et al, 2004) Therefore, it is suggested that the implementation of the BSC should
also be accompanied by a good ERP system in order to increase communication of
strategy within all levels of the organisation (Braam et al, 2004). Besides that
the implementation of BSC also leads to psychological pressure to the employees
which may lead to a feeling of overly being monitored and distrust towards the
company top management. However, the engagement of trust building behaviour,
increase in transparency of the company performance will reduce this problem.
2.3 Chapters conclusion
In conclusion, this part presented the effect of the BSC on the organisational
performance in a general view. The main point of is part is that the effect of the
BSC on organisational performance can be positive and negative. First, Geuser et al
provided an empirical analysis which presented that the development of the BSC is
positively impacting the perceived overall organisational performance. This
increase in the organisational performance is represented by the management
evaluation, cost/benefit evaluation towards the BSC implementation, the integration
in the management process and the process of the employee empowerment. Secondly,
they also analysed on how the success drivers of the BSC impact the firms
performance. Using regression analysis, it turns out that the ability of
translating and communicating the strategy into operational term within all levels
of organisation are the most significant variables in increasing the organisational
performance.
The second view is more concerned with the negative effect of the BSC as a
performance measurement. Braam and Nijssen (2004) empirically proved that the
implementation of the BSC may hinder or even decrease the firmsperformance. The
reason being, the implementation of the BSC will give rise to over
bureaucratization in the company and psychological pressure of being overly
monitored. However, these problems can be mitigated by implementing a good ERP
system in the company and increasing the transparency of the performance so that
the communication within company improves. (Braam et al, 2004)
3. Balanced scorecard on the individual level
3.1 Introduction
After finding that the balanced scorecard can have a positive effect on the
performance of firms. This part now will take a look at the balanced scorecard on
the individual level. This is done to find answers to why firms implement the BSC
and if they implement how to increase the probability of a successful
implementation. To find these answers two case studies will be used and one paper
released by a company themselves. The first paper focuses on the implementation of
the balanced scorecard in two Spanish municipalities (Kasperskaya, 2008) and is
used to answer the question of why firms implement. The second paper investigates
the implementation in a large Australian government authority and explores what
went wrong in their implementation.(Umashev and Willett, 2008) The release of a
company is from an health insurance company (UNUM Corporation) and shows what they
as a firm focused on to make the implementation a success.

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