Balanced Scorecard and Financial Perspective Essay Example

establish a logical relation between the company’s success factors and was unable to support management programs (Kaplan and Norton, 2001). Environmental management issues have received an increased amount of attention in recent years, as have various performance measurement systems (PMS) such as the balanced scorecard (BSC). At this time, BSC was presented as the most practical and comprehensive performance measurement model. In recent years, BSC has been a comprehensive model when looking at management issues for financial and non-financial purposes and has been very popular as it as attracted a lot of attention (Norreklit, 2000).

This model offers a variety of performance factors in four Mahdieh and Pedram perspectives: The Financial perspective; the customer perspective; the internal business process perspective and the organizational learning and growth perspective. The BSC is a multi-criteria evaluation concept that highlights the importance of performance measurement (Tseng, 2010). Based on BSC, the cause and effect relationship between the four perspectives have been created (WongOn-Wing et al. , 2007; Paul, 1998). In fact, the logic of cause and effect as the essence of he BSC approach-which distinguishes it from other approaches- is described (Atkinson et al. , 1997). It is stated that the learning and growth performance, internal process performance, costumer performance, and financial performance counteract each other eventually (DE Haas and Kleingeld, 1999). Jones and Sasser (1995) recognized a cause and effect relationship between loyalty and customer satisfaction and financial results, where customer satisfaction leads to loyalty and it is customer satisfaction that can bring positive financial results. Due to the chain relationship between perspectives, hanges in one perspective would cause changes and reactions in other perspectives. Consequently, managers

can achieve improved financial results through the chain relationship between perspectives (Cohen et al. , 2008).

Relationships in BSC model are indicated within the framework of the fact that in order to make financial results, we must provide value for costumers, and this would happen only, when an organization improved internal processes and match them with costumers’ demands. Accordingly, in order to improved internal processes, and initialize processes that provide value for costumers, the rganization must reinforce growth and learning in the organization (Kaplan and Norton, 1996). Hogue and James, in study of Australian construction companies in 2000, realized that the companies employing non-financial factors have made considerable financial results. Other researchers have realized that using BSC is indirectly related to improved performance and profitability (Malina and Selto, 2001). There are very few researches related to causal relationship between various factors; especially between financial perspective and other perspectives in BSC model. Amongst such researches we can point to a research, in Greece, that onsiders the relationship between parameters of BSC model in 90 companies. Results of this research indicate that improving non-financial perspectives results in better financial perspectives, and non-financial perspectives are interrelated (Cohen and Thiraios, 2008). Although BSC is known as a successful performance measurement tool amongst managers, there have been criticisms of that including: How are financial and nonfinancial measures are linked together? Are relationships in a direct way or there is bi-directional casualty? In this study, we present an approach to overcome the limitations to current BSC theory.

The scope of our study is two-fold; the first goal is to investigate and identified main factors of each balanced score card

perspectives with 12521 consider to automotive parts sector. We categorize the factors and determine their priority in regard to environment of automotive parts industry. While the second goal of the study is focused on cause and effects logics and linking financial and non-financial perspectives together. In this part, we will assess the influence of factors of each perspective on other perspectives and analyze the cause and effect relationship between them. In order to present a better image of reciprocal impacts f various factors, we have taken into consideration four perspectives of the automotive company with an exception of BSC, and then we will analyze the interrelationship between four perspectives. Considering the fact that in the present environment of Iran, management and control affairs are considerably important, and accurate scientific evaluations are amongst managers’ major concerns, BSC is considered to be one of the most comprehensive and functional tools of performance evaluation. This research measures the effects of different perspectives of balanced score card in an automotive parts manufacturing unit in Iran.

LITERATURE REVIEW

Here, we first explain how to use balanced scorecard, and then in the next part, we investigate and identify factors related to each perspective. Part A – BSC Since 1990s, when Kaplan and Norton introduced BSC model, this model has been considerably popular amongst managers all over the world. Hundreds of organizations have already employed this model, or intend to employ it in near future (Rautiainen, 2008; Kald and Nilsson, 2000). Healthcare organization in Sweden has appreciated BSC model quite well, and has employed it as a solution to organizational problems, as well as a means of realizing organizational goals

(Aidemark, 001). Germany, England and Italy have also successfully developed BSC model (Gehrke and Horvath, 2002). Numerous countries in Northern Europe have employed this model (Kald and Nilsson, 2000), and studies indicate that the model has been specifically favored in most of those countries; although in some countries, including France, where there is another model called “dashboard” rooted in their culture, BSC model is not so popular (Bourguignon et al. , 2004). Kaplan and Norton stress on importance of three principals in the concept of BSC: 1. Maintaining causal relationship 2. Including adequate performance incentives and timulators 3. Maintaining the relationship with financial measurement factors (Speckbacher et al, 2003). 12522 Afr. J. Bus. Manage. Figure 1. All perspectives of BSC. On this basis, researches refer to this model as a means of working out strategies based on causal relationship (Speckbacher et al. , 2003). Causal logic is considered to be the essence of BSC model.

Other researchers name causal logic as the core of BSC model (Atkinson, 1997; Norreklit, 2000). There are also theories stressing that Kaplan and Norton (1996) have not adequately explained the causal relationships, and researchers claim that the entioned relationships are not causal, and are merely logic (Pedram, 2003). Another research, in Finland, is indicative of dissatisfactions caused by lack of causal relationship between components of the model (Malmi, 2001). Although definition of causal relationships is the basis of accomplishment for balanced scorecard model, apparently many organizations do not take this into consideration (Aidmark, 2001; Ittner et al. , 2003). Part B – Factors related to each perspective in BSC In this paper, in order to measure and evaluate relationships

between various perspectives, we searched or factors related to each perspective. The four perspectives of BSC are learning and growth, internal processes, costumer, and financial. Here we briefly explain characteristics of each perspective. Learning and growth perspective: stress on innovation, creativity, competition, capabilities, and target subjective properties. This perspective aims to identify professions (human assets), system (informational asset), and organizational state (organizational asset) in order to support internal processes. Internal process perspective: identify decisive processes in the organization.

In this perspective, we ust make sure that company’s products and services meet the needs of customers. Costumer perspective: results in introduction of a valuable approach that guarantees loyalty of costumers. In this perspective we must keep constantly identifying parameters, which costumers consider as valuable, and provide them for costumers. Financial perspective: defines tangible outcomes of organization’s strategies and includes a series of traditional financial factors. This perspective covers longterm goals of the organization, and company’s major goals are usually put into this perspective. Financial erspective is usually considered to be a secondary aspect and a function of other perspectives. It is indeed the outcome of activities of other three non-financial perspectives. All perspectives, their causal relationships, and their relationships with strategies are shown in Figure 1.