The Balanced Scorecard (BSC) was developed by Kaplan and Norton in the 1990’s, it is a management system designed to measure the entire performance of a company by measuring all relevant angles of the company’s operations. BSC requires the company to retain its core financial measurement, but it goes further and expands the measurement to other important business areas. The BSC looks at the entire business from four perspectives, the customer perspective, financial perspective, the internal business process and the learning and growth perspective. It collects and analyzes data relevant to the company.
And it helps managers to get clearer more meaningful picture of their company, which in turn enables them to plan, improve and execute operational goals. The objective of this paper is to advocate the adaptation of BSC by Pepsi Saudi. The strength and economic advantages of BSC and why it would be beneficial to Pepsi Saudi will be extensively discussed in this presentation. PEPSI SAUDI ARABIA: The Pepsi company of Saudi Arabia is comprised of two key divisions based on the western region of the country, one the Saudi International Project Company (SIPCO) and the other is Saudi Fruit Juice and Beverage Industry (SFJBI).
This paper will look at this merger and how it could use the BSC methodology to elevate its entire operation and increase its profit margin. BALANCE SCORECARD (BSC). Developed in the 1990’s by Kaplan and Norton, balanced scorecard is a business management system that uses measurement to verify strategic plans. It tries to align business operations to the strategies of the business, by measuring the performance of the business in relations to its goals, usually for a given time period. It relies largely on the premise that a business principle or a business function that could be measured could also be improved upon.
“What gets measured gets done”. If a company can establish a measurement system to analyze its performance, then that company can find a way to improve on its performance based on the result of the measurement. Experts generally agree that the companies that take the time to measure their own performance usually does better than the companies who do no possess the tools of measurement. Based on the outcome of a business measurement BSC encourages managers to prioritize their efforts. The BSC does not focus on financial measurements alone, because financial measurement alone can not reveal all the important data needed
for long term performance. The balanced scorecard incorporates such business elements based on the customers needs, employees, technology, and other critical elements that could help the company emerge stronger in the future. Essentially BSC takes stock of the whole business. It uses the “feedback loop” to pinpoint all problematic areas and then it develops solutions for them. Managers and employees can then learn from those points that had been identified by the loop. It looks at the company’s current position then initiates the necessary strategies for correction. It uses learning, technical innovations and appropriate
behavioral shifts and cultural identities to accommodate essential actions for the benefit of the company. BSC also sets aside time to study the applications that have been implemented, and then analyzes the results for effectiveness of those mechanisms or lack of effectiveness. THE FOUR PERSPECTIVES AT A GLANCE: The BSC uses data to articulate performance management with the primary objective being the implementation of corporate strategy. The BSC methodology primarily employs four perspectives: financial, customer, business process perspectives and learning and growth perspectives.
It calculates present performance without ignoring the importance of future performance. (1) FINANCIAL PERSPECTIVE: The BSC recognizes the importance of financial data, but it does not want the emphasize on financial data to overshadow the other necessary perspectives that deserve equal amount of attention. In BSC adequate, timely and accurate funding are seen as key business requirements. But the BSC methodology goes a little further, it emphasizes that financial data be included in the corporate data base and be available by automation. The BSC method also explores financial risk assessments and cost benefit analysis as part
of the data collection in the financial perspective. (This will be discussed in detail in the main body of the study) (2)CUSTOMER PERSPECTIVE: The BSC methodology advocates customer focus and satisfaction, it insists that the company must not only satisfy its customers but it must do so without losing money in an attempt to provide superior services or products to those customers. According to the BSC, the customer perspective is a key indicator of the functional health of the company. Poor customer performance is usually an indication of corporate performance in the future.
If the customers are not satisfied they will take their businesses somewhere else, and that is an indication of poor business performance in the future. BSC mandates a satisfaction metric to measure the customer satisfaction. The aim is to identify all customer groups, analyze their needs and provide services to them accordingly. But the company cannot afford to lose profitability in an attempt to satisfy its customers. ( This will be discussed in detail in the main body of the study). (3) BUSINESS PROCESS PERSPECTIVE: The BSC defines this as the internal process. It enables the managers to become familiar
with the functions of the company, and it services and operations. It makes sure that the products and services meets the requirement of the customers. This is highly internal, i. e the process is preferably developed and handled by corporate managers and workers as who have intimate knowledge of the company, as opposed to consultants who are essentially corporate outsiders. The mission oriented process refers to the functions of government offices, and they could present some unique problems. On the other hand, the support process is more repetitive and generic and therefore easier to measure. (This
will be discussed in detail in the main body of the study). (4) LEARNING AND GROWTH PERSPECTIVE: The BSC describes this perspective as employee training in corporate culture as well as individual training and improvement. It sees employees as the mainstay of the corporation. The training would be regular and continuous. The idea is to avoid “brain drain” from the company. So employees would be trained in all new and relevant technologies. Kaplan and Norton emphasized that “learning is more than training”, it includes mentors and tutors in the organization. (Kaplan&Norton 1996). (This will be discussed in detail in the main body of the study).
CAN PEPSI SAUDI BENEFIT FROM BSC? To answer that question it is important to know where Pepsi Saudi came from in terms of business its identity and then analyze the reasons it chose to adopt the BSC management module, and then superimpose the analysis on the reports of other corporations that have adopted the BSC. It is worth noting that Pepsi’s decision to join the ranks of companies that have chosen to implement BSC was not made in a vacuum. The fact is that BSC had become a familiar and efficient working module for many successful companies. Also Pepsi Saudi has had its own incredible business and financial success, and by
adopting BSC it chose to follow many world class businesses. With the implementation of the balance scorecard methodology, Pepsi Saudi have joined ranks with such business heavyweights as Exxon mobile, British telecommunications worldwide, Hilton hotels, IBM, UPS, Volvofians of Sweden and much more. These are impressive list of companies, and again the decision for them to adopt the balanced scorecard system was not made in a vacuum, because the stakes are too high. On February 2nd 2002 the AME-INFO reported the merger of Saudi industrial projects company (SIPCO) and Saudi Fruit
Juice and Beverage industry (SFJBI) in the western region of Saudi Arabia. The reasons for the merger were many, they wanted to expand their command of the beverage industry, and they wanted to remain the best manufacturing operation in the industry. It is not difficult to imagine that Pepsi Saudi would adopt BSC in order to maintain its dominance of the industry. Before the merger it introduced the Pepsi twist (Pepsi taste laced with a twist of lemon) “in order to satisfy customers demand for something extra in their soft drink” AMEINFO October 8th 2001. It unfolded many ad campaigns designed to capture
new customers and retain old ones. The ad campaign targeted all major social events of the kingdom, including football games that featured the stars of the popular sport. As this study will show continue the company has continued to grow under BSC. FRAMEWORK: Because of the success of balance scorecard, there are enormous volumes of information on the practice of BSC, but this study will examine the phenomenon of balance scorecard with Saudi Pepsi as the reference agency. The study will review the book (Translating strategy into action) by Kaplan and Norton as well as many relevant literature on the subject.
It is the position of this study that BSC is a genuine business elevator, so this project will make the necessary efforts to present authentic evidence in support of that position. RESEARCH OBJECTIVES: The objectives of this study are to outline and analyze the fundamental principles of the Balanced Scorecard system. The paper will trace the formulation of the system and review some of the available data on its effectiveness. Also the paper will make an objective judgement on the advantages and disadvantages of its application. Since this is designed to ascertain the adaptability of BSC to Pepsi of Saudi Arabia, the paper will conclude
with a critical insight on how Pepsi could benefit from BSC, based largely on data from the performance review of other corporations that have implemented the BSC management system. QUESTIONS EXPECTED TO BE ADDRESSED BY THIS STUDY: Though questions abound on this study, but this discourse will focus greatly on the matters that address the application, and the structure of Balance Scorecard. The major perspectives as advanced by Kaplan and Norton will be presented and analyzed in depth . It must be emphasized that the system is an objective, responsive system. It
could be followed with appropriate data analysis, and adjustments could be made when desirable. The paper will provide the necessary steps that could be followed in order to attain a desired result. Because this dialogue has taken sides in favor of the BSC, it will clearly present the known benefits of implementing the system. But it must be emphasized that there are some drawbacks in the BSC system. Those drawbacks would equally be outlined. All the important steps in the implementation of the BSC will be discussed, and the different roles that different levels of a corporate entity would need to play will be enumerated as well.
All of the team members must not only make a commitment, they must participate in the process. Every department must know its participating role in the implementation of BSC, and this work will detail what those roles ought to be, and how to ensure that they are diligently executed. It should also be recognized that it is not enough to design and construct a BSC, the question is would it be used? No benefits would accrue if the built BSC is not used. Of course the most important question is that of the applicability of the system by Pepsi Saudi, that question will be adequately addressed in this process.
CHAPTER TWO: BOOK AND LITERATURE ANALYSIS. PERFORMANCE MEASUREMENT: Before the advent of BSC, a questionnaire by the national association of accountants indicated that about 60% of accountants were “not satisfied by their performance measurement system”, primarily because of its reliance on purely financial metrics. But since the implementation of BSC that dire view is turning around. (Nevin 2003). Performance measurement technique is used to compile data on many subjects, high school academicians use performance measurement to keep record of behaviors of students whose behaviors required to improvement.
The significant point here is that the actual behavior improvement could be measured empirically, scientifically and with discerning accuracy. So it is not surprising that corporations would also adopt performance management system. Corporations use performance measurement to keep record of its effectiveness, and its efficiency. It is used to tabulate quality and productivity. It is also used to keep records of timeliness and safety. (Nevin, Paul 2003). With an effective performance measurement system, companies can a develop a sustainable structure for its strategic planning, and its goals.
It helps companies assemble a clear mission, with appropriate resources, on long term intervals. With it companies can maintain accountability for its performance or lack of performance. By using performance measurement companies are better able to analyze and validate its results. It can also use it to acquire timely feedbacks, which could be used to change the direction of a given project or to move a project forward. So in total, performance measurement could help and organization to make informed decisions, to appraise its performance and to initiate an improvement as needed. (Nevin, Paul 2003). I suppose we can say that
performance measurement is a close “cousin” of BSC. However a performance measurement system could limit its benefits if it loses sight of key performance drivers. And it could be quite expensive to set-up a performance measuring unit, but most companies seem to agree that the cost is worth it at the long run. (Kaplan & Norton 1996). BALANCED SCORECARD, “DEFINITION” What is scorecard, how can we define scorecard, is it possible to provide a total comprehensive meaning? Scorecard is not a one word definition system, so in order to do justice to the question, what is scorecard, it is necessary to take a comprehensive
approach to that question. “If you can measure it you can manage” that is the guiding concept behind the BSC management philosophy. The balanced scorecard system was designed by Kaplan and Norton in the 1990’s with the objective of giving managers the tool to look into the long term prospect of their organizations with some measure of reliability. So the BSC is both a management and a measurement tool that when fully and accurately implemented will enable businesses to develop their own vision, and their own strategy, and then translate those business elements into business actions.
It is a system that can give businesses an authentic feedback about their internal and external results. And that in turn would enable them to develop a genuine strategy. Since a company with superior strategy and a way of measuring the results of its performance functions do better than companies that do not posses similar tool. (Kaplan & Norton 1996). With BSC managers are able to a maintain a clear insight into the operations and management of all business units. It gives the manager the picture that he needs to see how the business is performing when it is compared against the plans, and stated objectives of the business.
If a discrepancy is observed between the goals and the actual results, BSC enables practitioners to delve in and correct the noticed discrepancy. And when corrections are made effectively, the business would then redirect the necessary efforts and resources back to the expected reports. It has been abundantly documented that companies that use BSC have a highly accurate and generally dependable view of their entire operations and its performance. BSC does not simply employ financial metrics in its measurements, but it uses customer satisfaction, technical and intellectual innovations, market share and market competition to garner
better more reflective and more comprehensive results of company operations and performance. And there are very little doubts that this system is effective for those companies that have designed and executed the system. (Nevin 2003). A comprehensive survey/questionnaire conducted by CIO. Com, Balancedscorecard. org, and Microsoft. com revealed that companies that employ BSC “have improved their financial and future position in the market place”. (Studentweb. tulane. edu). A study by Nevin 2003 indicates that about 50% of fortune 1000 corporations now have employed some form of BSC
management performance metrics. (Nevin 2003). That alone means that all of these companies have used the BSC system to position themselves on a better financial and management future. With BSC organizations are able to articulate a comprehensive strategy towards desired performance, and implementation success. On the whole the BSC system employs tree main systems in order to accomplish its objectives. It uses the measurement system, the strategic management system, and the communication tool. (Nevin 2003). These three factors present only as translation tool to the entire strategy of the BSC business system.
The measurement system of BSC uses the “lead indicators” to forecast future business environment. It reveals the strategy via long term management that focuses on customer satisfaction, innovation and recognition of potential market competitors. It seeks out innovation for the benefit of superior products. It deploys essential resources in order to capture customers that it would retain for the long run. It looks for realistic ways to retain its customers. And it combines all of those factors for both effectiveness and efficiency. It is the measurement aspect of BSC that fully engages the four perspectives, so these
perspectives will be discussed here in a little more detail. The four perspective as have been mentioned on this discourse include the customer perspective, the internal process perspective, and the learning and growth perspectives. CUSTOMER PERSPECTIVES REVISITED: When a business loses the drive to pursue and retain customers, it loses its soul and therefore the right to exist. No business can function, thrive or prosper without a reliable customer base. In the customer perspective theory BSC makes it clear that it is not only essential to know who the target customers are and how a business can better serve
that customer base. The BSC identifies three primary ways of providing services to customers in the Balance scorecard system. Operational excellence emphasizes low prices, and convenience ( Nevin 2003). Product leadership focuses on providing the best product in the market. In customer intimacy the business stresses the development of long term relationships with the customer, doing whatever is necessary to know what it is that the customer truly wants. It does so while maintaining as much knowledge as possible of its customers. The reason for these efforts in acquiring superior customer
knowledge comes down to the point that the businesses are attempting to provide as much satisfaction to the customers as possible. The other reasons include customer loyalty and the need for more market share. (Balancedscorecard. org. ) INTERNAL PROCESS PERSPECTIVE REVISITED: This area focuses on identification of the things that would need to be done in order to continue to add value to the customers and ultimately to the shareholders (Nevin 2003). The internal process aims to serve the customer and increase the total value of the organization, as well as keep record of the companies progress. The team’s objective is
primarily to develop better products, to find better ways of manufacturing better products. To find better ways of delivering their products, and to find better ways of delivering better services after the products had been delivered. LEARNING AND GROWTH PERSPECTIVE REVISITED: This may actually be the most important aspect of the entire process. Organizations would get as far as their employees could take them. A team that lacks knowledge may not be able to provide the necessary services required by the customers. Therefore genuine effort must be made to keep employees abreast of necessary information. And that is what the learning
and growth perspective tries to define. It emphasizes that information be made available to the employees. It requires the employees skills be as sharp as necessary. It does not want employees to be ignored. Again the key here is that any organization would only go as far as the employees could take it. With adequate care and education, employees can only do better for the company. It is important to point out that the BSC system does not ignore the financial perspective. But the key is that when a company has satisfied the other objectives, that company stand a pretty good chance of doing well financially.
BALANCE SCORECARD AS A STRATEGIC MANAGEMENT SYSTEM: Obviously putting a business and management strategy is important, but no strategy will function if it does not actually get implemented. So the first step in resolving the issue of non-implementation, is to identify what the potential problems towards implementation may be, and then address those issues. According to fortune magazine (1999) about 70% of strategies are poorly executed, so how can it be executed better. Both the team and the management must pay attention to the four barriers: the vision barrier, the people barrier, the resource barrier, and the management barrier.
(1) VISION BARRIER: To overcome the vision barrier, employees must not be kept in the dark. The BSC wants management to be very clear as to what the vision is. When possible place a figure on the vision . For instance if the goal is to manufacture products without defects 90 % of the time, then it may be made clearer by stating exactly that. That figure of 90% translates the vision to a level that could not be misunderstood. Give the employees the appropriate knowledge base and strategic structure, that makes the entire strategic objective easier to follow. Management should facilitate a total understanding of the strategy and the whole
structure in order to enable all the team members to fully understand the strategy and therefore work towards achieving it as a unit. (Kaplan & Norton) (2) PEOPLE BARRIER: In order to overcome the people barrier, BSC outlines a system known as cascading. Essentially it give all of the team members or all of the employees a chance to actually demonstrate exactly how they contribute to their teams objective. The entire system is driven from the top to the bottom. Management would be able to have “direct line of site” to all levels by implementing the cascade system. the management would need to
redesign how it awards incentives. When the focus is on rewarding long term achievement as opposed to short term, employees tend to respond with long term focus, as they work towards achieving the goal. So if long term objectives are created and proper values and incentives placed on them, then the rest of the team would naturally follow. This is an important point because, when employees are rewarded based on short term expectations, then the entire effort would be based on attaining that short term incentive. (3) RESOURCE BARRIER: For the resource barrier, an organization that is genuinely concerned about achieving
BSC must allocate adequate budgetary resources to it. To do otherwise would simply be folly. No strategy would get off the ground without real financial commitment. Human and financial resources should be part of the consideration during the planning of the strategy. It just would not make sense not to allocate the necessary resources. (4) MANAGEMENT BARRIER: The last barrier is the management barrier, there is really no doubt that management participation about the importance of an earnest management participation in order for the strategies to work. If management would not show true commitment, then why
would the rest of the team. If the team leader is absent why would any one else pay attention. (Nevin 2003). When learning is prescribed as part of the strategy and when accurate evaluation are made based on the numbers from the scorecard, then its easier to read the results and compare them to the original hypothesis. If the report does not measure up to the hypothesis, then a different approach would be necessary. The point is that if all of these four strategic elements are implemented, and the required evaluations are made regularly, the company gives itself stands an excellent chance of reversing course
if the numbers indicate so. CRITICAL OBSERVATIONS: It would be unrealistic to think that the entire system would not have some criticisms, and there are some legitimate questions on how effective the system really is. For sure it is an expensive proposal to implement. It requires that management and team leaders must have hands on approach in order to achieve the stated goals. But it is not always easy to have that kind of high level participation. So it could be a problem. (Molleman 2007). Some have argued that it is difficult to relate one measurement to the other.
For instance, how could a change in one perspective have a direct correlation to another. It is not quite clear how change in a particular measure would affect another measure. Others have argued that BSC does not address what the appropriate balance ought to be when addressing the stakeholder value. Davidson 2002, reports that the BSC correctly anticipates the value for the shareholders and the customers, but it does not articulate the needs of the employees. It also asserts that the requirement for top management participation centralizes the methodology on the high level management.
In a project that requires a good degree of knowledge, Davidson argues that the top-down approach may not be the best. But on the issue of management participation, if the commitment is high enough, then management ought to be able to find the time to allocate to the idea, because the long term benefits could be enormous ,if the system is followed correctly. The point is that the benefits negates the shortcomings. All indication is that BSC is a business method that is worth pursuing, and there are definite measures that could be taken in order to mitigate some of the shortcomings. If an organization
follows the directives that were outlined by Kaplan an Norton, then they would have significantly elevated their chances for success in their endeavor. First Kaplan and Norton insists that on the question of wether an organization is applying the right measure of perspectives, they recommend that a stable BSC should have a good balance of both lagging and leading indicators. That would enable them to see a clear picture of not only past efforts but also the plans of the future. A company should not implement too many indicators. Organizations should focus on those indicators that clearly addresses their strategy.
So with the correct combination of lagging and leading indicators as well as the correct mixture of the most critical indicators, Kaplan and Norton belief that the organization would do just fine. (Kaplan & Norton 1996). They also advised against making a “quantitative link” between non financial indicators and financial indicators. Since lag time may be influenced by many factors, it is not advisable to link non financial indicators and financial indicators. Also Kaplan and Norton observed that failure would almost be guaranteed if senior management simply dump the system to middle management. Therefore it emphasizes that senior management
must remain engaged, it must define the performance measurement, thereby making the objective clear to all levels of the team. It is not enough to have a senior leadership, if the senior leadership is not working with the rest of the team to achieve the objective. All segments of the company or organization would need to be involved in order for the BSC to work as designed. Developing the process does not have to be protracted, because if implementing it becomes too long then strategies may change during this period, and that would not be a good for the process. Therefore they recommend that the development process ought to be short.
(Kaplan & Norton). It would be inadvisable to use the BSC just for compensation purposes, therefore it is recommended that compensation be linked only when it is involved in translating strategy. THE IMPLEMENTATION OF BALANCED SCORECARD. The two main phases of BSC are the planning phase and the development phase. Because different organizations operate differently, it may not be realistic to expect companies to follow one particular route to the implementation of the system. But Nevin 2003 drew an implementation “map” that could aid any organization as it plows through the difficulty of planning and implementation.
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