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Balanced scorecard - Solving all problems of traditional accounting systems?

Research Paper (undergraduate) 2009 29 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Table of Contents

Executive Summary

List of Abbreviations

List of Figures

List of Tables

1 Introduction

2 Main Part
2.1 Problems of traditional accounting systems
2.2 BSC as a management tool for translating strategy
2.2.1 Basic concept of Balanced Scorecard
2.2.2 Benefits of Balanced Scorecard
2.3 Limitations and difficulties of Balanced Scorecard
2.3.1 Key success factors for Balanced Scorecard
2.3.2 Problems and difficulties of Balanced Scorecard
2.3.3 Initiates to avoid the pitfalls of Balanced Scorecard

3 Conclusion

4 ITM Checklist

Executive Summary

Balanced Scorecard (BSC) is a modern management tool for performance measurement and was developed in the early 1990s to overcome the limitations of managing only with financial measures. The BSC supports translating organization’s strategy into action by defining specific goals and objectives associated with the organization’s vision, providing measures, and indicating initiatives to reach those goals. It helps to solve a big problem in the practice, namely the strategy concept is often brilliant but the realizations fail.

The aim of this study is to analyze whether the Balanced Scorecard can solve all problems of traditional accounting systems. To answer this question, firstly, typical problems of traditional accounting systems are studied. Afterwards, the basic concept as well as benefits and drawbacks of BSC are viewed into details. Finally, the limits and difficulties of BSC realization in practice and initiates to avoid the pitfalls are illuminated.

It could be stated, that the BSC provides a holistic thinking and a balance between financial and non-financial perspectives: finance, customer, internal business process, as well as learning and growth. It helps organization to implement strategy faster and more effectively. Moreover, BSC supports managers to perform the controlling tasks, namely planning, driving, briefing and monitoring organizational activities.

However, the BSC also shows some limitations and difficulties whereby the pitfalls in the practise are based on design and process failures. To avoid these pitfalls useful initiates and special features for practical design of BSC should be implemented. Taking into account this rules BSC could be used as a powerful tool for strategic management accounting.

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1 – Balanced scorecard as a management tool for translating strategy

Figure 2 – The four standard perspectives of Balanced Scorecard

Figure 3 – The strategy map of a fashion retailer

List of Tables

Table 1 – Balanced scorecard strategies and performance measures

Table 2 – The detailed strategy map and BSC for a specific strategic theme

1 Introduction

Balanced Scorecard (BSC) is a modern management tool for performance measurement and was developed by Kaplan and Norton in the early 1990s. The BSC supports translating organization’s strategy into action by defining specific goals and objectives associated with the organization’s vision, providing measures, and indicating initiatives to reach those goals[1]. It helps to solve a big problem in the practice, namely the strategy concept is often brilliant but the realizations fail. The shortage of traditional performance measurement systems is their strong focus on financially based business performance measures, e.g. return on investment and sales profitability. These key data describe only the organization’s success in the past and can not predict the future performances. The BSC can be used powerfully to achieve the organization’s strategic goals while it looks not only at the financial aspect but also considers other non-financial factors from customer, business process as well as learning and growth perspectives.[2]

The BSC is widely utilized in companies as well as in nonprofit, government, and health care organizations[3]. It gets a remarkable success story, particularly in the US. In Germany, the success of BSC could be confirmed in a big part of 100 top companies and several small medium enterprises[4]. However, the BSC is not a magic universal tool und also shows some limitations and problems by realization in the practice.

The topic of this assignment is “Balanced Scorecard – Solving all problems of traditional accounting systems?”. In this study, typical problems of traditional accounting systems are analyzed. Moreover, the basic concept of BSC is described and its benefits and drawbacks are studied. Finally, the limitations and difficulties of BSC and initiates to avoid the pitfalls in the practice are illuminated.

2 Main Part

2.1 Problems of traditional accounting systems

Nowadays, many modern management methods and systems for performance improvement can be used in order to ensure the competitive edge, e.g. Total Quality Management (TQM), Business Process Reengineering (BPR), and Activity Based Costing (ABC). Unfortunatelly, the sucess of those systems is only limited. The main reason is that the organization’s vision and strategy could not be linked with the evaluation of business performances so that the strategy concept is often excellent but the realizations fail[5]. In many cases, the communication of organization’s vision and strategy to everyone is not completed. Despite a huge number of performace measures managers could not make decisions and define specific goals and objectives as well as right actions which are fully consistent with the organization’s strategy. Moreover, the management accounting systems often focus on “control function” and are poorly oriented on the long-term strategy and customers.

One of the biggest problems of traditional accounting systems is the only look at financially based business performance measures so that the financial perspective has significantly higher weighting than others. However, these financial measures exhibit only the organization’s previous performances. For forecasting the future success additional information and presumptions are required. Furthemore, traditional accounting systems disregard other non-financial scopes which are likewise essential for achievement of financial goals, e.g. product development, process improvement, employee qualification and motivation, as well as customer satisfaction.[6]

The often used financial measure is the Return on Investment (ROI) whose component parts are defined in the Dupont system of performance measurement:[7]

illustration not visible in this excerpt

The primary reason for using ROI is to link decisions of employees and managers consistently to the organization’s goals and objectives. However, the only use of ROI and the Dupont system for business performance meets with some criticisms:[8]

a) The short horizon problem of managers:

Managers change frequently their job and tend to orientate rather on short-term results than on long-term success. For example, they could sell assets to reduce the average invested capital and improve the ROI in this way. Nevertheless, those assets could attribute essentially to the organization’s long-term sucess. On the other hand, managers could reduce cost of goods sold expenses by purchasing low-cost and low-quality merchandise from suppliers. Although it would increase the annual operating earnings, the organization’s overall reputation could be damaged in the long-run due to problems of lower product quality.

b) Falling to undertake profitable investments:

Devision’s managers may be inconsistent with the best interests of the whole organization. They can reject a good project that would increase the organization’s ROI solely because the investing in this project would reduce their division’s ROI.

c) Messurement problems:

The third problem of ROI is the difficulty in meassuring both the average invested capital and the actual operating earnings associated with that capital. Companies often have problem to clearly identify capital allocations by evaluating business performance, particularly, if many units within the organization share invested capital. In this case the allocation of capital between those units is arbitrary.

To avoid the difficulties with ROI, other financial measures like Residual Income (RI) and Economic Value Added (EVA) are utilized. They support evaluating the profitabity of particular parts of the business related to a specific investment base. However, problem of short-term thinking of managers still exist.

Additionaly, it should be careful by dealing with measures in general. In particular, the cause-and-effect correlation for measures should be well understood. For example, the employee productivity measure which is calculated as a ratio between sales and number of employees is often used in the practice. This measure shows how productive was the employee in the last period. This information is important for corporate management because the measure is based on two key figures: sales and personal cost. However, the employee does not have an influence on the product price and thus on the sales. As the result the employee productivity varies (unintentionally from the employee side) by price change. This could lead to false decisions of the management.[9]

[...]


[1] Williams et. al (2008). p. 1098.

[2] Bundesverband Deutscher Unternehmensberater BDU e.V. (2006). p. 49.

[3] Kaplan et. al (2001). p. 133–160.

[4] Greischel (2003). p. 3.

[5] Bundesverband Deutscher Unternehmensberater BDU e.V. (2006). p. 50.

[6] Bundesverband Deutscher Unternehmensberater BDU e.V. (2006). p. 49.

[7] Williams et. al (2008). p. 1091-1092.

[8] Williams et. al (2008). p. 1095–1096.

[9] Preißner (2008). p. 199.

Details

Pages
29
Year
2009
ISBN (eBook)
9783640383351
ISBN (Book)
9783640382941
File size
572 KB
Language
English
Catalog Number
v132252
Institution / College
University of applied sciences, Munich
Grade
1,0
Tags
Balanced scorecard Strategic management accounting Accounting system

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Title: Balanced scorecard - Solving all problems of traditional accounting systems?