Balanced Score Card Analysis
Introduction
Organisational performance effectiveness is the accomplishment of missions or the achievement of objectives. Whatever its mission, the effectiveness of an organization requires that it efficiently identify, assess, solve, and cope with events or problems that arise within the operational environments. These are the classical functions of all organizations, and performance of them has always been critical for organizational success. It is clear now that functional proficiency and the integration of management and control systems play important roles in the performance of all organizations.
To be effective in turbulent and complex conditions, every organization must possess capabilities to: Search out, identify, and interpret the properties of operational situations as they develop, solve problems as they occur within the context of rapidly changing situational demands, generate flexible decisions relevant to changing situations and cope with shifting situational demands with precise appropriateness ( 2000).
It is apparent that the above capabilities require a highly responsive and adaptive system of decision and action. In such a system, the complex interplay between individuals, positions, and organization levels is a critical element in flexibility and responsiveness and, therefore, in organizational effectiveness. Control and guidance and management of each of these performances are an essential function to ensure improved organisational performance.
In order achieve an effective organisational performance, it is important to consider the management of all performances within a certain industry. It is noted that, performance has become a business buzz word. Organisations use many different approaches in the quest for a high- performance workplace. Organizational management entails practices used to guarantee that internal functions achieve their respective goals. In the management context, there emerge to important managements systems that include performance management. Part of it is the measurement of performance of organisation using tools and instrument such as the balance scorecard systems. Primarily, the main goal of this paper is to analyse the balance scorecard approach of an organisation and the application of a new system to improve their performance measurement approach.
Overview of the Company/Issues
The case that will be considered in this report is the retailer industry in Hong Kong, specifically the ZARA. The company is noted to be the flagship chain store which is owned by Spanish tycoon Amancio Ortega, who also owns some brands like Pull and Bear, Bersha, Massimo Dutti and Stradivarius. The company is regarded as one of the mode retailer industry which has enabled to expand and compete with quality brands as well as affordable process. Zara has resisted the business-wide trend of transferring production to low-cost nations. The company has established a policy which is the zero advertising and they preferred to invest percentage revenues in opening new retail outlets instead. The company has been regarded by others as the most creative, innovative and devastating retailer industry in the world. The company is a vertically-integrated enterprise; they design, produce and distribute their products which make them unique from other retail stores. In addition, the company also has control most of the channels of the supply chain.
To be able to sustain its competitive position, the management the retailer industry has been able to measure their productivity or performance. One of the reasons why ZARA measures its performance is to identify whether their employees and the industry has been able to meet their organisational objective of providing quality service to their target market.
Evaluating the performance of an organisation is essential as this may serve as a tool for implementing organizational approaches ( 1996). Measuring performance which has been applied in the retailer enables the industry to translate their strategy into concrete objectives. Through performance measurement, such organisational purpose has been communicated well to their retailer staffs and employees (1998;2000).
One of the implications of the performance measurement used by Zara is in terms of the reliability and credibility of the result or findings of the conducted performance measurement or evaluation. This can be attributed to the inability of the management to use efficient indicators and metrics that would effectively and credibly measure the performance of employees or staff of the organisation.
Other issue that concerns the performance evaluation or measurement of this retailer industry is in terms of the inability of the management to integrate balance scorecard or performance measurement approach integrated with their strategic management approach. Accordingly, at the very core of this performance measurement concept is the strategy of the industry to guide the actions, decision as well as the assurance of aligning the top to bottom employees. A performance measurement through scorecard can be developed without the guidance of strategy. However, the implemented scorecard system of the retailer industry becomes a key performance indicator which lacks the attributes given by a true balanced scorecard. In this regard, the problem occurs on having a performance measure system that are not linked or connected with the organisational strategy which may lead to further conflict and issues.
In the study by (2000), the researcher conducted a research on the use of balance scorecards using 15 firms. Based from the findings, the application of balance scorecards should consider four main factors. First, the company must constantly communicate with its stakeholders (managers, employees, customers, and senior leaders). By means of communication, the company should clearly relay the purpose of using the scorecards, how it will be used, what it will measure as well as the outcome of the gathered measurements. Several respondent of the study stated that two-way communication should be practiced so as to engage, inform and empower every stakeholder.
Another factor to consider in applying scorecards is simplicity and flexibility. Based from the replies of the respondent, it appears that the efficacy of BSC is enhanced when the set of activities involved are more homogenous. The quantity of the measures involved is not the important thing in BSC. Thus, measures should be selected in accordance to the objectives of the company. In order to increase the probability of success of BSC, its application and implementation in the company should also undergo intensive studies and planning. Most importantly, the application of BSC requires special skills and effort. Several steps and procedures are then needed for the design and installation of a set of balance scorecards. Specifically, the respondent suggested the following steps: (1) conduct an environmental scan and develop a meaningful vision statement; (2) develop metrics that measure the right thing; (3) develop top-notch survey mechanisms; (4) use Intranet methods to collect data; (5) turn data into useful information; and (6) develop initiatives and action plans (2000).
Theoretical Framework Marks
For this case study analysis, the theoretical framework lies on the performance measurement approach. According to (1996), productivity performance measurement may be defined as the process measuring the competence and efficacy of purposeful action. Based from the administrative point of view, productivity performance measurement is a subsystem that needs to be formulated, handled, and assessed periodically in order to assure the attainment of the desired outcome. Several elements with functional interdependencies are involved within the system of organizational productivity performance measurement.
Usually, performance measurement is carried out through certain productivity measurement systems and Key Performance Indicators containing several individual measures. Each organisation is trying to have their set of KPIs for measuring productivity. The KPIs set depends on what the management want to evaluate and what objectives they are trying to attain.
The most common examples include the Balance Scorecard, the Performance Pyramid and the Performance Prism ( 2000). These systems are applied to the organization depending on its vision and strategies ( 1996). These measures are chosen to evaluate success factors from various points of view including the productivity of the employees, customers, financial success, and business operations. View of past, present and future performances may also be measured. Another theory that can be used is the motivational theory.
Generally, motivation is the part of the inner state of an individual that causes him or her to behave in a way that ensures the accomplishment of some goals. It relates to the willingness to exert high levels of effort toward organisation goals, conditioned by the effort’s ability to satisfy some individual need ( 1997). Simply, motivation is the prime determinant of behaviour at work and that high ability and high levels of job training will not result in high performance if the individual is completely demotivated or under motivated at work.
As such organisations should stress on people approaches which includes alterations in attitudes, motivation and behavioral skills through new training programs, selection procedures, and performance appraisal schemes. According to the model of (1997), an organisation must be able to motivate and satisfy employees by allowing them to have variety of skills, task identity, task significance, autonomy and feedback. Indeed, making a business successful in a particular setting demands crucial and detailed studies and examination of the factors that will generate the best results that will serve the aims and objectives of the organisation, in this case, ZARA. It can be said that ZARA needs to implement such organisational change has been made to improve their performance measurement approach (2004).
Application of Theory
Based on the analysis of the study, it can be said that the retailer industry like Zara must be able to have a conducing environment for their employees who highly motivates them to join the training process. In addition, the analysis also revealed that the retailer industry must be able to use a new and improved balance scorecard to evaluate the performance of an organisation.
To be able to enhance motivation of employees to, the retailer management should be able to implement performance measurement system. Accordingly, performance measurement is the principal set of practices by which control is manifested in organizations. Control here is defined as any process that is used to align the actions of individuals to the interests of the organization (1992). Under such a characterization, performance measurement system through integrated balance scorecard is expected to regulate both motivation and ability 1990). By using performance measurement approach the company would be able to formulate objective setting, formal performance evaluation, and linkage between evaluation outcomes and development and rewards, in order to reinforce desired behaviour among their employees (1993). This system is cybernetic, with feedback from both employer and employee driving modifications at each point in the system.
. Being able to recognise the importance of measuring both financial and non-financial indicators, it is noted that that the ZARA must use a measurement tool known as the balanced scorecard. Considering that financial and non-financial approaches are two very different systems, applying one mechanism in place of the company’s existing performance and evaluation means will entail greater changes and adjustments. Moreover, some aspects in traditional systems are lacking in the non-financial systems and vice versa. Hence, the application of only one system will not result to the maximization of the advantages of both systems. Thus, the integrated approach or the application of the balance scorecard in measuring performance appears to be better than the other two methods.
The balanced scorecard is an innovative performance measurement process that builds on the notion that reliance on traditional financial measures is no longer adequate for firms considering that other companies have realized the value of intangible assets and performance indicators (2001, 2001). Financial measures are outcome measures based on historical results. As such, these lag indicators generally focus management’s attention on past actions and short-term performance related to the management of tangible assets. In contrast, non-financial measures, categorized as lead indicators, tend to focus attention on actions that drive future results, creating value for the long-term from such intangible assets as human capital, customer relations, innovation in products, and highly efficient operating systems (1996, 2001). A balanced scorecard combines measures in such a way that management has access to key financial and non-financial information that they need, while not being inundated with abundance of information.
Customer, internal business processes, learning and growth and financial factors are the four main perspectives of the balance scorecard system. The focus of the customer perspective is on the external environment, which aims to discover, understand and stress on customer needs. Common measure used in this perspective includes customer loyalty, customer satisfaction, and customer retention ( 2002). The internal business processes perspective focuses on the company’s internal environment including its value chain operations and innovation processes. Common measures used for this perspective are expenditures on research and development, new product sales, cycle time, throughput efficiency and productivity. On the other hand, the learning and growth perspective provides the infrastructure or foundation required to meet the goals of the other two operational perspectives. The common indicators are employee satisfaction, voluntary turnover and dollars spent on training. Finally, the financial perspective is focused on shareholders.
In general, balance scorecards are advantageous as it help create management mechanism, which enhances the success of the organization. Specifically, balance scorecards help in the creation of a commonly understood and precisely identified strategy within the management team. It also provides an incorporated view of the strategy within all sectors of the organizations. Balance scorecards also encourage the participation and contribution of the employees as well as present a balanced combination of measurement, which enable easier management towards success.
With these main perspectives, it is clear why the balanced scorecard system is suitable for ZARA Company. The company implemented change in its operations in order to overcome the internal and external pressures affecting it. In particular, the company intended to resolve its problem with business competition, customer relations and employee performance. The components of the company’s change were directed to the achievement of these objectives. By training the employees how to perform their jobs and serve customers more effectively, the company was able to improve its sales as well as its appeal to the customers. The management and the subordinate staff now share a more collaborated relationship. All these results obtained from the performance measurement system of the company clearly stress that the company had been successful in improving its level of competitiveness.
Conclusion and Recommendation
It is noted that the retailer offers various services and these may also indicate the use of measures, aspects that are directly or indirectly influential on the retailer results. In this regard, it is also recommended that the management of ZARA must also measure customer’s loyalty and customer’s satisfaction as part of its performance or productivity measurement. The return rate of guests may be calculated to see the loyalty and perception of the service. Loyal customers are an asset to a business and can be encouraged with different schemes. There are also studies which indicate it can be as much as six times as expensive in marketing terms to attract a new customer as it is to retain an existing customer
Customer satisfaction is also a measure than can be used, this is pertaining to the return customer in order to estimate the impact the retailer has created on a new customer in the competitive environment. Other measurement may include the ratios, for example the number of calls answered by a receptionists each hour, the number of room cleaned by a chamber maid per hour, or average cleaning time over room, the usage of towels per room, the number of breakfasts severed as a ratio of the guests and so forth. Individually all of the measurements may be seen as small, yet they give an indication of potential room for improvements for the use of resources, either physical or in terms of human labour.
The performance measurement through the use of cascaded balance scorecards are also recommended for the company since it emphasizes that the development of human potential and abilities must be unleashed so as to create a good organization whereas. This concept suggests that the outcome of effective human resources is not dependent on knowledge alone but on performance as well. Within the performance paradigm, there are two significant factors that may be used for analyzing the implementation. One of which is the training or learning activity factor.
Another related factor of the integrated balance scorecard is performance appraisal. This enables the company to assess their employees individually based on various aspects such as daily work output, quality of work, work attitudes and overall performance ( 1994). This helps the company identify their employees’ strengths and weaknesses. The employees on the other hand, will be able to recognize their strengths and weaknesses. Included in this aspect is the provision of various forms of recognition for hard working and deserving employees.
Through performance appraisal, the company motivates its employees to work more productively and efficiently. Performance management assures that employees will be able to see how their work contributes to the achievement of the organisation’s overall goals; how they are managed should encourage them to want to make a better contribution; they should be helped to develop their skills and talents so that they can improve their contributions; and those contributions should be recognised and rewarded in ways that make employees feel good about themselves, their jobs and their employer (1994).
Furthermore, part of cascaded and integrated balance scorecards for the ZARA is the ability of the management to give employee feedback. Through employee feedback, the management are being aware of the needs of their employees. These needs are being analysed so as to manage performance effectively. When individual needs such as growth and strength, coupled with job characteristics or job scope (1993), have a matching existence within a structure then the levels of job performance and satisfaction are expected to be high. Upward and lateral communication through an effective employee feedback system has significant effect on job performance and job satisfaction when the matching existence with performance management is present.
Performance measurement has long been used by the various firms to assess different business factors. In general, three methods are being used to measure performance: financial, non-financial and integrated approaches. While these approaches have their own advantages and drawbacks, the goal of their application remains one and the same. Through the beneficial effects of performance measurement, businesses are able to create successful strategies towards success. All in all, it can be said that in order for an organisation sustain its competitive performance, they must use effective and appropriate performance measurement approach.
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