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THE ORIGIN OF BALANCED SCORECARD IN THE TRADITION OF MANAGEMENT ACCOUNTING AND ITS RECENT DEVELOPMENT Arben iSahiti1 , Liridon Dalipi2, Ard Ahmeti3 teaching Assistant, University ''KGdri Zeka" Ctjilan, Faculty of Econ oisiics, 2Teaching Assistant Itiniversitj' ''Kakri Zeka'' Gjilan,Faculty of Law, 2University of Prishtina, Faculty of Economics.
Abstract: This research will discuss the origin of BSC in the tradition of MA and its recent development. Then the usefulness of creating and/or maintaining firms' competitive advantages will be evaluated. It adopts secondary data drawn from a range of resources as it better fits the nature and the scope of the research. This research concludes that a firm which is undergoing significant strategic change may found BSC extremely useful. JEL Classification: M4, M41
Key words: performance; financial; competitive; value
I. Introduction
Management accounting (MA) aims at providing financial and non-financial information that intended primarily to assist managers in fulfilling the organisational goals (Bhimani et al., 2008). The contemporary MA has been the evolution of traditional one which is mainly built on its weaknesses since there is a large number of evidence that traditional MA cannot fit the modern business environment changes anymore. One evolution has been the integrated performance measurement 1 which emphasizes the importance of a more integrated approach relating operations to customers and oganisational vision (Chenhall, 2005).
Balanced Scorecard (BSC) has been proved by various studies the most outstanding performance measurement. This research will discuss the origin of BSC in the traditional MA and its recent development. Then the usefulness of creating and/or maintaining firms' competitive advantages will be evaluated.
II. Literature Review
As branch of accounting, MA plays an essential role in: providing information to all levels of management from senior managers to shop floor supervisors to aid them in making better judgement and decisions; supplying information to managers that can be used for planning, performance measurement and control; allocating costs between cost of goods sold and inventory for profit reporting both externally and internally; consequently, improving competency and efficacy of existing operations (Drury, 2001). Johnson and Kaplan (1987) argue that traditional MA information is produced too late, too aggregated, and too distorted. The environment in which
1 The techniques include Performance Pyramids and Hierarchies; Balanced Scorecards (BSC); the intangible Asset Scorecard, etc.
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MA is practised certainly has changed, with advances in information technology, more competitive markets, different organizational structures, and new management practices. However, firms were still using MA practices which had been developed over 30 years before and that were no longer relevant to today's competitive and manufacturing environment, therefore no longer relevant for decision-making.
Following the profound study from Johnson and Kaplan (1987), whether or not significant changes in MA are necessary has gained numerous debates, but majority studies have agreed that MA is in a crisis and that fundamental changes in practice are neededl (Drury, 2008). Since many scholars claim the urgency of MA to become more outward looking, to focus on success factors and to develop broad spectrum of cross-functional disciplines2, strategic management accounting (SMA) as the evolutionary approach to MA has developed and has played a contributory role in making strategic decisions 3 and developing business strategy. Weetman (2006) highlights that business strategy is an integrated set of actions aimed at securing a sustainable competitive advantage which emphasizes the question of how the business intends to reach some preferred state in the future by changing its competitive position to meet changing circumstances. Moreover, it has been argued that if the business strategy gives the organisation its competitive edge, then SMA is able to reflect that strategy as closely as possible.
Some techniques4 in SMA have been proposed to ensure a business stays vigilant to competitive forces and achieving competitive advantages. One is Balanced Scorecard (BSC) which was firstly developed by Johnson and Kaplan. BSC provides a boarder and more complete picture of an organisation's performance since it includes financial measures that tell the results of actions already taken and the future and complements the traditional financial measures5 with operational measures on customer satisfaction, internal processes, organisation's innovation and improvement activities—operational measures that are the drivers of future financial performance (Johnson and Kaplan, 1992). The basic rationale is the causality between operations and organisation's strategy.
1 Four principal criticisms of traditional MA practices have been highlighted by Drury (2008): 'failure to respond to changes in the manufacturing and competitive environment; limitations of traditional product costing systems in decision-making; MA has become subservient to financial accounting; relatively little attention is given to the external environment'.
2 Specific directions include performance management, intellectual capital management, environmental management, financial management, asset management, information management and strategic management.
3 The strategic decisions are focusing on: 'long term direction—committing to the future; Achieving and maintaining competitive advantage; Identifying the scope and boundaries of the company— what business are we in; Matching the activities and resources of the company to its environment—do we have adequate funds to create or seize new opportunities'.
4 These techniques include BSC, activity-based costing, benchmarking, investment appraisal for advanced manufacturing technologies (Weetman, 2006:683).
5 Although financial measurement ensures the alignment with the firm's goal which is maximizing shareholders' wealth, and the quantified results can be easily compared and understood, it is able to provide a single and comprehensive measure that reflects the trade-offs between revenues, costs and investments which may help managers in decision-making. But the drawbacks are quite evident: it does not reflect economic income perfectly because it is heavily dependent on the choice of measurement method, it ignores intangible assets, focuses on the past instead of future and does not reflect customer value; If used to assess managerial performance, they could have dysfunctional consequences; It induces investment myopia since it reduce or postpone investments that promise payoffs in future measurement periods, investment in employee training and research and development; and it provides misleading performance signals which disrupt the decision-making from managers.
Johnson and Kaplan (1996) highlight that BSC is more than a performance report. It is a useful tool in the system of strategic management since it focuses on five principles for a firm: translate the strategy into operational terms; align the organisation to the strategy; make strategy everyone's everyday job; make strategy a continual process; and mobilize leadership for change. It aims at providing a framework to formulate and implement strategies, to translate strategy into a coherent and comprehensive set of financial and non-financial measures covering various aspects, and to guide and evaluate an organisation's improvement activities (Chenhall, 2005). Therefore it helps firms to achieve and/or maintain competitive advantages in a more comprehensive and logical way.
III. Analysis
BSC addresses a deficiency in traditional management systems: their inability to link a firm's long-term strategy with its short-term actions' (Kaplan and Norton, 1996) by answering four important questions to managers: First, how do our shareholders see us (financial perspective)? Johnson and Kaplan (1992) highlights that since the ultimate objective for a firm is to increase profit and thereby maximise shareholders' wealth, financial performance measures are designed to indicate whether the firm's strategy, implementation, and execution are contributing to bottom-line improvement. Many studies have criticized financial measures because of their well-documented inadequacies, their backward-looking focus, and their inability to reflect contemporary value-creating actions. And some critiques steps further by saying that the terms of competition have changed, but the traditional financial measures failed in improving customer satisfaction, quality, cycle time, and employee motivation. The authors argue that these assertions are unnecessary and incorrect, because a well-designed financial control system can enhance rather than inhibit a firm's total quality management program.
The second question is how do customers see us (customer perspective)? Porter (1980) emphasizes that competitive advantages ultimately derive from creating better customer value for an equivalent product or equivalent customer value for a lower cost. Majority of firms regard customer as the extremely important factor to achieve competitive advantage. Managers identify the customer and market segments in which the business unit will compete and measures of the business unit's performance in these targeted segments (Johnson and Kaplan, 1996). Johnson and Kaplan (1992) highlight four aspects a firm needs to concern about in improving the perceived benefits of the firm, therefore, achieving the competitive advantages: time required for company to meet customer needs; quality measures of the defect level of incoming products as perceived and measured by the customer; performance and service measures of how the firm is able to create value for customers; and the firm must remain sensitive to the cost of the product. Thirdly, what must we excel at (internal business perspective)? Johnson and Kaplan (1992) argue that although customer measures are important, they must be linked with the internal measures since firms must in the first place meet customers' expectations internally. This is because excellent customer performance derives from processes, decisions, and actions occurring
throughout the firm after all and managers need to focus on internal operations to satisfy customer needs. The rationale of the internal measures is that business processes have the greatest impact on customer satisfaction because they directly affect the cycle time, quality, employee skill and productivity, etc. Therefore, in order to achieve and maintain the competitive advantages, firms should clearly identify and measure their core competencies and decide what processes and competencies they must excel at and specify each measure.
Finally, Can we continue to improve and create value (learning and growth perspective)? Johnson and Kaplan (1992) emphasize that the customer and internal business process measures identify the parameters that firms consider most essential for achieving and maintaining competitive advantages. But since the targets for success keep changing, the intense global competition forces the firms to make continual improvements to their existing products and processes and have the ability to introduce entirely new products with expanded capabilities by managing the intangible assets (Johnson and Kaplan, 1992). Generally, managers examine each of the processes they selected in the internal perspective. Then managers determine the factors that enable each process to be performed in an outstanding manner that it can contribute to the success of the firm's strategy.
Although the advantages of BSC are evident, however, it inevitably has several limitations. Firstly, BSC promises more than it can deliver. It does not specify how trade-offs need to be made between different measures. Otley (1999) argues that 'indeed others would view this as a strength of BSC; all the areas identified should only be on the scorecard if they are crucial to the success of the organisation', however, some measures are really not value drivers since there is no link between the measure and financial success. And since multiple measures are used, managers may get confused about how to weigh the importance of each measure. Secondly, BSC ends in itself. Because performance measurement should lead to performance management, but BSC fails to tell anyone how it should be managed. Thirdly, the role of feedback from BSC had little attention paid to it (Otley, 1999). Feedback is essential to measure to what extent a firm has achieved its key strategic aims. Therefore, BSC is unable to answer the question proposed by the author 'is the strategy working as expected? If not, is this because of inadequate implementation or the faulty of the strategy itself?' Fourthly, it does not solve the problem of setting good goals. And does not provide the answer of how can the goals be made equally and optimally challenging across the organisation and over time. Finally, it is evident from various studies that BSC is clearly a dynamic technique, its contents will change over time as strategies develop and key success factors change but there is little guidance to how these changes should be managed.
IV. Conclusion
In a nutshell, the BSC is designed to be at the centre of a firm's control mechanisms to effectively deploy strategy and to link operational practices with strategic intent. The BSC enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth. Therefore, a firm which is undergoing
significant strategic change may found BSC extremely useful. However, by balancing the pros and cons of BSC, the benefits may outweigh the limitations since the modern firms are more likely to face the impacts of changes.
V. References:
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Chenhall, R. H. (2005). Integrative strategic performance measurement systems, strategic alignment of manufacturing, learning and strategic outcomes: An exploratory study. Accounting, Organizations andSociety,30, 395-422.
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Johnson, H.T. and Kaplan, R.S. (1987). 'The rise and fall of management accounting, Strategic Finance (January), 68(7): p.22-30.
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Libby, T. Salterio, S.E., Webb, A. (2004) The Balanced Scorecard: The Effects of Assurance and Process Accountability on Managerial Judgment. The Accounting Review, Vol. 79, pp. 1075-1094 Otley, D. (1999) Performance management: a framework for management control system research. Management Accounting Research, 10, pp363-382
Weetman, P. (2006) Financial and management accounting: an introduction. Fourth edition. Prentice Hall.
MSc, PhD Cand. Arben Sahiti
Teaching Assistant, University ''Kadri Zeka'' Gjilan, Faculty of Economics, Email: arben.sahiti@uni-gjilan.net MSc, PhD Cand. Liridon Dalipi
Teaching Assistant, University ''Kadri Zeka'' Gjilan, Faculty of Law, Email:
liridondalipi@gmail.com
MSc, Ard Ahmeti
University of Prishtina, Faculty of Economics, Email: ardisahmeti@gmail.com
