The balanced scorecard approach Essay

The balanced scorecard approach was invented by Robert Kaplan and David Norton in the early 1990s as a means of assessing organizational performance and balancing financial and non-financial metrics of effectiveness (Daft, 2009). It has evolved from an instrument of measuring performance into a powerful strategic tool allowing to translate strategies into practice and to prioritize between strategies. This method also allows to adjust organizational structure and goals to the current set of values and mission (Daft, 2009). It is often considered that using balanced scorecard is costly and only large enterprises can benefit from this approach. The purpose of this paper is to consider the use of balanced scorecard method at medium-size company called Futura Industries, and to analyze the effect of BSC on the company’s performance.
Balanced Scorecard Approach
There are four key perspectives in the balanced scorecard method: financial perspective, customer satisfaction, internal business processes perspective and the perspective of learning and growth (Daft, 2009). For each of these perspectives, four components should be analyzed: objectives, achievements (measures), targets and initiatives. It should be noted that all perspectives and components are interrelated, and basing on the leading and lagging metrics it is possible to determine current strengths and weaknesses, forecast performance and identify areas for improvement (Crosson & Needles, 2007).
Companies often focus on measuring internal effectiveness and financial performance, but the other two quadrants of balanced scorecard method – learning and growth and customer satisfaction – are equally important. Moreover, in certain companies these factors are used to develop competitive advantage. One of such companies is Futura Industries.
Overview of Futura Industries
The company is based in Utah, has 230 employees and is one of the industry leaders in extrusion services (Gumbus & Johnson, 2003). Company website declares that Future Industries delivers customized start-to-finish extrusion services, and their competitive advantages are responsible and reliable service, flawless results and unique corporate culture centered around teamwork, responsibility and quality (Crosson & Needles, 2007). In 2001 the company was named top private employer of Utah, and is often qualified as one of the top 10 family friendly employers (Crosson & Needles, 2007). The secret of success of Futura Industries is that, contrary to competitors dealing mainly with financial performance and internal effectiveness, it focuses primarily on the learning and growth perspective as well on customer satisfaction.
Susan Johnson, President of Futura Industries, formulated that great people and employee loyalty are a priority for the company. Balanced scorecard allowed the company to align strategies using indicators of performance in all four sectors. As a result, the company managed to increase its revenues by 50% during three years (in the 1996-1999 period) without increasing the number of people (Crosson & Needles, 2007).
Learning and Growth and Customer Satisfaction
Futura Industries managed to reduce turnover by 33% in the 1998-2001 period and reached the level of 10.7% by 2002 (Gumbus & Johnson, 2003). This rate is impressive for the average industry figure of over 50%. This outstanding statistics is strengthen by increased employee loyalty and better customer service. This effect was reached by introducing a number of work-life initiatives and establishing a relation between performance and employee compensation.
The company takes a variety of employee surveys, such as “employee friendly initiatives”, “birthday review” and “leadership survey” (Gumbus & Johnson, 2003). Employee satisfaction and motivation are not the only metrics used for measuring learning and growth. Certification and training levels are also measured, through developing a training matrix and a profile of cultural maturity for every employee. In addition to this, the company provides personal development and annual performance reviews, which match employee objectives and expectations. Financial motivation was added: employees were paid using a quarterly formula for incentives, based on timely delivery, first pass yield and safety measures (Gumbus & Johnson, 2003).
The company ahs also developed metrics for measuring customer satisfaction. Every month 10 randomly selected customers are asked to answer a series of questions regarding quality of their cooperation with Futura. Customers grade their answers from 1 to 10 on a Likert scale, and the results of these surveys are discussed at monthly meetings of the company (Lussier, 2008). Futura Industries managed to reach average customer satisfaction score of 8.64 (with a goal being 8.5) (Gumbus & Johnson, 2003).
Financial Performance and Internal Business Processes
Using BSC approach also allowed the company to introduce new financial and effectiveness metrics. For instance, financial department of Futura Industries managed to create a new tool for analyzing costs per item for each customer and calculating a resulting net margin. This tool is currently used for comparing customer profitability. Every month 50 worst customers are considered, and for each of them, the causes of high costs are discussed (Gumbus & Johnson, 2003).
Measures used for evaluating internal performance are sales of new products, cost of quality, cost of production per standard hour, pounds and dollars packed per person. However, safety was identified as the most important metric of internal performance in the company. The measure of total recorded incidents report per 200,000 employee hours has been lowered to 7.5 incidents, compared with average industry figure of 13 incidents (Gumbus & Johnson, 2003). Focus on cost effectiveness and safety allow Futura Industries to improve quality and to increase company value for customers and for employees (Lussier, 2008).
Conclusion
By applying the balanced scorecard approach, Futura Industries managed to strengthen its competitive advantages such as excellent customer service, employee loyalty and quality. Moreover, the company managed to decrease turnover by 33% during a 3-year period, thus reaching virtually the lowest turnover within the industry, increased plant productivity by 20% (Gumbus & Johnson, 2003), improved safety, increased revenues by 1.5 times without hiring additional workforce, and managed to reach a 16% sales rate from new customers (Lussier, 2008). Thus, using BSC approach to align strategy, goals and company measures was very effective for Futura Industries, and can serve as a great example of using balance scorecard approach at a medium-size enterprise.