Various BSC-based models
The last decades saw a skyrocketing development of concepts for corporate governance and business management systems. Strategic management has received a special attention. Studies have shown that running midsize and big business without strategic management system is full of risks. That’s why several new concepts, tools and paradigms have appeared in the field of strategic management.
BSC model by Norton-Kaplan
One of the most interesting performance evaluation systems based on Balanced Scorecard concept was offered by Robert Kaplan and David Norton. The aim of Balanced Scorecard is to implement strategic goals in reality, as well as link strategy with operational management and cost factors. The key peculiar feature of Balanced Scorecard is that it is closely connected with business processes aimed at meeting demands of all customers. Moreover, all employees of the company are involved in this process. Balanced Scorecard focuses on strategic development unlike traditional management systems which as a rule took into account only financial indicators. BSC model represents enhancement of the system information potential through inclusion of non-financial indicators in order to achieve strategic goals. Normally, non-financial indicators are closely related to key success factors, i.e. with the strategy. The figure below offers visual representation of BSC model.
BSC system sorts out indicators into categories which the authors of this system called perspectives. Such perspectives make it possible for the company management to identify strategic goals and measures, and focus on implementation of certain objectives by using obtained knowledge on efficiency of business processes.
There are four perspectives in Balanced Scorecard model by Norton-Kaplan:
- Financial
- Customer
- Internal processes
- Learning, innovation and growth
Balanced Scorecard model by Norton-Kaplan is not the only one. Below are alternative systems which also use indicators to link operational management and strategy of an organization.
BSC model by Norton and Kaplan
Maisel model
The model by Lawrence S. Maisel was offered in 1992. It has the same name as the model by Norton-Kaplan. Maisel also defines four perspectives based on which business activity should be evaluated. Instead of learning and growth perspective Maisel uses human resource perspective which measures innovation, as well as such factors as education, development of production services, enhancement of competence and corporate culture. It is possible to say that these systems have very slight differences. The reason why Maisel uses perspective of human resources is explained by the fact that the company management should be more attentive to personnel and measure not only efficiency of processes and systems , but also evaluate performance efficiency of employees. Maisel BSC model was first introduced in the article “Performance Measurement. The Balanced Scorecard Approach”, in Journal of Cost Management.
Maisel BSC model
Efficiency pyramid
In 1990 C.J. McNair, Richard L. Lunch and Kelvin F. Cross introduced a model which they called efficiency pyramid. Similar to the above mentioned models, the key concept of efficiency pyramid was connection of customer oriented corporate strategy with financial indicators, supplemented by several key quality (non-financial) indicators.
Traditional managerial information should come only from the upper level. Efficiency pyramid is based on concepts of total quality management, industrial engineering and counting based on actions. Actions imply everything done by people and machines (equipment, mechanisms, computer systems) to satisfy customers’ needs.
Efficiency pyramid has four different levels that show organization structure with feedback and communication systems necessary for decision making at different managerial levels. Objectives and indicators communicate organization strategy with its operational activity. In other words, objectives are transferred top to bottom while indicators are gathered vice versa (bottom to the top).
Efficiency pyramid
At the top level company management formulates corporate vision. The second level includes objectives for departments and subdivisions in accordance to a certain market and financial indicators. Customers and shareholders define what needs to be evaluated. The third level is virtually non organizational. It consists of a number of aspects focusing on satisfaction of customer needs and flexibility of production process. Indicators here are measuring customer and financial objectives. The last level deals with quality, delivery terms, production cycle, losses etc. Quality and time for delivery are related to external environment, while production cycle and losses are indicators for internal processes of an organization.
It needs mentioning that indicators in the bottom of pyramid are measured every day, every week or every month. In the top of the pyramid financial indicators dominate, and thus they are measured not so often. Of course, indicators in the bottom levels should be subordinated to indicators in the top. This system makes it possible to show what financial indicators are based on, and what drives them.
This model was first introduced in Management Accounting magazine, the article “Do financial and nonfinancial performance measures have to agree?” in November 1990.
ЕР2М model
In 1993 Christopher Adams and Peter Roberts offered another model which they called ЕР2М that stands for Effective Progress and Performance Measurement. The model is visually represented in the following scheme.
Effective Progress and Performance Measurement
According to Adams-Roberts, the company should focus on the following 4 directions:
- Serving customers and markets
- Enhancement of internal processes (efficiency growth and profitability increase)
- Strategy and changes management
- Freedom of actions
This theory implies that strategic management has 2 consecutive stages: strategy development and strategy implementation. Development of strategy is an analytical process which answers the question “What needs to be done?” Implementation is a two sided process: on the one hand this is organization process which answer the question “How goals will be achieved?” and “Who will achieve them”, while on the other hand it contributes to development of managerial skills and change management.
The goal of the system is not only implementation of company strategy. The company management should also get used to the fact that frequent changes are quite normal. Employees who are involved in decision-making and implementation of strategy should be armed with effective feedback system.
Summary
It should be noted that use of strategy management systems will make it possible for a company to see real state of things. It does not mean that financial indicators became meaningless. It means that financial indicators should be balanced with nonfinancial ones. BSC System is the most promising concept which makes it possible to transfer operational activity into strategy, as well as create a full set of indicators that make a solid system of strategic control and management.
