THE BALANCED SCORECARD

Introduction
“The balanced scorecard provides managers with the instrumentation they need to
navigate to future competitive success .....The balanced scorecard translates an organisation’s
mission and strategy into a comprehensive set of performance measures that provides the
framework for strategic measurement and management systems (Kaplan and Norton, 1996,
p.2). this chapter discuss this revolutianory performance measurement philosophy, which has
gained prominence in management, accounting and operations management literature.

Balanced scorecard evolution

The imperative for improved performance measures cannot be ignored with today’s
worldwide competition and advancing technologies. Once new technologies are introduced,
major organisation changes are required, as the interaction between people and technology is
essential to ensure business processes become more and more effective and, therefore,
performance measures that focus on only financial criteria will not reflect the new
technological environment. New performance measures, if devised strategically, will
profoundly, influence business performance. Scholars, for example, suggest that more
attention needs to be placed on generating suitable performance measures to be a succesful
competitor, given today’s environment.
Research has revealed that for many companies, the difficulty is that there are “to
many performance measures”, ones that are outmoded and that are not harmonious.
Performance measures should observe changes in the market environment, determine and
assess progress towards business unit objectives and affirm achievement of performance
goals (Kaplan and Norton, 1996).
The literature suggests that any fresh, competent combination of measures must look
to four essential focuses that are missing in traditional measures. Firstly, a method to trace
customer satisfaction – in a competitive environment, customers must be content, or market
share will drop. Customers care more about price, faster and reliable deliveries, design,
quality and level of service. Secondly, a method to trace appropriate financial performance –
that is, is the company profitable? The third area is that firms need a plan to ascertain
competitive performance. Finally, these must be a method for tracking interorganisational
indicators to determine whether the business units are effectively using materials and
resources.
As a result of the focus on these factors, top management must aware that if they are
to fulfil their strategic plans, they should adopt a more “balanced approach” to gauge
performace by considering financial and non-financial performance measures. Significant
attention is now being given by academics and managers to building a more extensive and
linked set of measures for appraising and directing corporate and divisional performance,
influenced largely by Kaplan and Norton’s (1992, 1993, 1996) notion of the “balanced
scorecard”.

The balanced scorecard philosophy

The balanced scorecard (BSC) approach focuses on both financial and non-financial
measures. The financial measures indicate if improvements in financial performance resulted
from sacrificing investments in new products or on-time delivery. The BSC includes financial
measures that tell the “results of action already taken”. Kaplan and Norton suggest that
financial measures should not be eliminated altogether, as a well-designed financial control
system can actually enhance rather than inhibit an organisation’s management programme.
The balanced scorecard supplements the financial measures with operational measures on
customer satisfaction, internal processes and the firm’s innovation and improvement
activities. Kaplan and Norton suggest that operational measures are the drivers of future
financial performance.
The components of the balanced scorecard are, firstly, the financial perspective,
which includes profitability measures such as cash flow, quarterly sales growth and operating
income by division, increased market share and return on equity. Secondly, the customer
perspective encompasses such measures as market share, customer response time, on-time
performance, product reliability, percentage of sales from new products, percentage of sales
from established products, on-time delivery, share of key accounts purchases, ranking by key
accounts and number of cooperative engineering efforts. Thirdly, the internal business
processes include such measures as number of new patents, number of new product launches,
process time to market, time to develop next-generation, quality, time and efficiency
measures (such as direct materials efficiency variances, effect yield, manufacturing lead time,
head count and inventory). The learning and growth perspective identifies the infrastructure
that the organisation must build to create long-term growth and improvement. The objects in
the learning and growth perspective are the drivers for achieving excellent output in the initial
three scorecard perspective.
These essential principles for this perspective identified by Kaplan and Norton are
employee capabilities, information system capabilities and motivation. Table 12.1
summarises the four BSC dimensions.

Table 12.1 Balance scorecard dimensions and their measures

Balanced Scorecard Key Indicators (or measures)
Dimensions
Financial Operating income, return on investment, net earnings,
earnings per share, sales growth, generation of cash
flow and economic value-added
Internal Business Processes Product design, product development, post-sale
service, manufacturing efficiency and quality
Learning and Growth The intellectual ability of employees, information
systems, organisational procedures to manage the
business and adapt to change, employee training and
development, and employee satisfaction
Customer Customer satisfaction survey, customer retention,
new customer acquisition, customer response time,
market share and customer profitability

Arguments for the adoption of the balanced scorecard

 Several companies, especially in the United States, have already adopted the
“balanced scorecard”; as Kaplan and Norton observed, “their early experiences using the
scorecard have demonstrated that it meets several managerial needs”. Firstly, the scorecard
brings together in one report many miscellaneous elements ofa company’s competitive plan,
e.g. customer orientation, improvement in response time, quality, promotion of teamwork and
encouragement of shorted product launch times as well as looking to the long-term.
Secondly, the scorecard guards against sub-optimisation. By forcing top management to think
about all the important operational measures together, the “balanced scorecard” enables them
to see if improvement in one area has been achieved at the expense of another area.
Kaplan and Norton’s “balanced scorecard” has been put forth, presumably, because
traditional measurement systems have developed from, as they suggest, the finance role and
because traditional systems have a control bias. That is, traditional performance measurement
systems stipulate the type of behaviour that employees should take and are then used to
determine whether the employees have in fact behaved in the particular manner. As such,
traditional systems attempt to control behaviour as opposed to the “balanced scorecard”
which is used to encourage behaviour directed at improving the key indicators.
The ‘balanced scorecard” focused on strategy and vision, not control; this focus is the
kind of focus that many organisations are trying to accomplish, that is “cross functional
integration, customer supplier partnerships, global scale, continuous improvement and teams
rather than individual accountability”. By utilising the “balanced scorecard” firms can
establish management goals and managers can take whatever actions are necessary and adapt
their behaviour as appropriate to accomplish those goals.
In their 1993 paper, Kaplan and Norton suggest that different market situations,
product strategies and competitive environments require different scorecards and that
business units will create their scorecard to match their strategy, mission, technology and
culture. Kaplan and Norton identify a number of firms who have implemented the “balanced
scorecard”. Some examples are: Apple Computers, which use the scorecard as a device to
plan long-term performance, not as a device to drive operating changes; Advance Micro
Device, a semiconductor company, which wanted to consolidate their strategic information;
and Rockwater, a global engineering and construction company, which is a worldwide leader
in underwater engineering and construction, whose excecutives wanted a metric that would
communicate the importance of building relationships with customers.
Research has found that many companies that are now implementing local
improvement programmes, such as process redevelopment, total quality management and
employee involvement, are moving to the “balanced scorecard” as a means of measuring the
success of these endeavours. Furthermore, the “balanced scorecard” communicates priorities
to management, employees, investors, and even customers. It is used as the focal point for the
firm’s efforts in achieving its goals. Firm using the “balanced scorecard” do not have to rely
on short-term financial measures as the sole indicators of the company’s performance; the
scorecard contributes to linking long-term strategic objectives with short-term processes.
Creating a “balanced scorecard” has forced companies to unite their strategic planning and
budgeting, which has helped ensure that their budgets support their strategies.
The academic community has recognised that the BSC advances the management
literature by specifying a range of measures stated above that managers should attend to in
order to build long-term, sustainable competitive advantage. Atkinson et al. (1997) suggest
that the BSC has the potential to provide planners with a way of expressing and testing a
sophisticated model of cause-and-effect in the organisation, a model that provides managers
with a basis to manage desired and actual results.
The use of a BSC does not mean just “using more measures”: it means putting a
handful of strategically critical measures together in a single report in a way that makes
cause-and-effect relations transparent and keeps managers from sub-optimising by improving
one measure at the expense of others. To achieve a balance among the four dimensions of the
BSC, a company should pay attention to all of them, according to Kaplan and Norton (1996).
In other word, one can achieve this by putting equal emphasis on both the financial and non-
financial measures of the BSC. Atkinson et al. (1007, p. 93) suggest that the name
“scorecard” is misleading, because BSC is not a scorecard in the conventional sense. Rather,
it is a sophisticated information system and management approach that links effects (also
called organisational objectives, such as profit levels) with causes, such as customer or
employee satisfaction. This argument makes sense because one should not take the BSC as a
blueprint; it’s a philosophy. It has the potential to provide managers with a linked set of
measures that specifies how the four perspectives of measures stated above can be aligned
with overall company strategy, how managers should attend to both financial and non-
financial measures of performance and how they can integrate them.
No doubt, Kaplan and Norton’s BSC philosophy is extremely useful as one of the
“new” theories that can be applied (with positive effect) to many organisations. It is a logical
conclusion to a complex problem and after studying it, there are a number of points that make
straightforward common sense. It has been put forward with clarity, articulation and
rationality, which itself contributes to its worth as a sound and reasonable theory. The biggest
criticism that can be made is that the BSC attempts, in my opinion, to convey that an all-
encompassing solution to performance evaluation problems has been found. Deriving useful
results from its application is dependent on a number of factors, namely industry
concentrations, the operating environment and the management systems of the organisation.

Linking balanced scorecard measures to size and market factors: the Hoque and James
(2000) study
Hoque and james (2000) consider the size of organisations, product life-cycle stage
and market position as potential contextual factors of BSC usage, and explore how
organisational performance is affected by different uses of BSC in different settings. Each of
the potentially contingent factors will now be considered in turn.

Organisation size and the balanced scorecard

Contingency theories of organisations developed by Burn and Stalker (1961),
Lawrence and Lorsch (1967) and Woodward (1965) suggest that size may affect the way
organisations design and use management systems. Merchant (1981, 1984) claims that
organisational growth poses increased communication and control problems. As the size of
the firm increases, accounting and control processes tend to become more specialised and
sophisticated. The contingency theory literature suggest that size is related to greater
decentralisation and structuring of activities, due to information processing constraints upon
senior management. Futhermore, the need to stimulate effective communication flow
becomes more apparent in larger organisations, as in such organisations the behavioural
orientation characterising management controls in small organisations becomes unworkable.
As a consequence, in large business enterprises, a broader set of information and
measurement issues arises. Small companies frequently do not require elaborate performance
evaluation techniques as the strategy setters, usually the owners, are close to the “action”.
Organisations that have sole customer arrangements, unless faced with the prospect of
competition further down the track, are usually best off focusing on internal processes and
financials. Hoque and James (2000) found support for this view.

Product life-cycle stage and the balanced scorecard

One potential determinant of the use of BSC measures is the firm’s product life-cycle.
Product life-cycle stage relates to the evaluation of the product in terms of the widely
accepted product life-cycle model. A product’s stage in this life-cycle has been defined as an
organisational characteristic that will determine production and firm output. Merchant (1984)
sees product life=cycle stage as a market factor and suggests a relationship with budgeting
for planning and control. There is the suggestion thet, if companies are to survive and prosper
in today’s complex business environment, they must use measurement and management
systems derived for their strategies and capabilities (Kaplan and Norton, 1996). As a
consequence, it is anticipated that product life-cycle stage has a major influence on the
organisational arrangements adopted in order to attain strategic objectives, for example the
structure, systems and management style.
The organisational strategy literature classifies product life-cycle stage into four
categories: emerging, growing, maturing and declining. At the emerging stage, the product is
launched and sales are low with high prices. Sales begin to rise rapidly at the growth stage
because of the introductory promotions and growing customer awareness. At the mature
stage, there is no more sales growth as the potential for new customers is exhausted. At this
point sales have peaked, while prices remain low. Sales reduce at the declining stage as the
product is gradually replaced with either innovations or an enhanced version (Wilson, 1991).
Each of these stages also provides for the number of competitors facing the firm. In
the early stage of a product’s life there are few competitors. However, as the product
becomes popular, competition increases as other firms see advantages to entering the market.
At the mature stage, firms are beginning to recognise the product’s limited life and
subsequently depart from the market; this departure continues through to the declining stage.
Merchant (1984) suggests that organisations with products in the early product life-
cycle stages tend to make less use of traditional financial control tools, such as budgeting,
compared to organisations with products in the later stages. This rationale can be extended by
considering the potential relationship between product life-cycle and BSC usage.
As noted earlier, the primary focus of an organisation with products in the early stages
is to seek new market opportunities by creating something that has a perceives uniqueness in
the market. The type of organisation stresses effectiveness in innovation and the development
of succesful relationships with customers. Kaplan and Norton (1996) suggest that the BSC
retains financial measurement as a critical summary of managerial and business performance,
but that it also highlights a more general and integrated set of measurements that link current
customer, internal process, employee and system performance to long-term financial success.
It follows that business with products at the growth stage would be more prone to incorporate
a broad-based performance evaluation system such as that required by the BSC philosophy,
which incorporates not only financial information, but also information pertaining to strategic
factors such as efficiency, innovation and customer relations. At the later product life-cycle
stage, firms can be expected to be less concerned with the future effects of current sales and
therefore financial measures would adequately serve measurement and management needs. It
is to be expected, therefore, that this type of organisation is likely to place less emphasis on
BSC usage.
Hoque and James’s (2000) study shows the positive association between early product
life-cycle stage and a greater reliance on BSC. They found that firms that have a higher
proportion of new products have a greater tendency to make use of measures related to new
products. While this may be true, it is noted that decline-stage firms may also have a greater
need to make use of a BSC to rebuild their competitive positions in the market.

Market position and the balanced scorecard

Market position refers to the organisation’s market share in relation to its competitors
in a particular market. Merchant (1984) included this variable in his study and suggests that
when a organisation has a strong market position, the use of budgets for controls would be
more prominent than in a firm in a weak market position. This is because greater control may
be needed for firms with a strong market position. In a strong market position there is the
need to have the entire organisation committed to a group of pragmatic, feasible goals that
can be conveyed to every area of the organisation to ameliorate the systematisation of
activities. Furthermore, Merchant, following Galbraith (1977), suggest that there is a greater
need for increased communication in firms holding a strong market position.
The effect of market position on firms’ use of the BSC may be highly significant. This
is because today’s competitive environment demands greater communication across all
organisational areas in order to maintain awareness of market developments (Kaplan and
Norton, 1996; Libby and Waterhouse, 1996). MacArthur (1996) suggests that to be world-
class competitors, companies need performance measures that count. He further suggests
mnagers must need meaningful performance measures about each process and its output
which support decision-making. It seems likely that a BSC can satisfy this greater need, as it
facilities decisions and actions that support strategies based on the needs of stakeholders,
internal and external customers, regulatory bodies, managers and employees, and requires
involvement by all levels of the organisation. In their study, Hoque and James (2000) propose
that organisations with a strong market position are likely to place greater emphasis on the
use of a BSC, as it will assist maintenance of an already strong position. Conversely, a weak
position in a particular market creates a lesser demand for sophistication in management
systems. A lesser demand for sophistication suggests a lower deployment of sophisticated
management systems, such as the BSC. Thus, organisations with a weak market position can
be expected to place greater emphasis on traditional, financial oriented, performance
evaluation systems for assessing performance. They found some support for this proposition.
Table 12.2 Balance scorecard measures at Elsewhere Water
BSC dimensions Key performance indicators
Customer focus % customer satisfaction
% compliance with verbal service request response times
Number of water supply interruptions per 1,000 properties
Number of planned water supply interruptions per 1,000
properties
Number of unplanned water supply interruptions per 1,000
properties
% of water and wastewater service interruptions within 5 hours
Number of customer complaints per 1,000 properties
Number of water quality complaints per 1,000 properties
Number of odour complaints per 1,000 properties
% of meters installed within 14 days from date of payment
Chosen employer % lost working days
Training expenditure versus total operating expenditure (%)
Environmental sustainability % test meeting WWTP EPA licence criteria
Quantity of treated water supplied for property (kL) – not
seasonally adjusted
Number of uncontained wastewater spills
% of wastewater spilt per wastewater treated
% effluent reused
Commercial sustainability Combined operating costs per property
% expended off revenue funded capital expenditure
Water & wastewater renewals expenditure as a percentage of
current replacement cost of system assets
% unaccounted water
Operating profit (EBITD and abnormals)
Return on turnover (net profit after tax/sales)
Return on net operating assets (EBIT/total net assets)
Debt-equity ratio (total interest bearing debt/total equity)
Total financial distribution to council (as a % of post-tax
profits)
Quality water service provision % tests meeting NHMRC (1996) bacteria criteria
% tests meeting NHMRC (1996) chemical criteria
Water main breaks per 100 km of water main
Sewer chokes per 100 km of wastewater main
Wastewater main (gravity & pressure) breaks per 100 km of
main
Accountability % compliance to wastewater spillage procedure (ensures
spillages are properly reported and remediated)
Maintenance of ISO 9000 & 14000 third-party certification

Figure 12.1 Key performance indicators within the BSC at a housing authority
 Financial Perspective
Goals Measures
Survive Provit and loss
Cash flow
Financially viable Loans approved
Collection efficiency
Sales of houses/plots

Customer Perspective
Goals Measures
Responsive supply Average loan processing time
FNPF receipts
Customer satisfaction Customer queries/problems/
complaints to be attended and
resolved to customer satisfaction
within 5 working days

Internal Business Perspective

Goals Measures
Technology capacity Payroll reconciliation
Bank reconciliation
General ledger closure

Innovation and Learning Perspective

Goals Measures
Training Training taken up
Product focus Production equals sales

FNPF refers to the Fiji National Provident Found. Both the employer and employee
contribute 8% of the basic salary of the employee. The FNPF provides its members with two-
thirds of their savings towards home deposits at the Housing Authority. The FNPF receipts
refer to the collection of these two-third savings from each of their homebuyers.

Table 12.2 Balanced scorecard measures at Elsewhere Water

BSC dimensions Key performance indicators

Customer focus • % customer satisfaction
• % compliance with verbal service request response times
• Number of water supply interruptions per 1,000 properties
• Number of planned water supply interruptions per 1,000
properties
• Number of unplanned water supply interruptions per 1,000
properties
• % of water and wastewater service interruptions within 5 hours
• Number of customer complaints per 1,000 properties
• Number of water quality complaints per 1,000 properties
• Number of odour complaints per 1,000 properties
• % of meters installed within 14 days from date of payment
Chosen employer • % lost working days
• Training expenditure versus total operating expenditure (%)
Environmental • % test meeting WWTP EPA licence criteria
sustainability • Quantity of treated water supplied for property (kL) – not
seasonally adjusted
• Number of uncontained wastewater spills
• % of wastewater spilt per wastewater treated
• % effluent reused
Commercial • Combined operating costs per property
sustainability • % expended off revenue funded capital expenditure
• Water & wastewater renewals expenditure as a percentage of
current replacement cost of system assets
• % unaccounted water
• Operating profit (EBITD and abnormals)
• Return on turnover (net profit after tax/sales)
• Return on net operating assets (EBIT/total net assets)
• Debt-equity ratio (total interest bearing debt/total equity)
• Total financial distribution to council (as a % of post-tax
profits)
Quality water service • % tests meeting NHMRC (1996) bacteria criteria
provision • % tests meeting NHMRC (1996) chemical criteria
• Water main breaks per 100 km of water main
• Sewer chokes per 100 km of wastewater main
• Wastewater main (gravity & pressure) breaks per 100 km of
main
• % compliance to wastewater spillage procedure (ensures
spillages are properly reported and remediated)
• Maintenance of ISO 9000 & 14000 third-party certification

Table 12.3 TQM – BSC linkages

 Key TQM succes factors TQM-related performance metrics BSC dimension
Executive commitment and • Employee opinion survey • Learning and growth
management competence • Employee satisfaction • Internal business
• New techniques introduced compared processes
with competitors
Customer relationships • Customer satisfaction survey • Customer
• Customer acquisition rate • Financial (or
• Customer retention (or loyalty rate) shareholders)
• % of the industry market share
• Number of customer complaints
• Warranty repair cost
Supplier relationships • Supplier satisfaction survey • Internal business
• Supplier retention rate processes
Benchmarking • Labour efficiency compared with • Internal business
competitors processes
• Rework/scrap rate • Financial (or
• Cost of quality (% of sales) shareholders)
• Return on investment
• Market share
Employee training • Employee satisfaction survey • Learning and growth
• Employee capabilities
• Spending levels in dollars for
employee development and training
Open, less bureaucratic • Customer satisfaction survey • Customer
culture and employee • Employee satisfaction survey • Learning and growth
empowerment • The degree of decentralisation in
corporate governance
Monitoring quality • Incidence of products defects • Internal business
programmes (zero defects • Material and labour efficiency processes
culture) variances • Customer
Internal business proces • % shipments returned due to poor
improvement and quality
manufacturing innovation • Warranty repair cost
• Investment in high technology • Internal business
• Introduction of new management processes
system (e.g. JIT) • Financial (or
• Salae growth shareholders)
Balanced scorecard practices in the public sector
Many public sector organisations have implemented BSC. Table 12.2 and figure 12.1
provide evidence of BSC usage in two public sectororganisations. Table 12.2 illustrates the
implementation of the BSC indicators in an Australian water authority and figure 12.1
outlines the BSC of the housing authority of Fiji.

Total quality management and balanced scorecard linkage

According to the performance measurement literature, a performance measurement
system should encourage actions that are congruent with organisational strategy (Lynch and
Cross, 1991; Kaplan and Norton, 1996; Simons, 2000). More specifically, Lynch and Cross
(1991) demonstrate how a business unit strategy directly translates into how it plans to reach
its strategic goals and what performance measures are truly critical to the unit’s success.
Strategically driven measures provide both management and employees with the means to
identify with the success of the strategy and track their own contributions to its achievement.
Table 12.3 illustrates how all four BSC dimensions (or categories) can contribute to the
effectiveness of TQM programmes. The figure outlines key TQM activities (or factors), key
TQM-related performance metrics and critical BSC categories for each TQM factor. It list
eight key TQM-related activities. Note that in the light of the TQM literature, these eight
factors are considered to be critical to organisational effectiveness. From TQM and
performance measurement literature, key performance metrics are chosen (the second
column) and these metrics are then linked to the BSC category (the final column).
As discussed earlier, a BSC system incorporates a wide range of performance
indicators, financial as well as non-financial, which together can provide managers with
continuous signals as to what is most important in their day-to-day work and where efforts
must be directed. Therefore, to achieve TQM goals, TQM firms should implement a BSC-
like performance measurement system that identifies appropriate non-financial and financial
indicators, so that employees are motivated and rewarded for achieving desired outcomes and
also encouraged and rewarded to provide feedback on areas where improvements can be
made. It is the feedback mechanism that is the success ingredient. It is by empowering
employees to contribute towards achieving continuous performance improvement that TQM
success is achieved.
Table 12.3 shows that there are a number of dimensions for which TQM and BSC
converge. Firstly, strategic management accounting literature suggests that traditional
accounting systems do not support the drivers of quality and the evaluation of drivers of
quality and that management control systems should change to support TQM. Traditional
accounting supports cost and production analysis well, but does not support quality analysis
and problem-solving well. This is because quality is driven by non-financial factors such as
product design, process design, rework and on-time delivery.
There is also the view that non-financial performance measures are better indicators
of management effort and reflect the causal reasons for future financial performance.
Therefore, non-financial measures must supplement financial measures in providing support
for TQM. Goals and objectives for non-financial factors can be set and measures used to
provide feedback and rewards. BSC, with its emphasis on supplementing financial
information with non-financial information, then, supports TQM.
According to Kaplan and Norton (1996), a BSC approach focuses on strategy and
provides a broader control focus that thereby contributes to manager orientation towards
longer-term objectives. As shown in Figure 12.1, TQM programmes promote this broader
focus – the type of focus that many organisations are now working to accomplish, that is
cross-functional integration, customer supplier partnerships, global scale, continuous
improvement and teams rather than individual accountability (i.e. TQM philosophy). By
using BSC dimensions, firms can assess these goals and success factors, and managers will
take whatever actions are necessary, together with adapting their behaviour to accomplish
those goals and success factors. The BSC measures can also be designed to pull people
towards the firm’s overall TQM programme, along with its other organisational strategic
priorities.
Table 12.3 further demonstrates that for successful TQM implementations and
effectiveness, the firm should use performance measures that align the interests of employees
with those of the firm(i.e. learning and growth). The use of traditional financial measures are
not likely to present indicators that direct employees to take a holistic view; instead they
encourage employees to take a narrow view of what actions are required to achieve targets.
That is, employees traditionally focus on their own immediate targets often to the exclusion
of what may benefit the firm.
Traditionally, hierarchical firms developed strategies and budgets at the organisational
or divisional level which were imposed upon employees at the business unit level.
Management at business unit level had little, if any, input into the design of the budget or its
respective targets. Financial performance indicators provided little incentive for employees to
do anything other than meet or exceed budget. The “success ingredient” for TQM firms
adopting BSC, apart from identifying the necessary indicators, lies in the fact that it is the
employee at the shop-floor level that can impact most positively on performance and
profitability. It is not the CEO, nor other senior management, that sees first-hand how the
customer “feels” or how “red tape” hinders meeting customer service. Only by having
employees contribute to the identification of all processes that can impact on profitability can
the firm embrace continuous improvement. It is only through developing a BSC-like
performance measurement system that encourages employees to embrace continuous
improvement that firms can direct action towards achieving TQM objectives.
To sum uo, firms wishing to be competitively successful through TQM practice
(combined with the firm’s other strategic priorities) should develop a BSC that will provide
indicators of how the firm is viewed by shareholders (financial perspective), how customers
see the firm (customer perspective), in which area the firm must excel (internal business
processes perspective), and how and where the firm can learn and create value (learning and
growth perspective).

Chapter summary
Each firm is unique and so directs its own course for building a balanced scorecard
(BSC). As a result of this process, an entirely new information system that links top
management objectives down through to the plant floor and particular site operational
measures could be developed. Its primary benefit is its ability to join together manufacturing
capabilities in a strategic environment and financial control. It could be seen to be a bridge
between financial and manufacturing goals.
The exercise of creating a BSC forces companies to integrate their vision and strategic
objectives into measures that will be support short and long-term goals. A BSC creates a
framework for managing an organisation’s operations to gain competitive advantage. Before
jumping onto this “bandwagon”, management should ask one key question. Do we need a
BSC?

BENCHMARKING ANALYSIS AND MANAGEMENT ACCOUNTING

Introduction
In a complex, dynamic, fast-changing environment, companies must strive for
superiority in order to survive. Competitive edge cannot be achieved or maintained by setting
goals based on past or even present performance. Benchmarking is a management practice
that can be used to pursue excellence. It does this by identifying, comparing and emulating
best practice wherever it occurs. Management accounting data play an important role in this
analysis that managers conduct and this chapter illustrates how. What is this new approach?
Why do you need benchmarking? How do you carry it out? Exactly what management
accounting systems do you need to do it? The chapter addresses these questions.

What is benchmarking?
In recent years benchmarking has become increasingly popular in many organisations
worldwide. The concept of benchmarking originated in Rank Xerox in 1979 and it became a
company-wide effort in 1981. Rank Xerox defined benchmarking as a continuous systematic
process of evaluating companies recognised as industry leaders, to determine business and
work processes that represent best practices and establish rational performance goals. It is a
search for industry best practices that lead to superior performance. It illustrates how good a
company currently is in comparison to its competitors, that is benchmarking analysis
demonstrates what others are doing as well as what others are achieving.

What does benchmarking analysis offer?

Benchmarking is an integral part of the organisational improvement process and it
looks for ideas to borrow from those who are doing better, perhaps in one very specific
aspect. At Rank Xerox, benchmarking has become a lifestyle and is applied across all aspects
of the organisation – from environment, purchasing, human resources through to software
design, the audit function and so on.
Traditional competitive analysis focuses on performance indicators, strategic choices
and products or services within a given industry sector. This indicates the company’s
performance in relation to its peers and how much it deviates from the standards.
Benchmarking is a broad and focuses on an ongoing process of measuring and
improving products, services and practices againts the best that can be identified worldwide.
Performances are evaluated, based on the performance of the best organisations in the world.
 The benchmarking technique has now been applied to many world-class companies
like AT&T, DuPont, American Express, General Electric (GE), General Motors, Honda
Motors, Proctor and Gamble, Apple Computer, IBM and Motorola. Benchmarking is also
spreading as a direct result of its inclusion in the assesment criteria for the quality award.
Benchmarking is the cornerstone of total quality management (TQM), business
process re-engineering and time-based management. Benchmarking literature identifies
numerous advantages. For instance it :
- Provides direction and impetus for continuous improvement.
- Indicates early warning of competitive disadvantage.
- Promotes competitive awareness.
- Becomes the stepping stone to ‘breakthrough’ thinking.
- Identifies the ‘best practice’.
- Provides an objective attainment standard for key areas of business operation.
- Links operational tactics to corporate vision and strategy.
- Exposes performance gaps.
- Triggers major step changes in business performance.
- Helps companies redefine their objectives.
- Challenges the ‘status quo’.
- Allows realistic stretch goals.

Types of benchmarking
Benchmarking activities may be divided into three major groups: internal benchmarking,
external benchmarking and best-practice benchmarking.
- Internal benchmarking is a process of comparing performance within the company or
division, that is it looks for internal comparisons (comparing yourself to the best). A
comparison is made across internal operations and parameters, such as purchasing,
marketing, research and development, administration and so on.
- External benchmarking focuses on external comparisons, that is performance is
compared with a spread of ‘look-alike’ businesses in similar positions experiencing
similar market growth, fluctuations and circumstances.
- Best-practice benchmarking requires seeking out the undisputed leader in a particular
process that is critical to the entire business process – regardless of sector, industry or
location – and comparing it with your own.

The benchmarking process

The benchmarking process may be divided into the following stages (Codling, 1996):
- Stage 1 : Planning.
a. Select the broad function or procedural area to be benchmarked – manufacturing,
warehousing, marketing, etc.
b. Identify comparative companies or activity centres.
c. Determine data collection method and collect data.
- Stage 2 : Benchmark partners.
Identify potential benchmarking partners from three locations, internally, externally
and global best practice.
 - Stage 3 : Data analysis.
Collect the data and from these confirm the most likely benchmark partner to contact.
Determine current performance gap and project future performance levels.
- Stage 4 : Action.
Develop action plans, communicate benchmark objectives and results throughout the
organisation and other companies; implement specific actions and monitor progress.
- Stage 5 : Review and recycle.
Monitor performance, review and analyse progress and calibrate performance
improvements and targets.
Rank Xerox devised a ten-step benchmarking process:
Phase 1 : Planning
1. Identify benchmark outputs
2. Identify best competitors
3. Determine data collection method
Phase 2 : Analysis
4. Determine current competitive gap
5. Project future performance levels
6. Establish functional goals
7. Develop functional action plans
Phase 3 : Action
8. Implement specifications
9. Monitor results/report progress
10. Recalibrate benchmarks

The relation between TQM and benchmarking

The TQM culture influences the way in which benchmarking develops in the organisation
(Codling, 1996). So benchmarking as a natural evolution from quality measurement and
TQM concepts. TQM firms have a clear mission with a better understanding of their
customer’s needs and they are more confident in their activities. TQM firms devote
considerable time and resources to employee training and development in the area of the
company-customer relationship.
With these understandings, TQM firms encounter less of a struggle in focusing their
efforts to produce usable results or actionable recommendations. Emphasis on these factors
grows as organisations progress along the benchmarking learning curve. Although in theory
any company can implement benchmarking, whether going down the TQM path or not, in
practice the more that quality is ingrained, the easier it is for people to relate to benchmarking
(Codling, 1996). In a TQM environment top-level commitment is essential for an effective
TQM philosophy. This is also central to best-practice benchmarking.
TQM has limited ability to monitor developments outside a specific industry sector.
Taking some of the tools of quality improvement and problem-solving and developing them
into the rigorous benchmarking process adds the external dimension that, over time, provides
a cutting edge to achieve competitive superiority (Codling, 1996).
Benchmarking literature (Swift, Gallwey and Swift, 1996) reveals that in one form or
another, the following elements are common to both TQM and benchmarking tools :
 - Continuous improvement.
- Meeting customer requirements.
- Certain performance standards.
- Understanding industry’s best practices.
- Concurrent engineering.
- Measuring of elements (targets).
It has been suggested in the literature that benchmarking could be incorporated
directly into the TQM model. The biggest obstacle would be the idea of getting used to using
dissimilar companies as benchmarks. Just as managers had to be educated in achieving
customer satisfaction to yield a high-quality product, they will need to be educated in the
principles of ‘competitive benchmarking’ and will have to be shown its benefits.

Management accounting for benchmarking

Management accounting can supply useful data for benchmarking analysis. In benchmarking
it is not sufficient to look only at traditional cost and budget data. It is necessary to look at a
wide range of external information on the company’s customers, suppliers and competitors.
As discussed in Chapter 1, management accounting literature labels this ‘broad-scope’
management accounting systems (MAS) information. This means that organisations adopting
benchmarking practice need an MAS that has such a broad focus.
A typical benchmarking team is comprised of a leader and other members with
analtyical skills, work process documentation skills and information search and analysis
capability, together with customer representatives (internal and/or external). This indicates
that management accountants can palay a significant role in the benchmarking process from
data collection through to data analyses and presentation. When collection and analysing
information it must be remembered that irrelevant and ‘nice to know’ data should be
ruthlessly discarded, because more does not necessarily help to provide a clearer picture. A
benchmarking-oriented MAS focuses more on non-financial information, for example
measuring good working atmosphere, and collects the following information :
- Labour turnover over a fixed period
- Reward and recognition systems (levels/frequency/reviews)
- Off-site or on-the-job training per person per year (days/spend)
- Number/variety of shared social events
- Employee well-being initiatives (canteen/health care, etc)
Likewise satisfied customers can be established by measuring :
- Number/type of complaints
- Number of repeat orders
- Technical back-up (team/specific initiatives)
- Average ‘age’ of customer relationships
- Special promotion packages (number/type)

It has been suggested that good benchmarking combines a measurement of quantitative and
qualitative data and management accounting can play an important role in this process. Note
that it is best to collect as much data as possible and gradually draw out and emphasise that
which is most meaningful.
Chapter summary
As discussed above, benchmarking supports companies in their efforts to improve
their competitive situation. Benchmarking should not be throught of as a one-time event; it’s
a continuous performance assessment process in at least two different environments – the
company’s own and the reference object. Most of the activities discussed above involve
organisational change and a benchmarking process benefits from dynamic cross-functional
organisational structures (Hansen and Riis, 1996).
Benchmarking is an important element of the company’s total quality management
programme. Benchmarking helps a company to be competitive with the ‘best of the best’ and
it needs to be understood that this is a dynamic and continuous process (Swift, Gallwey and
Swift, 1996).
When benchmarking is used as a performance improvement tool, it is important to
process a wide range of both financial and non-financial information to assess the
effectiveness of benchmarking and to understand that management accountants can play a
significant role in this matter. Thus benchmarking companies benefit from a dynamic
management accounting system. Probably the most significant focus in the management
accounting system should be the redirection of the reference point from an internal focus to
an external one.

ANALISIS BENCHMARKING DAN AKUNTANSI MANAJEMEN

Pengantar
Dalam kompleksitas, dinamika, perubahan lingkungan yang cepat, perusahaan harus
berjuang untuk keunggulan supaya bertahan hidup. Kompetitif tepi tidak bisa dicapai atau
dipertahankan dengan menetapkan tujuan berdasarkan kinerja masa lalu atau bahkan
sekarang. Benchmarking adalah praktek manajemen yang dapat digunakan untuk mengejar
keunggulan. Hal ini dilakukan dengan mengidentifikasi, membandingkan dan meniru praktek
terbaik di mana pun itu terjadi. Data akuntansi manajemen memainkan peran penting dalam
analisis ini bahwa manajer melakukan dan bab ini menggambarkan bagaimana
melakukannya. Apa pendekatan baru ini? Mengapa Anda perlu benchmarking? Bagaimana
Anda melaksanakannya? Sebenarnya apa sistem akuntansi manajemen yang Anda butuhkan
untuk melakukannya? Bab ini membahas pertanyaan-pertanyaan ini.

Apa itu benchmarking?

Dalam beberapa tahun terakhir benchmarking telah menjadi semakin populer di
banyak organisasi di seluruh dunia. Konsep benchmarking berasal dari Rank Xerox di tahun
1979 dan itu menjadi upaya seluruh perusahaan pada tahun 1981. Rank Xerox
mendefinisikan benchmarking sebagai suatu proses sistematis yang berkesinambungan dari
evaluasi perusahaan yang diakui sebagai pemimpin industri, untuk menentukan proses bisnis
dan proses kerja yang merepresentasikan praktek-praktek terbaik dan menetapkan tujuan
kinerja yang rasional. Ini adalah mencari praktek industri terbaik yang mengarah pada kinerja
superior. Ini menggambarkan seberapa baik sebuah perusahaan saat ini dibandingkan dengan
pesaingnya, yaitu analisis benchmarking menunjukkan apa yang orang lain lakukan serta apa
yang orang lain capai.
Apa yang analisis benchmarking tawarkan?
Benchmarking adalah bagian integral dari proses perbaikan organisasi dan mencari
ide untuk meminjam dari mereka yang melakukan lebih baik, mungkin dalam satu aspek
yang sangat spesifik. Pada Rank Xerox, benchmarking telah menjadi gaya hidup dan
diterapkan di semua aspek organisasi - dari lingkungan, pembelian, sumber daya manusia
melalui rancangan software, fungsi audit dan sebagainya.
Analisis kompetitif tradisional berfokus pada indikator kinerja, pilihan strategis dan
produk atau jasa pada sektor industri tertentu. Hal ini menunjukkan kinerja perusahaan dalam
kaitannya dengan perusahaan sejenis dan berapa banyak menyimpang dari standar.
Benchmarking adalah luas dan berfokus pada proses yang berkelanjutan untuk mengukur dan
meningkatkan produk, jasa dan praktek versus terbaik yang dapat diidentifikasi di seluruh
dunia. Kinerja dievaluasi yang didasarkan pada kinerja organisasi terbaik di dunia.
Teknik benchmarking sekarang telah diterapkan kepada perusahaan-perusahaan kelas
dunia seperti AT & T, DuPont, American Express, General Electric (GE), General Motors,
Honda Motors, Proctor and Gamble, Apple Computer, IBM dan Motorola. Benchmarking
juga menyebar sebagai akibat langsung dari dimasukkan dalam kriteria penilaian untuk
penghargaan kualitas.
Benchmarking adalah landasan TQM, proses rekayasa bisnis dan manajemen
berdasarkan waktu. Literatur benchmarking mengidentifikasi banyak keuntungan. Misalnya:
- Menyediakan arah dan dorongan untuk perbaikan terus-menerus.
- Menunjukkan peringatan dini dari kompetisi yang tidak menguntungkan.
- Meningkatkan kesadaran kompetitif.
- Menjadi batu loncatan untuk berpikir 'terobosan'.
- Mengidentifikasi 'praktik terbaik'.
- Menyediakan sebuah standar pencapaian tujuan untuk area utama operasi bisnis.
- Menghubungkan taktik operasional dengan visi dan strategi.
- Memaparkan kesenjangan kinerja.
- Pemicu utama langkah perubahan dalam kinerja bisnis.
- Membantu perusahaan mendefinisikan kembali tujuan-tujuan mereka.
- Tantangan dalam 'status quo'.
- Memungkinkan jangkauan tujuan yang realistis.

Jenis Benchmarking
Aktivitas benchmarking dapat dibagi menjadi tiga kelompok utama: benchmarking
internal, benchmarking eksternal dan benchmarking praktek terbaik.
- Benchmarking internal adalah proses membandingkan kinerja dalam perusahaan atau
divisi, yaitu yang terlihat untuk perbandingan internal (membandingkan diri Anda
dengan yang terbaik). Pembandingan dilakukan di seluruh operasi internal dan
parameter, seperti pembelian, pemasaran, penelitian dan pengembangan, administrasi
dan sebagainya.
- Benchmarking Eksternal berfokus pada perbandingan eksternal, yaitu kinerja
dibandingkan dengan penyebaran bisnis 'mirip' dalam posisi yang sama, mengalami
pertumbuhan pasar yang sama, fluktuasi dan keadaan.
- Benchmarking praktek terbaik memerlukan mencari pemimpin yang tak terbantahkan
dalam proses tertentu yang sangat penting untuk seluruh proses bisnis - terlepas dari
sektor, industri atau lokasi - dan membandingkannya dengan Anda sendiri.

Proses benchmarking
Proses benchmarking dapat dibagi menjadi tahap-tahap berikut (Codling, 1996):
 - Tahap 1: Perencanaan.
a. Pilih luas fungsi atau wilayah prosedural yang akan di benchmark - manufaktur,
pergudangan, pemasaran, dll
b. Mengidentifikasi perbandingan perusahaan atau pusat kegiatan.
c. Menentukan metode pengumpulan data dan mengumpulkan data.
- Tahap 2: Benchmark partners.
Identifikasi potensi mitra benchmarking dari tiga lokasi, internal, eksternal dan praktek
terbaik global.
- Tahap 3: Analisis data.
Kumpulkan data dan dari mengkonfirmasi mitra patokan yang paling mungkin untuk
kontak. Menentukan kesenjangan kinerja saat ini dan tingkat kinerja proyek di masa
depan.
- Tahap 4: Aksi.
Mengembangkan rencana aksi, mengkomunikasikan tujuan dan hasil benchmark seluruh
organisasi dan perusahaan lainnya; melaksanakan tindakan-tindakan spesifik dan
memantau kemajuan.
- Tahap 5: Review dan daur ulang.
Memantau kinerja, meninjau dan menganalisa kemajuan dan penyesuaian peningkatan
dan target kinerja.

Rank Xerox merancang sepuluh langkah proses benchmarking:

Tahap 1: Perencanaan
1. Mengidentifikasi output benchmark
2. Mengidentifikasi pesaing terbaik
3. Menentukan metode pengumpulan data
Tahap 2: Analisis
4. Menentukan kesenjangan kompetitif saat ini
5. Memproyeksikan tingkat kinerja masa depan
6. Menetapkan tujuan fungsional
7. Mengembangkan rencana tindakan fungsional
Tahap 3: Aksi
8. Melaksanakan spesifikasi
9. Memantau hasil / laporan perkembangan
10. Mengkalibrasi ulang benchmark

Hubungan antara TQM dan benchmarking

Budaya TQM mempengaruhi cara benchmarking berkembang dalam organisasi
(Codling, 1996). Jadi benchmarking sebagai evolusi alami dari pengukuran kualitas dan
konsep TQM. TQM perusahaan memiliki misi yang jelas dengan pemahaman yang lebih baik
tentang kebutuhan pelanggan mereka dan mereka lebih percaya diri dalam kegiatan mereka.
TQM perusahaan mencurahkan waktu dan sumber daya untuk pelatihan karyawan dan
pengembangan di bidang hubungan perusahaan-pelanggan.
Dengan pemahaman ini, TQM perusahaan kurang menghadapi perjuangan dalam
memfokuskan usaha mereka untuk memproduksi hasil yang dapat digunakan atau
rekomendasi yang dapat ditindaklanjuti. Penekanan pada faktor-faktor ini tumbuh sebagai
kemajuan organisasi sepanjang kurva belajar benchmarking. Meskipun secara teori setiap
perusahaan dapat menerapkan benchmarking, apakah turun ke jalur TQM atau tidak, dalam
prakteknya semakin kualitas tertanam, semakin mudah bagi orang untuk berhubungan dengan
benchmarking (Codling, 1996). Dalam lingkungan TQM komitmen tingkat atas sangat
penting untuk filosofi TQM yang efektif. Hal ini juga pusat untuk benchmarking praktek
terbaik.
TQM telah membatasi kemampuan untuk memantau perkembangan di luar sektor
industri tertentu. Mengambil beberapa alat peningkatan kualitas dan pemecahan masalah dan
pengembangan mereka ke dalam proses benchmarking ketat menambah dimensi eksternal
yang, dari waktu ke waktu, menyediakan canggih untuk mencapai keunggulan kompetitif
(Codling, 1996).
Literatur benchmarking (Swift, Gallwey dan Swift, 1996) mengungkapkan bahwa
dalam satu bentuk atau lainnya, unsur-unsur berikut ini sama untuk kedua TQM dan alat-alat
benchmarking:
- Perbaikan terus menerus.
- Keperluan pertemuan dengan pelanggan.
- Standar kinerja tertentu.
- Memahami praktik terbaik industri.
- Concurrent engineering.
- Pengukuran elemen (target).
Hal ini telah diusulkan dalam literatur bahwa benchmarking dapat dimasukkan langsung ke
dalam model TQM. Hambatan terbesar akan ide mulai terbiasa menggunakan perusahaan
berbeda sebagai tolok ukur. Sama seperti manajer harus dididik dalam mencapai kepuasan
pelanggan untuk menghasilkan produk berkualitas tinggi, mereka perlu untuk dididik dalam
prinsip-prinsip 'benchmarking kompetitif' dan akan harus menunjukkan manfaatnya.

Akuntansi Manajemen untuk Benchmarking

Akuntansi manajemen dapat menyediakan data yang berguna untuk analisis
benchmarking. Dalam benchmarking tidak cukup untuk melihat hanya pada biaya tradisional
dan data anggaran. Hal ini diperlukan untuk melihat berbagai informasi eksternal pada
pemasok pelanggan dan pesaing perusahaan. Sebagaimana dibahas dalam Bab 1, literatur
akuntansi manajemen memberi label ini 'luas-lingkup' informasi sistem akuntansi
manajemen. Ini berarti bahwa organisasi mengadopsi praktek benchmarking memerlukan
MAS yang memiliki fokus luas.
Sebuah tim benchmarking khas terdiri dari pemimpin dan anggota lainnya dengan
keterampilan analtyical, keterampilan dokumentasi proses kerja dan pencarian informasi dan
kemampuan analisis, bersama dengan perwakilan pelanggan (internal dan/atau eksternal). Hal
ini menunjukkan bahwa akuntan manajemen dapat berperan signifikan dalam proses
benchmarking dari pengumpulan data hingga analisis data dan presentasi. Ketika
pengumpulan dan analisis informasi harus diingat bahwa data tidak relevan dan 'baik untuk
diketahui' harus tanpa ampun dibuang, karena lebih tidak membantu untuk memberikan
gambaran yang lebih jelas. Sebuah benchmarking yang berorientasi MAS lebih
memfokuskan pada informasi non-keuangan, misalnya mengukur suasana kerja yang baik,
dan mengumpulkan informasi berikut:
- Perputaran tenaga kerja selama periode tertentu
- Hadiah dan sistem pengakuan (tingkat / frekuensi / review)
- Pelatihan Off-site atau di tempat kerja per orang per tahun (hari/spend)
- Jumlah / berbagai acara sosial bersama
- Inisiatif kesejahteraan karyawan (kantin / perawatan kesehatan, dll)
Demikian juga pelanggan yang puas dapat dilakukan dengan mengukur:
- Jumlah / jenis keluhan
- Jumlah repeat order
- Teknis back-up (tim / inisiatif tertentu)
- Rata-rata 'umur' hubungan pelanggan
 - Paket khusus promosi (nomor / tipe)
Itu telah menunjukkan bahwa benchmarking yang baik menggabungkan pengukuran data
kuantitatif dan kualitatif dan akuntansi manajemen dapat memainkan peran penting dalam
proses ini. Perhatikan bahwa yang terbaik adalah mengumpulkan data sebanyak mungkin dan
secara bertahap menarik keluar dan menekankan yang mana yang paling berarti.

Ringkasan Bab
Sebagaimana dibahas di atas, benchmarking mendukung perusahaan dalam upaya
mereka untuk memperbaiki situasi kompetitif mereka. Benchmarking tidak boleh dianggap
sebagai peristiwa satu kali, melainkan sebuah proses penilaian kinerja yang
berkesinambungan dalam setidaknya dua lingkungan yang berbeda - perusahaan sendiri dan
obyek referensi. Sebagian besar kegiatan yang dibahas diatas melibatkan perubahan
organisasi dan manfaat proses benchmarking dari dinamika struktur organisasi lintas-
fungsional (Hansen dan Riis, 1996).
Benchmarking adalah elemen penting dari program TQM perusahaan. Benchmarking
membantu perusahaan untuk dapat bersaing dengan 'terbaik dari yang terbaik’ dan perlu
dipahami bahwa ini adalah proses yang dinamis dan berkesinambungan (Swift, Gallwey dan
Swift, 1996).
Bila benchmarking digunakan sebagai alat peningkatan kinerja, penting untuk
memproses berbagai informasi baik keuangan dan non-keuangan untuk menilai efektivitas
benchmarking dan untuk memahami bahwa akuntan manajemen dapat memainkan peran
penting dalam hal ini. Jadi benchmarking perusahaan bermanfaat dari sistem akuntansi
manajemen yang dinamis. Mungkin fokus yang paling signifikan dalam sistem akuntansi
manajemen harus mengalihkan titik rujukan dari fokus internal ke yang eksternal.