Balanced Scorecard (BSC) Measures in Small and Medium Enterprises (SMEs)
– An Exploratory Study
Brendan Phillips and Tekle Shanka, Curtin University of Technology
Abstract
The balanced scorecard (BSC) is an integrated strategic performance management framework
that helps organizations translate strategic objectives into relevant performance measures
(Bremser and White, 2000). This study explores how the BSC perspectives have been used in
small to medium enterprises (SME’s). The results of this exploratory study of 99 SME’s
indicate that younger businesses tended to use performance measures more frequently than
older businesses. Measures under the financial perspective were the most commonly used by
all businesses studied and measures of the internal business perspective were the least used.
Results are discussed and directions for future research are proposed.
Introduction
The old adage “what gets measured gets managed” is a reflection of the generally accepted
management principle dating back to the Hawthorne studies during the 1920’s and 1930’s by
Elton Mayo (Shafritz and Ott, 1991). Kaplan and Norton, (1992) and pioneered an approach
to measurement, which addressed what they believed was a serious inadequacy in traditional
process of performance measurement in their development of the Balanced Scorecard
(“BSC”). Menon and Varadarajan (1992) have also studied how traditional and nontraditional performance measures may be utilised to improve knowledge management and
decision making leading to improved organisational effectiveness. These developments were
on top of an emerging awareness that traditional financial performance measures, which
focussed on the outcomes of performance, were inadequate in themselves to assist managers
in today’s dynamic business environment (Fisher, 1992). The BSC aims to link business
strategy to operational performance by defining performance measures linked to critical
factors of success in the long run and demands a holistic approach to performance
measurement by focusing on four perspectives namely: a) financial perspective (which
addresses how an organization is performing financially using traditional outcome measures
such as ROE, cash flow, profit, ROI, project and customer profitability etc.); b) internal
business perspective (which addresses traditional operational issues such as process
performance indicators for example tender success rate, data rejection percentages, time per
customer etc.); c) innovation and learning perspective (which addresses percentage of
revenues from new clients, products or services; service improvement rates, level of employee
involvement in service innovations, employee satisfaction and commitment (measured by
surveys and unscheduled absenteeism patterns), research and development expenditures etc.),
and d) customer perspective, which addresses traditional marketing issues such as market
share, customer satisfaction and service quality ratings, customer loyalty, customer perceived
value etc. (Kaplan and Norton, 1996, 1993).
Wheelen and Hunger (2002) describe three kinds of performance measures necessary for
effective strategic management namely outcome, resource input and behavioural measures.
The BSC perspectives capture not only outcome measures such as financial performance,
sales and market share; but also resource input measures such as such as employee skills and
motivation as well as behavioural measures such as operational processes and business rules.
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To be most effective, input and behavioural measures should be related and influence
outcome measures (Wheelen and Hunger, 2002).
Since the introduction of the BSC as an integrative measurement system, there has been
considerable attention paid to its adaptation to large corporations and government
organizations around the world (Wheelen and Hunger, 2002; Ahn, 2001; Malmi, 2001; Butler,
Letza & Neale, 1997; Balanced Scorecard Institute). This attention has also resulted in a
number of criticisms of the BSC approach owing to its complexity and the difficulty in
operationalising this performance measurement framework in a way that improves managerial
decision-making in a practical manner (Ahn, 2001). McCall and Kaplan (1990) explain that
information on most strategic problems, opportunities and solutions is complex and emerges
slowly. Managers must make sense of the many pieces of information coming through as they
attempt to interpret and diagnose the strategic issues they need to decide on. In order to deal
with the barrage of information, managers employ a number of information processing biases
and re-organise information into cognitive categories employing personal constructs to
channel their perceptions and actions (Hogarth & Makridakis, 1981). The characteristics of
these personal constructs are determined by a number of personal and situational factors
including a manager’s function, history, level and prospects in an organization (McCall and
Kaplan, 1990; Lovelock, 2001).
Purpose and Method of the Study
This paper explores the use of performance information in small to medium enterprises
(“SME’s”). Whilst considerable attention has been paid to the use of performance measures in
large enterprises and government departments, relatively little research has been conducted on
performance measurement in SME’s. This is in spite of the fact that SME’s account for over
95% of all businesses and 85% of all new jobs in developed economies (Wheelen and
Hunger, 2002; Hanson et al., 2002). This exploratory study has attempted to identify
components of the four BSC perspectives currently in use in SMEs. The sample chosen to
represent small businesses was a convenience group of SMEs in Australia, Singapore, Hong
Kong, and Malaysia. Data was collected by face-to-face interviews with senior management
in the respective businesses to determine current measures used ander the in regards to the use
of the four perspectives of the BSC. The interviews also sought to elicit information on a
number of variables including: a) the number of years the business has been in operation, b)
the number of full time staff in employment, c) the type of business (industry) they are in, and
d) business orientation (local versus international market focus).
Results and Discussion
A total of 99 businesses participated in the survey. Information gathered was analysed using
the SPSS statistical package version 11.0. The majority of businesses were established in the
past 10 years; employing 21 - 45 staff, and serve mainly the local market (Table 1).
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Table 1. Profile of Businesses
Profiles
Year established
Number of employees
Business locations
Categories
1981 or before
1982 - 1991
1992 - 2001
20 or less
21 to 45
46 or more
Western Australia
Singapore
Hong Kong
Malaysia
Count
21
21
47
21
24
19
52
29
14
4
%
23.6
23.6
52.8
32.8
37.5
29.7
52.5
29.3
14.1
4.0
While the businesses represent 16 of the 17 Australian and New Zealand (ANZIC) standard
industrial classification codes the majority of them were in the manufacturing sector (20%),
followed by communication (11%), retail trade (9%), and property and business services
(8%).
BSC Perspectives
Various BSC perspectives were currently implemented in a number of businesses. Seventy
percent of respondents implemented financial perspective measures, 28% of respondents
implemented internal business perspective measures, 36% of respondents implemented
innovation and learning perspective measures, and 46% of respondents implemented
customer perspective measures.
Financial perspective
Seventy percent of businesses studied used some form of financial performance measure.
Fifty percent of businesses that used some financial performance measures were in their first
10 years of operation. Profit and loss measure (34%) was the most widely used measure
followed by sales/revenue measures (33%) and financial ratio measures (24%) (Table 2).
Table 2. Financial Perspective %
Measures
Profit and loss
Sales/revenues
Financial ratios
Cost efficiency
Accounts receivable/payable
Years in operation
≥ 21 11-20 ≤ 10
9
9
16
6
5
23
10
9
6
1
2
5
0
1
1
Total
34
33
24
7
2
Internal business perspective
The most commonly used internal business process performance measure was conformance to
delivery standards/service request (39%) followed by operational efficiency/effectiveness and
risk management /quality control 20%). Businesses 10 years or younger reported using the
conformance measure more than the other two business groups (22%) (Table 3).
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Table 3. Internal Business Perspective %
Measures
Conformance to delivery standards /service request
Operational efficiency / effectiveness
Risk management / quality control
Inventory control
Inquiry / complaint follow-up
Years in operation
≥ 21 11-20
≤ 10
7
11
22
4
11
11
2
4
13
4
0
9
0
0
2
Total
39
26
20
13
2
Innovation and learning perspective
Thirty-six percent of businesses used measures of innovation and learning. Once again,
younger businesses (46%) reported more usage of the measures compared with their older
counterparts. Employee performance management measure (29%) and employee training and
development measure (22%) together accounted for 57% of innovation and learning
perspective measures that were implemented by the businesses studied (Table 4).
Table 4. Innovation and Learning Perspective %
Measures
Employee performance management
Employee training and development
Quality / continuous improvement
Employee satisfaction / turnover
New product revenues / growth
Years in operation
≥ 21 11-20
≤ 10
7
9
14
3
5
14
5
9
5
3
7
7
3
3
7
Total
29
22
19
17
14
Customer perspective
Forty six percent of businesses used some form of measure of the customer perspective.
Customer feedback was the most widely reported measure (41%) across all aged businesses
followed by sales / inquiries / market share (22%). The majority of businesses (53%) using
these measures were in operation for 10 years or less. Conformance to service standard was
the least implemented measure across all three groups (2%) (Table 5).
Table 5. Customer Perspective % (N = 46)
Measures
Customer feedback – survey or unprompted
Sales / inquiries / market share
Customer retention / loyalty / profitability
Customer complaints / returns
Client referrals
Conformance to service standards
Years in operation
≥ 21
11-20
≤ 10
5
10
27
6
6
9
4
5
6
1
4
5
3
0
6
0
3
0
Total
41
22
15
10
9
3
Implications and Conclusion
This exploratory study has identified potential trends amongst businesses in their use of
performance measures. Measures of the financial perspective were used in most instances
(70% of businesses) followed by the customer perspective (46%), innovation and learning
perspective (36%) and internal business process perspective (28%). Within the financial
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perspective, sales and revenue measures were widely used amongst younger businesses (10
years or less) whereas profit and loss measures were more widely used among businesses that
have been in operation over 10 years. There was some indication of a downward trend in the
use of performance measures with an increase in the age of the business across all four
perspectives of performance; however, this needs to be empirically tested. Nonetheless, these
indications may show semblance to earlier research conducted in 1987 by the US Government
that showed small firms spend almost twice as much on research and development than large
firms and produce 24 times more innovation per research dollar than much larger Fortune 500
firms (Wheelen and Hunger, 2002). This study has its limitations. First of all, the authors
used a convenience sample of 99 firms to elicit information regarding the use of BSC
perspectives. The data collection method for this study was unstructured and therefore the
results were descriptive in nature. However, it has generated very useful scale items that is
now being tested in a more structured survey of SME’s in Australia and Sout East Asian
countries. This will enable more powerful statistical analyses and inferences to be made on a
number of factors including nature of business, age and business lifecycle, number of
employees, geographic location, career backgrounds of top management, product portfolio
organisational age etc.
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