Chapter 4 – Theoretical evaluation of BSC
The previous chapter introduced two generations of BSC, of which the initial was primarily
considered a measurement and the latter a strategy implementation and aligning tool that
innovatively develops and incorporates a strategy map into a performance measurement
system. Such a strategic management instrument attempts to identify and wiring critical
success factors of various business units and departments to corporation’s strategy cohesively
in order to provide better environment for organizational objectives to be achieved.
In practice, performance measurement and reporting may often not linked and aligned to
organizational strategy. The lack of alignment between often results in business performance
that cannot live up to organizational objectives (Kaplan & Norton, 1996, cited by Iselin et al.,
2008, p.72). According to Kaplan & Norton (1996, p.29-30, cited by Iselin et al., 2008, p.72),
a correctly designed and implemented BSC should both link and reinforce objectives and
measures in order to facilitate a management system that leads organization to goals
achievement (Malina & Selto, 2001, cited by Iselin et al., 2008, p.72).
However, the proposed existence of the cause-and-effect linkage between measures and
objectives created suspicion among scholars. Norreklit (2000, p.68) questioned that such a
cause-and-effect relationship would ever exist and the precise definition and a plausible
assumption of cause-and-effect. For instance, such a relationship would exist: measures of
-andeffect relationship could be found as well: measures of
financial measures are less useful since it is a pure summary of past activities; however, she
questions the assumption on which Kaplan & Norton’s model (1996, citedy by Norreklit,
2000, p.68) of cause-and-effect relationship is built. It is clear that tactics for strategy binds
two areas, i.e. leading and lagging indicators simultaneously, but it appears from the example
above that this relationship is two-dimensional and interdependent. Yet, according to
Norreklit (2000, p.76) an interdependent relationship is no causal relationship but a so-called
finality relationship that describes a certain action should be undertaken to cause a certain
outcome (Follesdal et al., 1997, pp. 170-171, cited by Norreklit, 2000, p.76). Further, she
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pointed out that a chosen action is one out of many possible actions to achieve this outcome
and may have more than just one effect (Arbnor & Bjerke, 1994, p.176, cited by Norreklit,
2000, p.76). With respect to the measures of BSC, for instance, financial success could be
achieved by marketing a product of high quality, then gaining customer satisfaction and
building reputation, and finally generating a higher market share and increasing profitability.
In comparison to causal relationship, such definition appears to illustrate the relationship
between BSC measures and perspectives better than causality, which is, according to
Norreklit (2000, p.77), leaves less room for ambiguity.
Building the concept on the assumption of finality, however, would have decreased the power,
function and applicability of BSC significantly. Norreklit (2000, p.77) finally argues that
finality would increase a tool’s complexity and reduce it to any other management technique;
it appears, BSC would lose its advantage and benefit to other approaches.
In her later research, Norreklit (2003) further tackled on the question of the usefulness of
BSC and Kaplan & Norton’s argumentation in their published works, this time, primarily
from a rhetorical aspect. She claimed that Kaplan & Norton tended to apply a style of
language that is more relevant to poetry, i.e. concepts and fundamental assumptions that
should have solidified the arguments for academic rigour were expressed in an emotional
way, filled with metaphors and pathos (Norreklit, 2003, p.601). However, to make
convincing arguments, logos rather than pathos is what suits academic and intellectual
purposes (Norreklit, 2003, p.595). Another critique is the entire communicative situation in
which the idea of BSC was published. A title of an internationally acknowledged professor at
the most renowned business schools in the world would trigger readers to attach ethos to any
arguments made and indirectly create confidence and plausibility to Kaplan’s work (Norreklit,
2003, p.598).
The arguments of Norreklit (2000, 2003) generally criticises that little evidence is found on
the effectiveness and function of BSC. While it might be true to argue that the usefulness of
BSC is a subject of persuasion and its effectiveness has been less evidenced, BSC is still
widely used among managers (De Geuser et al., 2009, p.94). In order to find evidence on its
concept and effective, recent research has attempted to quantify how BSC has contributed
towards business performance by testing Kaplan & Norton’s framework, firstly published in
their second book “Strategy-Focused Organization” (De Geuser et al., 2009, p.95).
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Despite a few research limitations – such as a weakly defined concept of contribution towards
organizational performance and an ambiguously definition of BSC – the study generally
evidences that BSC is positively correlated with performance (De Geuser et al., 2009, p.115).
More specifically, BSC is described to add value to the following three points: firstly, for the
translation of strategy; secondly, the potential to influence managerial behaviour; and finally,
for aligning business resources to strategy. Worth mentioning is that De Geuser et al. (2009)
basically did not provide the study to refute Norreklit’s perspective that finality is differently
characterised from cause-and-end relationship but purely attempted to find empirical proof
of the impact of BSC on organizational performance.
A comparison with the 5 principles of Strategy Focused Organization in chapter 3 illustrates
that principle 1, 2 and 4 can be evidenced by this study’s result; however, for principle 3 and
5, the study provides counterintuitive results. De Geuser et al. (2009, p.114) claimed,
especially for the lack of relationship between executive leadership and involvement of
everyone in the job of strategy formation and implementation respectively, these results may
be subject to a high degree of decentralization of international corporations, i.e. determined
by the characteristic of the sample.
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Chapter 7 – Relationship between strategy and performance
7.1. VRIO framework – resource-based view (RBV)
The purpose of this chapter is to build foundations for linking performance measurement,
which would assist in systematically evaluating the successful cases of applying the BSC as a
system for performance measurement and management control.
According to Nag et al. (2007, p.946), strategic management is about the study of the plans
and attempt to identify optimal plans for achieving and maintaining competitive advantage.
In order to identify such plans, an organization can be looked both from the perspective of its
external environment and its internal configuration. Either perspective results in the
development of various methods and frameworks – such as Porter’s Five Forces, SWOT for
an external, VRIO framework for an internal view (Eisenhardt et al. 2000, p.1105), each of
which may differ in assumptions and arguments.
Based on the definition from Nag et al. (2007, p.946),, RBV and VRIO could be ascribed to
methodological attempts to formulate strategy from an internal perspective, since it originates
from identifying key performance drivers – assuming that a company’s capabilities have been
exploited effectively and successfully – and aims at sustaining an organisation’s competitive
advantage.
According to Barney (1991, p.103-104), sustainable competitive advantage necessitates the
existence of two basic characteristics of firm attributes in order to become a resource –
heterogeneity and immobility. Heterogeneity implies that within an industry, strategic
resources may not be evenly distributed and accessible to all firms, while immobility
describes the expectation that no second firm would be able to gain the same or similar
resource and implement the same strategy.1 According to Grant (2001, p.126), mobility of
capabilities tends to be less than that of individual resources respectively, since capability is
formed upon several resources so that replicating competitors may have to lure the entire set
of resources and incorporate it in the same way in order to complete the strategy.
1
Wernerfelt (1984, cited by Rugman et al., 2002, p.771) contended that the Edith Penrose’s contribution towards the
formation of the concept of RBV is immeasurable; her “…idea of looking at firms as a broader set of resources goes back to
the seminal work of Penrose’ and the optimal growth of the firm involves a balance between exploitation of existing
resources and development of new ones”.
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Building on these two assumptions – heterogeneity and immobility – Barney (1991, p. 105111) extended the concept of RBV and developed the VRIO framework which summarizes
the following four characteristics of strategic resources: valuable – rare – inimitable –
organization.
A strategic resource rendering competitive advantage, according to Barney (1991, p.106),
needs to be on top of all other characteristics valuable, i.e. it assists the firm in initiating
strategy which in turn reduces its threat in the external environment. In that sense, a given
firm in an industry, regardless of threats from market incumbents or new entrants, in
possession of such valuable resources will be capable of neutralizing (Barney, 1991, p.106)
the source of threat.
When a firm manages to implement a strategy that is not easily conceived by a large number
of competitors exploiting the same resource this company benefits from a source of
competitive advantage. In other words, a valuable and rare resource protects the firm from
competition dynamics in an industry (Hirshleifer, 1980, cited by Barney, 1991, p.107). It is
the inability of competitors to emulate the same strategic resource not the time frame within
which the rareness of such a resource might fade; in Barney’s words (1991, p. 102-103), the
equilibrium between owners of strategic resources and non-owners defines whether or not a
resource is rare and strategically relevant to offer competitive advantage.
‘Imperfectly imitable’ or inimitable resources pose another barrier for competitors from
benefiting from competitive advantage and reaping above-average profits. The presence of
such inimitable resources is subject to the following (Barney, 1991, p.107):
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Historical conditions: RBV opposes the assumption, mostly supported by Porter
(1980, cited by Barney, 1991, p.107), that unique history or certain distinctive
attributes have no impact on a firm’s performance. In contrast, RBV advocates
support the opinion of traditional strategy researchers such as Ansoff (1965) and
reiterate that a firm’s long term performance is indeed determined by the firm’s
founding and unique circumstances, especially those firms which have gained
possession and control over ‘idiosyncratic attributes’ through its origination, growth
and development will be more probable to sustain such sources of competitive
advantages.
-
Causal ambiguity: Unlike to relationship between inimitability and historical
conditions, the relationship between causal ambiguity and imperfect imitability
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describes subtleness of firm’s attributes that form the setting of competitive advantage,
i.e. the link between organizational activities can hardly be defined and “relocated” to
other competitors in order to accomplish the same potential for performance. Barney
(1991, p. 109) and Lippman & Rumelt (1982) are even of opinion that even the
respective company itself may not understand its source for success, i. e. all industry
incumbents and entrants may not clarify, understand and control the linkage of such
actions, otherwise the dissipation of critical information will eliminate at least one of
the two fundamental assumptions of RBV – heterogeneity.
When comparing Barney’s VRIO framework to the theory RBV of Grant (2001,
p.126), causal ambiguity is similar to transparency in Grant’s understanding. One
source of non-transparency is that various capabilities may interdepend and interrelate
across several performance determining factors. Another cause for non-transparency
is the coordination and intertwining of a large number of resources simultaneously,
thus complicating the pattern for successful strategy implementation.
-
Social complexity:…is the fourth factor that reduces imitability may result from
organizational culture, structure, traditions that positively complement other
organizational resources and capabilities, thus promote such advantages to be
exploited (Barney, 1991, p.110). Even when competitors may have the same
technology at availability, the lack of those social determinants will pose impediments
to initiate an equally successful strategy (Wilkins, 1989, cited by Barney, p.110).
The ‘O’ in VRIO signals organization. It summarizes all possible and available attributes to
create a fertile internal environment that allows strategic resource to be availed effectively.
Such an environment may blend factors ranging from organizational culture, structure,
human capital, funding etc. (O’Riordan, 2006, p.43). The list of examples is non-exhaustive
and may adopt new types of resources and capabilities that have been upgraded in order to
conquer radical and rapid changes in business environment.
7.2. Linking strategy to performance measurement
Although, at first glance, strategy and performance measurement do not have much in
common, the previous chapter on BSC and the development of its various generations has
successfully attempted to solidify the foundations for linking those two seemingly separated
disciplines together. In fact, according to some sociology specialists, strategic management is
6
about the “…study of firms’ performance from a platform of tangible and intangible
resources in an evolving environment that includes their market and value network…” and it
could be argued additionally that strategic management supports an organization’s
management to comprehend the causal relationship between its strategic choices and
performance, which is understood more than just profitability and includes capability of
innovation and survival (Nag et al., 2007, p.946). This definition, derived from the study of
Nag et al., partly explains the importance of performance measurement for strategy formation
and implementation.
The strategic management process encompasses, according to Olson & Slater (2002, p.11),
five related components, ranging from the analysis of organization to formulation of its
competitive strategy, whereby strategy is completed by the supervision of performance in
order to foster organizational feedback and learning procedures. The indicators integrated
into the design of and those sources of information gained through performance measurement
systems are well needed both for internal communication and demonstration to external
stakeholders. In particular, organizational functions such as marketing, finance department’s
objectives are less recommended to stick to an organization’s operational level only but
related to that firm’s business level strategy. Successfully linking functional objectives to
organizational ones enables performance measurement to evolve as an effective tool used for
strategy formation and strategic decision making (Micheli & Manzoni, 2009, p.472-473).
In this paper, RBV and the related VRIO framework has been selected to analyze several
organization’s potential for creating and sustaining competitive advantage. In order to back
up practical examples and an appropriate analysis of case studies in subsequent chapters, it is
necessary to holistically understand the association between RBV and performance
measurement.
In her empirical study of 107 companies across non-manufacturing and manufacturing
industries, Widener (2006, p.433) investigated: firstly, manager’s perception and evaluation
of various types of performance measures and firms’ strategic resources that maintain the
sustainability of competitive advantage; and secondly, whether performance measures
function as connectors between strategic resources and performance.
The overall result of her structural equation model indicates a certain degree of importance of
using performance measures for mediating the connection between strategic resources and
firm performance. More specifically, empirical evidence supports the argument that
7
performance in non-manufacturing firms is stronger associated with the importance placed on
human capital than that associated with the importance placed on other resources (Widener,
2006, p.437), i.e. structural such as knowledge (Amit & Schoemaker, 1993, cited by Widener,
2006, p.434) and physical capital such as geographic locations and other fixed assets (Barney,
1991, cited by Widener, 2006, p.433).
Often stated in the in literature of performance measurement and management is “what gets
measured gets done”. This general concept indicates two aspects of performance
measurement for management control and strategic management process. One is that the
choice of performance measures can trigger various behaviors; when the “right” choice of
measures is made, behaviors are conducted into the “right” direction towards business
success (Olson & Slater, 2002, p.15; Kaplan & Norton, 1992, p.172). The other aspect
intuitionally follows from the fact that different strategies require different factors for success.
In order to reveal and properly manage such “critical success factors”, the design of
performance measurement system and the choice of multiple types of performance measures
should be tailored to strategic resources that nurture a firm’s strategy orientation, thus
building the ground for competitive advantage and business success (Olson & Slater, 2002,
p.15; Simons, 2000; Kaplan & Norton, 1996; Amit & Schoemaker, 1993, cited by Widener
2006, p.434). In other words, subject to the power of such strategic resources in supporting a
firm’s strategy, it is necessary for managers to customize the organization’s performance
measurement and also measure the effect of strategic resources (Simons, 2000, cited by
Widener, 2006, p.437).
For this purpose, Widener further came up with two other hypotheses which have been
supported by empirical results. There is association between manager’s assessment of
selecting certain performance measures and the emphasis on certain strategic measures. In
particular, the results of her study support the view that, in non-manufacturing businesses, the
evaluation of structural capital and non-traditional measures (e.g. productivity, operational
measures and employee) are more strongly associated. This outcome further implies that, in
non-manufacturing companies, the importance placed on structural capital is positively
related to that placed on human capital in terms of training, skills development etc. (Widener
2006, p.451).
Moreover, the third hypothesis of her study supports the view that a firm’s management
perception of the use of strategic resources and performance is mediated by the importance of
8
the use of performance measures. The link created by performance measures is most
significantly evident in non-manufacturing companies, of which, when importance is devoted
to human capital, management also chooses performance measures related to employee
satisfaction and operations. Consequently, those companies achieve a significantly higher
performance (Widener 2006, p.453).
In conclusion, the study, in spite of the limitation that it has not been able to investigate
research on all potential performance measures, strategic resources (Widener, 2006, p.454),
provides some essential insights into the importance of performance measures that have a
positive impact on firm’s performance, whereby those measures are considered linkages
between performance and strategic resources.
7.3. Linking strategy to Balanced Scorecard (BSC)
Initially emerged as a management instrument to link various different measures of
performance with each other in order to foster managerial attention onto business’s critical
areas (Kaplan & Norton, 1992, p.172), the BSC further reinforces its usefulness for creating a
causal relationship between performance measures and business level strategy. As previously
described, the BSC locates the essence of strategy in the form of “vision & mission” (Kaplan
& Norton, 1992, p.180), and builds several paths towards these four different perspectives:
customer, internal processes, learning & growth and financial, of which the first and the last
one are considered “lagging” indicators and the rest “leading” ones.
Building upon the structure of the first generation of BSC in 1992, Kaplan & Norton
investigated into the technique of implementation in 200 companies and detected that the
starting point for setting up an appropriate “environment” for BSC shall be the company’s
strategy. It forms the core of their strategy map, which describes a logical sequence of
business activities across the four perspectives from above and helps clarify some previously
hidden linkages and cause-and-effect relationship between stages of actions (Kaplan &
Norton, 2001, p.90). The following exhibit lists Kaplan & Norton’s suggestion of critical
elements:
9
Critical elements and their linkages for strategy
Shareholder value – enhanced by growth and productivity
Market share, acquisition, retention of target customers – encouraged by profitable growth
Higher-margin businesses – requires customer value propositions
Value propositions – delivered by excellence in innovation, products and services to target
customers
Sustainable growth – maintained by investment in human capital and systems
Source: Kaplan & Norton, 2001, p.90
Unlike to original form of BSC that is intended to combine long-term strategic objectives to
short-term activities (Ittner & Larcker, 1998, p.223) the “new” BSC accompanied by a
strategy map aims at focusing on a firm’s strategic orientation and thus, in Kaplan &
Norton’s words, on the “future”. In contrast to Ittner & Larcker who tended to describe the
BSC as a measurement tool, Kaplan & Norton observed the use of BSC in practice more as a
management system (Kaplan & Norton, 2001, p.102).
Moreover, the newer BSC intends to offer the potential for detecting an organization’s
dynamic capabilities which intend to meet new organizational strategy. According to RBV
specialists, dynamic capabilities build on a firm’s related system of activities that derive from
antecedent routines and existing resources and competencies configured in a new way to
accomplish value-creating strategies and meet new market specifications (Collis &
Montgomery, 1995, 1998; Porter, 1996; core competencies, Prahalad & Hamel, 1990; cited
by Eisenhardt & Martin, 2000, p.1107). This potential of dynamic capabilities to create new
value-generating strategies is integrated into a firm’s processes, which, in turn, catalyze a
procedure of synthesizing, acquiring and upgrading to reconfigure resources in a new way
(reconfigure, Teece et al., 1997; synthesize, Kogut & Zander, 1992; cited by Eisenhardt &
Martin, 2000, p.1107). The same power that dynamic capabilities offer is indeed embedded in
the new BSC Kaplan & Norton described. Along the process of communicating and
transforming strategy into a system of interrelated measures, the focus of an organization is
driven to resources and capabilities an organization possesses and newly detects, while
stimulating the old organization to unfreeze assets and capabilities and guarantee the
sustainability for long-term value creation (Kaplan & Norton, 2001, p.102) and competitive
advantage.
10
11
Source: Kaplan & Norton, 2001, p.92
The Balanced Scorecard Strategy Map
Beyond attributing a new definition to existing resources and capabilities, reconfigured and
integrated into the firm’s routines – which primarily encompass internal processes and
learning & growth perspective, BSC further, building on the presence of such dynamic
capabilities, redefines the firm’s relationship to its external stakeholders, represented mostly
by customers and stakeholders. Such a way of strategy communication and transformation
creates the potential for firms to balancing its devotions to the “stakeholders” of internal and
external parties, while integrating and linking all possible units (Kaplan & Norton, 2001,
p.102) of those parties to organizational strategy.
The previous exhibit displays a template of the “strategy map” by Kaplan & Norton (2001, p.
92). The chapter on cases review will apply this instrument for a critical evaluation of the
successfulness of BSC implementation.
12