School of Accounting - UNSW Business School

43 Pages·2012·0.37 MB·English

School of Accounting

Seminar – Session 1, 2012

th
Celebrating the 20 Anniversary of the Balanced
Scorecard: Relevance Lost or Relevance Gained
and Sustained?

Zahirul Hoque
La Trobe University

th
Date: Friday 30 March
Time: 3:00 to 4:30 pm
Venue: Webster256
th
Celebrating the 20 anniversary of the Balanced Scorecard:
Relevance lost or relevance gained and sustained?*

Zahirul Hoque
La Trobe Business School
La Trobe University, Melbourne

Corresponding author: Zahirul Hoque, Professor of Accounting, La Trobe Business
School, Faculty of Business, Economics and Law, La Trobe University, Melbourne,
Victoria 3086, Australia; Tel (613) 9479 3433; Fax (613) 9479 3047; E-mail:
[email protected]

*An earlier version of this paper was presented as a keynote speech at the New
Zealand Management Accounting Conference in Wellington, New Zealand, 17-18
November, 2011. I am gratefully appreciative of Professor Shahid Ansari and
Professor Jan Bell for providing logistic support when developing the earlier draft of
this paper during my visit at Babson College, Boston as an Exchange Scholar in July-
August 2010.

Page 1 of 42
th
Celebrating the 20 anniversary of the Balanced Scorecard:
Relevance lost or relevance gained and sustained?

A B S T R A C T
2012 marks 20 years since the first publication of the article on the balanced
scorecard, which was written by Robert Kaplan and David Norton. This paper
critically reviews the research on the balanced scorecard over the past 20 years. My
intention is to contribute to the thinking about the achievements and the relevance of
the balanced scorecard in the 21st century’s complex business environment. Following
this, I attempt to identify future research opportunities. The review used 114 articles
published in 27 accounting academic journals and 67 articles published in 34 business
and management academic journals in the twenty-year period, 1992-2011. The
reviewed articles have been categorized by each article’s topic(s), setting(s),
theoretical framework, research method, and data analysis techniques. My analysis
reveals much diversity in existing balanced scorecard research in terms of topics,
settings, methods and data analysis techniques. I conclude that the application of the
balanced scorecard worldwide is on the rise and, more importantly, industries and
practitioners in the public and private sectors find the balanced scorecard concept is
still relevant to their organizations in the 21st century’s rapidly changing environment.
Further, my review suggests that there lacks theory-driven in-depth studies in the
balanced scorecard. As such, several theory-driven ideas and practical issues are
developed and recommended for future research.
_____________________________________________________________________
1. Introduction
The purpose of this article is to foster research for an improved understanding of
performance management practices by critically reviewing 20 years of achievements
of the balanced scorecard, an approach invented in 1992 by Harvard Business
School’s professor Robert Kaplan and his practitioner associate David Norton. The
outcomes of this review are of significant interest to both academics and businesses.
The review will enable businesses to make strategic decisions when designing and
implementing a balanced scorecard type performance management practice as insights
from this review will demonstrate how the balanced scorecard concept has been used
in organizations around the world over the past 20 years. By bringing insights from
the accounting and management research literatures, the review will deliver to the
academic community a range of “new” ideas for future research.
2012 marks 20 years since the first publication of the article on the balanced
scorecard in the Harvard Business Review (HBR) in 1992. Based on a year-long
research project within 12 companies, Kaplan and Norton disseminated their findings
through a performance measurement framework, which they developed and called a
Balanced Scorecard. The balanced scorecard expands on mere financial performance
measures and incorporates operational performance measures categorized by three
perspectives: customer satisfaction; internal business processes; and employee
learning and growth. Kaplan and Norton (1992) suggest that a balanced scorecard
allows an organization at all levels of the business to assess its progress towards
achieving its targets and to take corrective actions, where needed. After their 1992
seminal article, and later based on their investigations into more than 300
organizations, Kaplan and Norton wrote a series of articles (Kaplan & Norton, 1993,
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1996a, 1996b, 2000a, 2001a, 2001b, 2004a, 2005a, 2005b, 2006a and 2008a) and
several books (Kaplan & Norton, 1996c, 2001c, 2004b and 2006b) to advance the
knowledge base of the balanced scorecard. Kaplan and Norton remarked about their
balanced scorecard innovation1: “just as you can’t manage what you can’t measure,
you can’t measure what you can’t describe’ (Kaplan & Norton, 2004b, Preface).
About fifteen years ago, in a review essay Atkinson and his associates (Atkinson, et
al., 1997, p. 94) note that ‘the balanced scorecard is among the most significant
developments in management accounting and thus, deserves intense research
attention.’ Since then balanced scorecard has been receiving increasing attention in
accounting research and in business and management research.
Workshops and seminars have been devoted to the balanced scorecard and many
books have been published by other scholars containing case studies of the
implementations of balanced scorecards and practical guides for adopting the
balanced scorecard in both the private and public sectors (see, for example,
Hannabarger, Buchman, & Economy, 2007; Niven, 2002, 2008; Olve, Roy, & Wetter,
1998; Person, 2009). The popularity of the balanced scorecard as a research topic is
also evident in a number of inter-country studies that demonstrate the wide
implementation of the balanced scorecard in organizations across various settings (for
example, see Ax & Bjornenak, 2005; Braam & Nijssen, 2004; Hoque & Adams, 2011;
Hoque & James, 2000; Pere, 1999; Shiu & O’Connor, 2011; Silk, 1998). Thousands
of companies across the world have adopted the philosophy of the balanced scorecard
not just as a measurement system, but also as a strategic management system (Kaplan
& Norton, 2004b). Academic and professional studies illustrate the ways in which the
balanced scorecard is able to help organizations to be more effective.
While several prior reviews of the management accounting research (e.g.,
Chenhall, 2010; Chenhall & Smith, 2011; Hesford et al., 2007; Hopper et al., 2001;
Ittner & Larker, 1998; Malmi & Brown, 2008; Otley et al., 1995; Scapens &
Bromwich, 2001; Selto & Widener, 2004; Shields, 1997; Shields & Shields, 1998;
Wagenhofer, 2006) have provided useful insight on the role of performance
measurement systems in organizations, these reviews have not taken the balanced
scorecard as their primary focus. This paper expands upon these previous reviews by
critically assessing the research on the balanced scorecard over the last 20 years. In
doing so, first, this paper tabulates and synthesizes the balanced scorecard research
literature in accounting and in management during the twenty-year period (1992-
2011). Second, it discusses what is special about the balanced scorecard, what specific
issues and problems have to be addressed, what the nature of balanced scorecard
practices is in organizations, and what has been found in the research literature. The
paper then identifies those areas where we know certain things and those where we do
not – that is, we investigate the gaps in the existing balanced scorecard research
literature. At the end of this review, the paper identifies lessons that can be learned by
studying some specific issues in organizations. Further, this paper contributes to the
generation of knowledge in the balanced scorecard research by examining whether the
balanced scorecard is still relevant to practice in the 21st century as it evolved 20 years
ago to meet the changing needs of organizations.

1 The term “innovation” has been defined as an ‘idea, practice, or object that is perceived as new by an individual
or other unit of adoption’ (Rogers, 2003, p. 11). This implies that when a new tool or practices is adopted by an
organization, it is considered as an innovation to the organization and to its people even though such tool may have
been long invented. In this context, the balanced scorecard is an innovative performance management tool.

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2. Review framework
A literature review is a voyage of gathering empirics or facts on issues
surrounding a particular topic. A major problem confronting a literature reviewer is
how to find reliable sources of data; it is a challenging task and a researcher needs to
plan carefully before embarking on this journey; otherwise he/she may end up with a
large volume of material that may not be relevant to the topic(s) under search.
There are two primary ways of searching the literature. One is to choose
particular discipline-focused journals in advance with a view to synthesize prior
research on the chosen topic. Another approach is to carry out an exploratory search
using web-based search engines such as Google Scholars and commercial databases
such as ProQuest and Scopus. The former approach is more discipline-focused and it
is easy to systematically develop and synthesize findings. The latter approach is fairly
unfocused and it is appropriate for an exploratory type search on a general topic in the
field. Since the current review focuses on a specific topic that is the balanced
scorecard, it opted for the former approach. Figure 1 offers a general guideline or
review framework to conducting a literature review.

INSERT FIGURE 1 HERE

The current review was carried out primarily by consulting 27 accounting
journals (see Appendix 1) and 34 business and management journals (see Appendix
2). As a standard way of making a start, the search began using the terms ‘Balanced
Scorecard’, and ‘Scorecard’ and was based on articles published by an individual
journal and available on its web homepage. The results revealed several papers which
bore no direct connection to the precise review requirements, as it picked up all papers
which had the words ‘balanced’ or ‘scorecard’. Therefore another round of searching
was carried out on these papers by typing the terms ‘balanced scorecard’, or
‘scorecard’ in the search bar in the PDF version of the article, and then manually
examining all articles as to what extent they carry insights and experiences on the
balanced scorecard. From the outset, the focus of the review was on publications that
explicitly concentrated on the balanced scorecard.
A review was also carried out on publications available on the web on the
balanced scorecard to provide additional insights into the topic. For this source for the
review, a relevant balanced scorecard web-based publication was one that directly
relates to the research topic and has been published exclusively on the web.
Newspaper articles, books, magazines, conference papers, software packages,
interview transcripts, and seminars and workshop material on the balanced scorecard
have not been considered. Some websites were excluded because of restricted access,
for reasons such as requiring login password; connection issues, such as website or
server not found; and the re-direction failure of host website.
As shown in Figure 1, following Chenhall and Smith (2011) and Shields (1997),
the published articles were categorized by (a) topics / issues, (b) research settings, (c)
theory/theories, (d) research methods, (e) data analysis techniques, and f) results.

3. Developments of the balanced scorecard concept
In the late 1980s, authors filled the professional and academic publications with
recommendations to rely more on non-financial measures for both evaluating and
managing organizations (Berliner & Brimson, 1988; Dixon et al., 1990; Johnson &
Kaplan, 1987; Nanni et al., 1988; Rappaport, 1999). Scholars and practitioners have
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expressed concerns with traditional performance measures that focus solely on
financial metrics which have little relevance to practice (Atkinson et al., 1997; Ittner
et al., 1997; Johnson & Kaplan, 1987; Kaplan & Norton, 1996a, 1996b, 1996c; Luft,
1997; Lynch & Cross, 1991; Shields, 1997). Performance measures that are based
solely on financial numbers such as return on investment, net earnings and ex post
costs have been criticized for encouraging managers to focus on short-run financial
results while sacrificing long-run prospects.
In the 21st century’s global markets and digital era, traditional financial measures
have been considered out-of-step as they portray misleading signals for long-term
strategies and continuous improvements in organizational processes and performance.
In 1992, Kaplan and Norton came up with an idea about how to combine financial
measures with non-financial measures in a single performance scorecard, the
‘Balanced Scorecard.’ Following their inaugural article, Kaplan and Norton have
developed the concept further.
Kaplan and Norton’s 1992 version of the balanced scorecard focuses on the
following four perspectives (see Figure 1 in Kaplan & Norton, 1992):
Customer perspective: (How do customers see us?): Customer perspective
focuses on how organizations create value for customers. Some typical measures are
customer satisfaction, market share, customer response time, time to market and
defect level;
Internal business perspective: (What must we excel at?): Internal measures stem
from business processes. Companies should identify and measure their core
competencies in areas such as manufacturing excellence, design productivity, new
product introduction, and technology capability;
Innovation and learning perspective: (Can we continue to improve and create
value?): Innovation and learning measures emphasize the ability of companies to
make continual improvements to existing products and services and to introduce new
products with expanded capabilities. Examples include measures of employees’
capabilities and skills, technology leadership, manufacturing learning and product
focus; and
Financial perspective: (How do we look to shareholders?): Financial measures
indicate whether company’s strategy, implementation and execution are contributing
to bottom-line improvement. Typical measures include cash flow, sales growth, return
on equity, and market share.
In their 1993 article, Kaplan and Norton showed how this new, state-of-the-art
balanced approach to performance measurement can keep companies looking and
moving forward, while reliance only on financial measures leads to a backward-
looking focus.
In their first book on the balanced scorecard, Kaplan and Norton (1996c) show
company managers how to ensure the successful adoption of a balanced scorecard by
treating the scorecard as a strategic management system that integrates financial with
non-financial strategic measures. Beginning as an operational performance
measurement system, the balanced scorecard concept has been developed into a
strategic management system to help companies manage their strategy over the long
run. Kaplan and Norton (1996c, p. 19) identify four major steps in implementing a
balanced scorecard strategic framework: (1) clarifying and translating the vision and
strategy, (2) communicating and linking strategic objectives and measures, (3)
planning, target setting and aligning strategic initiatives, and (4) enhancing strategic
feedback and learning.
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In their book Kaplan and Norton re-classified two of the four original
perspectives developed in the 1992 article: Internal Business Perspective has been re-
labeled as Internal Business Processes with an addition of the innovation element
while the Innovation and Learning Perspective has been re-labeled as Learning and
Growth, with an additional element of growth and the removal of innovation element
(see Figure 1-1 in Kaplan and Norton, 1996c, p. 9). The 1996c version of the
balanced scorecard is distinct from other strategic measurement systems in that it
contains outcome measures and the performance drivers of outcomes, linked together
in cause-and-effect relationships making the performance measurement system a feed-
forward control system. Kaplan and Norton (1996c, p. 31) outlined the following
causal relationship: measures of organizational learning → growth measures of
internal business processes → measures of the customer perspective → financial
measures, with the nature of relationship following the direction of the arrows. An
effective balanced scorecard has a mix of outcome measures, lag indicators,
performance drivers, and lead indicators (Kaplan & Norton, 1996a, 1996c).
Kaplan and Norton next developed five leadership and management principles for
successful strategy execution, which arose from their study of some balanced
scorecard adopters (2003). The principles are: a) mobilize change through executive
leadership; b) translate the strategy; c) align the organization to the strategy; d)
motivate employees to make strategy their everyday job; and e) govern to make
strategy a continual process. Subsequently, Kaplan and Norton (2006a) developed
different types of balanced scorecard perspectives (financial synergies, customer
synergies, internal process synergies, and learning and growth synergies), which they
call The Enterprise Scorecard (see Figure 3, Kaplan and Norton, 2010, p. 26); this
scorecard may help organizations to create corporate synergies.
The recent concept of the balanced scorecard emphasizes the linkage of
measurement to a strategy map; this tighter connection between the measurement
system and the strategy map elevates the role of non-financial measures in strategy
implementation (see Figure 2 in Kaplan and Norton, 2010, p. 22). Kaplan and Norton
show how their recent work has focused on the link between strategy and operations
(Kaplan & Norton, 2008a, 2008b). The 2010 article shows ‘the architecture of a
comprehensive six stage closed-loop management system that links strategic planning
with operational execution’ (p. 27; see Figure 4 Kaplan and Norton, 2010, p. 28).
Kaplan and Norton’s six stages are: Develop the strategy, Translate the strategy,
Align the strategy, Plan operations, Monitor and learn, and Test and adapt the strategy
(Kaplan and Norton, 2010, p. 27).
Table 1 provides a snapshot of the historical developments of the balanced
scorecard concept.

INSERT TABLE 1 HERE

Looking at the wider diffusion of the balanced scorecard concept across the
globe, the balanced scorecard certainly has attracted a great deal of attention from
practitioners for its several practical benefits. Traditional measurement systems only
include financial measures, while the balanced scorecard is designed to improve
managers’ decision making by guiding their attention to a broader vision of the
company’s operations (Kaplan & Norton, 1992). The use of the balanced scorecard
leads to improved managerial decision making by aligning performance measures in
the firm’s business units with the goals and strategies of the firm (Kaplan & Norton,
1996c).
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The paper by Ittner et al. (2003) reinforces Kaplan and Norton’s idea of
combining financial measures with non-financial measures in a scorecard by
highlighting that the balanced scorecard provides causal links connecting the multiple
classes of non-financial measures (“drivers of the performance”) and the financial
measures (“final outcome”). Hoque and James (2000), one of the early empirical
studies into the balanced scorecard, suggest that the balanced scorecard indicates
which specific improvements in drivers are linked to the desired outcomes of the
firm’s strategy.
With the shift of the balanced scorecard from being only a performance
measurement system (Kaplan & Norton, 1992) to a strategic management system
(Kaplan & Norton, 1996a, 1996b, 1996c, 2001, 2004, 2006) the pattern of results on
the causally linked driver and outcome measures may provide clues about the
effectiveness of the strategy, which then provides companies with the capacity for
strategic learning; this will then enable them to modify their strategies when
necessary. The unique features of the balanced scorecard noted above, relative to less
comprehensive performance measurement systems, would be expected to lead to
lower rater bias in performance appraisal (Guo et al., 2007). Davis and Albright
(2004) remark that an improvement in financial performance could occur after
implementing a balanced scorecard.
Speckbacher et al. (2003) propose three potential benefits of the application of the
balanced scorecard in organizations, namely: (a) improved company results in the
long term; (b) stronger consideration of non-financial drivers of performance and (c)
support of the shareholder value-based management system. Banker et al.’s (2000) US
study finds that the inclusion of non-financial measures in a performance
measurement system is associated with improved financial performance. The review
paper by Atkinson et al. (1997, pp. 93-94) suggests that “…the balanced scorecard has
the potential to provide planners with a way of expressing and testing a sophisticated
model of cause-and-effect in the organization, a model that provides managers with a
basis to manage results.” The study by Hoque and James (2000) reported a positive
impact of the use of balanced scorecard measures on firm performance.
Since its introduction in the organizational world, the balanced scorecard has also
received considerable criticism. For example, Butler et al. (1997) considered the
concept to be too general, pointing out that it might not fit in an organization’s culture
and could ignore corporate missions. In a similar vein, Laitinen (1996) considered the
selection of the four basic dimensions and their interrelationships problematic,
claiming that measures in practical applications appear to loosely connect to each
other and unable to provide clues on which company internal factors should be
developed. Atkinson et al. (1997, p. 93) expressed mixed reactions like this: ‘The
name “scorecard” is misleading because the balanced scorecard is not a scorecard in
the conventional accounting sense. Rather, it is a sophisticated information structure
and management approach that links effects (also called organizational objectives,
such as profit levels) with causes, such as customer or employee satisfaction.’
Laitinen (2003) notes that balanced scorecard in its original form may include non-
critical perspectives and exclude critical ones.
Other scholars (e.g. Ittner & Larcker, 1998; Otley, 1999) find that it is difficult to
identify the relative importance of and the trade-offs between the balanced scorecard
perspectives, as this identification is crucial when resolving the conflicts in the setting
of targets on different perspectives and on the measures of the perspectives. Epstein
and Manzoni (1997) question the ability of companies to agree on a strategy in such
clear terms that it would enable construction of balanced scorecard and the
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maintenance of systems to be laborious. Vaivio (1995) challenges the principal idea of
the balanced scorecard that a handful of quantitative measures could portray the
various facets of a company’s strategy.
Norrelkit (2000, 2003) has been highly critical of the causal relationship between
the four perspectives of the balanced scorecard and the validity of the system to serve
as a strategic management tool. Norrelkit argues that the balanced scorecard has
problems with some of its key assumptions and relationships. She argues that there is
not a causal but rather a logical relationship among the areas covered in the balanced
scorecard. In her 2000 paper, Norrelkit asserts that the balanced scorecard makes
invalid assumptions, which may lead to the anticipation of performance indicators
which are faulty, resulting in sub-optimal performance. Further, Norrelkit noted that
the balanced scorecard is not a valid strategic management tool as Kaplan and Norton
claim it to be – because the balanced scorecard does not ensure any organizational
rooting and also has difficulty ensuring environmental rooting.
Above criticisms challenge some key assumptions of the balanced scorecard, the
notion of causality in the relationship, and the idea that it can be a strategic tool.
Despite such criticisms, Kaplan and Norton (as reported in 2000, 2001, 2003, 2004a,
2004b, 2006a, 2006b, 2010) have extended and broadened the concept into a strategic
management tool for describing, communicating and implementing strategy’, thus
reinforcing Kaplan and Norton’s original point that the balanced scorecard has
practical relevance in organizational decisions. Kaplan and Norton further believe that
balanced scorecard measures need to be broken down into financial and non-financial
measures in such a way that information, communication and strategy at all levels of
organizations could be aligned for an effective organization. Their stance echoed
Grady’s (1999) statement that the strategic objective of a company ought to be broken
down into critical success factors and critical actions. Kaplan and Norton’s idea of
causal linkages among balanced scorecard objectives and measures led to the creation
of a strategy map that links a firm’s intangible assets and critical processes to the
value proposition and customer and financial outcomes (See Figure 2, Kaplan &
Norton, 2010, p. 22). Further, Kaplan and Norton (2010, p. 21) assert that a balanced
scorecard project should build a strategy map of organizational objectives first and
only afterwards select metrics for each objective.2

4. Balanced scorecard research
4.1 Studies in accounting journals
This section examines the 114 articles published by accounting journals that deal
with the nature and practice of the balanced scorecard. In so doing, the first subsection
presents the frequency distribution of publications. This is followed by the
classification of publications by various categories as outlined in Figure 1.

4.1.1 Frequency distribution of publications by accounting journals
Table 2 presents the frequency distribution of papers on the balanced scorecard
published by journals. 114 papers were published in 27 leading accounting journals in
the period 1992-2011.
As can be seen from Table 2, during the two decades under study, most of the
accounting papers (98 of 114) on the subject were published in the second half (2002-
2011). The highest number of publications appeared in Management Accounting

2 For details about the theoretical roots and motivations of the original and subsequent development of the
balanced scorecard, see Kaplan and Norton (2010).
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Research (MAR), one of the premier journals in management accounting, followed by
Financial Accountability & Management (FAM). A sizeable number of papers
appeared in other journals: experimental research and surveys in Accounting,
Organizations and Society (AOS), interview studies and descriptive papers in Critical
Perspectives on Accounting (CPA), descriptive and literature reviews in Journal of
Accounting Education (JAEd) and interview studies in Journal of Accounting &
Organizational Change (JAOC). No papers were published in other leading journals
including Accounting & Finance (A&F), Accounting & Business Research (ABR),
Journal of Accounting and Economics (JAE), Accounting Horizon (AH), Journal of
Accounting Auditing and Finance (JAAF), Journal of Business Finance and
Accounting (JBFA), Review of Accounting Studies (RAS), and International Journal
of Accounting (IJA).

INSERT TABLE 2 HERE

4.1.2 Distribution of topics/issues
Table 3 provides the frequency distribution of balanced scorecard papers by
topics/issues studied. As presented in Table 3, most of the papers were published in
the areas of performance measurement (27), implementation (24), designs (20), and
system outcomes encompassing its use effectiveness and benefits (11), respectively.
12 papers were of review/analytical nature, while some others focused on the
balanced scorecard in general (8), behavioral effects (4), incentive plans (3), and
diffusion (3).
While future research might continue exploring these issues further in different
contexts, there might also be increasing interest in linking these topics with other
organizational strategies or processes such as total quality management (Hoque,
2003), supply-chain relationships, business-process-management, and value chain
analysis.

INSERT TABLE 3 HERE

4.1.3 Distribution of settings
Table 4 presents the frequency distribution of balanced scorecard publications by
research settings. Table 4 shows that the popular choice for balanced scorecard studies
was services, manufacturing, retail, and publicly traded firms. A further noteworthy
observation was that nearly one-third of the papers did not explicitly mention the
research settings. This group mainly included review and descriptive papers.
Balanced scorecard is also widely diffused in the public sector. Table 4 shows
that 21 papers focusing on the public sector were published in the period 1992-2011.
To deal with financial constraints and increasing demand on accountability,
government administrators have begun implementing modern management tools in
their organizations. In addition to adopting reporting guidelines, municipal
administrators have tried to enhance accountability through refinement of their
organization’s own performance measurement system (Poister & Streib, 1999).
Poister and Streib (1999) reported that most of the US municipalities studied in
their survey were working from organizational missions, goals and objectives, a result
consistent with the prescribed use of the balanced scorecard. However, the municipal
managers' efforts also tended to rely on available data, a problem which, if persistent
in the longer run, may lead to low validity and hence low decision relevance.
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