BACKGROUND OF THE STUDY
From the beginning, it is important to understand why
measuring an organization’s performance is both necessary and vital. An organization operating without a performance measurement system is like an airplane flying without a compass or a CEO operating without a strategic plan. The purpose of measuring performance is not only to know how a business is performing but also to enable it to perform better. The ultimate aim of implementing a performance measurement system is to improve the performance of an organization so that it may better serve its customers, employees, owners, and stakeholders. A performance measurement system enables an enterprise to plan, measure, and control its performance according to a pre-defined strategy.
Managers at all levels in an organization can track key performance indicators to assess how well their groups are meeting their business objectives, whether performance is improving or declining, and how their group’s performance compares with that of other units or groups within the company and in rival organizations.
Consider these examples:
- A CEO examines return on investment (ROI) by division, or her company’s cash flow, by month and quarter, and compares the results to those of competitors.
- A customer service manager tracks customer service quality using surveys. If the surveys suggest that service quality is dropping, he might need to add more account representatives to improve service levels.
The Balanced Scorecard (BSC) is a strategic performance management tool for measuring whether the smaller-scale operational activities of a company are aligned with its larger-scale objectives in terms of vision and strategy. By focusing not only on financial outcomes but also on the operational, marketing and developmental inputs to these, the Balanced Scorecard helps provide a more comprehensive view of a business, which in turn helps organizations act in their best long-term interests. Organizations are encouraged to measure, in addition to financial outputs, those factors which influenced the financial outputs. For example, process performance,
market share / penetration, long term learning and skills development, and so on. The underlying rationale is that organizations cannot directly influence financial outcomes, as these are “lag” measures, and that the use of financial measures alone to inform the strategic control of the firm is unwise. Organizations should instead also measure those
areas where direct management intervention is possible.
Implementing Balanced Scorecards typically includes four processes: