Balance Scorecard

"The Balance Scorecard:

Judgemental Effects of Common

And Unique Performance Measures"

I. Introduction

The article I decided to critique for the purpose on management accounting 2 is by Marlys Lipe and Steven Salterio. There article entitled 'The Balanced Scorecard: Judgmental Effects of Common and Unique Performance Measures' came from the July 2000 edition of the Accounting Review journal.

The Balance Scorecard (BSC) was originated by Robert Kaplan and David Norton in the early 1990's as a strategic approach, and performance management system that would enable organisations to translate a company's vision and strategy into implementation. It essentially gives managers and executives a more 'balanced' view of the company's business performance.

The reasons for choosing this topic area, revolved around the fact that I believed it is a fascinating subject area with interesting concepts, also the BSC usage in today's business world as a performance measure has increased significantly over the past decade, making BSC a very relevant topic. I also had some concerns with the aspirations and results attributable to BSC and hoped that this article would improve my understanding of the whole balance scorecard process and understand its real value to a business.

II. The Objective of this Paper

There are various motivations put forward by Lipe and Salterio (2000) to explain the objectives of this article. Firstly they wanted to evaluate and define the possible affects that common measures and unique measures may have on the BSC evaluations of a particular business unit's performance.

Secondly, they wanted to observe if unique measures are being undervalued by evaluators in favour of common measures. They wanted to address this due to previous research by Slovic and MacPhillamys (1974); which found participants weighted common measures more heavily than unique measures for both judgement and choice. This article will test if these findings are mirrored when applied to a BSC scenario and what consequences they may have on the company's true performance. Finally through their experimental research Lipe and Salterio wanted to investigate if managers are getting the full potential benefits that BSC information can offer a firm.

III. The Key Issues/Theories Considered

This article is based on the theorem by Kaplan and Norton's (1996b) best selling book, which outlines the concepts and integration of a successful BSC. This theory has four steps that include;

1) Clarifying and translating the vision and strategy

2) Communicating and linking

3) Planning and target setting, and

4) Strategic Feedback and learning

Both Kaplan and Norton heavily emphasise the point that a business units BSC should be specifically designed to fit that unit and must encompass traits that will deal with realising its strategy, which will in turn help the organisation accomplish its objectives.

The theory also states that a range of measurement categories must be included in the BSC; these include measures of financial performance, customer relations, internal business process and organisational learning and growth (Kaplan and Norton 1996b). This ensures the covering of both generic common measures and the more specific measures that a business unit must evaluate in order to gain the full potential performance from their BSC.

The key issue and theory that Lipe and Salterio (2000) consider and thus base their experimental research on, is a classic judgement and decision-making study that concludes people use common and unique information differently. This study was carried out by Slovic and MacPhillamys (1974) on a number of undergraduate volunteers who had make a decision based on common and unique measures. It was concluded by Slovic and MacPhillamys (1974) that the volunteers weighted common measures more heavily than unique measures. The significance of these results is that potentially evaluators in a BSC business unit may concentrate more on common measures to simplify their judgment and decision process. This would completely defeat the purpose of implementing a BSC model in the first place.

Lipe and Salterio after considering the above issues and theories want to assess if Slovic and MacPhillamys (1974) findings are directly transferable to a BSC scenario, they have reasons to believe that the reliance on common measures may not be so obvious with regard to BSC results; due to managers better understanding their business units and being able to analyse them individually should reduce their emphasis on common measures.

IV. Methodology

For the purpose of this article, Lipe and Salterio wanted to examine if there was an over dependence on common measures when it comes to evaluating a BSC of a business unit. For this purpose they used 58 M.B.A. students with on average, more than five years of work experience. The students had to evaluate two divisions of a fictitious clothing firm WCS Incorporated.

The experimental case quotes WCS's mission statement, introduces the managers of the two business units (divisions), describes the strategies of each division, and presents a balanced scorecard for each division. The M.B.A. student's task was to act as WCS senior executive and decide a judgement for each division's manager based on the facts provided. The case follows Kaplan and Norton's strict theory that each unit develops its own specific scorecard and a superior manager (MBA students) evaluates the unit relative to this scorecard.

The two divisions were 1.) RadWear; specialising in clothing for teenagers, and 2.) WorkWear; specialising in direct sales of business uniforms. The experiment employed a 2 X 2 between subjects (Ss) design, in conjunction with a 2-level within Ss factor. The null hypothesis for this experiment was stated as;

Hn: Performance evaluations using the balance scorecard will be affected by both unique measures and common measures.