Balanced Scorecard, Essay Example

The news has been replete with examples of companies that have put financial performance ahead of the other three balanced scorecard perspectives. Three examples are the collapse of the financial market, the collapse of the Detroit auto industry and the lapse in quality control by Toyota that resulted in product recalls, property damage and personal injury. Toyota’s troubles are the most striking because the loss of quality control indicates that a major internal transition had occurred. This shift signals that Toyota moved away from its historical roots – a company steeped in the cultural practices of a disciplined society – to become a company whose public behavior smacks of dishonesty at a minimum and at its worse of self-protection steeped in self-interests. The evidence suggests that their desire to maximize profitability trumped their historical commitment to their customers, their dedication to operational excellence, their attention to quality and their zest for the continuous growth and development of their employees. The rush to greater profits resulted in an imbalance in the company’s historical priorities.

Since 1961, employee accountability and high quality standards were the hallmark of Toyota’s Total Quality Control manufacturing philosophy.  This philosophy exemplified a balance between the four perspectives of the balanced scorecard long before the concept was developed. The Toyota system employed quality circles that encouraged team members to be actively engaged in ensuring quality control reflective of the business perspective. In addition, they sought and used employee input while striving for constant improvement reflective of the learning and growth perspective.  They also emphasized that not only were the end buyers customers to whom the company owed the highest quality product, but that each preceding chain of the production line was a customer of the next as well reflective of the customer perspective. The quality circles emphasized teamwork, shared accountability, planning and a commitment to excellence that produced a suburb product reflective of the business perspective. Their high quality product fostered remarkable growth reflective of the financial perspective. However, growth in global sales began to outpace their ability to train their workers.  The emphasis on sales expansion seemed to overshadow the historical balance of the company’s focus.

As recently as 2006, Toyota’s use of the principles of W. Edwards Deming was being touted in the news. At the same time, Toyota was being warned to avoid the Deming’s Seven Deadly Sins, particularly the emphasis on short-term profits: tantamount to a disproportionate focus on the financial perspective. Toyota’s historical emphasis on research and development may have prevented the performance flaws that lead to the current quality problem. However, because of the increasing emphasis on sales expansion, development times began to be shortened in order to get more vehicles into production. Even if Toyota did not totally abandon their founding principles, as the balance shifted toward the financial outcomes, the disproportionate focus on revenues had a devastating effect on the company’s ability to sustain that balance and to prevent an erosion of the balance that had catapulted them to success.  The recent announcement from the leadership of Toyota that the company would become a “small Toyota” that would return their focus to quality and trained employees is a recognition that the critical balance had been upset. None-the-less, in the short run, their customer loyalty is being severely tested and investors are being advised to avoid Toyota stock until the affect of the problems can be assessed.

It is difficult to imagine entities that have no customers when the concept is viewed in its broadest sense of internal and external constituents; however, entities acting on behalf of their constituents have no customers in the traditional sense of “buyers” of their products and services. Government agencies such as the IRS, foundations or cause organizations would not have customers, but this does not mean that the customer perspective is irrelevant to their operational processes. Although these entities are not seeking customer satisfaction – the central focus of the customer perspective, they do need to maintain public good will. While the metrics differ for these types of entities, the customer perspective is as relevant for them as it is for businesses with traditional buying customers. These metrics would include measures of trust, credibility and reputation.

Toyota is an excellent example of an organization that had two perspectives in conflict. Increasing sales required minimizing customer wait times for the product as demand grew. This can only be accomplished by decreasing production time. In Toyota’s case, this choice placed the focus on the business perspective (preserving quality through quality control) and the financial perspective (rapid sales growth) in conflict.  It is difficult to see how both can be accomplished, and clearly, Toyota was unable to maintain the balance effectively.

As Toyota has suggested, restoring balance between the business and financial perspectives can only be accomplished by identifying the ratio of capacity-for- production to sales demand.  An internal assessment of genuine production capacity in human and physical terms defines an operational balance point – the level of production at which quality controls are most effective. The company can then realign its business practices to grow their production capacity to meet sales objectives without sacrificing quality.

The conflict in the Coca Cola example is also a conflict between the sales process (the Marketing department’s choice concerning which product to support) and the product production selection process.  The critical question is why is Marketing behaving as it is. A root cause analysis may be a useful tool in resolving this conflict.

The learning and growth perspective addresses cultural attitudes and community learning.  It includes the nature of communications among workers. Effective communication requires a culture of collegiality and trust. Measuring culture and climate is extremely difficult.

One metric that begins to measure the effectiveness of communications is the number of cross-functional collaborations. Cross-functional collaboration is a tool for solving problems or addressing a need. Problem solving across departments is evidence of the sense of shared responsibility that only comes when trust and respect are present in the environment. It is also evidence of healthy, non-blame oriented lines of communication.

The most difficult part of integrating the four perspectives is the nature of organizational structure and planning itself. Compartmentalization of budgets and rewards encourages self-interest and silo thinking.  Historically, customer satisfaction has been the responsibility of the sales force, while business operations have been the responsibility of the operations managers. Similarly, the financial impact of decisions more than likely stays within the “walls” of the finance department, while employee training and institutional climate remain the responsibility of Human Resources. The goals are defined by the managers in each distinct area based on their respective narrow view of the company, and their raises and promotions are based on their ability to meet those goals. Until the process itself recognizes the interconnectedness and relevance of each unit, balancing their focus is an insurmountable task. Implementing the balanced scorecard is first and foremost an effort of redefining organizational dynamics.

For me, ethical leadership and respect for people are the two elements essential to success in business administration. This may seem like an oversimplification of the issues involved in the complex process of administering a business, and yet, the breadth of each of the concepts elevates its importance above all other aspects of management.

Business administration includes operational management to maintain a cooperative environment that maximizes efficiency, financial management to sustain adequate financing and human resource management to ensure competent staffing. The actions of company leadership have a direct influence on defining the management style and culture in which these critical business practices occur. Although planning, oversight and decision-making are central to attending to each of the business areas effectively; if the choices management makes are not shaped by an ethical compass then they are often based on expedience or driven by self-interests and personal gain. The decisions of the financial market leaders such as those made at Goldman Sachs are evidence of what happens when leadership is not ethical. Ethical leadership begins with the recognition that integrity, honesty and respect are the foundation for all effective action.  Maintaining their ethics is the motivation behind their actions–actions that are more balanced, reasoned and focused on long-term good rather than short-term personal benefit.

Respect is a far-reaching attitude that includes respect for consequences, stewardship, tolerance, and appreciation. Since the leaders moral compass defines the organizational culture, their attitude of respect sets the climate standard for acceptable behaviors. Respect for the employees and among employees stems from this attitude. There is a body of evidence that asserts that recognition and appreciation are more motivating that money. The operational performance of an organization that respects their employees and acknowledges their good work will outpace an organization where intimidation, control and fear prevail. Ethical leadership holds such respect as the norm for their organization.