One might reasonably ask: Why did these problems with profit centre measures not emerge earlier?’ (Kaplan 1984:411). a) To which performance measures is Kaplan referring and what are the problems associated with their use? (30% of the marks for question 1) b) Consider either the balanced scorecard or economic value added. Assess whether this performance measure provides a solution for the problems identified in part a. (30% of the marks for question 1) c) Draw on your answer in part b to explain the timing of the widespread adoption by firms of the balanced scorecard. Ensure that you outline any important assumptions, including about human cognition and behaviour that contribute to your answer. (40% of the marks for question 1)
Sample Section of the paper
Analysis of Challenges With Performance Measures
Businesses face many challenges internally and externally as they endeavour to remain relevant and ensure longevity. Managing businesses – both internally and externally – requires constant monitoring and evaluation, as well as the setting of goals to aspire to, and markers to monitor progress. Competition and competitiveness in business, for a period of over 60 years, was measured by profits and profit margins. These were the key tool used to assess the value, efficiency and effectiveness of businesses. Profits were used not only measure overall company success, but they were also used as motivation tools and determinants of the achievement of a company’s short-term goals.
Kaplan in The Evolution of Management Accounting analyses the challenges faced in the development of cost accounting systems and the management control practices of the past based on costs and profits, their relevance in light of ever-changing economic systems, and assesses the need to develop different strategies that could be adopted, using new and innovative management information. He argues that the monitoring and evaluation systems and procedures that were developed over 60 years ago are still in use but may no longer be relevant in a changed economic environment.
There are various challenges faced in using costs and profits only, as the measure of success. These emerge from the fact that there are some aspects of business that are integral to operations and success, but are not directly connected financially to the efficiency or effectiveness of business operations. A manufacturing company for example could seem to be making a profit based on the value of total sales of final products, being greater than the cost of raw materials coming into the plant. The challenge with this is that there are other internal costs related to administration and human resource management that take away from this amount.
The key issues however that pose challenges to the profit or profit based measures today are based on history. There are several issues that Kaplan highlights in his essay: The organisation of today is much larger than it was in the earlier part of the twentieth century thus; Promotions to Management levels occur more often now than before; The pressure then was to attend to long-term profits, whereas today these can be overlooked in light of short-term goals, meaning; The pressure on short-term profits then was much less than it is now, because; Executive Bonus plans generally promote a short-term focus; Today’s Manager is not very familiar with the actual technology, processes or products related to the company’s business, moreover; Competition among other factors in the international markets have changed and consequently; Other elements such as employee skills, customer loyalty and the like are perhaps better markers for the success of a company.
In order to adjust to the changed economics, different approaches must be used to measure success. One such measure is the Balanced Scorecard. It attempts to link the vision and mission of a particular company to internal and external activities that make up the business. It is a good monitor for company performance as it measures activities against strategic goals. Not all business activities are financially quantifiable, but are relevant to the success of the business. For managers in this economy who are disconnected from the core business activities, the Balanced Scorecard gives a comprehensive bird’s eye-view of a company’s success.