Validating Cause-and-Effect Relationships in the Balanced Scorecard

Abstract

INTRODUCTION Performance management systems are often designed to enable organizations to plan, measure and control their performance, so that decisions, resources and activities be better aligned with business strategies to achieve desired results and create shareholder value. For the past two decades, the Balanced Scorecard (BSC) has been proposed as an integrated framework for the implementation of financial and nonfinancial performance that helps organizations align their initiatives with the organization's strategy (Kaplan & Norton, 1992). By integrating lagging indicators of performance (outcome measures, such as financial results) with leading indicators (performance drivers, such as human resource skills) the BSC approaches performance from four different perspectives, and is intended to provide managers with a tool not simply for reporting but also for managing performance. These claims of enhanced strategic alignment and performance gains have motivated widespread adoption of the BSC in the private, public and nonprofit sectors; some studies have estimated rates of BSC adoption in the range of 60 to 70% among large organizations (Angel & Rampersad, 2005). In spite of the substantial investments devoted to the BSC, there is still insufficient empirical evidence on how effective these performance systems are in actually improving performance, and the processes by which the multiple perspectives of the BSC interact to produce tangible results. This study represents an effort to contribute to fill this practical and theoretical gap in four significant ways. First, it offers an overview of the extant research on the cause-and-effect relationships among the BSC Second, it proposes a method for empirically testing how the BSC perspectives lead to performance outcomes, using publicly available, audited information (as opposed to perceptual data collected via surveys). Third, it illustrates one empirical test of the impact of the nonfinancial BSC perspectives on financial performance, based on a large sample of 332 publicly traded organizations in the United States (in contrast with previous small-sample studies). Fourth, it suggests that all of the nonfinancial BSC perspectives do, in fact, have a direct (as opposed to indirect) effect on financial results, addressing a long-standing debate in the BSC literature. The following sections present the overview of the literature, research question and hypotheses that were used to explore the financial impact of nonfinancial performance measures; the research methods that were employed to empirically test the model, the results obtained; and their implications for research and practice. LITERATURE REVIEW, RESEARCH QUESTION AND HYPOTHESES The Balanced Scorecard Framework The Balanced Scorecard was first proposed by Kaplan and Norton (1992) in their seminal article published in the Harvard Business Review. The BSC framework performance from four different perspectives: one financial and three nonfinancial. Financial of performance are relevant to senior managers as short-term feedback on the results of their past initiatives aimed at increasing shareholder value. In the BSC framework, these address the question: If we succeed, how will we look to our shareholders?. Nonfinancial are present in the other three perspectives of the BSC framework : the customer perspective (to achieve my vision, how must I look to my customers?); the internal perspective (to satisfy my customers, at which processes must I excel?); and the learning and growth perspective (to achieve my vision, how must my organization learn and improve?). The original BSC framework was further extended to provide a way of translating strategy into a coherent set of performance measures (Chenhall, 2005, p. 396). Kaplan and Norton (2004, p.11) proposed that managers can view their strategic measures, not as performance indicators in four independent perspectives, but as a series of cause-and-effect linkages among objectives of the four balanced scorecard perspectives. …

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