Benefits Of Balanced Scorecards For Family Businesses

Increasingly it is recognised that gaining competitive advantage requires a strategic approach to managing an organization.

This involves formulating explicit competitive strategic priorities and implementing them in ways that align organizations with strategies. Recent innovations in management accounting systems have sought to provide information to assist managers develop a strategic orientation to the operation of their firms. One such innovation of particular relevance to developing and implementing strategies is the ‘balanced scorecard’. Given evidence on the benefits of balanced scorecards, this paper outlines how family business organizations can improve their performance by adopting this approach.

Balanced Scorecard

Balanced scorecards are part of the ‘best practices’ of high performance firms in Australia, and approximately 60 percent of Fortune 1000 companies in the US have experimented with the approach. The balanced scorecard is essentially a performance management system providing a set of measures that integrates the effects of decisions across key elements of a business, namely, the effects on financial position, customers, relevant aspects of the operating processes and the capacity to be innovative.

Developed by Kaplan and Norton from Harvard University in the US, the balanced scorecard approach complements traditional measures of business unit performance. It came about because of the accounting systems’ inability to emphasize elements which lead to good or poor future financial results. Traditional accounting performance measures ignore the financial value of a company’s intangible assets such as R&D, human resources, and the good- and bad-will of the company.

Strategy

The balanced scorecard also relies on firm strategy, that is, the alignment of strategic objectives with competitive industry forces. Firms are characterised as competing by adequately differentiating products or by seeking a cost leadership position. Therefore strategy has to be based on market segments to be served, followed by identification of the internal business processes which the firm needs to excel in if it is to become competitive.

The balanced scorecard translates vision and strategy into objectives and measures in four different areas:

the financial perspective, which identifies how the company wishes to be viewed by its stakeholders;
the customer perspective, which determines how the company wishes to be viewed by its customers;
the internal-business process perspective, which describes the efficiency of various internal business processes that create customer and stakeholder satisfaction; and
the organizational and growth perspective, which outlines the priorities for supporting organizational change, innovation, and growth.

Conclusion

The heart of the balanced scorecard is being able to link together the four measures with carefully selected non-financial measures that involve a well-balanced representation of non-financial and financial measures. In other words, a scorecard contains the linking together of outcome measures and the performance drivers of those outcomes.

To have an effective balanced scorecard in place, family businesses need to create a measurement system that reflects their strategy. In other words, it should be possible for a family business owner (or for anybody for that matter!) to look at the measures and work out from these measures the strategy. The measurement system should also reflect and be aligned with the financial, customer, internal-process, and organizational and growth perspectives in order to identify any gaps. Thus, balanced scorecards address failures in previous strategic planning systems and lead to continuous improvement in the organization.

George Tanewski is Senior Research Fellow in the AXA Australia Family Business Research Unit at Monash University. Dr Tanewski writes extensively on family business issues and also sits on the board of a prominent Melbourne family business. For further information please contact George Tanewski on 61-3-9903-2388 or george.tanewski@buseco.monash.edu.au
First published: 7 May 2001.
Last updated: 5 October 2005.