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REFLECTIVE PRACTICE

Enhancing the effectiveness ofthe balanced scorecard with

scenario planningRozhan Othman

Graduate School of Management, Universiti Putra Malaysia, Serdang, Malaysia

Abstract

Purpose This paper aims to propose the idea of linking the use of the balanced scorecard withscenario planning. Scenario planning emphasizes the development of a strategic plan that is robust

across different scenarios. This ensures that the strategy implemented using the balanced scorecard islinked to external conditions and takes into consideration the expected changes in the environment.

Design/methodology/approach This paper examines the criticisms of the balanced scorecardand proposes the use of scenario planning as a way of overcoming some of these limitations.

Findings It argues that the use of scenario planning is capable of overcoming the lack of externalorientation in the balanced scorecard. Scenario planning also helps make the balanced scorecard morereflective of changes that may appear in the future. This ensures that the scorecard developed is notmerely a linear extension from the present.

Research limitations/implications Studies need to be undertaken to examine whetherintegrating scenario planning with the balanced scorecard leads to more effective strategyimplementation.

Practical implications Adopters of the balanced scorecard need to recognize that developing abalanced scorecard system needs to be preceded by a strategy formulation process that incorporatesan understanding of how future events may evolve. This can be achieved using scenario planning.

Originality/value This study is probably the first attempt to link the implementation of thebalanced scorecard and scenario planning.

KeywordsBalanced scorecard, Business planning, Business development

Paper type Conceptual paper

IntroductionThe balanced scorecard (BSC) has attracted considerable interest among researchersand practitioners. Gautreau and Kleiner (2001) cites Silk as reporting that 60 percent of

Fortune 1000 companies are either implementing the BSC or are attempting to do it.Yet, the BSC is not without problems. According to Atkinson (2006), it is estimated that70 percent of BSC initiatives failed. It appears that the difficulties in the BSC are due to

the difficulties in implementing certain aspects of the method as well as in thelimitations of the method itself. The purpose of this paper is to propose a possibleremedy to some of these difficulties. Specifically, it is argued that the limitations of the

BSC can be overcome by integrating it with scenario planning. It is expected that thisintegration will help make the BSC a more viable strategy implementation tool.

The current issue and full text archive of this journal is available at

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Received August 2Accepted September 2

International Journal of Produc

and Performance Manage

Vol. 57 No. 3,

pp. 25

q Emerald Group Publishing Lim

1741

DOI 10.1108/1741040081085


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Criticisms of the BSCThere have since been many criticisms of the BSC (Bessire and Baker, 2004;Bourguignon et al., 2004; Dinesh and Palmer, 1998; Norreklit, 2000, 2003; Van Tassel,1995). This includes criticisms about the lack of a human relations norm in the BSC and

the tendency to treat organizations as analogous to mechanistic systems (Bessire andBaker, 2004; Dinesh and Palmer, 1998). Kaplan and Nortons use of the jet plane as ametaphor to explain the behaviour of organizations is said to be misleading.Organizations are social systems that do not operate like mechanical systems. Thecause-effect relationships in social systems are more complex and sometimes evenambiguous.

Even though developing a causal model of the strategy is a central idea in the BSC,Davis and Albright (2004) reported that 77 percent of BSC adopters in the USA failed todevelop a causal model of their strategy. Similar findings are reported in studies onBSC adoption in Finland, Austria, Malaysia and Germany (Malmi, 2001; Othman, 2006;Speckbacher et al., 2003). The BSC uses the strategy map to present a graphical

depiction of the causal model of an organizations strategy (Kaplan and Norton, 1996;Moorajet al., 1999; Norreklit, 2000). However, some researchers argue that no specificmethod is available to help organizations develop the causal model of their strategy(Malmi, 2001; Speckbacheret al., 2003).

Part of the difficulty in thinking about the causal model of a strategy is due to thelimitation of the strategy map as a tool to depict the causal relationship of anorganizations strategy. The strategy map depicts how the internal processes of theorganization drive the outcomes sought by the organization (Kaplan and Norton, 2004;Scholey, 2005). However, the strategy map is a snap shot depiction of the strategy at a

particular point in time. Mintzberg (1994) argues that a strategy should articulate avision of a future state. This then provides the direction for the journey of theorganization. In other words, any thinking about the causal model of a strategy needsto see the temporal aspect of the cause-effect relationship. This involves developing anunderstanding of the sequence of events or milestones in steering the organizationtowards its desired future state.

The BSC recognizes the temporal dimension of strategy. This is reflected in theinclusion of the scorecard to help translate the strategy map into a set of performanceindicators that spans a period of time. The relationship depicted in the strategy map isused as the basis for the developing the scorecard. The scorecard spells out theshort-tem and long-term performance indicators of the strategy.

However, this approach, which positions the strategy map as the basis in chartingthe scorecard, is questionable. It assumes that developing the causal model of astrategy begins with understanding the cause-effect relationship between the internal

processes and the desired outcomes. Once this is done, planners need to lay out a planthat includes measures for the components in the strategy map. These measures areused as the temporal milestones in the scorecard. This means that the temporal aspectof the strategy is incorporated after the causal model of the strategy is conceptualized.The problem is there is the risk that once a strategy map is formulated, thedevelopment of the scorecard becomes an activity of developing a linear set of

performance measures, oblivious to the possibility of changes in the future. Thesemeasures become mere extrapolation from known data.

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The reliance on the strategy map assumes that the causal model of the strategy atformulated at the beginning of the BSC program is sufficient to reflect the evolution ofthe strategy over time. This is obviously rarely the case. A strategic plan needs to

visualize the sequence of activities or events that need to happen to create the desired

future state. This has to be clear in the mind of the planner before they think of thecause-effect relationship between the internal processes and the desired outcomes.Thus, instead of developing the temporal measures after the strategy map, theappropriate approach is to design a strategy map that incorporates the temporaldimension from the beginning.

The BSC is also criticised for being static and ignoring the external environment

(Norreklit, 2003; Voelpel et al., 2006). These problems are related since the static-ismis partly due to the internal focus of the BSC. When the thinking about the BSC isinsulated from the dynamism of the external environment it has the tendency tocreate measures that are out of touch with reality. The targets set do not take into

consideration external changes and is sometimes treated as fixed. It is seen as

myopic and ignores the activities and initiatives that goes beyond the originaltargets. As such, even though the BSC is supposed to help an organizationimplement its strategy, it does not help organizations deal with changes that can

affect the strategy.Merely developing a model of the strategy does not ensure the strategy will be

successful. Strategies can fail when the model is based on flawed assumptions. Amongthe flawed assumptions a company sometime make includes (Strategic Direction, 2006):

. That the strategy formulated will indeed work.

. Assumes that competitors will continue to behave in the same way.

. Assume that retaining customer loyalty is not going to be problematic.

.

Failure to incorporate long-term issues.

These flawed assumptions becomes institutionalized into an organizations strategywhen the strategy map used is treated as a static document. To be fair, it had neverbeen the intention of the gurus of the BSC to make it a static method. They recommendthat the scorecard be revised and updated regular (Gautreau and Kleiner, 2001).

However, they are not explicit on how this should be done.It should be pointed out that the BSC is meant to be a strategy implementation

technique (Gautreau and Kleiner, 2001). The BSC is not a substitute for strategyformulation. Organizations still need to formulate a sound strategy. Onceformulated, the task of steering the organization towards its goals can rely on

the BSC. Even then, management need to be cognizant of the changes in the

environment. Formulating a strategy is also a learning process that requiresadaptation to the environment and involves broadening perspectives (Mintzberg,1994). Braam and Nijssen (2004) argue that managers need to be proactive and be

alert of the changes in the environment to ensure a fit between the organizationsstrategy and its BSC program.

I propose that the some of weaknesses in the BSC can be overcome using futuremapping and scenario planning. These techniques complement the BSC by linking it

with external issues and enabling managers to think of the temporal cause-effect

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relationship of a strategy. In doing so, it brings forward the thinking about thetemporal aspect of the strategy to before the development of the strategy map.

Scenario planning and future-mappingScenario planning is the process for assessing future environment situations anddescribing the path from the present to the future. There are two forms of scenarioplanning i.e. future-forward planning and future-backward planning (Ratcliffe, 2000).Both are concerned with identifying pathways to the future. The latter is also known asfuture-mapping. Scenario planning begins from the present to identify pathways thatmay develop that will then create the future (Van Der Heijden, 2005, p. 49).Future-mapping begins with visioning a future state and identifying the pathwaysleading to it (Phillips, 1996).

Scenario planning is primarily concerned with understanding the externalenvironment. Van Der Heijden (2005, pp. 114-115) categorize the externalenvironment as consisting of the contextual environment and the transactional

environment. The former is that part of the environment that has repercussions for anorganization but which it has little or no influence over it. The latter refers to that partof the environment that the organization can influence and is a major player in it.Scenario planning focuses on understanding how the contextual environment mayevolve.

Scenario planning is different from forecasting in that forecasting is concerned withwhat will happen whereas scenario planning is more concerned with how things willhappen. The purpose of forecasting is to give answers whereas the scenario planningprocess is designed to get people to ask questions (Van Der Heijden, 2005, p. 6).Scenario planning is concerned with identifying plausible future states. It begins withidentifying the certain and the uncertain. It treats uncertainty as a learning opportunity(OBrien, 2004). In examining the possible pathways to the future, scenario planning

involves thinking about the sequence of events expected to shape the future (Phillips,1996). This will help managers think of the temporal cause-effect relationship thatshould be present in their organizations strategy. Ratcliffe (2000) states that thepurpose of scenario planning can be summarized as:

. Augment understanding of the possible future events that may emerge, how theyemerge and the factors that shape them.

. Forces fresh considerations to the surface and steer managers towards makingdecisions relating to it.

. The generation of scenarios to provide a context for managers to frame andreframe existing decisions.

. Help managers identify contingent decisions by uncovering circumstances thatmay arise and the decisions needed in dealing with them.

Mercer (1995) identified six steps that are common in many discussions of scenarioplanning:

(1) Decide the drivers for change. This involves an analysis of the environment todetermine which variables are influential in shaping the future. The analysis atthis stage can include an examination of the political, economic, social andtechnological factors (OBrien, 2004).

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(2) Bring identified drivers into a viable framework . This involves sensing andidentifying patterns from the data obtained. It would typically involvecategorizing and organizing the drivers into some logical groupings.

(3) Produce mini-scenarios. On the basis of the assessment in the earlier stage,develop a description of mini-scenarios. The generation of multiple scenarioshelps managers understand the range of uncertainties that can be expected(OBrien, 2004).

(4) Reduce the mini-scenarios into two to three scenarios. This requires considerabledebate among participants in the process and should conclude with scenariosthat are capable of containing the insights generated from the whole process.Mercer (1995) argues that experience shows that managers are can copeeffectively with only two or three scenarios. These scenarios should be tested byassessing whether they make sense to decision makers and whether theassumptions behind them are realistic.

(5) Write the scenarios. This involves writing the scenarios in a way that wouldmake it usable by those who are going to use them.

(6) Identify issues arising. At this stage, the main concern is understanding thecritical outcomes in each scenario and the issues that will have the greatestimpact on these outcomes. It includes identifying development that can createinflections in the pathways to these outcomes.

Once the scenarios have been generated, the main task of managers is to formulate astrategy that is robust under the conditions depicted under all the final two or threescenarios (Van Der Heijden, 2005, p. 115). Such a strategy will have to take intoconsideration how events are expected to unfold and the critical points and issues thatcan affect the future. In formulating this strategy, it is important to recognize that the

strategy developed can be formal and detailed or broad and flexible. Mintzberg (1994)argue that that there is no one best way in developing the strategy. An organizationcan develop a very detailed plan only when it is certain of the relative stability of itsenvironment. Scenario planning can help organizations ascertain whether this is likelyto be the case.

The basic idea in future-mapping is to base oneself in the future and then lookbackwards to visualize the milestones in the journey towards that future (Phillips,1996). It helps organizations understand how its strategy should evolve over time. Itdoes this by providing a process that enables an organization to understand whatneeds to be done to realize a desired future state.

Future mapping uses the same basic processes as in scenario planning except that itis done in a reverse order. Whereas scenario planning ends with developing possiblescenarios, future mapping involves a three-step process that begins with defining acompelling ideal future (Phillips, 1996). This involves setting a date for realizing theoutcome desired in the scenario and defining the clearly the characteristics of theseachievements. The second step involves mapping out the milestone events that wouldbe needed to create the desired scenario. This involves using the imagination to lookbackwards from the future to identify the actions needed to create the outcome. Theseactions are the pathways to the desired future state. The third step in future mappinginvolves managing accomplishments in the present. It is basically the implementation

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of a plan to execute the actions creating the pathway to the future. It includes a reviewand updating of the action plan as well the desired future state.

There are two ways the BSC can be linked with scenario planning. One way is to usethe insights generated in identifying pathways to the future as the basis for

formulating the organizations strategy map. This ensures that the BSC systemimplemented in an organization in anchored in an understanding of externalconditions. At the same time, management need to monitor the environment to assessany changes that can render the identified pathway invalid.

The second way to use scenario planning is by developing a future-map.Management begins with defining a future state and then identify the pathway thatwill take it to that future state. The action plan developed for the organization shouldbe one that is based on this pathway.

Steering the organization along the pathways will require the development ofmultiple strategy maps that depict the organizations strategy as it is expected toevolve over time. The number of strategy maps needed for a particular pathwaydepends very much on the extent of change and discontinuities expected in the future.This series of strategy maps can then provide a basis for aligning and realigning anorganizations objectives and internal capabilities with external conditions. By linkingthe strategy maps to a sequence of events that constitutes a pathway, manager will beable to develop a more realistic understanding of the sequence of events leading to thedesired future state. This can then be used to develop a more accurate scorecard oftheir strategy.

ConclusionThe fusion between the BSC and scenario planning provides organizations with a morecomplete process for formulating and implementing strategy. Scenario planning bringsan external focus to the process of thinking about an organizations BSC program. It

requires that planners think about the changes that can be expected in the externalenvironment and develop a plan that this robust in facing the uncertainties expected.This plan is then used as the basis for developing the BSC. This ensures that the BSCsystem implemented by their organization is linked to the realities in the environment.

The identification of the pathways to the future enables organizations to betterunderstand the temporal causal relationship of its strategy. It also enablesorganizations to anticipate possible discontinuities in the journey to reach the futurestate. This understanding will help planners understand the shifts and changes in thestrategy map used by the organization. Thus, instead of developing a single staticstrategy map to depict the organizations strategy, planners will probably need todevelop a series of strategy maps to depict the dynamics of their organizationsstrategy.

Application questionHow should the strategic planning cycle in an organization be adjusted to incorporatethe BSC and scenario planning?

References

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Bessire, D. and Baker, R.C. (2004), The French tableau de Bord and the American balancedscorecard: a critical analysis,Critical Perspectives on Accounting, Vol. 16 No. 6, pp. 645-64.

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About the authorRozhan Othman is a professor at the Graduate School of Management, Universiti PutraMalaysia. He earned his PhD from University College Dublin. His research interest is in HRM,Organizational Behaviour and Strategy. He has also done consultancy work in and outsideMalaysia. This includes consulting on the use of the balanced scorecard. He has published anumber of articles on the balanced scorecard. Rozhan Othman can be contacted at: [email protected]

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