Academic journal article Journal of Business Economics and Management

Measuring Trade-Offs among Criteria in a Balanced Scorecard Framework: Possible Contributions from the Multiple Criteria Decision Analysis Research Field

Academic journal article Journal of Business Economics and Management

Measuring Trade-Offs among Criteria in a Balanced Scorecard Framework: Possible Contributions from the Multiple Criteria Decision Analysis Research Field

Article excerpt

1. Introduction

Present-day economic thinking assumes that performance evaluation is a key element for the promotion of improvement initiatives (Urbonavicius, Ivanauskas 2005; Strandskov 2006; Zinkeviciute 2007; Santos et al. 2008; Acar, Zehir 2010; Curado, Manica 2010). As stated by Santos et al. (2008), "formal or informal performance measurement is common practice in most organizations and it is well established that this plays a critical role in signalling the level of success in achieving objectives and identifying where improvement efforts are required". From this assumption, remarkable progress has occurred in recent years in the development of performance measurement frameworks, where the Balanced Scorecard (BSC) (Kaplan, Norton 1992) is one of the best known examples. In fact, as claimed by the Harvard Business Review, the BSC is one of the major innovations of recent decades in management systems. However, notwithstanding the progress achieved, the BSC is not without its own shortcomings. As reported in the literature (e.g. Ittner et al. 1997; Ferreira et al. 2011), it seems generally agreed that the way compensations between criteria within a BSC framework are calculated remains an open issue. Following this, and considering the versatility and great potential of the multiple criteria decision analysis (MCDA) techniques (e.g. MACBETH) in dealing with trade-offs among evaluation criteria, this paper aims to analyze possible contributions of the MCDA approach to overcome the measurement shortcomings of the BSC. It must be highlighted, however, that Zorzi and Ensslin (2006) have already reported the integrated use of the BSC and MACBETH in the construction of a performance measurement system in an accounting context. As such, this paper builds on previous work, but aims to discuss new findings and amplify the interest of the MCDA approach to other measurement contexts in order to broaden the generalizability of the results.

The paper is organized as follows. Section 2 presents the BSC as a generic method of performance evaluation, and highlights its major shortcomings. Section 3 presents concepts related to MCDA, respective background and potential in the cardinal measurement of trade-offs among evaluation criteria. In section 4, a numerical example is provided. Section 5 discusses the pros and cons associated with the integrated use of the BSC and MACBETH, and concludes the paper.

2. The Balanced Scorecard

The Balanced Scorecard (BSC), as a generic method for performance evaluation, was created and developed by Robert Kaplan and David Norton in the early 1990s (Kaplan, Norton 1992). One of the main reasons for its creation is directly related to the fact that all the classic financial indicators are insufficient to measure the creation of value by the intangible assets of an organization. However, according to Kaplan and Norton (1996a), "the scorecard wasn't a replacement for financial measures; it was their complement". Following this, the BSC has been emphasized in several studies as a tool to assess performance, because it articulates several indicators, while considering the organization's strategy.

The structure of the model is focused on the initial strategic options defined by the organization. From this point of view, the evaluation is done according to a complex set of causes and effects articulated to define the so-called indicators of occurrence (with desirable well-defined goals and well-measured end-points). The modeling system is then initiated by defining key performance variables in the financial area, such as: return on invested capital and sales growth. Indexed to these types of indicators, different trend indicators (i.e. factors that influence the performance of the indicators of occurrence) are identified and defined, which determine the performance of the central variables, which are, again, consistent with the strategic goals of the organization. …

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