A Review of Balanced Scorecard Use in Small to Medium Enterprises

Abstract

There is a significant body of research about the use of the Balanced Scorecard (BSC) in

large organizations. Despite the expected benefits of the BSC, conflicting evidence exist on the use

and benefit of the BSC in small and medium size enterprises (SME's) where the value, cost, and

impact of BSC may be significandy different. Recent survey research has found limited use or

awareness of the BSC among SMEs while case study research of SMEs using the BSC has

consistently reported perceived benefits including improved performance. This paper reviews survey

and case study research into the use of the BSC in SMEs and entrepreneurial firms with the

objective of reconciling the differing perspectives of prior studies.

Prior studies indicate that there is a pattern to the BSC adoption by SMEs based on

information needs created by the increasing complexity of businesses driven by factors such as size,

growth rates, the presence of outside stakeholders, and other factors. The case study research of

BSC in SMEs typically studies firms that are larger and have self-selected into the use of the BSC.

Thus, the disparity in results between the two types of BSC in SME studies may be explained by the

differences in relative SME size, growth rates, and ownership.

The use of the BSC could benefit fast growing SMEs deal with rising complexity by helping

to clarify and develop strategy, tie strategy to operational measures, and communicate performance

to stakeholders. Assisting fast growing SMEs to successfully navigate difficult organizational

transitions may be of general benefit as fast growth SMEs are the most likely to provide new jobs

and other economic benefits.

Keywords: Balanced Scorecard, Small and Medium Enterprise, Entrepreneurial

1

Introduction

The Balanced Scorecatd (BSC) is a popular strategic performance measurement and

management system adopted by thousands of companies since its introduction two decades ago

(Kaplan 2010). The use of a Balanced Scorecard allows organizations to integrate non-financial

measures into its performance measurement to "balance" the traditional financial measures that may

not capture key aspects of performance.

Much has been written about the uses and benefits of the Balanced Scorecard in large

organizations where the communication of strategy and the collection of key performance measures

enhance management's ability to coordinate and control the organization (Andersen, Cobbold, and

Lawrie 2001; Kaplan 2010). Despite the expected benefits of the BSC, conflicting evidence exist on

the use and benefit of the BSC in small and medium size enterprises (SME's) where the value, cost,

and impact of BSC may be significantly different. (Hudson, Smart, and Bourne 2001; Gumbus and

Lussier 2006; Rickards 2007; Brem, Kreusel and Neusser 2008). Recent survey research has found

limited use or even awareness of the Balanced Scorecard among SMEs while case studies of SMEs

using the BSC have found several benefits including improved performance. This paper reviews

survey and case study research into the use of the BSC in SMEs and entrepreneurial firms with the

objective of reconciling the differing perspectives of prior studies.

The BSC surveys that do not find use or awareness of the BSC in SMEs may be looking at

firms that are too small to have the complexity and coordination issues that would benefit from a

BSC (many of the survey respondents were very small). The case study subjects, who generally had

self-selected for BSC implementation, had more employees than the average SME. In addition to

sample issues, researchers found "types" or "generations" of BSC formats in use; firms identifying

themselves as using or being familiar with the BSC may be referencing different versions or

incomplete implementations, thereby complicating this line of research.

2

Furthermore, prior studies indicate that there is a pattern to the BSC adoption by SME's

based on information needs created by the increasing complexity of businesses driven by factors

such as size, growth rates, the presence of outside stakeholders, and other factors. Thus, the

disparity in results between the two types of BSC in SME studies may be explained by the

differences in relative SME size, growth rates, and ownership.

First, we review the concept of the Balanced Scorecard. Second, we review the literature on

Small to Medium Enterprises (SMEs) and entrepreneurial firms and how they differ from large scale

enterprises. A discussion of the importance of the BSC as a performance measurement (PM) system

in SMEs and the barriers to BSC implementation follows. Finally, highlights of survey based and

case study research on the BSC in SMEs precedes suggestions for future research and conclusions.

Literature Review

The Balanced Scorecard is a popular strategic performance measurement and management

system adopted by thousands of companies since it was first published in the Harvard Business

Review in 1992 (Kaplan and Norton 1992; Kaplan 2010). It is widely perceived as one of the top

management tools used by companies to implement strategy (Rigby 2013). The addition of a

customer perspective, an internal business process perspective, and a learning and growth

perspective to the traditional financial results measures provides a framework for organizations to

focus attention on key performance indicators that are critical to strategic goals but are difficult to

capture in financial terms. The use of "non-financial leading" indicators, which are determinants of

future results, contrasts with the financial measures which are typically "lagging" measures of past

results (Kaplan 2010).

Non-financial measures are particularly important when trying to capture the value of

intangible assets. Intangible assets are difficult to measure in financial accounting terms because the

value of an intangible asset is typically indirectly realized, is often dependent on the strategy and

3

context of an organization and is difficult to separate from other assets (Kaplan and Norton 2004).

Few intangible assets, outside of brand names, have intrinsic value (Kaplan and Norton 2004). Since

valuation of investments in intangible assets is difficult, if not impossible, due to these complexities

and uncertainties, financial accounting often will expense these investments in the current

accounting period rather than carrying them as a continuing asset. So despite the potential long-

term benefits to an organization of investments in areas such as organizational learning, human

resource development, market development, and product development, financial accounting often

treats these costs as current expenses because of the difficulty in establishing a future value. This is

problematic as intangible assets have become increasingly important in an information and internet

age and are especially important to entrepreneurial firms which are making large investments in

intangibles. Hand (2005) finds that financial accounting information is more relevant for more

mature firms than entrepreneurial firms. Studies have found that research and development (R&D)

costs, typically recorded as an expense in financial accounting, are a positive indicator to investors

valuing startup firms (Armstrong, Davila and Foster 2006). Non-financial measures, such as those

used in a BSC, can provide more information on R&D activities than measures based solely on

financial indicators can (Bremser and Barsky 2004).

As developed by Kaplan and Norton (1992), the BSC typically has four perspectives1:

1. A financial perspective, described as "how should we appear to our shareholders?" would

measure shareholder value creation.

2. A customer perspective, described as "how should we appear to our customers?" which

would capture the success of the value proposition in the acquisition, satisfaction and

retention of customers.

1 But not always. Organizations can add or alter the perspectives as needed (Kaplan 2010).

4

3. A business process improvement perspective, described as "what business processes

should we excel at?" would measure success in creating and delivering the value proposition

in terms of quality, timing, and cost.

4. A learning and growth perspective, described as "how will we sustain our ability to

change and improve?" would be comprised of three main sections: human capital,

information capital, and organizational capital.

The financial perspective would be "balanced" by the other three to provide a more

comprehensive measure of performance. In addition, by basing the selection process on the vision,

mission and strategy of the organization, the balanced scorecard measures provide a framework to

monitor the key performance indicators needed to implement the chosen strategy. Luft (2009) notes

studies that show more organizational learning occurs from measuring leading, non-financial

indicators in addition to observing results-based, lagging financial indicators.

In addition, since the BSC provides a framework to link measures of leading indicators and

the eventual lagging results measures, the assumptions of the organization can be checked by

comparing the measures to expected results. Properly done, this allows the testing of the original

assumptions of the business model in a looped learning model that can lead to organizational

learning (Kaplan 2010).

Small to Medium Enterprises and Entrepreneurial Firms

SMEs are defined in terms of size: typically either by the amount of revenues or the number

of employees. SMEs are smaller, by definition, have fewer resources, and have a simpler structure

than large enterprises. Some characteristics that arise out of these differences: limited resources

mean SMEs are more orientated toward current survival than long-term strategy. Given limited time

and attention, SME managers who have operational and strategic responsibilities often do not have

the opportunity to invest in strategic planning given the immediacy of operational technical and

5

process concerns (Hudson, Smart and Bourne 2001; Ates, Garengo, Cocca, and Bititci 2013).

Management practices are often reliant on the personality of the entrepreneur and may also be

neglected due to the lack of time and attention. This entrepreneurial orientation may aid in the speed

of decision-making but may leave subordinates uninvolved in decisions and leave the entrepreneur

overwhelmed as the firm grows.

Beyond the limits to the entrepreneur's time, shortages of financial and human resources will

eventually limit growth. The financial resources needed to fuel growth are often better understood

than the human resources needed to develop products, people, and organizational systems (Ates et

ai 2013).

In addition, many SMEs have deficiencies in information technology systems and staff,

which may make any PM system implementation more difficult (Brem et al 2008). A critical factor

for PM system implementation was cost and labor saving automated data collection, which may be

an operational need that should precede a PM system.

Many SMEs remain small businesses due to the limits of the potential of the business, the

inability to attract the resources needed to grow, or sometimes simply the choice of the owners

when growth is not a personal goal. Growth can come with additional risks and typically requires

some loss of personal control. Some owner-managers will choose to limit growth (Jennings and

Beaver 1997).

Fast growth SMEs will be significandy different. These fast growing SMEs will face more

uncertainty and a more unpredictable environment while needing to attract resources to fuel growth.

Fast growth SMEs and entrepreneurial ventures can provide a large number of jobs in an economy

and a large number of the new jobs as larger firms are replaced by disruptive new entrants. Assisting

startups and SMEs to successfully grow would benefit the economy and should be an important

contribution to society at large (Davila, Foster and Jia 2010).

6

The Evolution of the Balanced Scorecard

After the initial model of the BSC (Kaplan and Norton 1992) was released, many

implementations of that initial BSC concept led to improvements and extensions of the original

model. The initial four perspectives could be also be connected in themes tied together in a strategy

map (Kaplan and Norton 2000; Kaplan and Norton 2004) to better describe how the organization

will create value and translate long term strategic goals into short term operational measures.

Another emerging benefit of the BSC was its use as a communications tool to explain strategy and

the relationship of activities to organizational success to managers and employees. By cascading the

BSC down through the organization, organizations could align personal goals and organization goals

by using monetary incentives tied to personal or group scorecards (Kaplan and Norton 2004).

Several studies of larger firms have identified different "generations" of Balanced

Scorecards. Speckbacher, Bischof, and Pfeiffer (2003) defined three types:

1. Type I BSCs used financial and non-financial measures in a strategic measurement system

similar to the first version introduced in 1992;

2. Type II BSC added cause and effect relationships tied together in a strategy map as

demonstrated in versions such as Kaplan and Norton (1996);

3. Type III BSC further added action plans and connected incentives to the scorecard to

change the BSC from a performance measurement system to a performance management

system (Kaplan and Norton 2000).

Some of the difficulty in conducting empirical studies of BSC use may be from the multiple

interpretations of what constitutes a BSC. Malmi (2001) found early adopting Finnish firms who

self-identified as using a BSC were using Type I or Type II formats. Speckbacher et al. (2003) found

half of their BSC users were Type I, 21 percent were Type II and 29 percent were Type III.

7

Several years later Soderberg, Kalagnanam, Sheehan and Vaidyanathan (2011) used a survey

to categorize firms within their BSC implementation taxonomy. Nineteen percent of their BSC users

were in Type I, 8 percent in Type II, and the Type III users had climbed to 73 percent. However,

only 41 percent of the firms that Soderberg et al. classified as BSC companies self-identified as such

while 16 percent of firms they classified as non-BSC organizations thought they had one. There is

clearly some confusion among users, partly because many performance measurement systems now

incorporate BSC-type features (i.e. a balance of financial and non-financial measures in a causally

linked framework).

Among researchers there are problems of definition as well. Hoque and James (2000) as an

example, used what would be considered a Type I BSC model to classify firms in their study as BSC

users. Future researchers should be careful to identify the level of BSC implementation within the

organization.

The Antecedents of the BSC in SMEs

Traditional theory held that Management Control Systems (MCS) would be too bureaucratic

for entrepreneurial firms but Simons (1995) had a useful analogy: fast cars need good brakes. Simple

SME organizational structures were flexible, low cost, but limited. As firms grew, increased size and

complexity increased needs beyond the ability of those limited systems, creative firms required some

structure and control to allow for experimentation and creativity. Therefore as a fast car needs good

brakes to allow it to go fast without accident, an entrepreneurial firm may need more formal strategy

implementation and monitoring if it is to grow rapidly without losing control (Simons 1995; Davila

and Foster 2007; Davila, Foster and Oyon 2009).

By providing stability, capturing organizational learning, coordinating across the enterprise

and legitimizing the company to outside stakeholders, MCS were increasingly important to maintain

the control of the organization and avoid chaos and operational failures (Davila and Foster 2007).

8

Fast track SMEs will often follow a non-linear evolution as a successful proof of concept or

prototype stage leads to an explosive growth stage. Shortfalls in operations, hiring and staffing,

financial resources, etc. may result in an organizational chaos where the problems exceed the

managerial capability to handle them (Garengo and Bemardi 2007).

When strategic indicators were unpredictable in nature, as they often are in fast growth

SMEs, Simons recommended interactive controls systems, which used face-to-face meetings of

personnel to compare and share information in an attempt to reduce uncertainty and confusion

about the environment (Simons 1995). One such interactive control system could be based on the

balanced scorecard (Kaplan 2010).

Lack of resources, both financial and human, led many SMEs to employ minimal PM

systems until either a crisis (a change of management; resource shortage in a period of growth;

production crisis or dramatic market change) or external pressure (from lenders, outside investors,

or even customers) requires a system be put in place. Many organizations "invest resources... only

to solve organizational crises but not to prevent them (Garengo and Bernardi 2007). Garengo and

Sharma (2014) noted that for Italian SMEs, the improvement of PM systems often followed the

introduction of outside managers or directors as SMEs transitioned from family firms to managerial

firms, similar to the "import in" concept from Davila and Foster (2007).

Zinger (2002) reviewed stages of growth and development models and postulated that the

small firms that would benefit from the BSC had high levels of organizational complexity and were

entering a transition period to a more advanced stage of organizational development.

Flamholtz and Randle (2007) present an organizational life cycle model and identify a

"professionalization" growth stage where the implementing of management systems is the key to

avoiding "growing pains" described as a mismatch of organizational development with

organizational needs while the organization is in a period of transition. They suggest that poor fit

9

between systems and stage of growth can increase the risk of failure (Flamholtz and Randle 2007).

Similarly, Davila et al (2009) describe "growing pains" as an "entrepreneurial crisis" but the impact is

the same: A start-up may not achieve their potential (or simply fail) if they cannot resolve this crisis.

Timely systems implementation could mitigate some of the downside of rapid growth by allowing

organization learning, coordination, and adaptation to assist in difficult transitions.

Benefits to the Use of the BSC in SMEs

SMEs will need a strategic framework to control and focus the organization as they grow.

SMEs often have difficulties rationaHzing their operations and tend not to see strategy as a deliberate

process (Garengo and Biazzo 2012). The BSC process can help focus attention towards long-term

strategy when short-term operational problems might otherwise dominate organizational time and

attention. This helps to translate long term strategic goals into short term operational measures. This

may be of critical value for entrepreneurs who have a strong strategic vision but have difficulty in

determining the sequence of operational tasks that are needed to execute their strategic vision. PM

systems have the hidden value of helping managers clarify and communicate strategy while

challenging the base assumptions of their business model (Neely and Najjar 2006). Strategy maps, as

used in the BSC, can make the links between leading and lagging measures exphcit and allow

organizations to test their assumptions in double-loop learning (Kaplan 2010).

The process of developing the BSC can build consensus around the strategies in use. Often

SMEs may have limited or incomplete vision and mission statements, which can lead to confusion

about strategies and goals. The BSC development process requires the clear statement of strategy,

vision, mission and goals, and beyond that, a working understanding of the business model of the

firm (Andersen et al 2001). Establishing these precursors may be the most beneficial part of the BSC

implementation as the BSC implementation as the process of identifying key objectives may require

management to address critical issues (Davila Foster Jia 2010).

The BSC helps to translate long term strategy into short term operational measures. This

may be of critical value for entrepreneurs who have a strong strategic vision but have difficulty in

determining the sequence of operational tasks that are needed to execute their strategic vision.

As the SME grows, the articulation of the strategy and goals via the BSC may help maintain

the cohesion of the smaller workplace by sharing the purpose and guiding decision making as

authority is decentralized. The KPI selected will help focus attention on the measures chosen as

critical to success.

As SMEs improve their technological capabilities to meet market needs, they will also need

to improve management systems to handle increases in complexity (Garengo, Biazzo and Bititci

2005). Small firms operate in more uncertain environments, are more dependent on innovation and

will be required to evolve as they grow. Small manufacturers are often already capturing non-

financial indicators of quality and continuous improvement. A BSC will provide a framework to put

that information in context (Garengo et al 2005).

Sawang, Unsworth and Sorbello (2007) studied innovation effectiveness in SMEs and found

that firms using a balanced (non-financial and financial) set of innovation metrics perceived more

performance benefit to customer satisfaction, financial performance, and quality from innovation

than did firms that used only financial metrics. In addition, those firms were more positive towards

future innovation adoptions.

By documenting assumptions and making clear the intermediate goals and objectives, the

BSC should assist stakeholders, both internal and external, in understanding the business plans. A

BSC can help small firms prove to bankers and investors that the firm is under control (Anderson

2001). Davila, Foster and Oyon (2009) call this use of a MCS "seeking legitimacy".

11

Barriers to the use of a BSC in a SMEs

The major barriers to using a PM system in SMEs are often identified as the lack of

resources (both financial and human resources), an extreme short-term focus, and a resistance to

formal systems (Hudson, Smart and Bourne 2001; Garengo, Biazzo and Bititci 2005). The shortfall

in human resources can be a lack of manager time and attention, as well as a lack of training, skills,

or experience.

A survey by Sousa, Aspinwall, and Rodrigues (2006) identified employee training, the

difficulty of defining performance measures, conflicts with current systems, cost, and management

commitment as the most important obstacles to adopting new performance measures in SMEs.

Some entrepreneurs identified concerns with disclosure of strategy and operating

information as a drawback to using a BSC (Todorut, Bojinca and Tselentis 2013; Giannopoulos et al.

2014).

Rompho (2011) was a case study of a SME whose BSC implementation failed because of

frequent strategy changes and a major change in sales channel. The need for quick adaptation to

environmental changes eroded the value of BSC for strategic learning and communication.

Finally, management practices developed for large organizations may not translate well to

smaller firms. For example the top-down strategic emphasis often used in PM systems, particularly

the BSC (Garengo and Biazzo 2012). Management process in small firms often bears no

resemblance to processes used in larger organizations (Jennings and Beaver 1997). Use of the BSC in

smaller firms should not look like the use of the BSC in large firms.

Highlights of Survey-type Studies of the BSC in SMEs

Hoque and James (2000) surveyed 66 manufacturers and found the likelihood of a BSC was

related to size; larger companies in its sample were more likely to use a BSC.

12

Tennant and Tanoren (2005) received 25 responses from small manufacturers and found

80% were unaware of the BSC concept and none actually used it (no demographics were given for

the respondents but the survey was mailed to SMEs with between 10 and 249 employees).

Giannopoulos, Holt, Khansalar, and Cleanthous (2013) received 40 responses from an

internet survey of SMEs. Only 13 of the responding firms were aware of the BSC and only 3 used it.

The responding companies were all under 50 employees.

Machado (2013) used semi-structured interviews with 58 Portuguese industrial companies

rated as "industry- excellent" with a median size of 82 employees. Only 3 companies used the BSC.

Knowledge of the BSC was correlated with the size of the company and the presence of a CFO.

Todorut, Bojinca, and Tselentis (2013) interviewed 6 Romanian CEOs of SMEs and found 5

of 6 had no knowledge of the BSC. No company used the BSC and all had less than 49 employees.

Highlights of Case Studies on the BSC in SMEs

Case studies of balanced scorecard use in SMEs typically first identified firms using or

implementing a BSC rather than surveying a random sample in order to find users. These firms have

likely, in a sense, self-selected themselves as fitting both the size (larger) and complexity (more

complexity due to growth or change) profile that would derive benefit from a PM system like the

BSC.

Chow, Haddad, and Williamson (1997) used interviews with four firms in different industries

to investigate BSC use. The firms ranged from 100 to 1,200 employees (somewhat larger than a

typical SME). The firms all thought the BSC concept was beneficial.

Gumbus and Lussier (2006) followed three companies implementing BSCs. An electronics

firm with 42 employees, a metals firm with 230 employees, and an orange juice supplier with 150

employees all successfully implemented BSCs and attributed improved operating results to their use

of scorecards maintaining focus on key performance measures.

Femandes, Raja and WhaUey (2006) helped implement a BSC in an established English SME

responding to global competition. Several benefits were immediately apparent as the implementation

process clarified strategy and tied strategic initiatives to key performance indicators. Challenges for

this implementation were identified as unprepared top managers, resistance to change, lack of

training, and lack of funds.

Manville (2006) followed the implementation of a BSC in a not-for-profit English Housing

SME with 240 staff in 60 locations and increasing regulatory demands. Perceived benefits included

increased integration between the strategic business plans and key performance indicators; more

efficient reporting; and increased understanding of activity across the organization.

Rickards (2007) followed a rapidly growing 200 employee e-commerce SME through the

process of developing a balanced scorecard. The implementation resulted in an improved strategic

development and decision process, organizational learning and improved feedback to stakeholders.

In these case study examples, the firms implementing the BSC tended to be at the larger end

of the SME range of 10-250 employees, growing in size and complexity, and often facing increasing

competition in the marketplace or increasing stakeholder pressure for performance reports.

Suggestions for future research

Researchers should consider the SMEs perception of the costs and benefits of a

performance measurement system like the BSC and how that perception may impact the decision to

implement. It appears that size matters to this decision, as does growth rates, the needs of outside

stakeholders, and the complexity of the business. All of these factors create demand for a BSC type

PM system. The perceived benefits must exceed the general perception of considerable costs in

precious time and resources for a BSC installation to be embraced by SME management.

Research should investigate which factors might lead to successful implementations in

SMEs. Hudson-Smith and Smith (2007) thought favorable factors for a BSC would be efficient

14

implementation (measured in both time and money), short-term benefits (to gain support), and the

perceived ability to continue the strategy development process over time.

In addition, careful consideration should be given to the categorization of the BSC by both

researchers and subjects, given the potential confusion over the types or BSC generations that

currently exists.

Conclusions

This paper addressed the research question of why there was a wide disparity of results

between case study research and survey research into the use of BSC in SMEs. The use of a strategic

performance measurement tool like the BSC in a SME appears to occur later in the growth stage,

after basic financial planning and evaluation systems are installed (Davila and Foster 2005). Many of

the SMEs in the surveys reviewed in this paper likely did not have the resources, skill sets or perhaps

even an immediate need to implement a BSC type performance measurement system. In contrast,

the reviewed case studies of SMEs that did report successful launches of a BSC tended to have more

employees, complexity and need than did the surveyed firms.

In addition, we noted that there appears to be significant confusion over what constitutes a

Balanced Scorecard, given the evolution of the scorecard over time and the different levels of

implementation of BSCs when undertaken. This makes comparison of BSCs difficult across firms

and across papers especially considering the flexibility of the BSC format in application. There needs

to be some systematic development of a BSC model similar to that proposed by Speckbacher et al.

(2003). Researchers of BSC use in SMEs should consider the implications of these problems when

designing their studies to avoid confusion and allow comparisons across studies.

15

The case study research indicates that the use of the BSC would appear to most benefit the

fastest growing SMEs who need to deal with rising complexity by helping to clarify and develop

strategy, tie that strategy to operational measures, and communicate performance to stakeholders.

Assisting these fast growing SMEs to successfully navigate difficult organizational transitions may be

of general benefit as fast growth SMEs are those most likely to provide new jobs and other

economic benefits.

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