Balanced Scorecard: Traditional Performance Measurement

Balanced Scorecard Traditional Performance Measurement Historically, the measurement system for business has been financial. Activities of companies were measured and monitored through the traditional financial accounting model. However, the extensive, even exclusive use of financial measurements in business has been criticized primarily because an overemphasis on achieving and maintaining short-term financial results can cause companies to overinvest in short-term fixes and to underinvest in long-term value creation, particularly in the intangible and intellectual assets that generate future growth. Indeed, the Harvard Business School Council on Competitiveness project in 1992 identified the following systematic differences between investments made by U.S. corporations and those made in Japan and Germany: The U.S. system is less supportive of long-term corporate investment because of the overemphasis on improving short-term returns to influence current share prices. The U.S. system favors those forms of investment for which returns are most readily measurable; this leads to underinvestment in intangible assets – product and process innovation, employee skills, customer satisfaction – whose short-term returns are more difficult to measure. Inevitably, as managers are pressured to deliverconsistent and excellent short-term financial performance, trade-offs are made that limit the search for investments in growth opportunities. Even worse, the pressure for short-term financial performance can cause companies to reduce spending on new product development, process improvements, human resource development, information technology, data bases, and systems as well as customer and market development. In the short run, the financial accounting model reports these spending cutbacks as increases in reported income, even when reductions have cannibalized a company’s stock of assetsand its capabilities for creating future economic