The Sustainability Balanced Scorecard as a Strategic Controlling Tool

Table of contents

List of Figures

List of Tables

List of Symbols/Abbreviations

1. Introduction
1.1 Background
1.2 Research Question
1.3 Objektive

2. Literature Review
2.1 The Concept of Balanced Scorecard (BSC) as a Strategic Controlling Instrument
2.2 The Definition of SBSC
2.3 The Process of Formulating SBSC
2.4 A Strategy Map for SBSC represents How the Organization Creates Value

3. Two Examples of the Implementation of SBSC shown in Annual- and Sustainability- Report of two German Automobile Industries (Daimler AG & BMW AG)

4. Conclusion

List of References

List of Figures

Figure 1 - Matrices used in the BSC

Figure 2 - Process of formulating SBSC

Figure 3 -SBSC as a Strategy Map for a Sample Company

Figure 4 - Three Years Summary of Daimler AG‘s Annual Report 2018

Figure 5 - Five Years Summary of Daimler AG‘s Sustainability Report 2016

Figure 6 - Three Years Summary of BMW Group‘s Annual Report 2018

Figure 7-Three Years Summary of BMW Group' Key Sustainability Indicators

Figure 8-The Ten Sustainability Goals of the BMW Group

List of Symbols/Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

1.1 Background

Figge, et al. (2002, p. 269) argued that, during the last decade, environmental and social issues, are reflected in market transactions and have become an important issue so that many companies implemented specific environmental and social man­agement systems. However, these systems have rarely been integrated with the general management system of a firm so that it affects environmental and social management is often not related to the economic success of the firm and the eco­nomic contribution of environmental and social management and it emerges an un­certainty.

According to Sen (2018, pp. 581-582) from Istanbul University - Turkey, she argued that "In today's highly industrialized business arena, harmful effects of corporations to the environment and society cannot be ignored. Organizations are operating in relationship with their stakeholders and for long lasting survival; they need to take into consideration their effects on all related parties."

Hence, topic about Corporate Social Responsibility (CSR) has become familiar now­adays, where companies, especially listed companies, have disclosed their CSR- activities, which involve economic, environmental and social issue, in their annual report or in their sustainability reports to show to the public that they are also con­cerned about these issues. Furthermore, sustainability has increasingly become an important issue for wellbeing of human life and it is responsibility of many parties such as individuals, corporations, or governments. Nowadays, the term sustainability also has become popular among companies to implicate social, economic and envi­ronmental pillars to their strategy and management of the company. Today, compa­nies should not only focus on their profits, but they are also forced to concern about other issues such as social, economic and environmental. Unfortunately, many com­panies still do not know how to implement or measure its outcomes.

1.2 Research Question

These are the questions that would be discussed in this academic paper, as follows:

- Why is it so necessary applied for sustainability of the business nowadays?
- What are the views of professionals regarding issues in Sustainability?
- How can the concept of SBSC be implemented and shown in company's an- nual-or sustainability reports?
- How can the implementation of SBSC help the company's financial perfor­mance?
- What are the direct and indirect effects of the implementation of SBSC on the company's financial performance?
- What are the benefits of implementing SBSC?

1.3 Objektive

This academic paper might be helpful to assist especially managers to implement the concept of Sustainability Balanced Scorecard (SBSC) as strategic controlling for their long-term success in their sustainability strategy.

Furthermore, at the end of this academic paper, we would find the benefits of the Implementation of Sustainability Balanced Scorecard (SBSC) to the company's fi­nancialperformance in Study Case of two German Automobile Industries -Daimler AG and BMW AG.

2. Literature Review

2.1 The Concept of Balanced Scorecard (BSC) as a Strategic Controlling In­strument

Sustainability balanced scorecard (SBSC) becomes a new model adopted by the concept of the balanced scorecard (BSC) which was introduced by Robert S. Kaplan and David P. Norton for the first time in 1992 in the journal of "Harvard Business Review".

Kaplan & Norton (1996, p. 2) argued that:

"The Balanced Scorecard (BSC) provides managers with the instrumentation they need to navigate to future competitive success. Today, organizations are competing in complex environments so that an accurate understanding of their goals and the methods for attaining those goals is vital". Furthermore, "The scorecard measures organizational performance across four balanced perspectives: financial, customers, internal business processes, and learning and growth. The BSC enables companies to track financial results while simultaneously monitoring progress in building the ca­pabilities and acquiring the intangible assets they need for future growth".

Based on above citation, the BSC, the instrumentation used to navigate to future competitive success, can be visualized as an airplane cockpit (Kaplan & Norton, 1996, pp. 1-2), the manager has arole as a pilot, the company is represented as an airplane and the cockpit is assumed as a tool for manager which is BSC steering where the company would be brought and where to bring the company to reach the intended objectives. They assumed that in the cockpit, there are a lot of devices founded to navigate the airplane. Furthermore, through the cockpit the manager may navigate not only one factor (for example, wind) but also there are many factors (for instance, temperature, speed, etc.) which are also necessary to be monitored to bring the journey towards excellent future results.

According to Savkin (2011, p. 20), the company works usually with the strategy which is made by CEO or top-management. In general, CEO makes a specific busi­ness strategy and then determines the targets to the lower level employees. The lower level managers convert the global strategic targets into specific business works that are necessary to be finished to achieve the strategic goal. In the end, these specific works are distributed and explained to the low-level employee to be executed. In this part, the concept of BSC may be used as systematic approach which may translate the global target to the end-level employee. As a result, the idea of CEO may be easily understood on each level. From this point of view, it may be argued that BSC has an ability to explain the strategy to employees on each level and it could be possible used to explain the organization's strategy and connected to the company's main goals.

In 2009, Taguchi, Kaneko and Tabe (p. 164) argued that balances in the BSC could be indicated as the balance between short-term and long-term objectives; the bal­ance between the past, present and future; the balance between financial and non­financial perspectives; and the balance between internal and external perspectives. According to Erichsen (2011, pp. 199-389), Balanced Scorecard (BSC) is one of strategic controlling instruments which can be used to achieve the long-term goals of organization and to deliver guidelines for daily operational business.

Based on above arguments, it stresses that BSC is considered as a complete stra­tegic controlling tool and according to Figge, et al. (2002, p. 269) it becomes a man­agement tool that could be implemented in a company to support corporate strate­gies by connecting operational and non-financial corporate activities with causal chains to the organization's long-term strategy.

"The Balanced Scorecard makes it possible to take into account non-monetary stra­tegic success factors that significantly impact the economic success of a business.

The Balanced Scorecard is thus a promising starting-point to also incorporate envi­ronmental and social aspects into the main management system of a firm. Sustain­ability management with the Balanced Scorecard helps to overcome the shortcom­ings of conventional approaches to environmental and social management by inte­grating the three pillars of sustainability into a single and overarching strategic man­agement tool." (Figge, et al. 2002, p. 269)

Compared with operational controlling which is commonly used to lead an organiza­tion to achieve its short-term goals (e.g.: Profit and Liquidity) with timeframe of one to two years and has detail-oriented characteristics (Erichsen, 2011, p. 9), strategic controlling by implementing the concept of BSC would lead an organization to achieve its long-term goals. According to Erichsen (2011, p. 199), strategic control­ling discusses about securing the existence of the organization. Thus, BSC as a complete strategic controlling tool could be considered in strategic planning to fore­see whether or not there are new potentials and opportunities for an organization to run its business for a long-term period.

Here, strategic controlling is reviewed for period of about one to five years in the future and is not commonly operated with detailed figures (e.g., turnovers or liquid­ity), but it provides a concept which is able to give informative, precise and explicit statement that may help managers in taking decision for the further development of its organization and the sustainability of its business model.

Although operational controlling and strategic controlling have different goals, they should be capable to work together and need to synchronise their goals in their daily activities.

Weber and Schäffer (2008, p. 149) stated that the concept of balanced scorecard could be applied as a measurement system and then it can be used as a reliable tool to connect organization's strategy with its operations. In other words, when a manager has already arranged a strategy for his organization then the manager may integrate the concept of BSC into its strategy in order to support him to control and to track his goals.

According to Procurement Executives' Association (PEA, 1998, pp. 15-16), in the concept of BSC it is necessary to create vision, mission statement, and strategy for the organization in order to ensure that the performance measures may be devel­oped in each perspective to support in achieving the company's strategic targets and it also supports employees to visualize and understand the connection between the performance measures and successful accomplishment of strategic targets.

PEA also argued that it is necessary to identify what the organization should do well (i.e., the performance goals) to achieve the organization's vision that had been tar­geted. Setting a clear vision is an example to identify where the organization would be driven in the near future.

For each goal, it is important to know the measures and to arrange goals relating to a reasonable period of time (for example, three to five years). It does not sound complicated. However, many variables have impact how long this exercise would take. For instance, how many employees that an organization has and how many of them who are involved in setting the vision, mission, measures, and goals. BSC may be implemented to translate a company's vision into a set of performance objectives related in four perspectives of BSC: Financial, Customer, Internal Business Process, and Learning and Growth.

PEA (1998, p. 16) added that:

"Some objectives are maintained to measure an organization's progress toward achieving its vision. Other objectives are maintained to measure the long-term driv­ers of success. Through the use of the BSC, an organization monitors both its current performance (financial, customer satisfaction, and business process results) and its efforts to improve processes, motivate and educate employees, and enhance infor­mation systems - its ability to learn and improve."

Abbildung in dieser Leseprobe nicht enthalten

Figure 1 above provides matrices applied in the concept of BSC. It may help man­agers to develop their objectives and measures. In creation of performance measures, PEA (1998, pp. 15-16) recommended that performance measures should be connected to the strategic vision of the company and the measurement should focus on the results to reach the company vision and the objectives of the strategic plan. Therefore, each objective within a perspective needs to be supported by at least one measurement indicating a company's performance against that objective. If a measure is executable and plausible, then its implementation should be sup­ported.

In addition, PEA (1998, pp. 15-16) argued that:

"When developing measures, it is important to include a mix of quantitative and qual­itative measures. Quantitative measures provide more objectivity than qualitative measures. They may help to justify critical management decisions on resource allo­cation (e.g., budget and staffing) or systems improvement".

A manager should capable to identify any available quantitative data and review how it may support the goals and measures integrated into the concept of BSC.

To obtain a qualitative data, for example, it can be acquired from the subjective opin­ions of customers, employees, managers and other stakeholders based on their ex­perience, since they provide important insights into acquisition performance and out­comes. These subjective opinions usually can be seen in annual reports or sustain­ability reports of its organization. In this academic paper, two annual reports from 2016& 2018 - and - two sustainability reports or sustainable value report from 2016 & 2018 would be analysed in order to allow us doing qualitative or quantitative as­sessment.

“The scorecard should tell the story of the strategy, starting with the long-run financial objectives, and then linking them to the sequence of actions that must be taken with financial processes, customers, internal processes, and finally employees and sys­tems to deliver the desired long-run economic performance. “ (Kaplan & Norton, 1996, p. 47)

In an article of Harvard Business Review written by Kaplan and Norton (1993), Larry D. Brady stated that the concept of balanced scorecard translates business unit strategies into a measurement system that connects with entire system of manage­ment. Balanced Scorecard is also becoming a very helpful instrument that may for­ward a corporate vision to the operational actions (Hirt, 2015, pp. 251-252). In other words, BSC enable each employee to indicate what employee should do to achieve corporate targets which are clearly constructed with the additional information of its indicators and then these targets are transformed to be a tangible action. However, an implementation of BSC in an organization is needed a certain openness and transparency in relation to all hierarchical levels in company. Before starting imple­mentation of BSC, it is necessary to review whether this instrument can be harmo­nised with its corporate culture because according to Kaplan and Norton (1993) that implementation of balanced scorecard depends on its business and different score­cards might be required for different market situations, product strategies, and com­petitive environments.

In addition, Kaplan and Norton (1997) claimed that the Balanced Scorecard as a strategic management is able to identify the major strategically relevant issues of a business and to describe the causal contribution of those issues that contribute to a successful achievement of an organization's strategy.

"By formulating and defining the goals and measures based on the strategy top down from the financial perspective through the other perspectives, it becomes clear which influence factors impact most the lagging indicators and thus ultimately the achieve­ment of the objectives. These strategy-specific influence patterns are reflected through cause-and-effect chains, which directly or indirectly link all the goals, indica­tors and measures of the BSC perspectives hierarchically towards the financial per­spective with its long-term financial goals." (Figge, et. al., 2002, p. 271)

Kaplan & Norton (1997, p. 28) in general distinguish between lagging and leading indicators. According to Figge, et al. (2002, p. 271), lagging indicators could be used to indicate whether the strategic goals in each perspective were achieved. While the leading indicators represent the specific competitive advantages of the firm and show how the results, which are reflected by the lagging indicators, should be achieved. In addition, the leading indicators are very firm specific.

“On the one hand, the Balanced Scorecard (BSC) can be described as an instru­ment, a scorecard consisting of 4 dimensions (Finance, Customers, Processes and Organisational Development). The dimensions comprise leading and lagging Key 9 Performance Indicators (KPIs) which are linked to each other by an architecture of relationships of cause and effect. On the other hand, the BSC is also a methodology to transform strategies into action.” (Bieker & Gminder, 2001, p. 4)

Departed from explanations of each author above, it can be concluded that BSC has targets and tasks to measure business units, tell the story of organization's strategy andto connect the long-term financial objectives into actions so that it would help an organization in easily achieving its vision and its mission.

Moreover, in 2001 Hahn & Wagner (pp. 1 - 2) argued that the concept of balanced scorecard has a special feature to monitor non-financial and long-term success fac­tors (social and environmental aspects) into the management system so that it is applicable for integrated sustainability management. These further aspects would be specifically presented in Sustainability Balanced Scorecard (SBSC) that is going to be more discussed in the next chapter below. An argumentation regarding this meth­odology (SBSC) came from Möller and Schaltegger (2005, p. 76) who argued that the balanced scorecard is able to incorporate sustainability issues in two different ways. One way is to restructure the existing perspectives, and another is to add a new key perspective. They are not the only authors who introduced SBSC concept, but also there had been some authors also discussing regarding this concept. For this topic, would be in chapter 2.2 more discussed so that we can see further argu­ments from different authors regarding SBSC methodology which might fit for organ­ization that would be generating sustainability strategy.

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