Balanced scorecard, activity-based costing and company performance: An empirical analysis

Abstract

Innovative techniques such as scorecard (BSC) (Kaplan and Norton, 1992, 1993, 1996) and activity-based costing (ABC) (Kennedy and Affleck-Graves, 2001; Krumwiede, 1998; Shields, 1995; Shields and Young, 1994) are being implemented by management in response to the new global competitive environment. The importance to managers of having a balanced measurement system has led companies to develop a variety of corporate scorecards suggesting a process approach to innovations in performance measurements (Epstein and Birchard, 2000; Hoque and James, 1997). The BSC has gained prominence in accounting research as a way of integrating financial and non-financial performance measures into an overall control system (Atkinson et at., 1997; Hoque and James, 2000; Malina and Selto, 2001; Ruhl, 1997; Shields, 1997; Simons, 2000). ABC is an innovation aimed toward an increase in the accuracy of cost measures and also is often viewed as a supportive measurement system for successful implementation of the scorecard. Advocates of ABC cite many benefits of such a system (Anderson, 1995; Banker and Johnson, 1993; Kaplan, 1992) and identify factors associated with ABC success (Foster and Swenson, 1997; Krumwiede, 1998; McGowan and Klammer, 1997; Shields, 1995). Previous research on ABC and BSC has added to our knowledge of how ABC implementation can help support process improvement (Turney, 1991) and develop cost-effective product design (Cooper and Turney, 1989), and how BSC can provide managers with an integrative framework to manage organizational activities. This study attempts to contribute to the body of knowledge in this area by investigating the complementarity effect of BSC and ABC on organizational performance. Our focus is the manufacturing unit because manufacturing performance is controlled by the business practices and tools in place at the business unit level (1), and competitive advantage is ultimately won or lost primarily at the business unit level rather than the corporate level (Porter, 1980). Measurements for this study are questionnaire responses from a random sample of manufacturing business units located in the United States. The article is organized as follows. First, the literature review is discussed and propositions are developed. Next, a discussion of the research methods is conducted. After the empirical results are reported, a conclusion, discussion and suggestions for future research are presented. LITERATURE REVIEW Balanced Scorecard (BSC) Many firms are implementing BSC systems that supplement traditional financial accounting measures with non-financial measures focused on at least three other perspectives--customers, internal business processes, and learning and growth (Kaplan and Norton, 1992, 1996). Proponents of BSC (e.g., Chow, 1997; Cravens, 2000; Kaplan, 1992) contend that this approach provides a powerful means for translating a firm's vision and strategy into a tool that effectively communicates strategic intent and motivates performance against established strategic goals. The value of the BSC is that it assists the development of a consensus around the firm's vision and strategy, allowing managers to communicate the firm's strategy throughout the organization and forces managers to focus on the handful of measures that are most critical. This communication ensures that employees understand the long-term strategy, the relations among the various strategic objectives, and the association between the employees' actions and the chosen strategic goals. The scorecard is also expected to help firms allocate resources and set priorities based on the initiatives' contribution to long-term strategic objectives, and to provide strategic feedback and promote learning through the monitoring of short-term strategic results (Kaplan and Norton, 1996). However, empirical support for these claims is limited and not conclusive. …