Using Structural Equation Modeling in Causal Relationship Design for Balanced-Scorecards' Strategic Map

Authors: A. Saghaei, R. Ghasemi

Abstract:

Through 1980s, management accounting researchers described the increasing irrelevance of traditional control and performance measurement systems. The Balanced Scorecard (BSC) is a critical business tool for a lot of organizations. It is a performance measurement system which translates mission and strategy into objectives. Strategy map approach is a development variant of BSC in which some necessary causal relations must be established. To recognize these relations, experts usually use experience. It is also possible to utilize regression for the same purpose. Structural Equation Modeling (SEM), which is one of the most powerful methods of multivariate data analysis, obtains more appropriate results than traditional methods such as regression. In the present paper, we propose SEM for the first time to identify the relations between objectives in the strategy map, and a test to measure the importance of relations. In SEM, factor analysis and test of hypotheses are done in the same analysis. SEM is known to be better than other techniques at supporting analysis and reporting. Our approach provides a framework which permits the experts to design the strategy map by applying a comprehensive and scientific method together with their experience. Therefore this scheme is a more reliable method in comparison with the previously established methods.

Keywords: BSC, SEM, Strategy map.

Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1071984

References:

[1] Dearden, J., 1969. "The case against ROI control", Harvard Business Review May-June, pp. 124-135
[2] Gavin Lawrie, Ian Cobbold (2004), "Third-generation balanced scorecard: evolution of an effective strategic control tool" International Journal of Productivity and Performance Management Vol. 53 No. 7, 2004 pp. 611-623.
[3] Kaplan, Robert S and Norton, David P (1992). "The Balanced Scorecard: Measures that Drive Performance," Harvard Business Review, 70(1), January-February, 71-79.
[4] Rigby, D., 2001. Management tools and techniques: a survey. California Manage. Rev. 43 No. 2, 139-160.
[5] Rigby, D.K. (2003), "Management tools survey 2003: usage up as companies strive to make headway in tough times", Strategy & Leadership, Vol. 31 No. 5.
[6] Niven, P.R. (2006), "Balanced Scorecard Step by Step: Maximizing Performance and Maintaining Results", 2nd edition, Wiley, New York, NY.
[7] Kaplan, Robert S and Norton, David P (1993). "Putting the Balanced Scorecard to Work," Harvard Business Review, 71(5), September- October, 134-142.
[8] Kaplan, Robert S and Norton, David P (1996a). "The Balanced Scorecard: Translating Strategy into Action", Boston: Harvard Business School Press.
[9] Kaplan, Robert S and Norton, David P (1996b). "Using the Balanced Scorecard as a Strategic Management System," Harvard Business Review, 74(1), January-February, 75-85.
[10] Kaplan, R.S., Norton, D.P., 2001a, "The Strategy-Focused Organization." Harvard Business School Press, Harvard.
[11] Kaplan, R.S., Norton, D.P., 2001b, "Transforming the Balanced Scorecard from performance measurement to strategic management", Business School Press, Boston, MA.
[12] J. Achterbergh, R. Beeres, D. Vriens (2003). "Does the balanced scorecard support organizational viability?" Kybernetes Vol. 32 No. 9/10, pp. 1387-1404.
[13] Evans, N. (2005), "Assessing the balanced scorecard as a management tool for hotels", International Journal of Contemporary Hospitality Management, Vol. 17 No. 5, 376-90.
[14] Malmi, T. (2001), "Balanced scorecards in Finnish companies: a research note", Management Accounting Research, Vol. 12, pp. 207-20.
[15] Speckbacher, G., Bischof, J. and Pfeiffer, T. (2003), "A descriptive analysis of the implementation of balanced scorecard in Germanspeaking countries", Management Accounting Research, Vol. 14, pp. 361-87.
[16] Atkinson, A.A., Balakrishnan, R., Booth, P., Cote, J.M., Groot, T., Malmi, T., Roberts, H., Uliana, and Wu, A. (1997b), "New directions in management accounting research", Journal of Management Accounting Research, Vol. 9, pp. 79-108.
[17] Norreklit, H., 2000, "The balance on the Balanced Scorecard; a critical analysis of some of its assumptions." Management Accounting Research, Vol. 11, pp. 65-88.
[18] Hoque, Z. and James, W. (2000), "Linking Balanced Scorecard Measures to Size and Market Factors: Impact on Organizational Performance", Journal of Management Accounting Research, Vol. 12, pp. 1-17.
[19] Laitinen, E.K. (2004), "Towards a microeconomic approach of the balanced scorecard", Managerial Finance, Vol. 30 No. 6, pp. 1-27.
[20] Otley, D., 1999, "Performance Management: A Framework for Management Control Systems Research", Management Accounting Research, v10, 363-382.
[21] Ittner, C.D. and Larcker, D.F., 1998, "Innovations in Performance Measurement: Trends & Research Implications", Journal of Management Accounting Research, v10, 205-238.
[22] Rozhan Othman (2006), "Balanced scorecard and causal model development: preliminary findings", Management Decision, Vol. 44 No. 5.
[23] Davis, S. and Albright, T. (2004), "An investigation of the effect of balanced scorecard implementation on financial performance", Management Accounting Research, Vol. 15, pp. 135-53.
[24] Bruno H.(2005): "Resources that drive performance: an empirical investigation", International Journal of Productivity and Performance Management Vol. 54 No. 5/6, 2005 pp. 340-354.
[25] C. Shook, D. Ketchen, J. Hult, K. Kacmar (2004) "An assessment of the use of SEM in strategic management research ", Strategic Management Journal , 25: 397-404
[26] Evans, N. (2005), "Assessing the balanced scorecard as a management tool for hotels", International Journal of Contemporary Hospitality Management, Vol. 17 No. 5, pp. 376-90.
[27] Eddie W.L. Cheng (2001), "SEM being more effective than multiple regression in parsimonious model testing for management model testing", Journal of management development, Vol. 20, No.7.
[28] David Gefen, Detmar W. Straub, Marie-Claude Boudreau (2000). Structural Equation Modeling and regression: Guidelines for research practice, CAIS, Vol. 4, Article 7.
[29] Loehlin, John C. (1998), "Latent Variable Models: An Introduction to Factor, Path, and Structural Analysis", 3rd ed. Mahwah, N.J.: Lawrence Erlbaum Associates.
[30] Schumacker, Randall E. and Richard G. Lomax (2004),"A beginner's guide to structural equation modeling", Second edition. Mahwah, NJ: Lawrence Erlbaum Associates.
[31] Karl G. Joreskog(2003), "Factor analysis by Minres", To the memory of Harry Harman and Henry Kaiser.
[32] Anderson, J.C. and Gerbing, D.W. (1988), "Structural equation modeling in practice: a review and recommended two-step approach", Psychological Bulletin, Vol. 103 No. 3, p. 411.
[33] Joreskog, K. G., & Sorbom, D. (1984), "LISREL VI: Analysis of linear structural relationships by the method of maximum likelihood", Chicago, National Educational Resources.
[34] Browne, M. W., & Cudeck, R. (1993)," Alternative ways of assessing model fit". In K. A. Bollen & J. S. Long (Eds.), Testing structural equation models (pp.136-162). Thousand Oaks, CA: Sage.
[35] MacCallum, R. (1986), "Specification searches in covariance structure modeling", Psychological Bulletin, 100, 107-120.
[36] Donkor, S.(2003): "Performance Measurement in the eCommerce Industry", A Professional Master Project Submitted to the Faculty of Worcester Polytechnic Institute in Partial fulfillment of the requirements for the Degree of Professional Master of Science in Financial Mathematics.