Methods of Assessing Performance (AQA A-Level Business): Revision Notes

Methods of Assessing Performance

Businesses need reliable ways to measure how well they're performing. Two important models help managers do this: the Balanced Scorecard and the Triple Bottom Line. Each model offers a different approach to understanding business success.

The Balanced Scorecard model

What it is

The Balanced Scorecard is a performance management framework that evaluates a business from multiple angles. Developed by Kaplan and Norton, it helps businesses assess their current performance and develop future strategy.

The model is particularly useful because it:

• Links measures of efficiency (how well resources are used) and effectiveness (how successfully objectives are achieved) to the business's overall strategy and vision
• Treats the business as a set of interconnected, dependent functions rather than isolated departments
• Helps managers understand how decisions in one area affect other parts of the business

How it works

The Balanced Scorecard operates by examining four key questions. For each perspective, managers identify:

• Objectives: what the business wants to achieve
• Measures: how performance will be tracked
• Targets: specific goals to aim for
• Initiatives: actions needed to reach those targets

This systematic approach ensures that improvements are planned and measured properly. Managers must carefully balance these different perspectives because progress in one area might come at the expense of another. However, positive changes in one area can also benefit others.

The four perspectives

The model evaluates business performance from four distinct but interconnected viewpoints. Each perspective focuses on a different aspect of the business and links back to the central vision and strategy.

Financial perspective

This perspective asks: "How do we create value for shareholders?"

It focuses on the traditional measures of business success, such as profitability and return on investment. Typical measures include ROCE (Return on Capital Employed) and sales growth.

Customer perspective

This perspective asks: "What do our customers value about us?"

It examines how the business is perceived by its customers and whether it's meeting their needs. The focus is on building customer loyalty and attracting new customers.

Key measures might include:

• Market share
• Number of new customers acquired
• Brand loyalty levels

Internal business process perspective

This perspective asks: "How can we improve our processes?"

It looks at the operational efficiency of the business and how well internal systems work. The goal is to identify areas where the business can work more effectively.

Common measures include:

• Capacity utilisation
• Unit cost
• Productivity levels

Learning and growth perspective

This perspective asks: "How can we continue to grow and improve?"

This focuses on the long-term development of the business, particularly through its people. It recognises that business success depends on having skilled, motivated employees.

Typical measures include:

• Labour retention rates
• Amount of staff development activity

Benefits and limitations of the Balanced Scorecard

Benefits:

• Provides a balanced view by considering multiple aspects of performance, not just financial results
• Recognises that all departments need to consider how their actions impact others
• Balances the needs of different stakeholders (shareholders, customers, employees)
• Particularly valuable for strategy development and monitoring

The Triple Bottom Line model

What it is

Elkington's Triple Bottom Line model takes a broader view of business success. Rather than focusing only on profit, it measures performance across three interconnected areas: profit, people, and planet.

This model reflects growing awareness that businesses have responsibilities beyond making money. It emphasises sustainability — the idea that businesses should balance financial performance with their impact on society and the environment.

The three areas of performance

The model evaluates business performance in three overlapping dimensions:

Profit: This covers the 'traditional' financial or economic value created by the company. It includes standard financial measures like revenue, profit margins, and return on investment.

Impact on people: This examines a company's social values and how it treats its employees and the local community. It considers factors like working conditions, fair wages, employee wellbeing, and community engagement.

Impact on the planet: This assesses a company's environmental values and impact on the environment. It looks at issues like carbon emissions, waste management, resource use, and environmental protection.

The overlapping area in the centre of these three circles represents sustainability — the ideal balance between social, environmental, and financial performance. This is what businesses should aim for.

Implementing the Triple Bottom Line

To use this model effectively, businesses set objectives for performance in each of the three areas. These objectives guide strategic planning and help monitor the strategy's effectiveness.

The business then chooses appropriate measures to assess its performance. These can be judged against pre-set targets or by comparing values to those of other businesses.

Benefits of the Triple Bottom Line model

This model offers several advantages for businesses:

• It encourages businesses to consider their actions carefully across all three areas
• It can help businesses change their behaviour or culture if necessary to demonstrate corporate social responsibility
• It's particularly useful for achieving social or environmental objectives
• It provides a more complete picture of overall performance by recognising that businesses might have other objectives beyond just increasing profit
• It reflects stakeholder expectations that businesses should be responsible to all their stakeholders and to the planet

Using the model for assessment

Performance in each of the three areas is assessed and reported back to stakeholders. This is known as triple bottom line reporting. By making this information public, businesses demonstrate accountability and transparency.