The Relationship between Structural Equation Modeling and Balanced Scorecard: Evidence from a Swiss Non Profit Organization

ABSTRACTThis paper studies the relationship between structural equation modeling and Balanced Scorecard in a Swiss non-profit establishment. Using financial and non-financial performance indicators collected directly from the organization, the paper proposes a rational construction and analysis of Balanced Scorecard by selecting the factual metrics for the right strategic areas. This choice is made by applying a sequence of Partial Least Squares in the proposed model. Furthermore, the approach establishes the cause-and-effect sequence originally defined by Kaplan and Norton as: the measures of organizational learning and growth will influence the measures of internal business processes, which, sequentially, will impact the measures of the customer perspective that, lastly, will affect the financial indicators. It will be noted that the Kaplan and Norton model of Balanced Scorecard is different from the findings in this study, a case somehow too general to handle today 's complex market environment. Following this, the paper puts forward a time-managed approach to identify the evolution of the main contributors to the current company's strategy as well as their behavior in the future organizational performance. This approach will be applied and demonstrated in a detailed real case of a Swiss non-profit organization.JEL: G39, M19, M40, L31KEYWORDS: Balanced Scorecard, Key Performance Indicators, Performance Measurement, Structural Equation Modeling (SEM), Partial Least Squares (PLS), Principal Component Analysis (PCA), Non-profit Organization(ProQuest: ... denotes formulae omitted.)INTRODUCTIONAn innovative approach of strategic management was introduced in the early 1990s by Robert Kaplan from Harvard Business School and David Norton, co-founder and president of Balanced Scorecard Collaborative Inc., based in Boston, USA. They named this approach the Balanced Scorecard (BSC). Pinpointing some of the drawbacks and ambiguity of previous management systems, the BSC method proposes a coherent guidance as to what companies should measure in order to "balance" the financial perspective.The BSC summarizes a series of performance indicators that offers executives a quick but comprehensive representation of their business. The BSC includes financial indicators that illustrate the outcomes of actions already taken and it complements the financial measures with operational indicators on customer satisfaction, internal processes, and the company's innovation and development activities - "operational measures that are the drivers of future financial performance" (Kaplan & Norton, 1992).However, one of the limitations of the BSC lies in its structure. Despite the fact that the authors provide us with some key points and describe the steps for building the BSC, the concepts are rather ambiguous and can be difficult to apply in an organizational environment. There are three main goals in this study. The first goal is to merge the above concepts and try to advance several statements for a representative construction of a BSC using the Partial Least Square (PLS) technique. The objective is to generate a realistic model that can be applied in any organization environment, thus modeling the concept of BSC. The second goal is to validate the assumptions with a nonprofit organization case where performance indicators selected will outline the different strategic perspectives, and a rational explanation for this selection is established. A cause-and-effect structure will be generated and clarifications made as to which strategic perspectives (latent variables) are influencing and which are to be influenced. One of the main conclusions of this example is that the Kaplan and Norton's model of BSC is nothing more but a particular case of our conclusions. The final aim is to closely monitor on a timely basis the upmost indicators that affected the organizational performance, indicators that will shape the future company's strategy. …