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Balanced scorecard in SMEs: effects on innovation and financial performance

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Abstract

Empirical research on the consequences of the use of the balanced scorecard (BSC) has mostly been conducted in large firms. Previous findings are not easily applied to the small business literature, and assumptions about the benefits of BSC for small- and medium-sized enterprises (SMEs) are not based on quantitative empirical evidence. We investigated the effects of SME’s use of BSC in terms of financial performance and innovation outcomes. Our arguments are based on the efficiency gains and potential flexibility losses associated with formalizing managerial practices in SMEs. We propose that the developmental stage of the firm may influence this trade-off. Based on a survey of 201 SMEs in Spain, we found that firms using BSC for feedforward control obtained better financial performance and presented higher levels of exploitative innovation. We also found that the positive effect of BSC on perceived and attained financial performance is stronger in more established SMEs.

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Notes

  1. Evidence shows that the BSC adoption rate is 60% among large firms and 25 to 31% among small and medium size firms (CIMA 2009).

  2. It has been suggested that managers of large firms could address the efficiency-flexibility trade-off by promoting spatial separation (e.g., structurally separate R&D units) (Benner and Tushman 2003), temporal differentiation (Nickerson and Zenger 2002), or strategic alliance networks (Lin et al. 2007). The small business literature has shown that these options are less accessible to SMEs and that top management teams, and the managerial practices supporting their decision-making play a pivotal role in managing the trade-off (Lubatkin et al. 2006; Volery et al. 2015).

  3. Even though early studies questioned the suitability of BSC for SMEs (McAdam 2000; Hoque 2003), more recent research developments on the adoption of managerial practices suggest that the adoption and use of BSC are related to the complexity of the firm rather than to size-related factors (Kallunki and Silvola 2008; Davila et al. 2009).

  4. Admittedly, to be consistent with prior literature, these labels could also be ‘interactive’ and ‘diagnostic’ (Bisbe and Malagueño 2009; Koufteros et al. 2014). Interactive and diagnostic uses have been employed to examine managerial control practices in large firms. Whereas the interactive use of controls involves double-loop learning, the diagnostic use concerns single loop learning. We opt not to introduce these labels into our discussion of small business and instead base our types on the extant prior literature. Several researchers in the small business literature have shown that the behavioural and organizational effects of managerial practices are deeply associated with how they are used. Among those studies, analogous typologies were examined, including loose/flexible and tight (De Massis et al. 2015), organic and mechanistic (McAdam et al. 2014) and feedback and feedforward (Ebben and Johnson 2005).

  5. The sample for this study is part of a larger research project. Only firms that reported 10 to 250 employees in their financial statements were selected for this research paper. We acknowledge that the reliance of this paper on a single industry constrains generalizations of our findings. An important advantage of this choice is that analysis of a single industry presents higher internal validity than multi-industry analysis, as a number of spurious effects can be better controlled (Ittner et al. 2003).

  6. For comparability, we include the standardized variables in the models.

  7. For content validity, we also asked in the survey whether the company had adopted budgets (the most extended control system among SMEs) and strategic planning, so that the respondents were aware that they were being asked about a balanced scorecard.

  8. We thank an anonymous SBE reviewer for signalling to the importance of this variable in the research model.

  9. The effect of innovation on the long-term profitability of a firm may be substantial; however, in this research, we only assess the performance implications of the use of BSC in the short- and mid-terms. Thus, the effects of innovation on financial performance are not tested.

  10. To avoid issues of multicollinearity, variables for the use of BSC and development stage were mean centred before creating the interaction term.

  11. We checked whether the incremental variances in the explained variables that stem from the control variables are statistically significant. In models 1 to 6, ΔR2 (ranging from 0.179 to 0.465) are significant to all cases (p < 0.01). ΔAdjusted R2 (ranging from 0.073 to 0.400) are also significant (p < 0.01), with the exception of ‘Perceived performance’ models.

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Acknowledgements

We acknowledge Margaret Abernethy, Shannon Anderson, Tiago Botelho, Victor Maas, David Naranjo-Gil and the participants of II Research Forum: Challenges in Management Accounting and Control at Seville for their helpful comments. We are also grateful for the comments of conference participants at the 2016 and 2017 European Accounting Association Congress, seminar participants at the Universidad Autónoma de Madrid and attendees of the XXII Workshop on Accounting and Management Control. We acknowledge financial assistance from the Spanish Ministry of Education and Science (ECO2016-77579-C3-3-P).

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Authors and Affiliations

  1. Norwich Business School, University of East Anglia, Norwich Research Park, Norwich, Norfolk, NR4 7TJ, UK

    Ricardo Malagueño

  2. Departamento de Economía Financiera y Contabilidad, Facultad de Ciencias Empresariales y Turismo, Universidad de Vigo, Campus Universitario As Lagoas s/n, 32004, Ourense, Spain

    Ernesto Lopez-Valeiras

  3. Departamento de Contabilidad, Facultad de Ciencias Económicas y Empresariales, Universidad Autónoma de Madrid, C/ Francisco Tomás y Valiente, 5, 28049, Madrid, Spain

    Jacobo Gomez-Conde

Authors
  1. Ricardo Malagueño
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  2. Ernesto Lopez-Valeiras
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  3. Jacobo Gomez-Conde
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Corresponding author

Correspondence to Ricardo Malagueño.

Appendices

Appendix 1

Table 8 Abbreviated survey
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Appendix 2

Table 9 Control variables
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Malagueño, R., Lopez-Valeiras, E. & Gomez-Conde, J. Balanced scorecard in SMEs: effects on innovation and financial performance. Small Bus Econ 51, 221–244 (2018). https://doi.org/10.1007/s11187-017-9921-3

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  • DOI: https://doi.org/10.1007/s11187-017-9921-3

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