Discussion Paper No. 102
Significance of Learning Process in BSC
Introducing Process in Japanese Small andMedium Enterprises
Masaaki Aoki
Mitsuya Hasebe
2012.01.06

TOHOKU MANAGEMENT & ACCOUNTING RESEARCH GROUPGRADUATE SCHOOL OF ECONOMICS AND
MANAGEMENT TOHOKU UNIVERSITY
KAWAUCHI, AOBA-KU, SENDAI
980-8576 JAPANSignificance of Learning Process in BSC
Introducing Process in Japanese Small andMedium Enterprises
Masaaki Aoki∗and Mitsuya Hasebe†
January 2012

Abstract
There are many small and medium enterprises(SMEs) in Japan andthey support Japanese economy.1 Though many researchers about balanced scorecard(BSC) focus on large companies’ case not on SMEs.We
have introduced BSC into Japanese SMEs for six years. Referring to several cases, we would like to clarify the diﬃculties encountered in the BSC
introduction process and propose a way to overcome these diﬃculties.

1

Introduction

There are about 4.2 million small and medium enterprises(SMEs) in Japan andthe ratio of SMEs to total number of companies is more than ninety-nine percent.1 It is not too much to say that SMEs support Japanese economy. They
compete against companies all over the world in severe markets as the globalization of economy pervades. SMEs have to develop the excellent strategies andincrease the corporate value in order to survive in competitive markets. But wehave observed that many SMEs run a business without the strategy adaptive
to environment.
We have introduced BSC into Japanese SMEs for six years. We ﬁnd thatmany SMEs’ top managements are eager to introduce new management tools,
including BSC, to win severe competitions. But many researchers in balanced
scorecard(BSC) focus on large companies2 and it is diﬃcult for us to get cases
about BSC in SMEs.
∗ Professor of Tohoku University Accounting School. This research is supported by The
Melco Foundation.
† President of Arcept Consulting Co.Ltd.
1 See http://www.chusho.meti.go.jp/koukai/chousa/faq/index.html# Q 101, the small andmedium enterprise agency of Japan.
2 For example, see Kaplan and Norton[1996], Kaplan and Norton[2001], Kaplan and Norton[2004], Kaplan and Norton[2006], and Kaplan and Norton[2008].

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We encountered the common diﬃculties when we introduced BSC into SMEs.
The serious diﬃculty arises at the beginning of the introduction process, namely,
strategy development process. We should overcome this diﬃculty to introduce
BSC into SMEs. Referring to several cases, we would like to describe our diﬃculty and clarify the cause of this diﬃculty. Furthermore, we will show the way
to resolve the problems we encountered in our consulting process.
Finally, we describe the composition of this paper. In the next section,
we explain our research approach. This research approach enables us to carryout collaborative research of academic researchers and practitioners. In section
three, we explain closed loop strategy management system(CLSMS) proposedby Kaplan and Norton[2008] because we regard this management system as aneﬀective tool to introduce BSC into SMEs. In section four, we describe theoutline of the case company. In section ﬁve, we pick up three cases and examine
these cases in detail. In the last section, we summarize our discussion andmention about our future research topics.

2

Research Approach

We begin to describe each role of us in this research. Aoki is an accounting
researcher and a professor of accounting school. Coauthor Hasebe is a practitioner, tax accountant and president of consulting company. Hasebe can get
internal information of the client company and observe BSC introducing andexecuting processes. Because he learned BSC at accounting school and doctoral course of Tohoku University, he knows BSC well. So he can identify the
problems appropriately in his consulting process.
We designed a research approach that enables us to examine the businessprocesses together. Our research approach is depicted by Figure 1.
We repeat the loop described in Figure 1 several times in our research. Firstloop is a process to ﬁnd some problems and second or later loops are process to
ﬁnd the way for solving the problems. Thus we explain these loops separately.
First Loop
Step 1: Hesebe collects data from his client companies and tells me some interesting cases.
Step 2: We pick up the case to be examined. We discuss and examine the casein detail to clarify the problems to be solved.
Step 3: We conceive the ideas to solve the problems and develop the method
to put our ideas into practice.
Step 4: Hasebe explains our ideas to client company and proposes to implement our new practices. He monitors implementation processes as a consultant.
Second Loop or later2

Step 2.
Discuss and Examine
the Cases

Step 1.
Observe Phenomena
HasebeHasebe and Aoki

Step 4.
Implement New or
Modified Practices

Step 3.
Develop or Modify the
Practices

HasebeHasebe and Aoki

・Lecture at Accounting School・Give a Presentation at Academic Meeting
・Write Articles
Figure 1: Research Approach

Step 1: Hasebe reports the result of the proposed practice to me and tells
diﬃculties and problems he observed at his consulting process.
Step 2: We examine the solutions suggested before. We verify whether our
new practice works well or not. If we ﬁnd some problems, we examine thecauses of the problems. Aoki comments on the problems referring to the
new ideas published in recent academic journals and books.
Step 3: We modify our solutions or sometimes may develop new alternatives.
Step 4: Hasebe explains our modiﬁed or new ideas to client company and proposes to implement our new or modiﬁed practices. He monitors implementation processes as a consultant.
After we repeat several loops, we summarize the results and have a presentation at academic meeting or write articles. We sometimes use cases discussed
by us as teaching materials in accounting school.
Kaplan[1998] proposes the innovation action research in which researchers
join the ﬁrm’s decision processes directly and change the practices actively.
This approach is eﬀective to understand practices correctly and devise somenew practices but it is diﬃcult to execute it because many Japanese accounting researchers have little chances to collaborate with practitioners. Using ourapproach, we can acquire valuable information about BSC introduction andimplementation through practitioner(Hasebe). Researcher(Aoki) can join indirectly the decision processes of SME. Our research is a little diﬀerent from
Kaplan’s innovation action research but is similar to one.
3

Many researchers have devoted their energy into BSC research and proposed
new applications of BSC into practice for about twenty years.3 We can apply
the outcome of research and our new idea into our client companies through our
research approach. Because we can observe the execution process of our proposals by ourselves, we can scrutinize why our idea is successful or unsuccessful.
If there are some problems in our proposals, we can modify them adaptive toenvironment in the next loop. Therefore we may produce practically applicable
results on our research approach.

3

Strategy Management System

Hasebe has engaged in BSC consulting for six years and took charge of about
twenty small and medium enterprises. We ﬁnd that Japanese SMEs cannot
manage strategy well. We have applied the strategy management system proposed by Kaplan and Norton[2008] into the client companies. We describe theessence of this system because it is signiﬁcant to our research.
The strategy management system (Kaplan and Norton[2008]) is illustrated
by:4

Step1.
Develop the Strategy

Step 2.
Plan the Strategy

Step 3.
Align the Organization

Performancemeasures

Strategic Plan

Step 6.
Test and Adapt

Results

Step 4.
Plan Operations

Operating Plan
Performancemeasures

Step 5.
Monitor and Learn

Results

Execution（Kaplan and Norton[2008],p.36. modified by authors）
Figure 2: Closed Loop Strategy Management System (CLSMS)

The above system manages the strategy through Plan-Do-Check-Act(PDCA)
cycle and is a closed loop system. We refer to this management system as Closed
Loop Strategy Management System (CLSMS) thereafter. CLSMS is repeatedevery year. When a company introduces BSC into its business, it organizes BSC
3 BSC is proposed by Kaplan and Norton[1992].
4 Kaplan and Norton[2008],p.36.

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project team, which is responsible for BSC planning and execution. This teamdevelops and plans the strategy in Step 1 and 2, executes the plan after Step
4, reviews the strategy in Step 5, and analyzes the proﬁtability and adapts thestrategy to the environment in Step 6.
Referring to the large company case, Kaplan and Norton[2008] says that top
managements should always consider the changes of the strategy. For example, they execute minor changes of strategy every year, middle-scale changesof the strategy within three years, and drastic strategy changes once in ﬁve
years.5 Because the environment surrounding SMEs is likely to ﬂuctuate rapidly,
it is necessary for top management of SME to consider the transformational
strategy every year. Therefore we regard CLSMS as the eﬀective tools for SMEs’
strategies and BSC.
When we introduced BSC into SMEs, we faced the serious diﬃculties in
Step 1. Namely, we observed that many SMEs could not develop strategies
appropriately. Analyzing some cases, we would like to look for the reason why
it is diﬃcult for SMEs to develop strategies.

4

Cases

We examine Company A whose business area is around Akita city in Japan.6 This
company has introduced BSC since 2006. We describe the outline of this company.
Outline of Company A• Company A was established at 1973.
• Company A sales in 2010 is about 900 million yen($11.25 million).7• The number of employees is about two hundred-ﬁfty and the number of
executives is six.
• Company A is a franchise of Company D, which is a large company andhas many franchises all over Japan.
• Company A has two kinds of business, namely, one is a franchise businessand the other is non-franchise business. The former includes mop rental
business for household and oﬃce, cleaning oﬃce, exterminating harmful
insects, supporting housework, and so on. The latter includes temporary
personnel service, sale of teaching materials and books, dispose of waste
oil for restaurant, and so on.

5 Kaplan and Norton[2008], pp.64-65.
6 Akita city is at north-east of Japan. Its population is about 300 thousand and its local
market is relatively small.
7 We suppose that the exchange rate for U.S. dollar is 80 yen in this paper.

5• There are fourteen departments in Company A. Each department is responsible for one business described above and is evaluated as a proﬁt
center.
We would like to mention why we select the above case to make our analysis
plausible. First, top managements of Company A are eager to introduce BSC.
We often hear that BSC is failed because of the lack of top management initiative. We can exclude this reason from BSC failure reasons. It means that we
can identify the causes of BSC failure clearly.
Second, Company A introduces BSC into fourteen departments and has
executed BSC for about ﬁve years. Eﬀectiveness of BSC should be evaluatedfrom mid- or long-term perspective. It seems that ﬁve years execution of BSC
is enough for our evaluation and examination. As each department has diﬀerent
BSCs and faces up to diﬀerent market conditions, we can examine various kindsof BSC in our analysis at the same time.
Last, Company A had an excellent accounting system before BSC introduction. So it has evaluated departmental performance based on the department
monthly income statement and balance sheet. It implies that we can identify
the results of BSC on internal ﬁnancial data. Additionally, we can obtain nonﬁnancial data in consulting process. It will be beneﬁcial to our future BSC
research.

5

Case Analysis

We will pick up three departments cases and analyze these cases respectively inthis section.

5.1

Case 1: Department X

Outline of Department X• Business of this department is leasing mops for household. It is one of theoldest departments in Company A and has operated for 40 years. It has
been a main business of Company A but its performance has been notgood for these years.
• Department X sales in 2010 is about 200 million yen($2.5 million).
• The number of employee is seventy-ﬁve (four managers and seventy-one
salespersons).
• Economic conditions are changing. Main clients of this department arehousewives who use mops for their houses cleaning. Salespersons visit
households periodically and sell products and service. Recently, housewives tend to have jobs in Japan and are not always at their home. Housewives also can buy substitutes for mops at shopping center easily.

6• We introduced BSC into this department but its performance has not been
improved.
Analysis of Department X
This case is an example of failure. We examine the reason why BSC does
not work well here.
This department follows the parent company’s strategy. This strategy does
not accommodate to the change of local market condition. We often see such acase. It is necessary for Department X to modify the parent company’s strategy
to increase its proﬁt but this department could not develop the eﬀective strategy.
It has been enough for departmental managers to operate their businessbased on the parent company’s strategy. They do not regard the strategy development as their job. Thus they had not had any opportunity to master the
strategy development. As a result, they cannot develop a strategy even if theywant to.
If they want to modify and develop the strategy, they have to get market
research data. But they don’t have suﬃcient ability to collect data and cannot
purchase the market research data because of shortage of fund. As a result, theyplan the departmental budget under the inadequate strategy and they cannot
accommodate to the environmental change.
This case shows the typical diﬃculty common to Japanese SMEs. Department X cannot develop strategy because it lacks human, informational, andorganizational capital. Especially, the lack of competency for developing strategy is serious. It is diﬃcult for this department to draw up eﬀective BSC andannual budget. It implies that this department cannot cope with changes of
local market.

5.2

Case 2: Department Y

Outline of Department Y• Business of this department is cleaning of small oﬃces and newly-built
houses. This department has been in business for 25 years.
• Department Y sales in 2010 is about 50 million yen($625 thousand).
• The number of employee is twenty-two (two salespersons and twenty workers).
• This department targeted at the market into which major building maintenance companies have not made inroads. This is a niche market and thisdepartment had increased sales several years ago. But the orders fromsmall oﬃces and the number of newly-built houses decreased because ofa long recession in Japanese economy. Sales of this department decreases
and the departmental manager is interested in short-term proﬁt.

7• This department has three strategies, namely, “Cooperate with other departments,” “Improve sales skills,” and ”Develop the original sales tools.”
The ﬁrst strategy denotes that every department exchanges its customer
information with other departments. This strategy is eﬀective in shortrun. In fact, this department could obtain new clients and its proﬁt had
increased at the ﬁrst year of BSC introduction. The second and third
strategies are not eﬀective in short-run but are signiﬁcant for securing
mid- or long-term proﬁt. This department could not devote its resource
to these strategies suﬃciently at the ﬁrst year of BSC introduction.
Analysis of Department Y
The serious problem of this department is that the departmental managers
do not understand the role of BSC, namely, they regard BSC as the tool for
obtaining short-term proﬁt not as a tool for securing mid- or long-term proﬁt.
Thus they do not understand the signiﬁcance of strategy development.
Though this department increased its proﬁt by the strategy ”Cooperate withother departments” at the ﬁrst year of BSC introduction, its proﬁt declined
drastically at second year. We identiﬁed two reasons for its low performance.
First, the eﬀect of ”Cooperate with other departments” is not sustainable. Other
departments could introduce their customers to Department Y at the ﬁrst year
but they do not have new customers to be introduced at the second year. Second,
the service quality of Department Y is poor. In fact, many clients made acomplaint about the service provided by Department Y. If this department had
supplied excellent service to new clients, this department might not lose newand existing clients and might obtain new clients. The departmental managers
are prone to eager to achieve the short-term proﬁt target and are satisﬁed withthe ﬁrst year result. Thus, they did not improve their service quality and seek
new clients by themselves.
The basic cause of the second year’s slump is that departmental managers do
not recognize the signiﬁcance of the strategies though they have well-articulated
two strategies. We had a in-house training for studying what is strategy and
BSC at the beginning of the third year. In other words, we added ”Learning
process” before Step 1 on CLSMS.
We observed that the departmental managers understood the purpose of
BSC and the importance of strategy. They executed the two eﬀective strategies,
namely, ”Improve sales skills” and ”Develop the original sales tools.” Additionally, they developed a new strategy ”Improve the quality service by educating
employees.” As a result, this department could recover performance at the thirdyear.
This case shows that a department cannot develop appropriate strategy and
BSC does not work well because of lack of human resource. We have often
encountered the similar cases in our consulting process. We propose to add”Learning process” to the beginning of CLSMS to overcome this diﬃculty andobserve that our proposal is successful. It implies that addition of ”Learning
process” may be eﬀective to resolve the insuﬃciency of human capital in SMEs.

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5.3

Case 3: Department Z

Outline of Department Z• Business of this department is exterminating harmful insects. It has operated for about 15 years. Recently, Company A regard this department
as promising business.
• Department Z sales in 2010 is about 20 million yen($250 thousand).
• The number of employee is three. It is a small department. Everyone does
sales and exterminating jobs. One of them is a departmental manager.
• The market of this business is competitive and major companies have large
market share. The performance of this department has not been good fora long time.
• The departmental manager could not cope eﬀectively with this diﬃculty.
Top management decided to replace this departmental manager with ayoung manager.
• We taught a new manager the importance of strategy and the purposeof BSC at the beginning of the third year. Namely, we added ”Learning
process” before Step 1 on CLSMS.
• A new manager devised a strategy of specializing in exterminating bees.
Special knowledge and skill is necessary to exterminate bees. As thisdepartment has such knowledge and skill, it could supply diﬀerentiatedservice to its clients. A new manager also found that there is a seasonal
demand for exterminating bees from a local marketing research and it iseﬀective to advertise before bee season.
• This business grows rapidly. The parent company D pays attention to
the growth rate of this department though it was notorious for its low
performance.
Analysis of Department Z
The lack of human resource is also a problem in this case. We resolve thisproblem by replacing an existing manager with a new manager and educating a
new manager. A new manager is a highly motivated person and learned a lot in
our “Learning process.” As a result, he understands the importance of strategy
and proposes a new strategy.
This is a special case because this department is very small but it tells us
implication relevant to BSC introduction and execution. When the scale of department is small, success of the department depends largely on the competenceof a manager. As this case denotes, drastic organizational change, replacementof the manager, may be eﬀective to complement the insuﬃciency of human resource. This case also shows that educating a manager at the beginning of
CLSMS is eﬀective to the execution of BSC.
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6

Summary and Conclusion

Examining several cases, we clarify diﬃculty with which many SMEs in Japanare confronted in this paper. Japanese SMEs do not have suﬃcient resources ofhuman, information, and organization, which relate to “Learning and Growth”
perspective of BSC. Thus SMEs cannot develop the strategies adaptive to theirenvironment.
We also ﬁnd that CLSMS proposed by Kaplan and Norton[2008] is usefulfor introducing and executing BSC in SMEs. Because SMEs have to compete
against large enterprises and their rivals with insuﬃcient resources and it isnecessary for them to review and modify their strategies continuously depending
on changes of environment.
We make a proposal to Company A to get rid of the above diﬃculty in
our BSC consulting process. Our solution is simple, namely, adding “Learning
process” at the beginning of CLSMS cycle. We observe that our proposal iseﬀective to several cases, especially eﬀective to small size department. Ourﬁndings show that managements and employees of SMEs are not incompetentbut they have not had any opportunity to learn about strategy and BSC.
We have adopted a peculiar research approach in this study. Our research
approach is similar to “innovation action research” proposed by Kaplan[1998]
but is diﬀerent in that a researcher does not participate in the process of changing the practice. Though an academic researcher cannot involve in the decision
processes of SMEs directly, researcher can give SMEs’ top managements suggestive ideas based on the recent academic research and receive the results ofour proposals through practitioner. Thus we can propose practically applicable
solutions to SMEs by our research approach. Our research results are robust
because both academic and practical knowledge are reﬂected in our proposals.
Though CLSMS is an eﬀective management tool of BSC for SMEs, we observe that it is diﬃcult for SMEs to execute CLSMS by the same procedure as
Kaplan and Norton[2008] describes. Many SMEs compete in severe markets andnot only long-term or mid-term results but also short-term results are imperative for them. It is diﬃcult to change the mind of SMEs’ top managements andemployees from short-term proﬁt oriented to long-term proﬁt oriented rapidly.
Thus it is necessary to provide them with a procedure that enable us them tointroduce BSC into SMEs step-by-step. We are now tackling this problem andwill present the results in the future.

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