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Business and Finance

Capital isn’t this pile of money sitting somewhere; it’s an accounting construct

Bethany McLean has rightly described the nature of capital. It causes integration so that not on the human and informational capital but the physical and the financial capital are combined in a way so that the strategic objectives of an organizations can be achieved. Capital in an organization shares many factors which causes it to perform in a better way. On the other hand an organization where such coherence among all these types of capital is low, becomes unable to efficiently communicate the people of the organization that how they can align themselves to execute a strategy. Thus the integration of capital is very important.

The term capital includes all its types such as Financial, physical, human and social. Where financial capital is an economic resource of an organization, the physical capital involves the all the factors of production such as machinery, building. It signifies all the paraphernalia required to produce a product which an organization requires. Moreover, human capital involves the knowledge and the skill level of the human resource in an organization. These skills and knowledge are further required to generate economic output. Finally, the social capital is the networking of relationships among individuals within the society.

Balance Scorecard is a very important tool to identify the capital objectives for an organization. It helps an organization to enhance its learning and broadens its horizon along with the specific growth level. Some of the typical objectives which the organization incorporate, realizing the importance of integrating all the important types of capitals for an organization include, providing customers better services by focusing on their needs and sharing knowledge among employees as well as aligning them along with the organization’s goals and objectives. However one important thing in this regard is that the management of any organization has to build is the framework because a framework is particular to specific organization. There is no general framework. The framework of one organization differs from the other due to the organizational settings it possesses.

The decisions made by the managers in the present time affect the business tomorrow, the organization’s reliance on the financial metrics which can overemphasize the short-term. Thus, it ultimately tends to relax the nerves of the management for the long term perspective. To win in the long run, an organization needs to take a more balanced view. The advantage balance score card provides, lies in its four perspectives which it provides to measure the health of the company. The financial perspective helps to identify and work for the financial capital. The other perspective includes customer perspective which helps working on the social capital by asking the question that if the customers like the products and services of the company or not? Next is the internal perspective, which questions the adequate availability of the adequate level of human and physical capital so to check if the company can efficiently deliver what the customers want? Finally, the balance score card provides a learning and growth perspective, it questions the utilization of a company current human capital in order to sustain its social and financial capital.

Example:

A semiconductor company applied this approach, it’s financial objectives was to survive, succeed and prosper. To measure its financial objectives it identified certain parameters these include return on investment, cash flow and quarterly sales growth. The goals of its customers were to develop innovative and tailored products. It also aimed to get its supplies to the market faster and to become a supplier of choice. To measure this, the company used percentage of sales of new products, on time delivery rate and popularity with key customers. For internal perspective, the company prioritized its goals like excellent manufacturing processes, producing new designs and introducing new products. To achieve all this, the company used operational measures. For its learning and growth goals it decided to produce new products. It helped the company to attain the customer satisfaction and better shareholder returns.

Explanation:

The example signifies that at each step the balance score card signifies the importance of each type of capital. The better shareholder returns signify the growth in the working capital. It not only caused to satisfy the shareholders of the company but helped the organization to achieve its own objectives. The customer perspective strengthens the need of social capital and the learning and growth and internal perspective show the importance of human and physical capital in order to support the system. All these are steps of BSC are interlinked and provide boost to the capital requirements of an organization. For an organization to be successful, the presence and the growth in all steps and a perfect balance at an ongoing basis are mandatory.

Moreover, the resource based theory helps to understand the contribution of financial capital to accelerate the performance of the firm. It helps the organization to increase its physical capital by purchasing assets either fixed or current which are necessary to improve the working of the firm. For this the company needs to enhance its human capital and the social capital as well. these additional two factors shall play a complementary role because the skilled human resource shall be able to utilize the physical capital and shall be in a better position to perform learning and growth activities for the company where as the social capital facilitate the company by increasing its customer base Elsenhardt and Martin (2000).

In the absence of a proper framework it is difficult for an organization to utilize its full potential. The following figure highlights the use of Balance Score Card in integrating the capital in an organization in order to manage objectives with the strategy and to ultimately introduce changes in the organization.

The figure summarizes how value is created by integrating the capital and by incorporating the change in the behaviors. It shows that the objectives of the organization revolve around two categories. They involve behavioral changes such as exerting more attention towards the customers, being creative and focus on delivering the results. In order to execute the strategy certain further behaviors are identified as well which include understanding the mission, vision and values of the organization so that every individual in the organization could be brought on to the same page, creating accountability, reducing communication gap and team work.

Case Study: Application of Balance Scorecard:

Fulton County Schools worked for BSC development. It initially struggled to understand the strategy map. For instance “student achievement” that in which quadrant it should be placed and how it must be treated? Either it should be placed in the customer quadrant or it should be dealt with the financial perspective. However, it identified five goal areas or perspectives. Such as student Achievement, the involvement of the customer, customer satisfaction and the efficiency and the effectiveness with the processes were being dealt, financial performance and finally the learning and growth of staff. This was the first BSC draft for the school for which the school had to work on. The areas which were identified then broken down into further categories. Such as the grade levels, subjects, student groups, staff types and further operational processes. This helped the school in identifying the direction.

Entrepreneurial Process and the Capital

Further, research studies show that the social and the human capital affect the entrepreneurial process. It is because of the fact the entrepreneurship is a socio-economic process. An entrepreneur is an individual who belongs to a particular social context. Thus this social context conditions the mind of the individual according to the environment in which he/she is living. The identification of opportunities is also influenced by the social context as well in which these individuals belong. An entrepreneur has to interact with people such as customers and the suppliers thus it is treated as a social activity thus the presence of social capita influence the nature of the business. The understanding about the fact that how social capital is influenced facilitate the entrepreneur in conducting his/her business efficiently and effectively. When an entrepreneur possesses an insight about the influences of the people he/she is catering he can make better and informed decisions. The human and social capital both are affected by the class position and the family. The reason is that an individual is a basic unit of society. Individuals form society and these individuals as a human capital take the role as entrepreneur and operate in the same society. Thus the human and social capital affects the entrepreneurial process.

The financial capital also influences the process because it is required to initiate the business activity. Not only this, but the entrepreneurial process influence the economic actions in a variety of ways (Gartner, 1988). According to Grannovetter (1985), social factors constrain the behavior patterns of the individuals.

Conclusion

In a nut shell, the all types of capital are interlinked. Financial capital which is an economic resource cannot generate profit unless the physical capital is available. The presence of physical capital is mandatory along with the financial capital to attain the adequate level of efficiency. The human capital controls the first two types. It drives the financial and physical capital and its presence is important for attaining the level of effectiveness. Finally the social capital which encompasses all types discussed as the businesses cannot thrive in isolation. There must be an adequate level of networking among people who live in a particular society so that the effectiveness can be sustained.

References

Anderson, A.R. and Miller, C.J., 2003. “Class matters”: Human and social capital in the entrepreneurial process. The journal of socio-economics32(1), pp.17-36.

Elsenhardt KM, Martin JA 2000. Dynamic capabilities: What are they? Strategic Management J, 21(1): 1105- 1121.

Famous Quotes at BrainyQuote https://www.brainyquote.com/

Fatoki, O.O., 2011. The impact of human, social and financial capital on the performance of small and medium-sized enterprises (SMEs) in South Africa. Journal of Social Sciences29(3), pp.193-204.

Gartner, W.B., 1988. Who is an Entrepreneur? Is the Wrong Question. American Journal of Small Business, 11-32.

Granovetter, M., 1973. The Strength of Weak Ties. American Journal of Sociology 78, 1360-1380.

Kaplan, R.S. and Norton, D.P., 1995. Putting the balanced scorecard to work. Performance measurement, management, and appraisal sourcebook66(17511), p.68.

 

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