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The Balance Scorecard – The Basic Concepts

Segment income, ROI, residual income and EVA, as discussed previously, are important measures
of managerial performance, but they lead managers to focus only to peso figures, which may not
tell the whole story for the company. In addition, the lower-level managers and employees may
feel helpless to affect income or investment. As a result, non-financial operating measures that
look at such factors as market share, customer complaints, personnel turnover ratios and
personnel development have evolved. Letting lower-level managers know that attention to long-
run factors is also vital reduces the tendency to overemphasize financial measures.

Managers in an advanced manufacturing environment are especially likely to use multiple


measures of performance and to include non-financial as well as financial measures. Exhibit 1
produced by Cedar Consulting provides an example.

Exhibit 1: Cedar Consulting Balance Scorecard, p. 3,http://www.cedar-


consulting.com/pdf/Balance%205scorecard.pdf.
Project Objective Owners for Measure Target
Objective
Financial Enhance profitable CEO Growth in 10%, 15%
revenues revenues and
EBIDTA
Improve capacity GM Growth in % 80%
utilization Manufacturing utilization
(GMM)
Customer Reduce cost of GMM Cost reduction 50 million
product from current base
Contemporary and GM sales Brand image 4 on 5 rating
high-quality products rating
Prompt and reliable GM service Customer service 4 on 5 rating
customer care rating
Healthy channel CFO ROA > defined 30% +
returns minimum
Internal Integrate R&D with R&D Reduction in field 100 ppm
market requirements rejections
Implement sales and GM sales Market share 25%
marketing strategy
Roll-out plan Re-engineer critical GM operations Number of SLAs 20
business processes agreed

The Balance Scorecard (BSC), developed initially by Kaplan and Norton (1992), has evolved as a
strategic management process that defines a strategic-based responsibility accounting system.
The purpose of these processes is to break down the criticized ‘silo effect’ of traditional
accounting performance systems caused by focusing performance evaluation and rewards on a
department’s or responsibility center’s sole performance, which has been claimed to restrict
opportunities or create an organizational culture that resists change.
The BSC’s four strategic management processes provide an avenue, first, to translate an
organization’s mission and strategy into operational objectives; second, to communicate and link
these strategies and operational objectives; third, to identify critical success factors (CSF) and
develop key performance indicators (KPI); and finally, to use performance measures for feedback
and learning for the following four perspective.

1. The financial perspective describes how shareholders should view the organization so that it
succeeds financially by increasing profitability through a productivity strategy, or through the
implementation of both strategies. The financial measures and variance analysis are economic
consequence of actions taken in the other three perspective.

2. The customer perspective identifies how the organization’s customers should be perceived
the organization for it to be successful. Through this identification process, customer
relationship management may be developed to display to the market the superior product’s
quality, costs or innovation compared to the competition. Therefore, the organization may
define the customer and market segments in which the business unit will compete.

3. The internal process perspective defines what internal processes are needed for the
organization to achieve excellence in the identified areas that provide value for customers and
shareholders; for example, what must be done to achieve excellence in quality control or
innovation.

4. The learning and growth perspective (comprising human capital, information capital and
organization capita) defines the capabilities an organization needs to create long-term sales
growth and productivity improvement that will sustain this ability to change and improve. This
perspective is concerned with three major enabling factors: employee capabilities,
information systems capabilities, and employee attitudes (motivation, empowerment and
commitment alignment)

Linking Performance Measures to Strategy

Balancing outcome measures with performance drivers is essential in linking with the
organization’s strategy. Performance drivers make things happen and are indicators of how the
outcomes are going to be realized. Outcome measures are also important because they reveal
whether the strategy is being implemented successfully with the desired economic
consequences. The testability of the strategy is achieved by restating the strategy into a set of
cause-and-effect hypotheses that are expressed by a sequence of if-then statements. Example:

Hypothesis: Quality training is link with increased profitability.


1. If design engineers receive quality training, then they can redesign products to reduce the
number of defective units.
2. If the number of defective units is reduced, then
a. Customer satisfaction will increase.
b. Costs will reduce and the profit margin will increase.
3. If customer satisfaction increases, then market share will increase.
4. If market share increases, then sales will increase.
5. If sales increase, then profit will increase.

Exhibit 2 illustrates the above if-then statements to the four perspective of balance scorecard:

Financial Increase Sales Increase profits

Customer Increase market share Increase customer


satisfaction

Internal Redesign products Reduce defective units

Learning and Quality Training


Growth

Exhibit 2: Testable Strategy Illustrated