CHAPTER 7: The balanced scorecard: A tool to 4.

Innovation and Learning – measures of the

implement strategy firm’s ability to develop and utilize human
resources to meet the strategic goals now
The Balanced Scorecard and into the future.
■ Translates the organization's mission and Features of a Good Balanced Scorecard
strategy into a set of performance measures
that provides a framework for implementing 1. The balanced scorecard should tell the story
strategy. of a company’s strategy by articulating a
sequence of cause-and-effect relationships.
■ It is used to measure the company's health or
performance. 2. It helps to communicate the strategy to all
members if of the organization by
■ The scorecard measures organization's translating the strategy into a coherent and
performance from four perspectives: linked set to understandable and measurable
financial, customer, internal processes, and operational targets.
learning and growth.
3. In for-profit companies, the balanced
■ Strategic information using critical success scorecard places strong emphasis on
factors such as growth in sales and earnings, financial objectives and measures.
cash flow, stock price, market share, product
quality, customer satisfaction, and growth 4. The balanced scorecard should focus only
opportunities provides a road map for a firm on key measures to be used by identifying
to chart its competitive course and serves as only the most critical ones.
a benchmark for a competitive success.
5. The scorecard should highlight suboptimal
■ To emphasize the importance of using tradeoffs that managers may make when
strategic information, both financial and they failed to consider operational and
nonfinancial, accounting reports of a firm's financial measure together.
performance are now often based on critical
success factors in different dimensions. Pitfalls in Implementing a Balanced Scorecard

■ Financial performance measures - 1. Don’t assume the cause-and-effect linkages

summarize the results of past actions and are are precise.
important to a firm's owners, creditors, 2. Don’t seek improvements across all of the
employees and so forth. measures all of the time.
■ Nonfinancial performance measures - 3. Don’t use only objective measures in the
concentrate on current activities which will balanced scorecard.
be drivers of future financial performance.
4. Don’t fail to consider both costs and benefits
Four Perspectives of the Balanced Scorecard of initiatives before including these
1. Financial Perspective – measures of objectives in the balanced scorecard.
profitability and market value among others, 5. Don’t ignore nonfinancial measures when
as indicators of how well the firm satisfies evaluating managers and employees.
its owners and shareholders.
6. Don’t use too many measures.
2. Customer Satisfaction – measures of
quality service and low cost, among others,
as indicators of how well the firm satisfies
its customers.

3. Internal Business Processes – measures of

the efficacy and effectiveness with which
the firm produces the product or service.
Evaluating The Success Of A Strategy Internal Business Processes Performance

Assume the following operating incomes: Delivery cycle time – The amount of time from
when an order is received from a customer to when
Year 2003 Year 2004 the completed order is shipped is called delivery time
Revenues: cycle.

(1,000,000×$26) $26,000,000 Throughput (Manufacturing Cycle) time – The

amount of time required to turn raw materials into
(1,100,000×$24) $26,400,000 completed products is called throughput time or
manufacturing cycle time. It is made up of process
Expenses:
time, inspection time, move time, and queue time.
Materials 4,050,000 3,631,320
Process time – The amount of time work is actually
Other 16,000,000 16,000,000
done on the product.
Operating income $5,950,000 $6,768,680
Inspection time – The amount of time spent ensuring
How can the increase in operating income of that the product is not defective.
$818,680 be evaluated?
Move time – The time required to move material or
Growth Component partially completed products from workstation to
workstation.
Revenue effect of growth component = (Actual
units of output sold in 2004 - Actual units of output Queue time – The amount of time a product spends
sold in 2003) x Output price in 2003 waiting to be worked, to be moved, to be inspected,
or to be shipped.
Cost effect of growth component = (Actual units of
input or capacity that would have been used in 2003 Manufacturing Cycle Efficiency – Through
to produce year 2004 output assuming the same concerted effort to eliminate the non-value-added
input-output relationship that existed in 2003 - Actual activities of inspecting, moving, and queuing to
units or capacity to produce 2003 output) x Input reduce their throughput time to only a fraction of
prices in 2003 previous level.

Price-Recovery Component Manufacturing Cycle Efficiency Formula

Revenue effect of price-recovery component = MCE = Value Added Time (or Process Time)
(Output price in 2004 – Output price in 2003) ×
Manufacturing Cycle Time
Actual units of output sold in 2004
where:
Cost effect of price-recovery component = (Input
prices in 2004 – Input prices in 2003) x Actual units Manufacturing cycle time= Process time + Inspection
of inputs or capacity that would have been used to time + Move time + Queue time
produce year 2004 output assuming the same input-
output relationship that existed in 2003

Productivity Component

Productivity component = (Actual units of inputs or

capacity to produce year 2004 output - Actual units
of inputs or capacity that would have been used to
produce year 2004 output assuming the same input-
output relationship that existed in 2003) x Input
prices in 2004