CHAPTER 7: The balanced scorecard: A tool to
Innovation and Learning – measures of the
implement strategy
The Balanced Scorecard
■ Translates the organization's mission and
strategy into a set of performance measures
that provides a framework for implementing
strategy.
■ It is used to measure the company's health or
performance.
■ The scorecard measures organization's
performance from four perspectives:
financial, customer, internal processes, and
learning and growth.
■ Strategic information using critical success
factors such as growth in sales and earnings,
cash flow, stock price, market share, product
quality, customer satisfaction, and growth
opportunities provides a road map for a firm
to chart its competitive course and serves as
a benchmark for a competitive success.
■ To emphasize the importance of using
strategic information, both financial and
nonfinancial, accounting reports of a firm's
performance are now often based on critical
success factors in different dimensions.
■ Financial performance measures -
summarize the results of past actions and are
important to a firm's owners, creditors,
employees and so forth.
■ Nonfinancial performance measures -
concentrate on current activities which will
be drivers of future financial performance.
Four Perspectives of the Balanced Scorecard
1. Financial Perspective – measures of
profitability and market value among others,
as indicators of how well the firm satisfies
its owners and shareholders.
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.
4.
firm’s ability to develop and utilize human
resources to meet the strategic goals now
and into the future.
Features of a Good Balanced Scorecard
1. The balanced scorecard should tell the story
of a company’s strategy by articulating a
sequence of cause-and-effect relationships.
2. It helps to communicate the strategy to all
members if of the organization by
translating the strategy into a coherent and
linked set to understandable and measurable
operational targets.
3. In for-profit companies, the balanced
scorecard places strong emphasis on
financial objectives and measures.
4. The balanced scorecard should focus only
on key measures to be used by identifying
only the most critical ones.
5. The scorecard should highlight suboptimal
tradeoffs that managers may make when
they failed to consider operational and
financial measure together.
Pitfalls in Implementing a Balanced Scorecard
1. Don’t assume the cause-and-effect linkages
are precise.
2. Don’t seek improvements across all of the
measures all of the time.
3. Don’t use only objective measures in the
balanced scorecard.
4. Don’t fail to consider both costs and benefits
of initiatives before including these
objectives in the balanced scorecard.
5. Don’t ignore nonfinancial measures when
evaluating managers and employees.
6. Don’t use too many measures.
Evaluating The Success Of A Strategy

Assume the following operating incomes: Internal Business Processes Performance

Year 2003 Year 2004 Delivery cycle time – The amount of time from when
an order is received from a customer to when the
Revenues: completed order is shipped is called delivery time
(1,000,000×$26) $26,000,000 cycle.

(1,100,000×$24) $26,400,000 Throughput (Manufacturing Cycle) time – The

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

Revenue effect of price-recovery component = Manufacturing Cycle Efficiency Formula

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

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