CHAPTER 7

(The Balanced Scorecard: A Tool to Implement Strategy)

THE BALANCED SCORECARD: A TOOL TO IMPLEMENT STRATEGY

THE BALANCED SCORECARD

- An organization’s mission and strategy into a set of performance measures that provides
the frame work for implementing the strategy.
- The scorecard measures an organization’s performance from four(4) perspective:
1. Financial
2. Customer
3. Internal Processes
4. Learning and Growth

Financial Performance Measures – summarize the result of pat actions and are important to a
firms owner, creditors, employees, and so forth.
Nonfinancial Performance Measures- It concentrates on current activities, which will be the
drivers of future financial performance.
The balanced scorecard integrates performance measures in four (4) key areas:
1. Financial perspective
2. Customer satisfaction
3. Internal business process
4. Innovation and learning

FOUR PERSPECTIVE OF THE BALANCE SCORECARD

1. Financial Perspective
- Measures of profitability and market value among others, as indicators of how 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 efficiency and effectiveness with which the firm produces the product of
service.
4. Innovation and Learning
- Measures of the 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. These would lead to increase customer
satisfaction and market share as well as higher operating income and shareholder wealth.
 Each measure in the scorecard is part of a cause-and-effect chain a linkage from strategy
formulation to financial results.
2. It helps to communicate the strategy to all members 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
fail to consider operational and financial measure together.

PITFALLS IN IMPLEMENTING A BALANCED SCORECARD

Pitfalls to avoid in implementing a balanced scorecard include the following:
1. Don’t assume the cause-and-effect linkages are precise.
2. Don’t seek improvements across all the measures all of the time. Tradeoffs may need to
be made across various strategic goals.
3. Don’t use only objective measures in the balanced scorecard. The balanced scorecard
should include both objective measures and subjective measures.
4. Don’t fail to consider both costs and benefits of initiatives such as spending on
information technology R&D before including these objectives in the balanced scorecard.
5. Don’t ignore nonfinancial measures when evaluating managers and employees. Managers
tend to focus on what their performance is measured by.
6. Don’t use too many measures. It clutters the balanced scorecard and takes attention away
from the measures that are critical for implementing strategy.

EVALUATION THE SUCCESS OF STRATEGY

The following analytical relationships may be used:
1. Growth component
Revenue effect of growth component (Quantity Factor)
Actual units of output sold this year Pxx
Less: Actual units of output sold last year _xx
Increase (Decrease) Pxx
Multiply by: Output price last year _xx
Favorable (Unfavorable) Pxx

Cost of effect of growth component*

Actual units of input or capacity that would
have been used to produce this year’s output
assuming the same input-output relationship
that existed last year Pxx
Less: Actual units of inputs or capacity
 to produce last year’s output _xx
Increase (Decrease) Pxx
Multiply by: Input prices last year _xx
(Favorable) Unfavorable Pxx
*This will be computed for each cpst element such as direct materials cost, conversion costs,
selling and customer-service cost.

2. Price-Recovery component
Revenue effect of price-recovery component (Price Factor)
Output price this year Pxx
Less: Output price last year _xx
Increase (Decrease) in Output price Pxx
Multiple by: Actual units of output sold this year _xx
Favorable (Unfavorable) Pxx
Cost effect of price-recovery components*
Input prices this year Pxx
Less: Input prices last year _xx
Increase (Decrease)* Pxx
Multiply by: Actual units of inputs or capacity
that would have been used to produce this
year’s output assuming the same input-output
relationship that existed last year _xx
(Favorable) Unfavorable Pxx
*To be computed for each cost element

3. Productivity components
Actual units of inputs or capacity
used to produce this year’s output Pxx
Less: Actual inputs or capacity that would
have been used to produce this year’s
output assuming the same input-output
relationship that existed last year _xx
Increase ( Decrease) Pxx
Multiply by: Input price last year _xx
Favorable (Unfavorable) Pxx
*Favorable if it increases operating income. Unfavorable if it decreases operating income

INTERNAL BUSINESS PROCESS PERFORMANCE

Most of the performance measures are self-explanatory. However, three are not.

Delivery cycle time - the amount of time from when an order is received from a customer to
when the completed order is shipped.
Throughput (Manufacturing cycle) time - amount of time required to turn raw materials into
completed products.

Manufacturing cycle efficiency (MCE)

MCE = Value-added time

Throughput time