RADA COLLEGE- KOMBOLCHA CAMPUS

DEPARTMENT OF ACCOUNTING AND FINANCE

ADVANCED COST AND MANAGEMENT ACCOUNTING

INDIVIDUAL ASSIGNMENT

Review of “The Balanced Scorecard: Strategic-Based Control’’.

PREPARED BY: - TSGEREDA LEBSIE G /MARIYAM

ID NO. 006/2012

SUBMITTED TO: - MULYE TAREKEGN DIRES (PHD)

OCT/2020 G.C
ETHIOPIA, KOMBOLCHA
The Balanced Scorecard: Strategic-Based Control.

A balanced scorecard is a strategic management performance metric used to identify and

improve various internal business functions and their resulting external outcomes. Balanced
scorecards are used to measure and provide feedback to organizations. Data collection is
crucial to providing quantitative results as managers and executives gather and interpret the
information and use it to make better decisions for the organization.

The Origin of the Balanced Scorecard

In 1992, Drs. David P. Norton and Robert S. Kaplan started a working group to examine the
challenge of reporting only on financial measures. In for-profit organizations, financial
measures provided a lagging report (i.e. they told you what happened last month, quarter, or
year), but they were not able to look forward. Norton and Kaplan wanted to specifically look
at what measures that look forward in time and act as leading indicators might look like and
how that could affect an organization’s strategy.

History of the Balanced Scorecard

The balanced scorecard approach was first set out by Dr. Robert Kaplan and Dr. David
Norton in a Harvard Business Review article in 1992. It was designed as an alternate to
traditional ways of measuring corporate performance. It built on performance measurement
systems designed at General Electric in the 1950s and a system designed by French
accountants in the 1930s, called Tableau do Bord, which used a “dashboard” of
performance measures. In a series of articles and books, Kaplan and Norton then expanded
the concept into a strategic planning system, providing guidance on what companies should
measure to translate business goals into an action plan.

Features of the Balanced Scorecard

The balanced scorecard approach involves collecting data and analyzing the company from
four different perspectives. These are: learning and growth, which includes training and
knowledge resources; business processes, including how well products and services meet
customer needs; customer perspectives, such as customer satisfaction; and the financial
perspective, which includes collecting traditional types of financial data about corporate
performance, such as sales and expenditure.

Benefits of the Balanced Scorecard

The balanced scorecard approach allows managers to more easily identify the aspects of the
business they need to monitor more closely, and highlight the areas that need improvement.
By taking a holistic approach, the balanced scorecard system also lets managers monitor
what company-wide objectives have been met, and what is needed to achieve strategic
goals. Managers waste less time monitoring and have an increased understanding of the
steps needed to achieve their goals.

Characteristics of the Balanced Scorecard Model

Information is collected and analysed from four aspects of a business:

Financial perspective

The financial perspective is important for all shareholders and other financial backers of an
organization. It answers the question: “How attractive must we appear to our shareholders
and financial backers?” This is mainly a quantitative benchmark based on figures from the
past.

In addition, it provides a reliable insight into the operational management and the
sustainability of the chosen strategy. The delivered added value from the other three
perspectives will be translated into a financial success. This is therefore a quantification of
the added value that is delivered in the organization. After all in the balanced scorecard, when
there is a higher added value, the profits will also be higher.

Customer perspective

Each organization serves a specific need in the market. This is done with a target group in
mind, namely its customers. Customers determine for example the quality, price, service and
the acceptable margins on these products and/or services. Organizations always try to meet
customer expectations that may change at any time. The existence of alternatives (those of
the competitor) has a large influence on customer expectation. This perspective answers the
question: “How attractive should we appear to our customers?”

Internal Business Processes

From the perspective of internal processes the question should be asked what internal
processes have actually added value within the organizations and what activities need to be
carried out within these processes. Added value is mainly expressed as the performance
geared towards the customer resulting from an optimal alignment between processes,
activities and decisions. This perspective answers the question: “What must we excel at to
satisfy our customers and shareholders/ financial backers?”

Balanced Scorecard: A Tool for Strategic Control

Organizations are interlinked and their strengths derive from that interlink age more than they
do from standalone activity.

There is a linkage between the results the organization seeks for its shareholders, the strategy
it adopts and the various activities it carries out as part of its day-to-day operation.

The creation of loss of value occurs if the organization is casual about those linkages and fails
to capture the learning that occurs every day to improvise and strengthen its operations.

Measurement is the central theme in the balanced scorecard developed by Norton and Kaplan
(1996).

Balanced scorecard considers four interlinked internal perspectives – the financial, customer,
operations and organizations to develop and define value.

The scorecard was initially used as a performance improvement tool but later it became
popular as a strategy implementation tool as it emphasizes measurement.

Balanced Scorecard emphasizes “what cannot be measured cannot be improved” and the
scorecard either measured quantitatively or qualitatively.
If profitability is the result of increased sales and lowered operating costs and investments
then the organization should be able to translate the implication of lowered costs of
operations and investments into marketing, sales, procurement, and maintenance targets for
the front line.

Lowered costs of production translate into lower prices. The strategy sought to be attained for
shareholders must be translated across the functional areas so as to be discernible to those
who perform the daily operations.

The strategy is not fully realized if the description of strategy in terms of what it wants to do
for customers, the position it wishes to occupy in the market, is not converted into specific
attainable and measurable targets for the lowest-level employee.

If McDonald’s has to attain position of the low cost and quality producer of fast food and
earn a return on investment of say 11 percent, it must be able to translate its financial targets
for strategy into customer-specific targets (time to be taken to deliver the food), operations
targets (batch of fries to be obtained in one even, machine maintenance periodicity
and organisational targets (transferring learning from the Hamburger University to the
outlets).

The monitoring must be put in place so that any detraction from operational efficiency is
addressed. The organization’s efficiency that is created is enduring for the organization.

Considerations

In order for the balanced scorecard approach to benefit a company, that company must
already have an objective in mind. Without this, the company will not know what it wants
to achieve and will not be able to make accurate measurements. For example, in a 2005
Harvard Business Review article, balanced scorecard designer Robert Kaplan suggests that
some companies become too engrossed in measuring customer satisfaction and lose sight of
their ultimate objective--to make money. He suggests that once they have a profit objective
in mind, they can use the customer profitability metrics of the balanced scorecard system to
determine the cost of serving individual customers and earn more from each customer.