NON-FINANCIAL MEASURES

The Balanced Scorecard

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COST MANAGEMENT
 Strategic Management
- this involves the development of a
sustainable competitive position in
which the firm’s competitive
advantage provides continued
success.
 Planning and Decision-making
 Control
 Preparation of Financial Statements
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Strategic Competitive Analysis
 Cost leadership
 Differentiation
 Focus

All of these shall be optimized in the use

of the balance scorecard.

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 The Balanced Scorecard

An approach known as the

balanced scorecard has
become popular recently.
This approach extends
performance evaluation from
merely looking at financial
results to formally
incorporating measures that
look at customer satisfaction,
internal business processes,
and the learning and growth
potential of the organization.

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 The Balanced Scorecard

The balanced scorecard asks four basic

questions:
1. How do customers see us? (the
customer perspective)
2. What must we excel at? (the internal
business process perspective)
3. Can we continue to improve and create
value? (the learning and growth
perspective)
4. How do we look to stockholders? (the
financial perspective)

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Balanced Scorecard Flow
 Firms assume that improvements in
learning and growth will lead to
improvements in internal business
processes
 Improvements in the internal
business processes will lead to
improvements in the customer and
financial perspectives

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The Balanced Scorecard
 The balanced scorecard translates an
organization’s mission and strategy into a
set of performance measures that provides
the framework for implementing its
strategy
 It is called the balanced scorecard because
it balances the use of financial and
nonfinancial performance measures to
evaluate performance

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The Financial Perspective
 Main objective is to maximize the
wealth of shareholders
 Evaluates the profitability of the
strategy, like cost management.
 Uses the most objective measures in
the scorecard
 The other three perspectives
eventually feed back into this
dimension
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The Customer Perspective

 Identifies targeted customer and

market segments.
 Is there an increase number of
customers? How about customer
satisfaction?

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The Internal Business Prospective
 Focuses on internal operations that
create value for customers that, in
turn, furthers the financial
perspective by increasing
shareholder value
 Includes three subprocesses:
1. Innovation
2. Operations
3. Post-sales service
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The Learning and Growth
Perspective
 Identifies the capabilities the
organization must excel at to achieve
superior internal processes that
create value for customers and
shareholders

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Balanced Scorecard
Set of performance measures constructed for four
dimensions of performance
◼ Financial
 Critical measures even if they are backward looking

◼ Customer
 Examines the company’s success in meeting customer
expectations

◼ Internal Processes
 Examines the company’s success in improving critical business
processes

◼ Learning and Growth

 Examines the company’s success in improving its ability to
adapt, innovate, and grow

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Balanced Scorecard
 Company develops three to five
performance measures for each
dimension
 Measures should be tied to company
strategy
 Balance among the dimensions is
critical

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Balanced Scorecard

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How Balance is Achieved in a
Balanced Scorecard

 Performance is assessed across a

balanced set of dimensions

 Balance quantitative measures with

qualitative measures

 There is a balance of backward-

looking measures and forward-
looking measures
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The Balanced Scorecard Flowchart

Internal Learning
Financial Customer Business &
Process Growth

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Developing a Strategy Map for a
Balanced Scorecard

 A strategy map is a diagram of the

relationships of the strategic objectives
across the four dimensions

 Used to test the soundness of the strategy

 Identifies how strategy is linked to

measures on the scorecard

 Communicates strategic objectives to

employees

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Strategy Map Example

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Features of a Good
Balanced Scorecard
 Tells the story of a firm’s strategy,
articulating a sequence of cause-and-effect
relationships: the links among the various
perspectives that describe how strategy will
be implemented
 Helps communicate the strategy to all
members of the organization by translating
the strategy into a coherent and linked set
of understandable and measurable
operational targets

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Keys to a Successful Balanced
Scorecard

 Targets
◼ For each measure, there should be a target so managers
know what they are expected to achieve
 Initiatives
◼ For each measure, the company must identify actions that
will be taken to achieve the target
 Responsibility
◼ A particular employee must be given responsibility and held
accountable for successfully implementing each initiative
 Funding
◼ Initiatives must be funded appropriately
 Top Management Support
◼ It is crucial to have the full support of top management

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Features of a Good
Balanced Scorecard
 Must motivate managers to take actions
that eventually result in improvements in
financial performance
◼ Predominately applies to for-profit entities, but
has some application to not-for-profit entities as
well
 Limits the number of measures, identifying
only the most critical ones
 Highlights less-than-optimal tradeoffs that
managers may make when they fail to
consider operational and financial measures
together

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Balanced Scorecard Measures
 Financial  Internal Business
◼ Operating income from ◼ Process quality yield
growth ◼ Cycle efficiency
◼ Throughput
◼ Profitability
◼ On-time delivery
◼ Organizational growth ◼ Process productivity
◼ Market price of stock  Learning and Growth
◼ Number of patents or
 Customer copyrights
◼ Percentage of R&D
◼ Lead time projects that are
◼ Quality patentable
◼ Service ◼ Employee satisfaction
survey commercialization
◼ Price ◼ Percentage of capital
invested in “high-tech”
projects
Throughput
 Number of good units or quantity of
services that are produced and sold
within a specified time
 Increase throughput in time and in
quality
◼ Decrease non-value-added activities
◼ Increase total unit production and sales
◼ Decrease per-unit processing time
◼ Increase the process quality yield
 Throughput Formula Good Units
Total Time

Manufacturing Process
Process
Cycle X X Quality
Productivity
Efficiency Yield

Value-Added Total Units

Processing Time Value-Added Good Units
Total Time Processing Time Total Units
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