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The Balanced

Scorecard:
StrategicBased Control
Prepared
Preparedby
by

Douglas
DouglasCloud
Cloud

Pepperdine
PepperdineUniversity
University
15-1

Objectives
Objectives
1. Compare and contrast activity-based and
After
studying
this
After
studying
strategic-based responsibility this
accounting systems.
chapter,
you
should
chapter,
you
should
2. Discuss the basic features of the Balanced
be
able
to:
be
able
to:
Scorecard.
3. Explain how the Balanced Scorecard links
measures to strategy.
4. Describe how an organization can achieve
strategic alignment.

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Activity-Based
Activity-Based versus
versus StrategicStrategicBased
Based Accounting
Accounting
The
The activity-based
activity-based
system
systemadds
adds aa process
process
A
strategy-based
A
perspective
to
the
perspective to the strategy-based
responsibility
financial
perspective
of
financial perspective ofresponsibility
accounting
system
accounting
system
the
functional-based
the functional-based
translates
the
strategy
translates
the
strategy
responsibility
responsibility
of
the
organization
into
of
the
organization
into
accounting
system.
accounting system.
operational
operational objectives
objectives
and
and measures.
measures.
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Activity-Based
Activity-Based versus
versus StrategicStrategicBased
Based Accounting
Accounting
The
The Balanced
Balanced
Scorecard
Scorecard isis aa
strategic-based
strategic-based
performance
performance
management
management system
system
that
that typically
typically identifies
identifies
objectives
objectives and
and
measures
measures for
for four
four
different
different perspectives.
perspectives.

The financial
perspective
The customer
perspective
The process
perspective
The learning and
growth perspective
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Assigning
Assigning Responsibility
Responsibility
Activity-Based Responsibility

Strategic-Based Responsibility

1. No tie to strategy

1. Linked to strategy

2. Systemwide efficiency

2. Systemwide efficiency

3. Team accountability

3. Team accountability

4. Financial perspective

4. Financial perspective

5. Process perspective

5. Process perspective
6. Customer perspective
7. Learning and growth
perspective
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Establishing
Establishing Performance
Performance Measures
Measures
Activity-Based Measures

Strategic-Based Measures

1. Process-oriented and
financial standards

1. Standards for all four


perspectives

2. Value-added standards

2. Used to communicative
strategy

3. Dynamic standards
4. Optimal Standards

3. Used to help align


objectives
4. Linked to strategy and
objectives
5. Balanced measures
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ABC
ABC versus
versus Strategic-Based
Strategic-Based
Activity-Based
Performance Evaluation

Strategy-Based
Performance Evaluation

1. Time reductions

1. Time reductions

2. Quality improvements

2. Quality improvements

3. Cost reductions

3. Cost reductions

4. Trend measurements

4. Trend measurements
5. Expanded set of metrics
6. Set stretch targets for all
four perspectives
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Rewards
Rewards Compared
Compared
Activity-Based Rewards
1. Based on multidimensional
performance
2. Group rewards
3. Salary increases
4. Promotions
5. Bonuses, profit sharing, and
gainsharing

Strategy-Based Rewards
1. Based on
multidimensional
performance
2. Group rewards
3. Salary increases
4. Promotions
5. Bonuses, profit sharing,
and gainsharing
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Strategy
Strategy
Strategy is choosing the market and
customer segments the business unit
intends to service, identifying the
critical internal and business processes
that the unit must excel at to deliver the
value propositions to customers in the
targeted market segments, and selecting
the individual and organizational
capabilities required for the internal,
customer, and financial objectives.
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Visions and
Strategy

Financial

Customer

Process

Infrastructure

Objectives
Measures

Strategy
Translation
Process

Targets
Initiatives

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Summary
Summary of
of Objectives
Objectives and
and Measures:
Measures:
Financial
Financial Perspective
Perspective
Objectives

Measures

Revenue Growth:
Increase the number of new
products
Create new applications
Develop new customers and
markets
Adopt a new pricing strategy

Percentage of revenues from


new products
Percentage of revenue from
new applications
Percentage of revenues from
new sources
Products and customer
profitability

Continued
Continued
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Objectives
Cost Reduction:
Reduce unit product cost
Reduce unit customer cost
Reduce distribution channel
cost
Asset Utilization:
Improve asset utilization

Measures
Unit product cost
Unit customer cost
Cost per distribution
channel
Return on investment
Economic value added

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Core
Core Objectives
Objectives and
and Measures
Measures
Increase market share
Increase customer retention
Increase customer acquisition
Increase customer satisfaction
Increase customer profitability
Only
Onlyfinancial
financialmeasure
measure
Among
Amongthe
thecore
coreobjectives
objectives
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Customer
Customer Value
Value
Customer
Customer value
value isis the
the difference
difference
between
betweenrealization
realization and
and sacrifice,
sacrifice,where
where
realization
realization isis what
what the
the customer
customer receives
receives
and
and sacrifice
sacrifice isis what
what isis given
given up.
up.

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Summary
Summary of
of Objectives
Objectives and
and Measures:
Measures:
Customer
Customer Perspective
Perspective
Objectives

Measures

Core:
Increase market share

Market share (percentage of


market
Increase customer retention
Percentage growth, existing
customers
Percentage of repeating
customers
Increase customer acquisition Number of new customers
Increase customer satisfaction Ratings from customer surveys
Increase customer
Customer profitability
profitability
Continued
Continued
Continued

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Objectives
Performance Value:
Decrease price
Decrease postpurchase costs
Improve product functionality
Improve product quality
Increase delivery reliability
Improve product image and
reputation

Measures
Price
Postpurchase costs
Ratings from customer surveys
Percentage of returns
On-time delivery percentage
Aging schedule
Ratings from customer surveys

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Cycle
Cycle Time
Time and
and Velocity
Velocity
The
The time
time itit takes
takes aa
company
respond
company to
to
respond
Cycle
time
and
Cycle
time
and
to
order
isis
to aa customer
customer
orderare
velocity
two
Cycle
time
(manufacturing)
isis
velocity
are
two
Cycle
time
(manufacturing)
referred
as
referred to
to
as
operation
the
length
of
time
itit takes
to
operation
the
length
of
time
takes
to
responsiveness.
responsiveness.
measures
of
aa unit
measuresproduce
of
produce
unit of
of output
output from
from
responsiveness.
the
responsiveness.
the time
time materials
materials are
are received
received
Velocity
number
of
units
Velocity isis the
theuntil
number
of
units
the
good
isis delivered
until the good
delivered to
to
of
be
in
of output
output that
that an
anfinished
be produced
produced
ininventory.
goods
finished
goods
inventory.
aa given
given period
period of
of time..
time..
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Conversion
Conversion Cost
Cost Example
Example
A company has the following data for one of its
manufacturing cells:
Theoretical velocity: 40 units per hour
Productive minutes available (per year): 1,200,000
Annual conversion costs: $4,800,000
Actual velocity: 30 units per hour

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Conversion
Conversion Cost
Cost Example
Example
Actual Conversion Cost per Unit
Standard cost per minute = $4,800,000/1,200,000
= $4 per minute
Actual cycle time
= 60 minutes/30 units
= 2 minutes per unit
Actual conversion cost = $4 x 2
= $8 per unit
Theoretical Conversion Cost per Unit
Theoretical cycle time
= 60 minutes/40 units
= 1.5 minute per unit
Ideal conversion cost
= $4 x 1.5
= $6 per unit

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Objectives
Objectives and
and Measures:
Measures:
Process
Process Perspective
Perspective
Objectives
Innovation:
Increase the number of new
products
Increase proprietary products
Decrease product
development cycle time

Measures
Number of new products/total
products: R & D expenses
Percentage revenue from
proprietary products
Number of patents pending
Time to market (from start to
finish)

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Objectives
Operations:
Increase process quality
Increase process efficiency
Decrease process time
Postsales Services:
Increase service quality
Increase service efficiency
Decrease service time

Measures
Quality costs
Output yields
Percentage of defective units
Unit cost trends
Output/input(s)
Cycle time and velocity
MCE
First-pass yields
Cost trends
Output/input(s)
Cycle time

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Objectives
Objectives and
and Measures:
Measures:
Learning
Learning and
and Growth
Growth Perspective
Perspective
Objectives
Increase employee
capabilities

Measures
Employee satisfaction ratings
Employee turnover percentages
Employee productivity
(revenue/employee)
Hours of training
Strategic job coverage ratio
(percentage of critical job
requirements filled)

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Objectives
Increase motivation and
alignment
Increase information systems
capabilities

Measures
Suggestions per employee
Suggestions implemented per
employee
Percentage of processes with
real-time feedback
capabilities
Percentage of customer-facing
employees with on-line
access to customer and
product information

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Increase Shareholder Value

Financial

Customer

Internal
Process
Learning and
Growth

Decrease
Process
Costs
Improve
Delivery
Reliability

Improve
Cycle Time

Increase
Profits

Increase
Customer
Retention

Redesign
Process

Improve Employee Skills

Increase
Revenues

Increase
Market
Share
Casual
Flow
Diagram:
Testable
Strategy
Illustrated
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Targets
Targets and
and Weighting
Weighting
Scheme
Scheme Illustrated
Illustrated
Perspectives
Financial (25%)

Objectives
Increase shareholder value (25%)

Measures
Share price

Targets
50% increase

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Targets
Targets and
and Weighting
Weighting
Scheme
Scheme Illustrated
Illustrated
Perspectives
Financial (25%)

Objectives
Increase profits (25%)

Measures
Profits

Targets
Double

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Targets
Targets and
and Weighting
Weighting
Scheme
Scheme Illustrated
Illustrated
Perspectives
Financial (25%)

Objectives
Increase revenues (25%)

Measures
Revenues

Targets
30% increase

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Targets
Targets and
and Weighting
Weighting
Scheme
Scheme Illustrated
Illustrated
Perspectives
Financial (25%)

Objectives
Decrease process costs (25%)

Measures
Costs

Targets
20% decrease

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Targets
Targets and
and Weighting
Weighting
Scheme
Scheme Illustrated
Illustrated
Perspectives
Customer (25%)

Objectives
Increase market share (20%)

Measures
Market share

Targets
25%

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Targets
Targets and
and Weighting
Weighting
Scheme
Scheme Illustrated
Illustrated
Perspectives
Customer (25%)

Objectives
Increase customer retention (30%)

Measures
Repeat orders

Targets
70%

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Targets
Targets and
and Weighting
Weighting
Scheme
Scheme Illustrated
Illustrated
Perspectives
Customer (25%)

Objectives
Improve delivery reliability (50%)

Measures
On-time
percentage

Targets
100%

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Targets
Targets and
and Weighting
Weighting
Scheme
Scheme Illustrated
Illustrated
Perspectives
Internal Process
(25%)

Objectives

Measures
Cycle time

Targets
2 days

Improve cycle time (60%)

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Targets
Targets and
and Weighting
Weighting
Scheme
Scheme Illustrated
Illustrated
Perspectives
Internal Process
(25%)

Objectives

Measures
Yes or No

Targets
Yes

Redesign process (40%)

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Targets
Targets and
and Weighting
Weighting
Scheme
Scheme Illustrated
Illustrated
Perspectives
Learning and
Growth (25%)

Objectives
Improve employee skills (100%)

Measures
Targets
Hours of training 30 hours per employee

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End of

Chapte
r
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