(Lecture 9)

Topic 7: Strategic Management Accounting

The Balanced Scorecard (BSC)

Reference:
• Chapter 23, Drury, management and cost accounting 6,7 ed,
Thompson Learning.

• Chapter 12 Garrison, R.H., Noreen E.W., Brewer, P.C., Cheng, N.S., and
Yuen, K.C.K., (2012). Managerial Accounting - An Asian Perspective,
McGraw-Hill.

1
 Learning outcomes
1. Explain the importance of using leading and lagging
indicators to build a balanced scorecard for (BSC)
communication, motivation and evaluation.
2. Understand how an organisation selects related
measures for a BSC.
3. Evaluate the benefits and costs of a BSC.
4. Explain how an organisation implements strategies
using The Balance Scorecard.

2
The contemporary business environment
• Many changes in business environment
in recent years have cause significant
modifications in cost management
practices:
1. Increase in global competition
2. Advances in manufacturing
technologies
3. Advances in information technologies,
the internet, and e-commerce
4. Greater focus on customer
5. New form of management organisation
6. Changes in the social, political, cultural
environment of business.
3
 The Way Forward: SMA
SMA :"the provision and analysis of MA data
about a business and its competitors for
use in developing and monitoring the
business strategy“ Simmonds (1981:26)

SMA systems and practices are:

- externally and competitive focused
- forward-looking and longer-term orientated
- strategically driven

4
 Two views on the BSC
1. A framework of performance
measurement - A way of monitoring and
improving operational performance
(eg, supplementing standard costing).

2. And/or as a tool to aid the formulation

and implementation of organizational
strategy.

5
 BSC as a framework of
performance measurement

6
 The Balanced Scorecard
• Traditionally MA focused mainly on financial
performance measures.

• Greater emphasis now being given to incorporating

non-financial measures into the formal reporting
system.

• Result was a proliferation of performance

measures.

• To integrate financial and non-financial measures

the Balanced Scorecard emerged. (A framework of
performance measurement)

7
 The Balanced Scorecard
• The term was introduced by Kaplan and Norton
(1992) based on criticisms of traditional
management accounting, with its emphasis on
short-term financial measures, to support world
class manufacturing.

• Kaplan and Norton advocate the approach as

enabling "companies to track financial results
while simultaneously monitoring progress in
building the capabilities and acquiring the intangible
assets they would need for further growth"

8
 Key features of BSC
• presenting together information on a range of
areas
• emphasising non-financial as well financial
information
• looking at medium and long term policies and
aspirations as well as short-term targets
• looking at external as well as internal
measures

9
 4 perspectives of BSC
Management
Management translates
translates its
its strategy
strategy into
into
performance
performance measures
measures that that employees
employees
understand
understand and
and accept
accept

Financial Customers
Performance
measures
Internal Learning
business and growth
processes
10
 Relationships between the 4
perspectives of BSC
How do we look
to the owners?
Financial

In which internal How can we

business processes continually learn,
must we excel? grow, and improve?
Learning & growth
Internal Process

How do we look
to customers?
Customers 11
The Balanced Scorecard and learning

Learning improves
business processes.

Improved business
processes improve
customer satisfaction.

Improving customer
satisfaction improves
financial results.
12
The Balanced Scorecard (Source: Kaplan and Norton, 1996b)

13
 The financial perspective
• Objectives include Profitability; Revenue
growth/mix; Cost reduction; productivity; and
Cash flow.
• Typical measures include ROI, RI, EVATM,

• Growth, cost reduction and asset utilization.

• Argued by some that by focusing on other

perspectives, financial measures will take
care of themselves.
14
The customer perspective
Typical generic measures include:
1. Market share
2. Customer retention and
loyalty
3. Customer acquisition
4. Customer satisfaction
5. Customer profitability 15
The learning and growth perspective
• Focuses on the infrastructure that the
business must build to create long-term
growth and improvement.

• Three principal categories identified:

1. Employee capabilities
2. Information system capabilities
3. Motivation, empowerment and alignment
16
 The internal business perspective

• Typical innovation measures include:

1. Percentage of sales from new products.
2. New product introduction versus competitors.
3. Product development break-even time.

• Typical operation process measures include:

Cycle time; Quality; Activity and process costs;
Post-sales service processes.

17
 Internal business performance

• Delivery cycle time- reduce this to

improve competitive advantage.

• Throughput/manufacturing cycle time-

process+inspection+move+queue time.

• Manufacturing cycle efficiency- relates

throughput time to value added time.
18
19
Designing BSC

20
 Steps in designing BSC
1. list objectives for each perspective (financial,
customer, internal business and learning and
growth)
2. describe measures for each objective
3. illustrate how each objective can be quantified
and displayed
4. formulate a graphic model of how the
measures are linked within the perspective and
to measures or objectives in other perspectives

21
 Design of BSC
• identify measures that best communicate
the meaning of the strategy
• align individual, organisational and cross-
departmental initiatives
• identify new processes for meeting
customer and shareholder objectives

22
 Designing BSC
• To implement the BSC the major objectives for
each of the 4 perspectives should be articulated
and these objectives should be translated into
specific performance measures.

• A critical assumption of BSC is that each

performance measure is part of a cause-and-
effect relationship.

• The BSC consists of two types of performance

measures:

– Lagging measures
– Leading measures
23
 Lead and Lag indicators
ad Financial
Le
Performance
Customer
ead value lag
L
Performance
Business
lag
Process
ead Performance
L
lag
Learning &
growth
Performance

24
 Example - Lead and Lag indicators
ad Improved
Le
revenue
Increase
ead customer lag
L
satisfaction
Faster loan lag
processing
ead
L
lag
Increased
employee
training

25
 Learning & Growth performance
Financial
Performance

ead
L
Customer
value
Learning & growth performance Performance
1. Employee Training
2. Employee satisfaction ead
L
3. Employee Turnover
Business
4. Innovativeness
Process
5. Opportunities for improvement Lead
Performance

26
 Business process performance
Financial
Performance

ead
Business Process Performance L

1. Process improvement Customer

2. Productivity improvement value
ead Performance
3. New service development L

d
Lea
Learning &
growth
performance
27
 Customer value performance
Financial
Performance

ead
L

Customer value Performance

• Customer satisfaction
Business
ad • Customer loyalty
Process Le • Sales growth
Performance
• Market share growth
ead
L
Learning &
growth
performance
28
 Financial performance
Financial Performance
• Revenue Growth
ead • Profits Growth
L
• Profitability Growth
Customer
value • Return on Investment
Performance Growth
Business ead
L
Process
Performance

ead
L

Learning &
growth
performance
29
 Strategy mapping
• Strategy maps are communication tools used to tell a
story of how value is created for the organization.

• They show a logical, step-by-step connection

between strategic objectives in the form of a cause-
and-effect chain.

• Generally speaking, improving performance in the

objectives found in the Learning & Growth perspective
enables the organization to improve its Internal
Process perspective Objectives, which in turn enables
the organization to create desirable results in the
Customer and Financial perspectives

30
 Example 1
Objectives

31
Implementing strategy using
The Balanced Scorecard

32
 Translating strategy with the BSC

Mission,
Our desired future state Core Value,
Vision
How to attain desired state Strategy

What must we do well to

Objectives
implement strategy
Financial Customer Internal Learning
Process & growth
How strategic
success is Measures
measured and Internal Learning
Financial Customer
tracked Process & growth

33
 Strategy & BSC
• BS seeks to link performance measures to an
organization’s strategy.

• The BS should be used to clarify,

communicate and manage strategy.

• An approach to the provision of information to

management to assist strategic policy
formation and achievement.

34
 Linking short term actions
with long term strategy
The BSC introduces four new management
processes that link strategy and short run actions:
1. Translating the vision - translating lofty aims into
an integrated set of objectives and measures
through identifying performance drivers and
linking them to objectives;

2. Communicating and linking - allows senior

managers to communicate the strategy and link
it to departmental and individual objectives;

35
 Linking short term actions
with long term strategy
3. Business planning - using BSC goals as a
basis for allocating resources and setting
priorities; and

4. Feedback and learning - strategic learning and

not budget v actual but include short-term
results from the 4 perspectives. The BSC
enables companies to modify strategies to
reflect real time learning.

36
 Objectives of BSC
• move away from an obsession with current year's
results

• encourage continued focus on key factors which are

critical to long run financial success in the longer term
eg. production cycle time and market share.

• encourage managers to choose, from the many

measures they could monitor, the relatively small
number that they should watch.

• to guard against sub-optimisation by ensuring that all

measures are considered together so that it is obvious
if improvements in one area are at the cost of another
eg. increasing production but lower quality output.
37
 BSC Benefits
• Translation of strategy into measurable
parameters
• Communication of strategy to everybody in
the firm
• Alignment of individual goals with the
firm’s strategic objectives
• Feedback of implementation results to the
strategic planning process
38
 Potential Pitfalls
• Lack of well defined strategy
• Using only lagging measures
• Using generic metrics instead of KPI

39
 Critique of the BSC
• the relationships between the perspectives
measured by the BSC are logical and reveal
interdependence rather than causal (eg. customer
satisfaction does not necessarily equal good
financial results) as claimed.

• the BSC is a poor strategic management tool as it

(a) ignores certain stakeholders (eg. suppliers,
public authorities and institutional stakeholders) and
their perspectives; and (b) although there may be
benchmarking in the planning stage, there is no
continuous monitoring of competitors actions
and technological changes - it is therefore static
rather than dynamic.

40
 Critique of the BSC
• the control method of the BSC is described as
hierarchical and top down both in the
formulation of measures and the breakdown and
distribution of these to teams and employees. This
lack of participation means that the BSC may fail
to become rooted in the organisation and is not
fully accepted by managers and employees.

41
Examples of measures

42
Examples of measures

43
Examples of measures

44
Examples of measures

45
 Benchmarking
"Benchmarking... looks for ideas to borrow from
those who are doing better, perhaps in one very
specific aspect" (Hoque, 2003:186).
Identify what others are doing and achieving.
Benchmarking is an integral part of and
organization's improvement processes. It is the
cornerstone of TQM and business process re-
engineering.
• identifies the best practices.
• challenge status quo and promote competition.
• promote forward and strategic thinking.
• provides direction and objectives - achievable
performance targets for key areas of the operation.
• information sharing can stimulate innovation.
46
 3 types of benchmarking
• Internal benchmarking
• External benchmarking
Comparing with organizations facing similar
circumstances, e.g. revenue, costs, profit
margin, product development and throughput
cycles (the HT case study), school and
hospital (star rating) league tables.
• Best-practice benchmarking
Compare with a recognized leader in terms of
the particular process - regardless of sector,
industry or location, e.g. investing in people or
innovation.
47
 3 levels of benchmarking
1. Resources (through resource audit)
Examples of measures:
• Quantity of resources – revenue, cost, employee or
capital investment.
• Quality of resources – qualifications of employees,
age of machinery or uniqueness (e.g. patents).

2. Competences in individual activities

• Measures –output per employee, wastage, product
development cycle, miles traveled per seat (airlines),
waiting time and operation cancellation (hospitals).
3. Competences in linked activities (overall performance)
• Measures – e.g. market share, profitability or
productivity. 48
Example - Benchmarking against
competitors’ cost structures
• Costs can be inferred by using publicly
available information, such a sales volume,
market share, product mix
• Industry-sponsored databases
• Stockbroking firms
• Specialist benchmarking consulting firms
may provide data

14-49
 The Benchmarking Process
• Stage 1:select the benchmarking area
• Stage 2: identify benchmarking partners
• Stage 3: collect data from the benchmarking
partners and determine current performance gap
and project future performance levels
• Stage 4: implement plans to meet or exceed the
benchmarks
• Stage 5: Monitor performance, review and analyse
progress and recalibrate benchmarks.

Benchmarking is a continuous performance

improvement process which aims to help
organisations work towards the best of the best!
50
 Benchmarking against
competitors’ cost structures
• Costs can be inferred by using publicly
available information, such a sales volume,
market share, product mix
• Industry-sponsored databases
• Stockbroking firms
• Specialist benchmarking consulting firms
may provide data

14-51
 Business Process Re-engineering (BPR)
• Involve examining business processes and making
substantial changes to how the organisation current
practices.
• A business process – consist of a collection of activities that
are linked together in a co-ordinated manner to achieve a
specific objective.
– Eg. Material handling process – consist of activities make
up of scheduling production, storing materials, processing
purchase order, inspecting material, paying suppliers.
• Aim to improve key business processes by focusing on:
– Simplification
– Cost reduction
– Improved quality
– Enhanced customer satisfaction.
52
Business Process Re-engineering (BPR)
• Eg. The material handling process can be re-engineered
with end result elimination of non value added activities.
• The key feature of BPR is that it involves radical changes
in processes by:
– abandoning current practices and reinventing
– Reinventing completely new methods of performing
business processes.
• Eg: Moving away from traditional functional plant layout to
a just in time cellular product layout and adopting Just In
Time (JIT) philosophy.

53
End of lecture 13

54