The Balanced Scorecard:

Measuring Total Business Unit

Performance

Kaplan & Atkinson

(8th Chapter)
Introduction:

Companies are now shifting from industrial age

competition to information age competition.
During the industrial age, financial control systems
were developed in companies such as General
Motors, DuPont etc. to facilitate and monitor efficient
allocations of financial and physical capital. The
information age environment for both manufacturing
and service organizations require new capabilities for
competitive success.
The ability of a company to mobilize and exploit
its intangibles or invisible assets has become
significant in the information age competition.
Intangible assets enable the firm to:
a) Develop customer relationships
b) Introduce innovative products
c) Produce customized high-quality
products at low cost
 d) Mobilize employee skills and
motivation for continuous improvements in
process capabilities, quality and response
time
e) Deploy information technology, data
bases and systems
The Balanced Scorecard:

The balance scorecard (BSC) approach

focuses on both financial and non-financial
measures. Traditionally, corporate managers
focus more on financial measures. The BSC
supplements the financial measures with
operational measures on customer
satisfaction, internal business process and
the firm’s innovation and improvement
activities.
Kaplan and Norton (who initiated the concept of
balanced scorecard in 1992) suggests that
operational measures are the drivers of
future financial performance .
Arguments for the adoption of BSC:

Several companies at USA have already

adopted BSC. Even in Bangladesh, few
multi-national companies have adopted
balanced scorecard successfully such as
Unilever Bangladesh limited. Using the BSC
meets several managerial needs:
1. The scorecard brings together in one report
many miscellaneous elements of a
company’s competitive plans e.g.., customer
Orientation, improvement in response time, quality,
promotion of teamwork and encouragement of
shorter product launch time etc.
2. Traditional performance measures have a control
bias i.e., stipulates the type of behavior that
employees should take. Whereas BSC which is used
to encourage behavior directed at improving the key
elements.
3. Firms communicates priorities to
management, employees, investors and
even customers.
4. The scorecard contributes to linking long-
term strategic objectives with short-term
processes.
5. The BSC is a model of testing cause and
effect in the organization, that provides
managers with a basis to manage desired
and actual results.
The balanced scorecard
dimensions/perspectives :

The BSC has the following four dimensions:

a) Financial perspective
b) Customer perspective
c) Internal Business process perspective
d) Learning and growth perspective
a) Financial perspective:

The BSC retains the financial perspectives.

Financial objectives are mainly related to
profitability. Financial measures typically
include operating income, return on
investment, EVA etc.
b) Customer perspective:

Managers identify the customer and market

segments in which the business unit will
compete and the measures of the business
unit’s performance in these targeted
segments. The core measure outcome
measures include customer satisfaction,
customer retention, new customer
acquisition, customer profitability and market
share in targeted segments.
The following are the common attributes that makes up the
value propositions:
 Product and service attributes (the functionality of the
product or service, its price and its quality)
 Customer relationship (Delivery of the product in due
time, and the feelings of the customer on purchase)

 Image and reputation (What the customer thinks

about the company)
c) Internal business process
perspective:

The businesses must excel at the critical

business processes internally to satisfy I) the
customers and II) the stockholders.
Each business has its unique set of processes
for creating value for customers and
producing financial results. The generic
value chain model encompasses three
principal business processes:
 Innovation (the innovation process
represents the ‘long wave’ of value creation
in which companies first identify and nurture
new markets, new customers and the
emerging and latent needs of existing
customers and finally develop the
product/service accordingly.
 Operations (Existing products are
produced and delivered to customers)
 Post sale service (Post sale service
includes warranty and repair activities,
treatment of defects and returns, the
processing and administration of payments
such as credit card administration etc.)
d) Learning and Growth perspective:

The fourth BSC perspective, learning and

growth identifies the infrastructure that the
organization must build to create long-term
growth and improvement. The customer and
internal business process perspective
identify the factors most critical for current
and future success.
The BSC perspectives tries to answer
the following questions:

a) Financial perspective : To succeed

financially, how should we appear to our
shareholders?
b) Customer perspective : To achieve our
vision, how should we appear to our
customers?
c) Internal business process perspective: To
satisfy shareholders and customers, what
business processes must we excel at?
d) Learning and Growth perspective: To
achieve our vision, how will we sustain our
ability to change and improve?
Linking multiple scorecard measures
to a single strategy:

Question might arise if several independent

measures are considered for four
perspectives in the BSC, will it not be too
complicated for the company to absorb?
The multiple measures on a properly
constructed BSC should consist of a linked
series of objectives and measures that are
both consistent and mutually reinforcing.
The balanced scorecard should be viewed as
the instrument for a single strategy. The
formulation of BSC should consider:
 Cause-and-effect relationships
 Performance drivers
 Cause and effect relationships:
A strategy is a set of hypotheses about cause
and effect. The measurement system should
make the relationship (hypotheses) among
objectives and measures in the various
perspectives.
Example of cause and effect
relationship:

Financial Return on capital employed

Customer Customer loyalty
On-time delivery
Internal Process quality
Business &
Process Process cycle time
Learning and Employee skills
Growth
Performance drivers:

A good BSC should also have a mix of outcome

measures and performance drivers.

Example of performance driver:

Return on capital employed (ROCE) is an outcome
measure in the financial perspective and the
performance driver of this measure could be
expanded sales from existing customers.
Four perspectives: Are they sufficient?

There is no mathematical theorem that four

perspectives are both necessary and
sufficient. Companies may use less than four
or more than four depending on the situation
in reality. Some people criticize that the BSC
ignores the role of other stakeholders like
employees, suppliers and the community.
But these measures are implicitly included in
the BSC.