17 Strategic Performance Management - Balanced Scorecard

Question 1

How does the balanced scorecard link to wider management accounting

Answer 1

• This topic relates to management control
• When answering questions on this must come back to management control
• How it can relate overall strategic goals to operational actions
• Must always mention environmental considerations for a full answer as key in modern world

Question 2

What is the balanced scorecard

Answer 2

• A balance exists between outcome measures (financial, customer) and operational measures (customer value, internal processes, learning, and growth)
• BSC focuses management attention on strategic goals and how to achieve these goals
• Every measure is part of a chain of cause and effect linkages which form the elements of a firm’s strategy and its implementation

Question 3

Why do companies need the balanced scorecard

Answer 3

• Objective for most ordinary companies is to increase the shareholders value
• The source of value has shifted from tangible to intangible assets
• So cannot just focus on those tangible assets when evaluating performance

Question 4

What are intangible assets

Answer 4

• An intangible asset is an identifiable non-monetary asset without physical substance
• An organisation’s intangible assets include:
  o Loyal and profitable customer relationships
  o High-quality processes
  o Innovative products and services
  o Employee skills and motivation
  o Databases and information systems

Question 5

What can you create value from intangible assets

Answer 5

• Intangible assets do not have a direct impact on financial results
• It is not like a machine that is making a component
• They have second or third order impacts.
  o Better employee skills can give greater customer satisfaction driving repeat custom and therefore revenue growth

Question 6

How can you measure intangible assets

Answer 6

• Difficulties in placing a reliable financial value on intangible assets have prevented them from being recognised on a company’s balance sheet
• Yet these assets are critical for success
  o Managers understand that if “you can’t measure it, you can’t manage it”
  o Accounting is needed to give visibility to intangible assets
• For many years managers have searched for a system that would help them measure and manage the performance of their intangible, knowledge-based assets
• BSC provides a means to recognise the importance of employees and providing the circumstances to motivate them

Question 7

What are the 4 perspectives of the balanced scorecard

Answer 7

• It complements the financial measures with operational measures on customer satisfaction, internal processes, and the firm’s innovation and improvement activities
  1. Financial: How is success measured by shareholders?
  2. Customer: How do we create value for customers?
  3. Internal: At what internal processes must we excel to satisfy customers and shareholders?
  4. Learning & Growth: What employee capabilities, information systems, and organisational climate do we need in order to continually improve internal processes and customer relationships?
• These four perspectives are derived from an organisation’s vision and strategy

Question 8

What is the financial perspective of the balanced scorecard

Answer 8

• The ultimate objective for profit-maximising companies
• Financial performance measures indicate whether the company’s strategy, implementation, and execution are contributing to bottom-line improvement
  o Financial objectives typically relate to profitability
   For example, operating income and ROI
• A company’s financial performance can be improved in two ways:
  o Revenue growth and increased productivity

Question 9

How can companies increase revenue growth

Answer 9

• Selling new products
• Selling to new customers
• Selling in new markets

Question 10

How can companies increase productivity

Answer 10

• Lowering direct and indirect expenses
  o Enabling a company to produce the same quantity of outputs while spending less on materials, energy, and supplies
• Utilising their financial and physical assets more efficiently
  o Reducing the working and fixed capital needed to support a given level of business

Question 11

What is the customer perspective of the balanced scorecard

Answer 11

• In this perspective, managers identify the targeted customer segments in which the business unit competes and the measures of the business unit’s performance in these targeted segments
• The Customer perspective typically includes several common measures of the successful outcomes from a well-formulated and implemented strategy:
  o Customer satisfaction
  o Customer retention
  o Customer acquisition
  o Customer profitability
  o Market share
• A strategy identifies specific segments targeted for growth and profitability
  o E.g., Easyject, targets price-sensitive customers while Emirates targets customers willing to spend their high disposable incomes
• Companies must also identify the objectives and measures for the value proposition it offers customers

Question 12

What is value proposition

Answer 12

• The value proposition is the unique mix of product, price, service, relationship, and image offered to the targeted customers
  o Defines the company’s strategy
  o Should communicate what the company expects to do for its customers better or differently from its competitors
• Value propositions used successfully by different companies include:
  o “Best buy” or lowest total cost (e.g. Which? recommendation)
  o Product innovation and leadership (e.g. Tesla)
  o Complete customer solutions (e.g. Alphabet Inc.)

Question 13

What is customer satisfaction

Answer 13

• It is a feedback measure on how well the company is doing with its customers (e.g. number of complaints)
• This type of measures assesses attitude, which might be subjective and difficult to quantified
• Coupled with more objective measures (e.g. repeat sales)

Question 14

What is customer retention

Answer 14

• To retain existing customers in the targeted segment (i.e. improve customer loyalty, e.g. Tesco Clubcard)
• The rate at which a business unit retains or maintains ongoing relationships with its customers

Question 15

What is market share

Answer 15

• Market share: the proportion of business in a given market that a business unit sells
  o e.g. number of customers, volume sold
  o This measure indicates how well a company is penetrating the targeted market segment

Question 16

What is the internal perspective of the balanced scorecard

Answer 16

• Once an organisation has a clear picture of its financial objectives and customer objectives, it should determine the means by which it will:
  o Produce and deliver the value proposition for customers
  o Achieve the productivity improvements for the financial objectives
• The Internal Perspective identifies the critical processes at which the organisation must excel to achieve its customer, revenue growth, and profitability objectives
• Organisations perform many different processes, which may be classified into four groupings:
  1. Operating processes
  a. The basic, day-to-day processes by which companies produce their existing products and services and deliver them to customers
  2. Customer management processes
  a. Processes by which companies expand and deepen relationships with targeted customers
  3. Innovation processes
  a. Processes by which companies develop new products, processes, and services, often enabling the company to penetrate new markets and customer segments
  4. Regulatory and social processes
  a. Processes by which companies ensure that they meet or exceed regulations on business practices
• Managers should identify which of the process objectives and measures are the most important for their strategy
  o Need to follow a “balanced” strategy and invest in improving processes in all four groups

Question 17

What is customer acquisition

Answer 17

In order to expand sales, a business unit can measure ‘the rate at which it attracts or wins new customers and business’ (i.e. number of new customers or the total sales to new customers)

Question 18

What is the learning and growth perspective of the balanced scorecard

Answer 18

• Identifies objectives for the people, systems, and organisational alignment that create long-term growth and improvement
  o Managers define the employee capabilities, skills, technology, and organisational alignment that will contribute to improving performance in the measures selected in the first three perspectives
  o They learn where they must invest to improve the skills of their employees, enhance information technology and systems, and align people to the company’s objectives
• Based on core employee measurements

Question 19

What are some core employee measurements for the company to keep track of

Answer 19

• Measuring employee satisfaction
  o Involvement with decisions, access to sufficient information to do the job well
• Measuring employee retention
  o This can be measured by percentage of key staff turnover
• Measuring employee productivity
  o This is to relate the output produced by employees to the number of employees used to produce that output
  o This can be measured by revenue per employee, for example

Question 20

What is the process for building a balanced scorecard

Answer 20

• Start with the financial elements, as key to return to shareholders
• Then ask what its customers want and work on satisfying them
• Then it must look internally to see if it is capable to satisfy these needs
• After being self critical it must ask if it has the ability to sustain this growth

Question 21

What are the impacts of the balanced scorecard

Answer 21

• It forces clear specification of strategic objectives and appropriate measures in four areas: financial, customer, internal business, and learning/innovation.
• It helps managers understand the causal linkages from high-level financial and strategic objectives to operational measures.
• It helps managers understand critical success factors and helps them move toward the development of measures of value drivers throughout the firm.
  o The BSC helps top management communicate its strategic vision throughout the firm.

Question 22

How does strategy relate to the balanced scorecard

Answer 22

• A properly constructed Balanced Scorecard tells the story of the business unit’s strategy
• It identifies and makes explicit the hypotheses about the cause and effect relationships between:
  o Outcome measures in the Financial and Customer perspectives
   Revenue growth; customer loyalty
  o Performance drivers of those outcomes that are measured in the Internal and Learning & Growth perspectives
   Such as zero defect processes, short cycle times, and skilled, motivated employees

Question 23

What is the cause and effect relationship and what are some contextual examples

Answer 23

• Strategies for learning growth, internal processes, and customer and strategies for outcome perspective (financial) should be linked in causal relationships:
  o Investments in employee training lead to improvements in product/service quality
  o Better quality leads to higher customer satisfaction
  o Higher customer satisfaction leads to increased customer loyalty
  o Increased customer loyalty generates increased revenues and margins
• Return on investment (ROI) is a widely recognised measure of financial success
  o Accordingly, ROI is included on the scorecard
  o But what drives ROI?
• Repeated and expanded sales from existing customers, the result of a high degree of loyalty among existing customers, could be one driver of this financial measure
  o Customer loyalty is included on the scorecard because it is expected to have a strong influence on ROI
  o But how will the organisation achieve customer loyalty?
• Analysis of customer preferences may reveal that product quality is highly valued by customers
  o Improved quality is expected to lead to higher customer loyalty
  o So both customer loyalty and product quality are incorporated into the scorecard’s Customer perspective
  o But how will the organisation improve product quality?
• The company must excel at internal processes to achieve exceptional product quality
• Quality control and high-quality production processes are two drivers of product quality
  o These two parameters are measured in the Internal perspective
  o But how do organisations improve the quality of their production processes?
• The company must have skilled production workers, well-trained in process improvement techniques
  o A measure of employees’ skill and capabilities in process improvement is, therefore, used in the Learning & Growth perspective
• Vital to link how the non-financial measure relates to financial performance

Question 24

What are strategy maps

Answer 24

• A strategy map provides a visual representation of the linkages in the four perspectives of the BSC
• The balanced scorecard can be used as a framework for describing value-creating-strategies that link intangible and tangible assets
  o Financial: the strategy for growth, profitability and risk viewed from the perspective of the shareholder
  o Customer: the strategy for creating value and differentiation from the perspective of the customer
  o Internal business processes: the strategic priorities for various business processes that create customer and shareholder satisfaction
  o Learning and growth: the priorities to create a climate that supports organisational change, innovation, and growth

Question 25

How can you evaluate the balanced scorecard

Answer 25

• Not possible to know proper weighting to find the optimal balanced of the perspectives and measures
• In the short term, tying incentive compensation of managers to a balanced set of scorecard measures will foster commitment to overall organizational goals, rather than suboptimization within functional departments
• Complexity provides challenges:
  o Identifying right measures, measurement rules, and importance weightings
  o Developing the measurement systems
  o Setting properly challenging performance targets for many measures
  o Linking to incentive compensation
  o Keeping up-to-date (avoiding obsolescence)
• BSC is not comprehensive when evaluating stakeholders
  o Interests of other stakeholders (e.g. suppliers and competitors?)
• When multiple measures are used, there is a danger that some measures are really not value drivers
  o e.g., some customers are not willing to pay for improved quality, and improved quality is costly.
• Choices of measures get confounded with measurement difficulties.
  o e.g., Few would argue that customer satisfaction leads to repeat sales, and hence, shareholder value. But can customer satisfaction be measured accurately?
• It does not solve the problem of setting good goals.
  o How can the goals be made equally and optimally challenging across the organization and over time?

Question 26

What are the pitfalls of the balanced scorecard

Answer 26

• The drivers in the Internal and Learning & Growth perspectives don’t link to the desired outcomes in the Financial and Customer perspective
  o E.g., strategy may call for creating innovative solutions for its customers but the measures in the internal perspective focus exclusively on operational improvements
• The biggest threat is a poor organisational process for developing and implementing the scorecard, seen when:
  o Senior management is not committed, and the BSC project is delegated to middle management
  o Senior executives feel that only they need to know and understand the strategy, and BSC responsibilities don’t filter down
  o The BSC is treated as a one-time event that requires the perfect scorecard for implementation
   BSC is an iterative process
   All BSC’s start with some new measures for which no data currently exists