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Balanced Scorecard
Financial measures, such as ROI and residual income, and operating measures, such as
those discussed in the previous section, may be included in a balanced scorecard. A
balanced scorecard consists of an integrated set of performance measures that are
derived from and support a companys strategy. A strategy is essentially a theory about
how to achieve the organizations goals. For example, Southwest Airlines strategy is
to offer an operational excellence customer value proposition that has three key
componentslow ticket prices, convenience, and reliability. The company operates only
one type of aircraft, the Boeing 737, to reduce maintenance and training costs and
simplify scheduling. It further reduces costs by not offering meals, seat assignments, or
baggage transfers and by booking a large portion of its passenger revenue over the
Internet. Southwest also uses point-to-point flights rather than the hub-and-spoke
approach of its larger competitors, thereby providing customers convenient, nonstop
service to their final destination. Because Southwest serves many less- congested
airports such as Chicago Midway, Burbank, Manchester, Oakland, and Providence, it
offers quicker passenger check-ins and reliable departures, while maintaining high asset
utilization (i.e., the companys average gate turnaround time of 25 minutes enables it to
function with fewer planes and gates). Overall, the companys strategy has worked. At a
time when Southwest Airlines larger competitors are struggling, it continues to earn
substantial profits.
Under the balanced scorecard approach, top management translates its strategy
into performance measures that employees can understand and influence. For example,
the amount of time passengers have to wait in line to have their baggage checked
might be a performance measure for the supervisor in charge of the Southwest Airlines
check-in counter at the Burbank airport. This performance measure is easily understood
by the supervisor, and can be improved by the supervisors actions.
Exhibit 4 lists some examples of performance measures that can be found on the
balanced scorecards of companies. However, few companies, if any, would use all of
these performance measures, and almost all companies would add other performance
measures. Managers should carefully select performance measures for their own
companys balanced scorecard, keeping the following points in mind. First and foremost,
the performance measures should be consistent with, and follow from, the companys
strategy. If the performance measures are not consistent with the companys strategy,
people will find themselves working at cross-purposes. Second, the performance
measures should be understandable and controllable to a significant extent by those
being evaluated. Third, the performance measures should be reported on a frequent
and timely basis. For example, data about defects should be reported to the responsible
manager at least once a day so that problems can be resolved quickly. Fourth, the
scorecard should not have too many performance measures. This can lead to a lack of
focus and confusion.
While the entire organization will have an overall balanced scorecard, each
responsible individual will have his or her own personal scorecard as well. This scorecard
should consist of items the individual can personally influence that relate directly to the
performance measures on the overall balanced scorecard. The performance measures
on this personal scorecard should not be overly influenced by actions taken by others in
the company or by events that are outside of the individuals control. And, focusing on
the performance measure should not lead an individual to take actions that are counter
to the organizations objectives.
With those broad principles in mind, we will now take a look at how a companys
strategy affects its balanced scorecard.
different customers with different kinds of products and services. Take the automobile
industry as an example. BMW stresses engineering and handling; Volvo, safety;
Jaguar, luxury detailing; and Honda, reliability. Because of these differences in
emphasis, a onesize- fits-all approach to performance measurement wont work even
within this one industry. Performance measures must be tailored to the specific strategy
of each company.
Suppose, for example, that Jaguars strategy is to offer distinctive, richly finished
luxury automobiles to wealthy individuals who prize handcrafted, individualized
products. To deliver this customer intimacy value proposition to its wealthy target
customers, Jaguar might create such a large number of options for details, such as
leather seats, interior and exterior color combinations, and wooden dashboards, that
each car becomes virtually one of a kind. For example, instead of just offering tan or
blue leather seats in standard cowhide, the company may offer customers the choice of
an almost infinite palette of colors in any of a number of different exotic leathers. For
such a system to work effectively, Jaguar would have to be able to deliver a completely
customized car within a reasonable amount of time and without incurring more cost
for this customization than the customer is willing to pay. Exhibit 5 suggests how Jaguar
might reflect this strategy in its balanced scorecard.
If the balanced scorecard is correctly constructed, the performance measures
should be linked together on a cause-and-effect basis. Each link can then be read as a
hypothesis in the form If we improve this performance measure, then this other
performance measure should also improve. Starting from the bottom of Exhibit 5, we
can read the links between performance measures as follows. If employees acquire the
skills to install new options more effectively, then the company can offer more options
and the options can be installed in less time. If more options are available and they are
installed in less time, then customer surveys should show greater satisfaction with the
range of options available. If customer satisfaction improves, then the number of cars
sold should increase. In addition, if customer satisfaction improves, the company should
be able to maintain or increase its selling prices, and if the time to install options
decreases, the costs of installing the options should decrease. Together, this should
result in an increase in the contribution margin per car. If the contribution margin per
car increases and more cars are sold, the result should be an increase in residual
income.
In essence, the balanced scorecard lays out a theory of how the company can
take concrete actions to attain its desired outcomes (financial, in this case). The
strategy laid out in Exhibit 5 seems plausible, but it should be regarded as only a theory.
For example, if the company succeeds in increasing the number of options available and
in decreasing the time required to install options and yet there is no increase in
customer satisfaction, the number of cars sold, the contribution margin per car, or
residual income, the strategy would have to be reconsidered. One of the advantages of
the balanced scorecard is that it continually tests the theories underlying
managements strategy. If a strategy is not working, it should become evident when
some of the predicted effects (i.e., more car sales) dont occur. Without this feedback,
the organization may drift on indefinitely with an ineffective strategy based on faulty
assumptions.
manipulated. As Robert Kaplan and David Norton, the originators of the balanced
scorecard concept point out, compensation is such a powerful lever that you have to
be pretty confident that you have the right measures and have good data for the
measures before making the link.
Managerial
Accounting Garrison, Brewer, Noreen