Question Tag: Internal business process

MEMO

To: The Chief Executive Officer From: Management Accountant Date: Subject: Balanced Scorecard

Introduction This memo is to describe the four perspectives of the balanced scorecard and the major problems inherent in its application to corporate strategic management.

i. Description of the four perspectives of the balanced scorecard

• Financial perspective – The financial perspective of the balance scorecard answers the question, ‘how do we as an organisation look to shareholders?’ Thus, it addresses the question on how the organisation should create value for its shareholders in order to succeed financially. It covers traditional measures such as growth, profitability and shareholder value, with measures set through talking directly to the shareholders. Financial performance measures indicate whether the company’s strategy, implementation, and execution are contributing to bottom-line improvement.
• Customer perspective – The customer perspective of the balance scorecard is a means by which management translates its overall mission statement on customer service into specific measures that reflect the factors that really matter to customers. It answers the question of how the organisation should appear to its customers in order to achieve its vision. It helps management to pay attention to customers’ concerns such as cost, time, quality, performance, reliability and service.
• Internal business process perspective – This perspective addresses internal business processes for which the organisation must excel at in order to meet or exceed customer expectations and achieve financial objectives. Internal measures for the balanced scorecard should stem from the business processes that have the greatest impact on customer satisfaction – factors that affect quality, employee skills, and productivity. It also attempts to identify and measure the organisation’s core competencies and critical technologies needed to ensure continued market leadership.
• Innovation and learning perspective – This perspective is a means of recognising that the targets for success keep changing due to intense global competition and other environmental factors. Thus, it is an attempt to measure the continual improvement of the organisation with regards to existing products and processes. Thus, measures may include the ability of the company to introduce entirely new products with expanded capabilities as well as innovative processes that delivers better value to customers. It brief, it answers the question of how the organisation can continue to create value and maintain its competitive position through improvement and change.

ii. Major problems associated with the application of the balanced scorecard

• Conflicting measures – The balanced scorecard sometimes presents conflicting measures. A typical example is research funding and cost reduction. While research is a means of ensuring innovation and learning it leads to cost accumulation which may reflect in high prices for customers. Thus, it is often difficult to determine the balance which achieves the best results.
• Selecting measures – Not only do appropriate measures have to be devised but the number of measures used must be agreed. Care must be taken that the impact of the results is not lost in a sea of information. The innovative
• Expertise – Measurement is only useful if it initiates appropriate action. Non-financial managers may have difficulty with the usual profit measures. With more measures to consider, this problem will be compounded. Measures need to be developed by someone who understands the business processes concerned.
• Interpretation – Even a financially-trained manager may have difficulty in putting the figures into an overall perspective.
• Management commitment – The scorecard can only be effective if senior managers commit to it. If they revert to focusing solely on the financial measures they are used to, then the value of introducing additional measures will be reduced. In this context, do not overlook the cost of BSC. There will be costs involved in data-gathering and in measuring the performance of additional processes.
• Lack of aggregate performance measure – The balance scorecard doesn’t provide a single aggregate summary performance measure; for example, part of the popularity of ROI or ROCE comes from the fact that they provide a convenient summary of how well a business is performing.
• No direct link with shareholder value – In comparison to other measures used in value-based management (such as economic value added or EVA) there is no direct link between the scorecard and shareholder value.
• Culture – Introducing the scorecard may require a shift in corporate culture; for example, in understanding an organisation as a set of processes rather than as departments.
• Imbalance between short-term and long-term perspective – Implementing the scorecard will require an organisation to move away from looking solely at short-term financing measures, and focus on longer-term strategic measures instead. This usually leads to an imbalance between the long and short-term perspectives by management.

Signed