Balanced Scorecard and the Financial Perspective (SLP1)
The purpose of the Session Long Project is to give you the opportunity to explore the applicability of the Module to your own life, work, and place in space and time, and to experiment with the Module to see how the otherwise academically rigorous presentation of a topic may, with more or less work and/or trauma, become “up close and personal”. This is done in a number of different ways — sometimes cumulative papers, sometimes practical hands-on experimentation with a tool of some sort, sometimes reflections on a place of work or life. The common thread is personal application, aimed at demonstrating a cumulative knowledge and understanding of the course’s material.
For this course, the Session Long Project will take the form of putting together background from each of the four perspectives for a balanced scorecard approach to an organization or organizational unit with which you are familiar. In the final module, you will have a go at strategy mapping. You’re not building a complete balanced scorecard — that would be far beyond our current scope – but you’ll have a chance to see what goes into it and how it gets put together into a coordinated whole. As in the cases, you’ll be drawing on your previous course work to help.
The Module 1 assignment has two parts. First, you need to identify an organization to which you have access to at least some information concerning financial data; staffing and human resource systems; marketing and customer relations; information systems; and operations. While most material on the Balanced Scorecard is written from the private, for-profit point of view, it’s perfectly possible to use this approach with public or non-profit organizations as well.
For the second part of this assignment, consider the organization’s mission and strategy from the perspective of its financial operations (from your work on the case, your previous course work, and your background reading, you should be reasonably clear what such operations are). In this section of the assignment you’ll begin to identify objectives and measures relevant to that perspective. If you’re unclear on just what objectives and measures are, here is a presentation that describes what they are and how to write them.
SLP Assignment Expectations
When you have thought about it and made your selection, please specify (2-3 pages):
- The name of your organization
- What this organization does – its mission, vision and overall strategy
- The access you have to information about this organization — remember, you’ll need information about its financial performance, marketing, internal operations, strategy, and management systems.
Once you’re reasonably clear on what’s involved, think about your organization and its finances, and then:
- Identify at least three objectives for improving the organization’s financial position, and show how they relate to the mission, vision and strategy of the organization.
- For each objective, develop at least one meaningful performance measure (metric).
- For each objective, identify at least one expected level of performance (target).
- For each objective, identify at least one new action or program that needs to be developed to ensure successful implementation of the organization’s strategy (initiative).
Here’s a table that you may wish to copy and fill in: The table is to be done in EXCEL
Objective Measure Target Action
If you haven’t yet read the Course Overview in the Syllabus and/or reviewed thegeneral presentation on the balanced scorecard, now would be an excellent time to do so. It’s critical information for what follows in the Modules to come.
To summarize, the balanced scorecard views the mission and strategy of the organization from four perspectives:
- The business owners/shareholders (represented by the Financial perspective)
- Customers and other stakeholders (represented by the Customer perspective)
- Managers and process owners (represented by the Internal Business Processes perspective)
- Employees and infrastructure capacity (represented by the Learning and Growth perspective)
Within each perspective, the following elements are developed:
- Strategic Objectives – what is the process that will be used to define strategic objectives and what are the strategic objectives that should be achieved using each perspective?
- Measures – how will progress for each objective be measured?
- Targets – what is the target value sought for each measure?
- Initiatives or action plans – what will be done to facilitate the reaching of the targets?
Why does all this matter? Well, the basic reason is that everything is connected to everything else, even though policies may be created by people in widely different corporate units; those connections are often full of unintended consequences. Here’s a classic example of the complications of integrating marketing strategy with human resource strategy. At one point, Proctor and Gamble had product managers who were paid based on how well their products performed. It sounded like a pretty good human resource strategy. Thinking about people as an investment and paying them using a return on investment formula seems pretty straight forward. If CEOs get paid for performance, why not product managers? P & G had a product manager for Crest toothpaste and a product manager for Gleem toothpaste. Wouldn’t a little competition between these product managers be good for P & G?. Wrong! Here is what happened. To get market share, the Gleem manager ran a $0.50 rebate coupon in the Sunday newspapers. Seeing the market share of Crest drop, its manager ran a special where 3 tubes were sold for the price of two. Seeing the market share of Gleem drop, its manager tried another tactic to gain share. Are you beginning to get the picture? The competition between the product managers meant that P & G gave away profit because customers, who saw little difference between the products, simply bought what was on sale.
How did P & G learn that the method of paying the product managers was causing them to take actions that are not in the best interest of the firm? Enter into the picture the balanced scorecard, in which the contributions of product managers are no longer seen as competitive; because focusing on their contributions from customer, financial, internal process, and learning perspectives revealed that paying them based on performance did not result in the desired outcome. So that’s what this process is all about – helping to reveal the causal connections among often apparently unrelated actions taken in different functional components of the firm, and focusing those connections in positive rather than potentially negative ways.
Where to start? Well, the financial perspective is usually the easiest entry point, because it’s the most familiar to most managers. Financial measures are, after all, frequently the only performance measures that are compiled. In fact, the balanced scorecard was developed to counteract the weight given to financial measures. This does not mean, however, that financial measures are unimportant, particularly in these increasingly difficult economic times — but it does mean that solving financial problems is a function of lots of things besides finance. It’s finding those best points of leverage that the Balanced Scorecard is all about.
The graphic here highlights our starting point. The financial perspective asks the question “How do we look to our investors?” In evaluating measures that indicate if and how the company’s strategy, implementation, and execution contribute to profitability or the bottom line, keep the following in mind. Depending solely on financial measures led some organizations to buy anything and everything based on three bids. One source for the bids was always an internal. Thus, if a department wanted an advertisement prepared, it was forced to seek bids – one from the advertising department within the organization and two from outside bidders. Given that they were consistently undercut by outside bidders, several departments were outsourced and eventually closed. Of note are organizations that outsource their accounting, IT, advertising, and/or HR functions. But these aren’t always the best decisions, when the full range of interconnections is assessed.
The financial performance measures that are used vary based upon the long-run objectives and strategy of a business and where the company is with respect to its business life cycle. In general companies use various combinations of the following three approaches or tactics to achieve their business goals:
- Revenue growth and mix
- Cost reduction/ Productivity improvement
- Asset utilization/ Investment strategy
Financial measures that indicate how successful the company is at implementing its strategy include the following:
- Cash flow
- Sales growth
- Market share
- ROE – Return On Equity
- ROCE – Return on Capital Employed
- Economic value added
In this module, you’ll be introduced to the BSC approach in your case study, and will look at how setting financial performance expectations constitutes a vital first step in implementing a balanced scorecard in your Session Long Project. You’ll have a chance to draw on courses you’ve taken like ACC 201 (Financial Accounting), ACC 202 (Managerial Accounting), FIN 301 (Principles of Finance), ITM 301 (Principles of Information Systems in Business and Organizations), MKT 301 (Principles of Marketing), and MGT 499 (Strategic Management). You’ll also pick up some key new vocabulary for looking at these issues.
The Balanced Scorecard & the Financial Perspective
Please read the Introduction and Chapters 1-3 of:
MacKay, A., (2004) A practitioners guide to the balanced scorecard: A practitioners’ report based on: Shareholder and stakeholder approaches to strategic performance measurement using the balanced scorecard. Chartered Institute of Management Accountants. Retrieved from: http://www.cimaglobal.com/Documents/Thought_leadership _docs/tech_resrep_a_practitioners_guide_to_the_balanced _scorecard_2005.pdf
Please read Chapter 1 of:
Murby, L., Gould, S., (2005). Effective Performance Management with the Balanced Scorecard: Technical Report. Chartered Institute of Management Accountants. Retrieved from: http://www.cimaglobal.com/Documents/ImportedDocuments/ Tech_rept_Effective_Performance_Mgt_with_Balanced_ Scd_July_2005.pdf
Also review the following to re-familiarize yourself with the concept of mission and vision as they relate to strategy:
Robin, D. (n.d.) Vision, Mission and Values: Management Tools for Building a Better Workplace. Daniel Robin & Associates. Retrieved from: http://www.abetterworkplace.com/developing-the-organization-and-the-people-in-it/