Summary
Samenvatting - Non-financial performance analysis (B3T2104)
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Summary of all necessary literature and lectures for the final assignment of the course Non-Financial Performance Analysis
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Direct antecedentThe Balanced Scorecard
The Balanced Scorecard lets executives see whether they have improved in one area at the expense
of another -> protect companies from posting suboptimal performance. Traditional financial
accounting measures like ROI and EPS can give misleading signals for continuous improvement and
innovation. Managers want a balanced presentation of both financial and operational measures. The
Balanced Scorecard is a set of measures that gives top managers a fast but comprehensive view of
the business. It includes financial measures that tell the results of actions already taken as well as
operational measures on customer satisfaction, internal processes, and the organization’s innovation
and improvement activities -> this second category includes drivers of future financial performance.
The Balanced Scorecard allows managers to look
at the business from four important perspectives.
It provides answers to four basic questions:
1. How do customers see us? -> customer
perspective
2. What must we excel at? -> internal
business perspective
3. Can we continue to improve and create
value? -> innovation and learning
perspective
4. How do we look at shareholders? ->
financial perspective
While giving senior managers information from
four different perspectives, the scorecard
minimizes information overload by limiting the number of measures used. It forces the managers to
focus on the handful of measures that are most critical.
Early experiences using the scorecard have demonstrated that it meets several managerial needs.
First, the scorecard brings together, in a single management report, many of the seemingly disparate
elements of a company’s competitive agenda: becoming customer oriented, shortening response
time, improving quality, emphasizing teamwork, reducing new product launch times, and managing
for the long term. Second, the scorecard guards against suboptimization. By forcing senior managers
to consider all the important operational measures together, the balanced scorecard lets them see
whether improvement in one area may have been achieved at the expense of another.
How a company is performing from its customers’ perspective has become a priority for top
management. The balanced scorecard demands that managers translate their general mission
statement on customer service into specific measures that reflect the factors that really matter to
customers. Customers’ concerns tend to fall into four categories: time, quality, performance and
service, and cost. Lead time measures the time required for the company to meet its customers’
needs. For existing products, lead time can be measured from the time the company received an order
,to the time it actually delivers the product or service to the customer. For new products, lead time
represents the time to market, or how long it takes to bring a new product from the product definition
stage to the start of shipments. Quality measures the defect level of incoming products as perceived
and measured by the customer. It could also measure on-time delivery.
To put the balanced scorecard to work, companies should articulate goals for time, quality, and
performance and service and then translate these goals into specific measures. Some companies hire
third parties to perform anonymous customer surveys, resulting in a customer-driven report card.
Benchmarking procedures are another technique companies use to compare their performance
against competitors’ best practices.
Customer-based measures are important, but they must be translated into measures of what the
company must do internally to meet its customers’ expectations. After all, excellent customer
performance derives from processes, decisions and actions occurring throughout an organization.
Managers need to focus on those critical internal operations that enable them to satisfy customer
needs -> internal perspective.
The internal measures for the balanced scorecard should stem from the business processes that have
the greatest impact on customer satisfaction: factors that affect cycle time, quality, employee skills
and productivity, for example. Companies should also attempt to identify and measure their
company’s core competencies, the critical technologies needed to ensure continued market
leadership. Companies should decide what processes and competencies they must excel at and
specify measures for each.
Information systems play an invaluable role in helping managers disaggregate the summary
measures. When an unexpected signal appears on the balanced scorecard, executives can query their
information system to find the source of the trouble. If the information system is unresponsive,
however, it can be the Achilles’ heel of performance measurement.
The customer-based and internal business process measures on the BSC identify the parameters that
the company considers most important for competitive success. But the targets for success keep
changing. Intense global competition requires that companies make continual improvements to their
existing products and processes and have the ability to introduce entirely new products with
expanded capabilities. A company’s ability to innovate, improve and learn ties directly to the
company’s value. That is, only through the ability to launch new products, create more value for
customers, and improve operational efficiencies continually can a company penetrate new markets
and increase revenues and margins -> increase shareholder value.
In addition to measures on product and process innovation, some companies overlay specific
improvement goals for their existing processes.
Financial performance measures indicate whether the company’s strategy, implementation, and
execution are contributing to bottom-line improvement. Typical financial goals have to do with
profitability, growth, and shareholder value. Many have criticized financial measures because of their
well-documented inadequacies, their backward-looking focus and their inability to reflect
contemporary value-creating actions. Shareholder value analysis (SVA), which forecasts future cash
flows and discounts them back to a rough estimate of current value, is an attempt to make financial
,analysis more forward-looking. But SVA still is based on cash flow rather than on the activities and
processes that drive cash flow.
Some critics go much further in their indictment of financial measures. They argue that the terms of
competition have changed and that traditional financial measures do not improve customer
satisfaction, quality, cycle time, and employee motivation. In their view, financial performance is the
result of operational actions, and financial success should be the logical consequence of doing the
fundamentals well. In other words, companies should stop navigating financial measures.
Assertions that financial measures are unnecessary are incorrect for at least two reasons. A
well-designed financial control system can actually enhance rather than inhibit an organization’s total
quality management program. More important, however, the alleged linkage between improved
operating performance and financial success is actually quite tenuous and uncertain.
The disparity between improved operational performance and disappointing financial measures
creates frustration for senior executives.
Ideally, companies should specify how improvements in quality, cycle time, quoted lead times,
delivery and new product innovation will lead to higher market share, operating margins and asset
turnover or to reduced operating expenses. The challenge is to learn how to make such explicit
linkage between operations and finance. Exploring the complex dynamics will probably require
simulation and cost modeling.
The scorecard puts strategy and vision, not control, at the center. It establishes goals but assumes
that people will adopt whatever behaviors and take whatever actions are necessary to arrive at those
goals. The measures are designed to pull people toward the overall vision. Senior managers may
know what the end result should be, but they cannot tell employees exactly how to achieve that
result, if only because the conditions in which employees operate are constantly changing.
, Lecture 1
Should businesses care about customer satisfaction? More satisfied customers:
1. Are more loyal
2. Are less price-sensitive
3. Lower advertising costs through word-of-mouth
4. Reduce transportation costs
5. Enhance firm reputation
Customer satisfaction is informative about future financial performance and it is causally related to
future financial performance.
Customer satisfaction is not the only one. For airlines, you can also look at the load factor, market
share or available ton-miles, and for hotels at the likelihood of return or customer complaints.
Multiple parties are interested in performance information:
The managerial perspective is as follows:
Companies care about their financial performance and mostly financial metrics are measured and
tracked. Also, managerial bonuses are based on financial targets. However, financial performance is
backward-oriented and managerial actions have an effect on the future. The idea now is to use a
“balanced” set of performance dimensions, which capture backward- and forward- looking metrics.
These would be relevant metrics derived from strategy.
The result is the Balanced Scorecard with four dimensions -> financial measures focus on results of
prior actions and operational measures that drive future financial performance.
The four categories of the Balanced Scorecard are:
1. Financials
2. Internal business processes
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