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Strategic management systems and the balanced scorecard
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Explains the balanced scorecard and provides extensive example. Benefits and drawbacks are analysed and explored in depth.
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Managerial Accounting 23.11.20Strategic management systems and the balanced scorecard
Balanced scorecard
o Implementing strategy is the objective of performance measurement systems (PMS)
o Reliance on financial measures only can be insufficient and problematic
for several reasons:
- Business unit managers might feel under pressure to meet short-term performance
measures
- Short termism: long term profits may be sacrificed because managers focus on short-
term firm profitability
- Motivates business unit managers to play the system by setting easy profit targets for
example to reap the awards (bonuses)
- Provides business unit managers incentives to manage data in order to make the
company performance appear better than reality
- Lag indicators – no future performance indication
- Not well-suited in the service economy and intangible assets
o A problem in using financial measures like ROI and EVA is that they are “backward
looking”
- No future indicators for managers
o Hence, relying solely on financial performance measures may lead to suboptimal
decisions and actions
o How should business unit managers be evaluated then?
o As Stivers et al., (1998, p.1) note there is no magic formula or one right measure for
evaluating business performance...in an effort to capture the essence of business
performance, many companies are creating new performance measurement systems that
include a broad range of financial and non-financial measures
o A successful business unit performance evaluation system therefore blends financial and
non-financial controls at all levels within the organisation (TNT Express Ltd.)
o It is important to use a combination of financial and non-financial measures at all levels
within the organisation
o Non-financial performance measures: customer service, market
performance, innovation, goal achievement, employee involvement
, Managerial Accounting 23.11.20
What is a balanced scorecard?
o A set of discrete yet linked measures of business performance that provides managers
with comprehensive and timely information about performance
o Not limited to accounting data
o Financial and non-financial data
o The balance scorecard combines:
- Outcome (profitability for E.G.) and driver measures (causes the outcomes)
- Financial with non-financial
- Internal with external data (outward looking)
- Short term with long term measures of performance
o However, it is important to note that the Balance Scorecard is not a template
o Rather, each company has to use a BS consisting of a set of measures unique to the firm
and business strategy
o Has to be reviewed and updated as business operations and the external environment
adapts
o Financial perspective:
- Profit, cash flow, ROI, Earnings per share, market share
o Customer perspective:
- Customer satisfaction, quality, cost
o Internal business perspective:
- ABC, JIT, TQM, reengineering
o Innovation:
- New products, new processes, new competencies
o The above are likely to provide information on current performance;
however, they are also leading indicators of future firm performance
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