The Balanced Scorecard Model: Theory

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The Balanced Scorecard Model Theory Practice
Presented byC. Christopher LeeAssociate
Professor of Management
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The Balanced Scorecard Model (BSM) Purpose is to
translate strategy into measures that uniquely
communicate an organizations vision. Four
perspectives

1. Financial value to shareholders
2. Customer customer satisfaction and market
   growth
3. Innovation and Learning people and
   infrastructure
4. Internal processes that drive the business

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BSM Performance Categories and Linkages
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Lee (2012) Critical Issues on BSM

1. Process Improvement
2. Whole Organization
3. Target a Process Set a Goal

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1. Process Improvement

• Total Quality Improvement (TQM) BSM (1990s) is
  an extension of TQM (1980s)
• TQM Process TQM focuses on Process Product
  Control (old) vs. Process Improvement (new, TQM
  approach)
• BSM Process A main focus of BSM also is
  process improvement, just like TQM.
• BSM vs. TQM TQM focuses on an incremental
  (small) change (improvement) in a small process
  in one area of business (production, sales, etc.)
  at a time, while BSM attempts to include
  processes of all related areas to the business
  (financials, internal operations, customers) at
  the same time.

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Why Process Is So Important - TQM

• Product Control (old) Before TQM, we implemented
  quality control by checking the defect rate of
  finished goods. This is product control. This
  approach does NOT improve the quality. When you
  check the quality of finished goods, damages were
  already done.
• Process Improvement (new TQM) TQM asks you to
  check the quality in each process if the process
  shows low quality, you must stop the whole
  operation, and everyone must solve the particular
  process immediately. By improving each process,
  the whole operation (total quality) is improved,
  and the quality of the fished good is improved.

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Why Process Is So Important (continued)

• Challenges of Process Improvement Improving an
  process takes a lot of resources (time cost).
• Long Term Project Therefore, BSM must be a
  long-term project, like TQM.
• Conclusion BSM should not show only the current
  picture of the firm (As-is), but include the goal
  (As-should be) and the progress report (process
  improvement data).

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Why Financials Are So Important

• Performance Evaluation When stockholders
  evaluate the performance of a manager
  (CEO/President) at the quarterly meeting, they
  used the stock price mostly. This would motivate
  a manager to focus on increasing the stock price.
  
• Stock Price In theory, the stock price is
  supposed to serve the best indicator of the
  firms financial/business conditions
• Stock price firm value / of common stocks
• Firm value profit (EBIT) / cost of capital
• Profit revenue cost
• Revenue goes up and/or cost goes down, then
  profit goes up, then the stock price goes up
  eventually.
• Ideally, we would work hard to improve the
  business process, which will produce better
  quality products, resulting in more sales more
  profits. In the end, the stock price will be up.
  But this approach takes long time.

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Weakness of Using ONLY Financials

• However, there are bad managers who care about
  their job security more than the firm itself. To
  boost the stock price, they would manipulate the
  financials.
• The quick way to increase the stock price is to
  boost profit. There are two ways. To increase
  revenue or decrease cost.
• A commercial on 1000 rebate for a new car sales
  is a quick revenue increase scheme. This scheme
  costs a lot. Thus, the bad manager is more
  likely to find a way to decease cost quickly.
• A quick cost reduction alternative is to reduce
  the labor cost. This is why we see a big firm
  announce a lay-off just prior to the quarterly
  meeting.
• Most of time, such lay-off announcement leads to
  favorable response from Wall Street. The stock
  price is up, stockholders are happy, and the
  managers job is safe now.
• But such spike in the stock price does not
  accurately reflect the real picture of the firm -
  long-term prospects, sustainability.

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2. Whole Organization

• As seen in the previous slides titled Why
  Financials Were Important, a bad manager can get
  away with the quick fix (lay-off) spike of
  stock price, though he did perform poorly as a
  manager.
• We need a better way to measure the performance.
  We need a measurement that include a whole
  picture including the financials.
• BSM is an answer to this need. It covers a whole
  organization value chain, including the
  financials.
• BSM covers not just (1) Financial, but also (2)
  Customer, (3) Innovation Learning, and (4)
  Internal.
• In short, BSM complements the disadvantage of
  using the financials alone, and offers a
  comprehensive model in comparison with TQM.

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3. Targeting a Process Setting a Goal

• BSM must require a comprehensive view of business
  processes in the entire organization.
• BSM needs to target which processes to improve.
• BSM sets a goal for the targeted processes.
• Schneiderman calls this management practice as
  strategic planning in his paper titled How to
  Build a Balanced Scorecard.

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Why BSM Fails

• Process Improvement A wrong BSM does not focus
  on process and process improvement.
• Whole Organization A wrong BSM does not capture
  a whole picture of the organization and value
  chain.
• Target a process Set a Goal A wrong BSM does
  not target processes to improve, and fails to set
  the improvement goal for each process (Lack of
  strategic planning).
• RQ Explain three major reasons why BSM fails.

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Concluding Remarks

• Abuse of BSM - Many organizations use BSM
  incorrectly. They use it to summarize their
  current picture. It does not improve anything.
  It is a big waste of money and time.
• BSM Present Future BSM is not the perfect
  tool, but it is well received by the business
  community as well as other organizations
  (government agencies, schools, etc.). Wherever
  you work in the future, you will be involved with
  BSM one way or another.
• Get on the Board - Be an active participant of
  the BSM project. After all, it is about
  improving business process. At the corporate
  meeting, make good suggestions on BSM. Many
  executives still misunderstand what BSM is for.