CHAPTER 7

THE BALANCED
SCORECARD: A TOOL
TO IMPLEMENT
STRATEGY
LEARNING OBJECTIVES
Define the balanced scorecard
Understand the four perspectives of the balanced scorecard
Know the features of a good balanced scorecard
Analyse changes in operating income to evaluate success of a
strategy
Evaluate internal process performance and compute the delivery
cycle time, the throughput time and the manufacturing cycle
efficiency (MCE)

01
BALANCE SCORECARD
It consists of an integrated system of performance measures that are derived
from and support the company's strategy.

A well-constructed balanced scorecard provides a means for guiding the

company and also provides feedback concerning the effectiveness of the
company's strategy.

It involves the use of both financial and non-financial measures to evaluate

performance.

02
 FINANCIAL NON-FINANCIAL
PERFORMANCE MEASURES PERFORMANCE MEASURES
Summarize the results of past
Concentrate on current activities which will
actions and are important to a firm's
be the drivers of future financial
owners, creditors, employees and so
performance.
forth.

03
FOUR PERSPECTIVES OF THE BALANCED SCORECARD

04
FINANCIAL PERSPECTIVE
Measures of profitability and market value among others, as indicators of how well the firm
satisfies its owners and shareholders.

05
CUSTOMER SATISFACTION
Measures of quality service and low cost, among others, as indicators of how well the firm
satisfies its customers.
INTERNAL BUSINESS PROCESSES
Measures of the efficiency and effectiveness with which the firm produces the product or
service.
INNOVATION AND LEARNING
Measures of the firm's ability to develop and utilize human resources to meet the strategic
goals now and into the future.
EXAMPLES OF BALANCE SCORECARD
EXAMPLES OF BALANCE SCORECARD
 FEATURES OF A GOOD
BALANCED SCORECARD
1. The balanced scorecard should tell the story of a company's strategy by
articulating a sequence of cause-and-effect relationships.

The example given in the book (XYZ Manufacturing Co.) illustrates

that:

Investing in employee training (learning and growth) —> improved

internal processes. —> increased customer satisfaction. —>
higher sales and profits (financial results).
2. It helps to communicate the strategy to all members of the
organization by translating the strategy into a coherent and linked set to
understandable and measurable operational targets.
3. In for-profit companies, the balanced scorecard places strong
emphasis on financial objectives and measures.
4. The balanced scorecard should focus only on key measures to be used
by identifying only the most critical ones.
5. The scorecard should highlight suboptimal tradeoffs that managers
may make when they fail to consider operational and financial measures
together.
PITFALLS IN IMPLEMENTING
A BALANCED SCORECARD
PITFALLS TO AVOID IN IMPLEMENTING A BALANCED SCORECARD INCLUDE
THE FOLLOWING:

1. Don't assume the cause-and-effect linkages are precise. They are merely
hypotheses.
2. Don't seek improvements across all of the measures all of the time.
Trade-off may need to be made across various strategic goals.
3. Don't use only objective measures in the balanced scorecard. The
balanced scorecard should include both objective measures and subjective
measures.
PITFALLS TO AVOID IN IMPLEMENTING A BALANCED SCORECARD INCLUDE
THE FOLLOWING:

4. Don't fail to consider both costs and benefits of initiatives such as

spending on information technology and R&D before including these
objectives in the balanced scorecard.
5. Don't ignore non-financial measures when evaluating managers and
employees.
6. Don't use too many measures. It clutters the balanced scorecard and
takes attention away from the measures that are critical for implementing
strategy.
EVALUATING THE SUCCESS
OF A STRATEGY
The following analytical relationships may be used in evaluating the
success of a strategy:

1. GROWTH COMPONENT
Similar to Sales-Volume or Quantity Factor

Measures the change in operating income attributable

solely to the change in the quantity output sold between
the current and prior periods.
The following analytical relationships may be used in evaluating the
success of a strategy:

2. PRICE-RECOVERY COMPONENT
Measures the change in operating income attributable
solely to the change in prices inputs and output sold
between the current and prior periods.
The following analytical relationships may be used in evaluating the
success of a strategy:

3. PRODUCTIVITY COMPONENT
Measures the change in cost attributable solely to the
change in the quantity of inputs used between the
current and prior input-output relationship in the prior
year.
 current year
(Favorable) Unfavorable
ILLUSTRATIVE PROBLEM 7-1
 INTERNAL BUSINESS
PROCESS PERFORMANCE
UNDER INTERNAL BUSINESS PROCESS PERFORMANCE, THERE ARE THREE
IMPORTANT PERFORMANCE MEASURES THAT WILL BE DISCUSSED THOROUGHLY.
THESE ARE:

1. Delivery Cycle Time

2. Throughput Time
3. Manufacturing Cycle Efficiency (MCE)
FIGURE 7-3
 WAIT TIME
This is the time interval between when the
customer’s order is received and start of the
production.
DELIVERY CYCLE TIME
Delivery cycle time is a vital performance
metric that measures the amount of time
between receiving an order and shipping the
completed product.
THE NECESSARY FORMULA TO COMPUTE FOR THE DELIVERY CYCLE
TIME IS:

Wait Time + Throughput Time =

Delivery Cycle Time
THROUGHPUT TIME (MANUFACTURING CYCLE)
This refers to the total time required to convert raw materials into
finished products. It consists of four components: process time —
turning inputs into outputs, inspection time — ensuring the products are
not defective, move time — transferring materials or work-in-process
from workstation to another or inventory, and queue time — waiting to
be worked on, moved, inspected, or shipped.
FORMULA TO COMPUTE THE THROUGHPUT TIME:

Process Time + Inspection Time +

Move Time + Queue Time =
Throughput Time
MANUFACTURING CYCLE EFFICIENCY (MCE)
Manufacturing Cycle Efficiency (MCE) is a key
performance measure used to assess how effectively a
company is utilizing its production time.
 THE FORMULA FOR MCE IS:

MCE = Value-Added Time /

Throughput (Manufacturing Cycle)
Time

A high MCE indicates that most of the manufacturing time is spent on activities
directly contributing to the product, while a low MCE suggests that significant time
is wasted on non-value-added activities.
ILLUSTRATIVE PROBLEM 7-2
Southwest Company keeps careful track of the time relating to orders and their production. During
the most recent quarter, the following average times were recorded for each unit or order:

Days
Wait Time 17.0
Inspection Time 0.4
Process Time 2.0
Move Time 0.6
Queue Time 5.0

Goods are shipped as soon as production is completed.

TO COMPUTE FOR THE:

Throughput time = Process time + Inspection time + Move time + Queue time
= 2 days + 0.4 days + 0.6 days + 5 days
= 8 days

MCE = Value-added time/Throughput time

= 2 days/8 days
= 0.25

Since the MCE is 25%, the complement of this figure, or 75% of the total production
time, is spent in non-value-added activities.
 Delivery cycle time = Wait time + Throughput time
= 17 days + 8 days
= 25 days

Thus, the total throughput time of Southwest Company is 8 days, delivery cycle is 25
days, with 75% of the production time consumed by non-value-added activities and
25% by value-added activities, which means more than half (¾) of the
manufacturing process is inefficient and wasted.
 THANK YOU

Borcelle Department Ingoude University