are familiar with.
ANSWER:
What is the Balanced Scorecard?
The rationale for the development of the Balanced Scorecard was a growing dissatisfaction with traditional, financial measures of performance. These measures suffer from a number of serious drawbacks in that they take a short-term, lagged (i.e., historic) view of performance. The shift towards flexible, lean production/service systems in many firms has strengthened the requirement for performance measurement systems to become more broadly based, incorporating both non-financial and external measures of performance. According to Kaplan and Norton, the Balanced Scorecard provides a better assessment of performance as it "enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth".
The original scorecard designed by Kaplan and Norton contained four key groupings of performance measures. These four groupings, called ‘perspectives’ by Kaplan and Norton, were considered sufficient to track the key drivers of both current and future financial performance of the firm. The perspectives focused on the achievements of the firm in four areas: namely the financial, customer, internal business process and innovation/learning perspectives. The four perspectives can be represented as an interlinked hierarchy. The firm’s strategy underlies the whole scorecard, as the measures for each of the four perspectives are drawn from this strategy.
To obtain a satisfactory overview of performance, the scorecard will require a mix of lagging and leading (forward looking) measures. Financial measures tend to be
lagged and consequently, the measures chosen for the other perspectives will need to include leading measures. In general, outcome measures tend to be lagged, for example, current market share is the result of past decisions and consequently is a lagging measure. Thus the challenge in designing a Balanced Scorecard is to choose driver measures which lead changes in the outcome measures in the non-financial perspectives and which ultimately drive the financial measures.
Once the firm’s objectives have been agreed and the appropriate outcome and driver measures chosen for each of the perspectives, firm and managerial performance is assessed by comparing actual attainment on each measure with the target set for that measure.
Objective Measure Target Actual
Benefits from adopting the Balanced Scorecard
There are several benefits from implementing a Balanced Scorecard. Originally the Balanced Scorecard was seen as a useful tool for performance measurement. In this role, the Balanced Scorecard was seen as integrating financial/non-financial, internal/external and leading /lagging information on firm performance in a coherent fashion.
Later it was realised that the Balanced Scorecard could play a pivotal role in the strategic management process. Because the Balanced Scorecard requires management to clarify and obtain consensus on the strategic objectives of the firm, it can assist in the communication of the chosen strategy, consequently aligning the efforts both of individuals and of departments. In this role, there is a clear link between the Balanced Scorecard and management by objectives (MBO). Effective implementation of a Balanced Scorecard project will generally involve the development of a series of hierarchical (cascaded) scorecards. Given the overall corporate scorecard, supporting scorecards can be developed for each department within the firm. Within each department, a scorecard can be developed for each manager (or perhaps even for each individual member of staff) which links the objectives on each perspective for that manager back to the objectives for each perspective outlined in the scorecard for the department and finally, back to the objectives listed in the firm’s overall scorecard.
The Balanced Scorecard could be used to assist in corporate restructuring. In recent years, many firms have migrated away from a traditional hierarchical structure to a flatter, team-based organisational structure. The Balanced Scorecard can support such changes, as it can help clarify the objectives and the critical success factors for the newly formed teams.
Apart from the communication and co-ordination roles of the Balanced Scorecard in strategic implementation, the Balanced Scorecard can be used to link strategy to specific critical success factors in the customer, internal business process and growth/learning perspectives. By setting both short and long-term targets for driver and outcome measures and by comparing actual attainment against target, feedback is obtained on how well the strategy is being implemented and on whether the strategy is working.
Building on the Balanced Scorecard’s use as a strategic management tool, it has been suggested that the Balanced Scorecard can play a role in the investment appraisal process(5). Traditional methods of investment appraisal such as discounted cash flow do not cope well with investments which generate indirect rather than direct financial returns. Examples of these include investments which enhance the future ‘flexibility’ of a firm or investments in the firm’s infrastructure, such as an enhanced management information system. The Balanced Scorecard can assist management’s investment appraisal decisions as it provides managers with a mechanism to incorporate the strategic aspects of the investment into the appraisal process. This could be achieved by using a weighting system developed from a firm’s Balanced Scorecard measures to evaluate new projects. An index score would be calculated for each investment opportunity and projects would then be ranked and selected based on this score.
Q .2)Soniya Company has two Divisions: A & B. Return on Investment for both divisions is 20%. Details are given below:-
Particulars Div A Div B
Divisional sales 4000000 9600000
Divisional Investment 2000000 3200000
Profit 400000 640000
Analyse and comment on divisional performance of each. ANSWER
As Profit Margin = Profit *100 Sales
Profit Margin for Division ‘A’= 4,00,000 /40,00,000 *100 = 10% Profit Margin for Division ‘B’ = 6,40,000/ 96,00,000 *100 = 6.6% Turnover of Investment = Sales * 100
Turnover of Investment for Division ‘A’ = 40,00,000/20,00,000 = 2 times Turnover of Investment for Division ‘B’ = 96,00,000/32,00,000 = 3 times As Return on investment for both Divisions A and B is 20%.
COMMENTS:-
Division ‘A’ – Although ‘A’ has more profit margin than Division ‘B’ that is 10% as compared to 6.6% of ‘B’, so it has more profitability but inspite of it, division ‘A’ has lower turnover of investment that its assets management is bad than Division ‘B’, it can be improved by increased sales or reducing investment.
Division ‘B’ – Needs to improve profit margin by increasing sales and reduce variable cost and sales at same price or by reducing salesprice and increase the volume of sales so that its profit would improve. As it has good assets management shown by its turnoverof Division ‘B’ that is 3 times which is better than Division ‘A’. So it can become profitable organisation by improving Profit Margin.
Q.4)Discuss and illustrate differences and similarities between