Balanced Scorecard and Analysis

Introduction

The balanced scorecard translates an organization’s mission and strategy into a comprehensive set of performance measures that provides the framework for implementing its strategy.

(Kaplan and Norton, 1966) The balanced scorecard does not focus solely on achieving the financial objectives of the firm. It also highlights the non-financial objectives that an organization must achieve in order to meet its financial objectives. The balanced scorecard measures an organization’s performance from four key perspectives:

1. Financial
2. Customer
3. Internal Business Processes and
4. Learning and Growth (Horngren et al. 2002)

The Balanced Scorecard for Mi Tenda may take the following form:

	Financial What is our appearance to Stakeholders? Objectives: 1.Increase Owner’s equity by maximizing revenue 2. Reduce Purchase cost Measurements: 1.Net Profit from operations 2. Total Cost of sales Targets: 1. To achieve annual growth in profitability of 5% 2. To reduce the purchasing cost by 3% annually Initiatives: 1. Build strong customer relationships to increase sales 2. Source the materials from competitive sources
Customer How should we appear to our customers? Objectives: 1. Increase market share 2. Increase customer satisfaction Measurements: 1. Increase in market share of food items 2. Customer satisfaction survey Targets: 1. To increase the market share of food items to 2% 2. To increase the number of repeat customers Initiatives: 1. Identify new customer segments – Low-income groups 2.Increase customer service – door delivery service		Internal Business processIn what must we excel in satisfying shareholders and customers Objectives: 1.Reduce time in the replenishment of stock of different merchandise 2. Reduce customer waiting time in-store Measurements: 1. Reduction in the number of stock-out items 2. Reduction in order delivery time Targets: 1. To have the number of stock-out items at less than five monthly 2. To reduce the customer billing time to less than 5 minutes Initiatives: 1. Organize better inventory management and control 2. Improve the efficiency of billing staff
	Learning and Growth To achieve vision and mission, how will we sustain and improve? Objectives: 1. Develop employee skills 2. Enhance information system capabilities Measurements: 1. Percentage of employees trained in computerized billing systems 2. Number of Point of Sales (POS) systems added Targets: 1. To get 80% of the staff trained in mechanization before year-end 2. To add three additional POS points Initiatives: 1. Ask supervisors to train the subordinates 2. Purchase and install improved POS software

Exhibit 6-1—Strategic Management: Formulation, Implementation, and Control, 9^th edition (Pearce & Robinson, 2004)

Recommendations –for Improvements and Changes:

Summary

The above-balanced scorecard of High Tech Limited will provide the following strategic inputs for the improvement in the performance of the company:

Financial Perspective

This perspective evaluates the profitability of the strategy. Because of cost reduction in the purchases, the company will be able to reduce the cost of sales. One advantage of buying at reduced costs is that the store will be able to offer competitive prices to the customers, which will increase the sales as well as the number of customers. This will result in increased profit for the company. Being a sole proprietorship company, the higher profits will increase the owner’s equity. Since increased sales growth and profitability are the key strategic initiatives of Mi Tenda, the financial perspectives focus on how much operating income results from the new strategies.

Customer Perspective

This perspective identifies the targeted market segments and measures the company’s success in these segments. The customer perspective also focuses on the ability of the company to improve customer satisfaction. In the case of Mi Tenda, the store, in order to improve on the number of customers it serves, has to identify new segments of customers like the poor income group in the neighborhood. It is also important the store has to retain the customers by making them visit the store again and again.

Internal Business Process Perspectives

This perspective focuses on internal operations that further both the customer perspective by creating value for customers and the financial perspective by increasing the shareholder wealth. According to Paul R. Niven (2003), every organization from the smallest local service agency to the largest departments of the Federal government will have documented processes for establishing their goals. Small organizations may have dozens, while larger entities may have processes numbering in the hundreds. The key to Balanced Scorecard success lies in selecting and measuring just those processes which lead to improved outcomes for customers and ultimately allow the organization to work towards its mission. The processes that were chosen to focus on should normally flow directly from the objectives and measures chosen from the Customer perspective.

Mi Tenda can determine its internal business process improvement targets after benchmarking them against the key competitors who are of the same size as Mi Tenda, as the values provided in this model represent the ideal index for the performance. However, if such comparisons are not possible, the store on its own follows the initiatives and tries to achieve the targets. It is also important the company reviews the metrics periodically to incorporate changes as may be necessitated by the business. This may mean adding new internal business process perspectives like improving the quality of merchandise being supplied.

Learning and Growth Perspectives

This perspective identifies the capabilities in which the organization must excel in order to achieve superior internal processes that create value for customers and owners. The learning and growth perspective of Mi Tenda emphasizes two capabilities:

1. Employee capabilities are measured using employee education and skill levels and providing training to them
2. Information system capabilities measured by the percentage of front line employees having the ability to work in a mechanized environment

Motivated employees with the right mix of skills and tools operating in an organizational climate designed for sustaining improvements are the key ingredients in driving process improvements, working within financial limitations, and ultimately driving customer and mission success. The right mix of skills and competencies of employees, the information flow, and the organizational climate under which the employees function are the important parameters for applying the balanced scorecard and derive the benefits therefrom.

Balanced Scorecard and Performance Improvement

The performance evaluation and improvement is the key assessment area of large and medium companies alike. In the process of evaluation, models like Balanced Scorecard goes a long way in helping the organizations critically analyze the functions of the organization concerned by offering managers a relatively small number of categories of key performance metrics to focus on. The central issues this tool considers, in general, are objectives, strategies and plans, target setting, reward structures, and information feedback loops (Wongrassamee et al. 2003).

Conclusion

The balanced scorecard focuses attention not only on the financial objectives of the company but also highlights the non-financial objectives that an organization must achieve in order to meet its financial objectives. The balanced scorecard gets its name from the attempt to balance financial and non-financial performance measures to evaluate both short-run and long-run performance in a single report. The balanced scorecard reduces the organization’s emphasis on short-term financial performance like quarterly earnings because the non-financial and operational indicators measure fundamental changes the organization is making. The financial benefits of these changes may not be captured in short-run earnings, but big improvements in non-financial measures signal the prospect of creating economic value in the future. For example, an increase in customer satisfaction signals higher sales and income in the future. By balancing the mix of financial and non-financial measures, the balanced scorecard focuses management’s attention on both short-run and long-run performance.

References

Horngrrn T. Charles, Foster George, and Datar M. Srikant (2002) ‘Cost Accounting A Managerial Emphasis’ Edition X Prentice Hall of India Private Limited

Kaplan R.S and Norton D.P (1966) The Balanced Scorecard Harvard Business School press

Paul R. Niven 2003Adapting the Balanced Scorecard to Fit the Public and Nonprofit Sectors.

Wongrassamee, J.E.L. Simmons, P.D. Gardiner (2003) Performance measurement tools: the Balanced Scorecard and the EFQM Excellence Model Measuring Business Excellence Journal Volume 7 No 1 pp 14-2