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Module 1 – Home
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The Balanced Scorecard & the Financial Perspective
Modular Learning Outcomes
Upon successful completion of this module, the student will be able to satisfy the following outcomes:
Case
Evaluate the application of the Balanced Scorecard approach in an organizational situation.
SLP
Write objectives, identify measures, and propose initiatives to improve performance from the financial perspective.
Discussion
Discuss the application of an integrative approach to organizational improvement using a financial perspective.
Module Overview
If you haven’t yet read the Course Overview in the Syllabus and/or reviewed the general presentation on the balanced scorecard, now would be an excellent time to do so. It’s critical information for what follows in the Modules to come.
To summarize, the balanced scorecard views the mission and strategy of the organization from four perspectives:
The business owners/shareholders (represented by the Financial perspective)
Customers and other stakeholders (represented by the Customer perspective)
Managers and process owners (represented by the Internal Business Processes perspective)
Employees and infrastructure capacity (represented by the Learning and Growth perspective)
Within each perspective, the following elements are developed:
Strategic Objectives – what is the process that will be used to define strategic objectives and what are the strategic objectives that should be achieved using each perspective?
Measures – how will progress for each objective be measured?
Targets – what is the target value sought for each measure?
Initiatives or action plans – what will be done to facilitate the reaching of the targets?
Why does all this matter? Well, the basic reason is that everything is connected to everything else, even though policies may be created by people in widely different corporate units; those connections are often full of unintended consequences. Here’s a classic example of the complications of integrating marketing strategy with human resource strategy. At one point, Proctor and Gamble had product managers who were paid based on how well their products performed. It sounded like a pretty good human resource strategy. Thinking about people as an investment and paying them using a return on investment formula seems pretty straight forward. If CEOs get paid for performance, why not product managers? P & G had a product manager for Crest toothpaste and a product manager for Gleem toothpaste. Wouldn’t a little competition between these product managers be good for P & G?. Wrong! Here is what happened. To get market share, the Gleem manager ran a $0.50 rebate coupon in the Sunday newspapers. Seeing the market share of Crest drop, its manager ran a special where 3 tubes were sold for the price of two. Seeing the market share of Gleem drop, its manager tried another tactic to gain share. Are you beginning to get the picture? The competition between the product managers meant that P & G gave away profit because customers, who saw little difference between the products, simply bought what was on sale.
How did P & G learn that the method of paying the product managers was causing them to take actions that are not in the best interest of the firm? Enter into the picture the balanced scorecard, in which the contributions of product managers are no longer seen as competitive; because focusing on their contributions from customer, financial, internal process, and learning perspectives revealed that paying them based on performance did not result in the desired outcome. So that’s what this process is all about – helping to reveal the causal connections among often apparently unrelated actions taken in different functional components of the firm, and focusing those connections in positive rather than potentially negative ways.
Where to start? Well, the financial perspective is usually the easiest entry point, because it’s the most familiar to most managers. Financial measures are, after all, frequently the only performance measures that are compiled. In fact, the balanced scorecard was developed to counteract the weight given to financial measures. This does not mean, however, that financial measures are unimportant, particularly in these increasingly difficult economic times — but it does mean that solving financial problems is a function of lots of things besides finance. It’s finding those best points of leverage that the Balanced Scorecard is all about.
The graphic here highlights our starting point. The financial perspective asks the question “How do we look to our investors?” In evaluating measures that indicate if and how the company’s strategy, implementation, and execution contribute to profitability or the bottom line, keep the following in mind. Depending solely on financial measures led some organizations to buy anything and everything based on three bids. One source for the bids was always an internal. Thus, if a department wanted an advertisement prepared, it was forced to seek bids – one from the advertising department within the organization and two from outside bidders. Given that they were consistently undercut by outside bidders, several departments were outsourced and eventually closed. Of note are organizations that outsource their accounting, IT, advertising, and/or HR functions. But these aren’t always the best decisions, when the full range of interconnections is assessed.
The financial performance measures that are used vary based upon the long-run objectives and strategy of a business and where the company is with respect to its business life cycle. In general companies use various combinations of the following three approaches or tactics to achieve their business goals:
Revenue growth and mix
Cost reduction/ Productivity improvement
Asset utilization/ Investment strategy
Financial measures that indicate how successful the company is at implementing its strategy include the following:
Cash flow
Sales growth
Market share
ROE – Return On Equity
ROCE – Return on Capital Employed
Economic value added
In this module, you’ll be introduced to the BSC approach in your case study, and will look at how setting financial performance expectations constitutes a vital first step in implementing a balanced scorecard in your Session Long Project. You’ll have a chance to draw on courses you’ve taken like ACC 201 (Financial Accounting), ACC 202 (Managerial Accounting), FIN 301 (Principles of Finance), ITM 301 (Principles of Information Systems in Business and Organizations), MKT 301 (Principles of Marketing), and MGT 499 (Strategic Management). You’ll also pick up some key new vocabulary for looking at these issues.
