Question

The Financial Director of your company has recently asked you to attend a conference where a paper on Balanced Scorecards entitled ‘Linking Management Accounting with Strategy’ was presented. At the next Board meeting of the company you have been asked to:
(a) Discuss what the four perspectives of a Balanced Scorecard are, and how they are translated into performance measures and targets.

(b) Critically appraise the success of the application of Balanced Scorecards in business organisations and whether they are still as relevant today.

Answer 1

A) The four perspectives of a balanced scorecard are,

1. Financial Perspective

2. Customer Perspective

3. Internal Business Perspective

4. Learning and growth Perspective

1. Financial Perspective : "How Do We Look To Shareholders" Financial performance measures indicate whether the company’s strategy implementation and execution are contributing to its revenue and earnings.

2. Customer Perspective : “How Do Customer View Us”  Here companies identify customers and market segments in which they compete and also the means by which they provide value to these customers and markets. Managers identify the lead indicators which make a particular business unit or product different from that of others. Lead indicator may vary from customer to customer or market segment. If for example, a customer values on-time delivery then on-time delivery becomes a lead indicator.

Examples:

1. On-time delivery

2. On-site service

3. After sales support

4. Defects per order

5. Cost of the product

6. Free shipments

3. Internal Business Perspective : “At What Must We Excel”  Here companies identify processes and activities which are necessary to achieve the objectives as identified at financial perspectives and customer perspective stage. These objectives may be achieved by reassessing the value chain and making necessary changes to the existing operating activities. If maintaining net earnings is the financial objective of a company and after sales service can increase customer retention, then internal business perspective needs to improve after sales services to satisfy customer requirements to maintainnet earnings. This objective may be achieved by providing for example toll free customer help lines, setting up service centresin all major cities.

4. Learning and growth Perspective : “How Do We Continue To Improve And Create Value” Here Companies determine the activities and infrastructure that the company must build to create long term growth, which are necessary to achieve the objectives set in the previous three perspectives. Organisational learning and growth comes from three principle sources:

- People i.e. employee capabilities

- Systems i.e. information system capabilities and

- Organisational procedures i.e. motivation, empowerment and alignment.

B) Yes balanced Scorecards are still relevent in the business organisations.