Question

1. Explain the fundamental characteristics of a balanced scorecard.
2. Why should non-financial measures be included within a balanced scorecard?
3. Sargent Ltd is a manufacturer of high-end video teleconferencing equipment. Following a recent management workshop, the firm has identified the following objectives for the next 12 months:

• Improve customer satisfaction,
• Minimise rework costs
• Improve on-time delivery performance,
• Increase customer retention
• Enhanced average shopfloor personnel qualification
• Enhance sales growth in local markets.

Develop a balanced scorecard for Sargent Ltd. Include a range of financial and non-financial measures for each objective.

Answer 1

Balanced scorecards to be effective and useful should have the following characteristics:

The balanced scorecard is a balanced set of measures that organizations use to motivate employees and evaluate performance.

• Balanced scorecards should highlight a company’s strategy by focusing on cause-and-effect relationship.

• The Balanced scorecard limits the number of measures used by identifying only the most critical ones. Avoiding a proliferation of measures focuses management’s attention on those that are key to the implementation of strategy.

• The balanced scorecard indirectly also provides a useful insight into an organisation's strategy – by requiring general strategic statements (e.g. mission, vision) to be precipitated into more specific/tangible forms.

• Balanced scorecards should help in communicating the strategy formulated to all members of an organisation by translating the strategy into a coherent and linked set of understandable and measurable operational targets.

Why should non-financial measures be included within a balanced scorecard?

In profit-seeking companies, the balanced scorecard gives strong emphasis on financial objectives and measures. Sometimes managers give too much importance to innovation, quality and customer satisfaction though they may not produce tangible benefits. A good balanced scorecard considers non-financial measures as a part of a strategy or programme to achieve and improve future financial performance. When financial and non-financial performance measures are properly linked in balanced scorecards, many non-financial measures serve as leading indicators of future financial performance.