Question

1. Prepare a report for the management of Tesla Motors which critically examines how the adoption of a Balanced Scorecard approach could be used to measure the performance of the organisation

Answer 1

The balanced scorecard initially developed as a response to problems caused by evaluating managers only
on the quarterly or annual financial performance of their business units. If managers are evaluated and
rewarded on only their units’ short-term financial performance, then that is what managers will primarily
focus on. This focus on short-term financial performance often takes place to the detriment of other dimensions
that may be equally or more important for improved long-term financial performance. For example,
a focus on cost containment to improve quarterly results can result in a loss of quality due to the use of
low-priced but inferior manufacturing components. The long-term result of loss of quality is loss of customers
and, ultimately, loss of business.
The balanced scorecard includes both financial and non-financial measures in evaluating the overall contribution
made by each unit to the achievement of company goals. Financial measures that focus on shortterm
financial performance are in fact lagging indicators of how the company is doing.
While the balanced scorecard does use financial measurements, it also uses non-financial and operational
indicators that measure the basic performance of the company and improvements it is making in those
indicators. Improvements in the non-financial measures provide the prospect of increased future economic
value for shareholders. Non-financial measures focus on performance that should ultimately result in improved
long-term financial performance. Thus, non-financial measures are leading indicators of
performance.

· Developing a company’s strategic plan includes :

• Stating the company’s goals
• Developing strategies to attain the goals; &
• Implementing the strategies

· The balanced scorecard enables a company to implement its strategies by identifying

Ø the activities that need to be performed; &

Ø how to measure the extent to which goals have been achieved.

· Drs Robert Kaplan and David Norton introduced the concept of balanced scorecard in 1992.

· It was initially just a performance measurement tool.

· However, it evolved to become a tool that measures an organization’s progress towards the achievement of its strategic plan.

· The balanced scorecard makes use of both financial and non-financial measures to evaluate the contribution made by each unit towards achieving the company’s goals.

· Financial measures of short-term performance are lagging indicators of the company’s performance .

· When non-financial measures improve, shareholders will benefit economically; long term financial performance of the company improves.

· Thus, non-financial measures are leading indicators of the company’s performance

· Every company needs to develop its own ways of measuring the extent to which it has achieved organizational objectives.

· The balanced scorecard developed for each business ensures that the organizational goals are aligned with the goals of the division and thus promotes goal congruence.

The Four Perspectives
The metrics used fall into four broad categories of performance indicators, also known as perspectives.
The perspectives are hierarchical, meaning that achievement of the objectives of each perspective supports
achievement of the objectives of the perspective on the next level above it. Achievement of learning and
internal process objectives leads to achievement of customer satisfaction and financial measures objectives.

· Performance is evaluated under 4 broad categories, called perspectives.

· Achievement of the objectives in one category leads to the achievement of objectives in the subsequent category.

Financial : Measures the extent to which the firm has achieved financial success and increase in shareholder value. Common measures under this perspective are :

Operating Income, Revenue growth, Gross margin %, Cost reductions, RI, ROI, etc,

Customer :

Ø Identifies the market segments that that the company wants to target to capture and measures success in those segments.

Ø Market share helps measure such success.

Ø Customer satisfaction is an important objective under this perspective.

Ø Customer surveys may be made to receive customer feedback.

Ø Customer satisfaction can be attained by either providing low cost products, or high quality products, or by minimising defects.

Internal Process : This comprises innovations or improvements in products and services, operations, and customer service/support resulting in value addition for customers.

For eg: If a company wants to become the lowest cost supplier in the market, it needs to cut down costs and thus monitor and control cost drivers such as cost of raw materials, no: of labour hours to manufacture a product,etc,

Focus also needs to be laid on innovation of products, technological capability for customer service personnel, implementing advanced controls in the manufacturing process,etc.

Learning and Growth : Comprises the attributes that an organization should have in order to achieve its objectives in the Internal process perspective. They are :

· Human capital , i.e, expertise and skills of employees;

· Information capital , i.e, the company’s information systems, networks, and technological facilities infrastructure; &

· Organizational capital : The company’s culture, leadership, extent of teamwork, and knowledge management

Key performance indicators

· Instead of focusing on too many performance measures, it is wise for the company to choose a few measures that are relevant to its specific business strategy. These are Key performance indicators(KPIs). KPIs are essential for a company to achieve competitive advantage and thus to achieve success.

For eg: If a business identifies customer satisfaction as one of its important objectives, KPIs are measures associated with it like customers’ wait time over the telephone, customer serive personnel’s knowledge, the availability of essential info for customer service personnel, etc,

· Strategy Map

A strategy map links the four balanced scorecard perspectives together, beginning with Learning and   Growth.

• The goals of the Learning and Growth perspective contribute to the Internal Process perspective

because the company’s culture of empowering staff members and providing them with the

technological support they need makes innovation and improvements in products and services

possible.

• The innovations and improvements in products and services in the Internal Process perspective

support the goals of the Customer perspective, such as increasing market share.

• Increased market share from the Customer perspective leads to increased profits, thereby supporting

the goals of the Financial perspective.

When the company’s financial and non-financial measures are linked in the strategy map, the non-financial measures serve as leading indicators of the firm’s future financial performance. The strategy map provides a way for all employees to see how their work is linked to the corporation’s goals.

· Implementing a Balanced Scorecard

Ø For the implementation of a balanced scorecard system to be successful the entire organization has to be aware of it and also strongly support it.

Ø The importance, benefits, and other details of a balanced scorecard need to be communicated by management to its employees.

Ø Every business unit should develop its own balanced scorecard, mentioning the activities needed to be performed by it to contribute towards overall company goals.

Ø Balanced Scorecards developed by middle level managers need to be reviewed and modified by senior managers as appropriate

Ø In respect of each activity or target, the targeted and actual results need to be recorded.

Ø For each line, a person needs to be held accountable

· Marketing the Balanced Scorecard within the organization

Ø The Balanced scorecard needs to be promoted among both management and staff; their support must be received.

Ø A brochure describing how a balanced scorecard can help a company achieve its long-term objectives which otherwise could not have been achieved may be published. A report on how a certain objective was successfully achieved could be published.

Ø Verbal communication regarding the balanced scorecard needs to be made by management in regular employee meetings. Employees must be provided the opportunity to ask questions and also to provide constructive feedback. If employee feedback is not provided enough importance, employees might feel demotivated.

Ø The overall results of the balanced scorecard may be posted on the company’s intranet; link needs to be provided to the main corporate goal supported by each result under the balanced scorecard program.

Ø If employees are rewarded for achieving their results as mentioned in the balanced scorecard, its purpose would be served better and employees would feel motivated.

Ø The results of the balanced scorecard may be published through a software.