Management Control System Session 6

Prof. R.C.M.Pendyala

The balanced scorecard

Meaning
BSC is a set of financial & non-financial measures relating to a companys success factors. It is an approach advocated by Kaplan & Norton. It provides information to management to assist in strategic policy formulation & achievement. The main objective of BSC is to provide a comprehensive framework for translating a firms strategic objectives into a coherent set of performance measures

Components of BSC.
A well designed BSC combines financial measures of past performance with measures of a firms drivers of future performance. The specific objectives & measures of an organization BSC are derived from the firms vision & strategy . Generally , the BSC has the following perspectives from which a companys activity can be evaluated:

1. Customer Perspective (i.e.) How Customers See Us ?

In order to translate effective internal processes into the organizational success , customers/ clients must be happy with the service they receive . The customer perspective considers the business through the eyes of the customers , measuring and reflecting upon customer satisfaction.

2. Internal perspective (i.e.) in what must the organization excel?

The internal perspective focuses attention on the performance of the key internal processes, which drive the business. The nature of the processes is dependent on the nature of the organization.

 The Learning & Growth perspective is a measure of potential future performance it directs attention to the basis of all future success the organization's people and infrastructure. Adequate investment in these areas is critical to all long-term success.

3. Innovation & learning perspective i.e. can we continue to improve & create value?

4. Financial perspective i.e. how we look to our shareholders?

The financial perspective measures the results that the organization delivers to its shareholders. Thus the score card provides a view of an organization's overall performance by integrating financial measures with other key performance indicators. All these four perspectives provide a balanced view of the present and future performance of the business

3.Creating a BSC.
The following steps in the process of creating a BSC may be identified:Steps: 1. Identify the VISION i.e. Where an organization is going. For e.g. the vision of the company may be to dominate the market. 2. Identify the organization's STRATEGIES i.e. how an organization is planning to go there. For e.g. strategy may be to focus on cost efficiency , high quality & fresh investment in new technology.

3. Define critical success factors & perspectives i.e. what we have to do well in each perspective. 4. Identify measures which will ensure that everything is going in the expected way. 5. Evaluation of BSC , i.e. ensuring what we are measuring is right. 6. Create action plans & plan reporting of the BSC. 7. Follow up & mange i.e. which person should have reports & how reports should look like.

Illustration of perspectives & performance measures:

A. Customer perspective
Goals Performance measures

Price

Competitive price .

Delivery

Number of on time delivery, lead time from receipt of order to delivery to customer. Own quality relative to industry standards , number of defects or defect level. Response time , customer satisfaction surveys.

Quality

Support

B. Internal Business Perspective

Goals Performance measures

Efficiency of Mfg. cycle time manufacturing process Sales Annual sales versus Plan sales, perspective increase in number of customers in a unit of time New product Rate of new product introduction per introduction quarter

C. Innovation & learning perspective

Goals Performance measures

Technology Leadership

Product performance compared to competitors, number of new products with patented technology Manufacturing overheads per quarter as a percentage of sales, rate of decrease in cost per quarter. Market share in all major markets

Cost leadership

Market leadership

Research & development

Number of new products , number of patents.

D. Financial Perspective
Goals Performance measures

Sales

Revenue and profit growth

Cost of sales

Extent to which it remained fixed or decreased each year Return on capital employed

Profitability

Prosperity

Cash flow

Advantages of BSC:
The following are the advantages: 1. Wholistic Approach: 2. Creativity 3. System design 4. co-operation

WHOLISTIC APPROACH
It brings strategy & vision as the center of the management focus . It helps companies to assess overall performance , improve operational processes and enables management to develop better plans for the improvements. It provides the managemnet with a comprehensive picture of business operations.

CREATIVITY
Management accountants must integrate databases & potential sources of timely information on competitive forces confronting the business. This calls for innovation & creativity in gathering & analyzing information for the management decisions .

System design Designing internal & external information systems to assist managers in planning , monitoring & improving valuecreating processes is another challenge facing management accountants

Co-operation
Management accountants must solicit support from all senior managers for allocating resources to develop & improve value chain-oriented information systems . The management accountant should ensure that the top management is committed to value chain analysis and the organizational changes necessary for its successful implementation.