Choosing Control Metrics: The Balanced Scorecard - Principles of Management

An important issue confronting managers, particularly with regard to output and incentive controls, is deciding what metrics to use for a firm’s control systems. Historically many firms have relied on financial metrics, such as profitability, profit growth, and cash flow. Such metrics are important and should always be used in a business enterprise; but several commentators have argued that overreliance on a narrow set of financial metrics to control an organization can have negative consequences.

Most notably, in an attempt to improve current financial performance managers might pursue actions that boost short-term profitability at the expense of long-term competitiveness and profits. The problem with such an approach, for example, is that a lack of investment in equipment and products can significantly hurt the firm down the road.

One approach to this problem is to use what is known as the balanced scorecard. Robert Kaplan and David Norton, who developed the balanced scorecard, suggest that managers use number of different financial and operational metrics to track performance and control an organization.

In addition to traditional financial measures, which they refer to as the financial perspective, they suggest that managers use metrics related to how customers see the organization(the customer perspective ), what the organization must excel at (the operational perspective ), and the ability of the organization to learn and improve its offerings and processes over time (the innovation perspective ).

The precise metric used to capture each of these perspectives will vary from business to business depending on the strategy of the enterprise, the nature of its production process, and the industry in which it is based. Obviously a retailer like Wal-Mart or Costco would use different operational measures from a software company like Microsoft or a manufacturing company such as General Motors.

Examples of the kinds of metrics managers might use are given in Figure , which summarizes some of the measures for a balanced scorecard used by a high-tech medical equipment company that the author consulted for. This company wished to differentiate itself from competitors by being able to fill customer orders quickly(many of its competitors operated with long backlogs) and offering industry-leading aftersaleservice and support.

Thus for the customer perspective, it chose to measure the time from order to delivery and the time taken to solve customer service problems. From the operational perspective the strategic objective was to be an efficient, high-quality manufacturer of medical equipment; thus managers selected a series of operational metrics including unit costs, inventory turnover, and defect rates in manufacturing to track operating efficiency. Forth innovation perspective, the company was based in an industry where technology was advancing rapidly and timely new product development was crucial for long-term success.

The-Balanced-Scorecard

Managers tracked success along this dimension by the percentage of sales generated fromproduct.With regard to the financial perspective, the company wished to survive, prosper, and grow, so it chose a fairly standard set of financial metrics, including cash flow measures, profitability measure (return on invested capital or ROIC), and growth measures.

Kaplan and Norton’s contention is that the balanced scorecard is akin to the dials and indicators in an airplane cockpit. It gives managers a fast but comprehensive view of the business that balances financial measures with operational, customer-centered, and innovation measures; and it gives a better view of the overall health of the business than relying on just financial measures.

Implementing the balanced scorecard approach requires managers to identify which individuals and units within the organization should be responsible for achieving which metrics, linking output controls and incentives to those metrics. Thus manufacturing managers might be given the responsibility for achieving the unit cost, inventory turn, and defect rate goals detailed in Figure.

They might also be given responsibility for goals related to delivery time because that is largely within the control of manufacturing. Customer service managers might be responsible for goals related to the time taken to solve customer service problems; reducing product development time might be a responsibility shared by marketing, manufacturing, Andrade managers because all three functions must work together closely to develop products quickly.


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