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The Balanced Scorecard Model (BSM)

The Balanced Scorecard Model: Theory & Practice Presented by C. Christopher Lee Associate Professor of Management. The Balanced Scorecard Model (BSM) Purpose is to translate strategy into measures that uniquely communicate an organization’s vision. Four perspectives:.

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The Balanced Scorecard Model (BSM)

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  1. The Balanced Scorecard Model: Theory & Practice Presented byC. Christopher LeeAssociate Professor of Management

  2. The Balanced Scorecard Model (BSM) Purpose is to translate strategy into measuresthat uniquely communicate an organization’s vision. Four perspectives: • Financial — value to shareholders • Customer — customer satisfaction and market growth • Innovation and Learning — people and infrastructure • Internal — processes that drive the business

  3. BSM Performance Categories and Linkages

  4. Lee (2012): Critical Issues on BSM • Process Improvement • Whole Organization • Target a Process & Set a Goal

  5. #1. Process Improvement • Total Quality Improvement (TQM) – BSM (1990s) is an extension of TQM (1980s) • TQM & Process – TQM focuses on “Process”; Product Control (old) vs. Process Improvement (new, TQM approach) • BSM & Process: A main focus of BSM also is process improvement, just like TQM. • BSM vs. TQM – TQM focuses on an incremental (small) change (improvement) in a small process in one area of business (production, sales, etc.) at a time, while BSM attempts to include processes of all related areas to the business (financials, internal operations, customers) at the same time.

  6. Why “Process” Is So Important - TQM: • Product Control (old):Before TQM, we implemented quality control by checking the defect rate of finished goods. This is product control. This approach does NOT improve the quality. When you check the quality of finished goods, damages were already done. • Process Improvement (new – TQM): TQM asks you to check the quality in each process; if the process shows low quality, you must stop the whole operation, and everyone must solve the particular process immediately. By improving each process, the whole operation (total quality) is improved, and the quality of the fished good is improved.

  7. Why “Process” Is So Important (continued) • Challenges of Process Improvement: Improving an process takes a lot of resources (time & cost). • Long Term Project: Therefore, BSM must be a long-term project, like TQM. • Conclusion:BSM should not show only the current picture of the firm (As-is), but include the goal (As-should be) and the progress report (process improvement data).

  8. Why “Financials” Are So Important • Performance Evaluation: When stockholders evaluate the performance of a manager (CEO/President) at the quarterly meeting, they used the stock price mostly. This would motivate a manager to focus on increasing the stock price. • Stock Price: In theory, the stock price is supposed to serve the best indicator of the firm’s financial/business conditions: • Stock price = firm value / # of common stocks • Firm value = profit (EBIT) / cost of capital • Profit = revenue – cost • Revenue goes up and/or cost goes down, then profit goes up, then the stock price goes up eventually. • Ideally, we would work hard to improve the business process, which will produce better quality products, resulting in more sales & more profits. In the end, the stock price will be up. But this approach takes long time.

  9. Weakness of Using ONLY “Financials” • However, there are bad managers who care about their job security more than the firm itself. To boost the stock price, they would manipulate the financials. • The quick way to increase the stock price is to boost profit. There are two ways. To increase revenue or decrease cost. • A commercial on $1000 rebate for a new car sales is a quick revenue increase scheme. This scheme costs a lot. Thus, the bad manager is more likely to find a way to decease cost quickly. • A quick cost reduction alternative is to reduce the labor cost. This is why we see a big firm announce a lay-off just prior to the quarterly meeting. • Most of time, such lay-off announcement leads to favorable response from Wall Street. The stock price is up, stockholders are happy, and the manager’s job is safe now. • But such spike in the stock price does not accurately reflect the real picture of the firm - long-term prospects, sustainability.

  10. # 2. Whole Organization • As seen in the previous slides titled “Why Financials Were Important,” a bad manager can get away with the quick fix (lay-off) & spike of stock price, though he did perform poorly as a manager. • We need a better way to measure the performance. We need a measurement that include a whole picture including the financials. • BSM is an answer to this need. It covers a whole organization & value chain, including the financials. • BSM covers not just (1) Financial, but also (2) Customer, (3) Innovation & Learning, and (4) Internal. • In short, BSM complements the disadvantage of using the financials alone, and offers a comprehensive model in comparison with TQM.

  11. #3. Targeting a Process & Setting a Goal • BSM must require a comprehensive view of business processes in the entire organization. • BSM needs to target which processes to improve. • BSM sets a goal for the targeted processes. • Schneiderman calls this management practice as “strategic planning” in his paper titled “How to Build a Balanced Scorecard.”

  12. Why BSM Fails • Process Improvement – A wrong BSM does not focus on “process” and “process improvement.” • Whole Organization – A wrong BSM does not capture a whole picture of the organization and value chain. • Target a process & Set a Goal – A wrong BSM does not target processes to improve, and fails to set the improvement goal for each process (Lack of strategic planning). RQ: Explain three major reasons why BSM fails.

  13. Concluding Remarks • Abuse of BSM- Many organizations use BSM incorrectly. They use it to summarize their current picture. It does not improve anything. It is a big waste of money and time. • BSM Present & Future – BSM is not the perfect tool, but it is well received by the business community as well as other organizations (government agencies, schools, etc.). Wherever you work in the future, you will be involved with BSM one way or another. • Get on the Board - Be an active participant of the BSM project. After all, it is about improving business process. At the corporate meeting, make good suggestions on BSM. Many executives still misunderstand what BSM is for.

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