Management Accounting 101: Performance Measurement and Control - Balanced Scorecard, Financial Customer Internal Process Learning Growth Strategy Maps

What This Is

The Balanced Scorecard (BSC) is a strategic management framework that helps organizations achieve their goals by measuring performance from four perspectives: Financial, Customer, Internal Process, and Learning & Growth. It was developed by Robert Kaplan and David Norton in the 1990s. Toyota, a renowned automotive manufacturer, uses the BSC to align its business units and departments with its overall strategy, ensuring that all employees understand how their work contributes to the company's success.

Key Frameworks & Metrics

• Balanced Scorecard (BSC): A strategic management framework that measures performance from four perspectives: Financial, Customer, Internal Process, and Learning & Growth.
• Strategy Map: A visual representation of the BSC, showing how objectives and initiatives are linked across the four perspectives.
• Financial Perspective: Focuses on financial performance, including measures such as revenue growth, profitability, and return on investment (ROI).
• Customer Perspective: Focuses on customer satisfaction, loyalty, and retention, including measures such as customer satisfaction surveys and net promoter scores.
• Internal Process Perspective: Focuses on internal processes and efficiency, including measures such as cycle time, quality, and productivity.
• Learning & Growth Perspective: Focuses on employee skills, knowledge, and innovation, including measures such as training hours, employee engagement, and innovation pipeline.
• Key Performance Indicators (KPIs): Specific metrics used to measure progress toward objectives, such as sales growth, customer satisfaction, and cycle time.
• Objectives: Specific, measurable goals that are aligned with the company's overall strategy.
• Initiatives: Specific actions taken to achieve objectives, such as process improvements or new product launches.
• Target Setting: The process of setting specific targets for each objective, based on historical data and industry benchmarks.
• Scorecarding: The process of tracking and evaluating progress toward objectives, using KPIs and other metrics.

Step-by-Step Process

1. Define the company's overall strategy: Identify the company's mission, vision, and goals, and ensure that all employees understand how their work contributes to these objectives.
2. Identify the four perspectives: Determine which measures will be used to evaluate performance from the Financial, Customer, Internal Process, and Learning & Growth perspectives.
3. Develop objectives: Set specific, measurable goals for each perspective, aligned with the company's overall strategy.
4. Create a strategy map: Visualize the relationships between objectives and initiatives across the four perspectives.
5. Establish KPIs: Select specific metrics to measure progress toward objectives, such as sales growth, customer satisfaction, and cycle time.
6. Set targets: Establish specific targets for each objective, based on historical data and industry benchmarks.
7. Monitor and evaluate progress: Track and evaluate progress toward objectives, using KPIs and other metrics.

Common Mistakes

• Mistake: Focusing too much on short-term financial metrics, such as ROI, without considering long-term strategic goals.
• Correction: Use a balanced set of metrics, including financial, customer, internal process, and learning & growth measures, to evaluate performance.
• Mistake: Not involving employees in the BSC process, leading to a lack of buy-in and engagement.
• Correction: Involve employees in the development of objectives and initiatives, and provide regular feedback and coaching to ensure they understand how their work contributes to the company's success.
• Mistake: Not regularly reviewing and updating the BSC, leading to a lack of relevance and effectiveness.
• Correction: Regularly review and update the BSC to ensure it remains aligned with the company's overall strategy and changing business conditions.

Decision-Making Tips

• When faced with a 'make-or-buy' decision, always isolate avoidable costs and consider strategic, not just quantitative, factors.
• When evaluating a new project, consider both financial and non-financial metrics, such as ROI, payback period, and customer satisfaction.
• When setting targets, use a combination of historical data, industry benchmarks, and strategic goals to ensure they are challenging yet achievable.

Quick Practice Scenario

A company is considering a new product launch, which is expected to generate $1 million in revenue and $500,000 in costs. The required rate of return is 12%. What is the expected ROI on this project?

Answer: 25% (=$1,000,000 / $4,000,000)

Explanation: The expected ROI is calculated by dividing the expected profit ($1,000,000) by the total investment ($4,000,000).

Last-Minute Cram Sheet

• Balanced Scorecard (BSC): A strategic management framework that measures performance from four perspectives: Financial, Customer, Internal Process, and Learning & Growth.
• Strategy Map: A visual representation of the BSC, showing how objectives and initiatives are linked across the four perspectives.
• Key Performance Indicators (KPIs): Specific metrics used to measure progress toward objectives.
• Objectives: Specific, measurable goals that are aligned with the company's overall strategy.
• Initiatives: Specific actions taken to achieve objectives.
• Target Setting: The process of setting specific targets for each objective, based on historical data and industry benchmarks.
• Scorecarding: The process of tracking and evaluating progress toward objectives, using KPIs and other metrics.
• Financial Perspective: Focuses on financial performance, including measures such as revenue growth, profitability, and ROI.
• Customer Perspective: Focuses on customer satisfaction, loyalty, and retention, including measures such as customer satisfaction surveys and net promoter scores.
• Internal Process Perspective: Focuses on internal processes and efficiency, including measures such as cycle time, quality, and productivity.
• Learning & Growth Perspective: Focuses on employee skills, knowledge, and innovation, including measures such as training hours, employee engagement, and innovation pipeline.
• ROI: Return on investment, calculated by dividing expected profit by total investment.
• Payback Period: The time it takes for an investment to generate enough cash to pay back its initial cost.
• Customer Satisfaction: A measure of how satisfied customers are with a company's products or services.
• Net Promoter Score (NPS): A measure of customer loyalty, calculated by subtracting the percentage of detractors from the percentage of promoters.