Chapter 22: Balanced Scorecard and Transfer Pricing

Balanced Scorecard Perspectives and Sample KPIs 1. Customer Perspective: Measures customer satisfaction and perception, which are critical for loyalty and growth. o KPIs:  On-time delivery rate  Customer complaints and satisfaction ratings  Order return percentage o Example: A retailer might target a specific on-time delivery percentage (e.g., 98%) to ensure customer satisfaction, using green/red/gray indicators to show progress. 2. Internal Processes Perspective: Focuses on operational efficiency and quality, assessing processes that directly impact product/service quality. o KPIs:  Accident-free days (workplace safety)  Percentage of defective products made  Cycle time for production or delivery o Example: A manufacturer may aim for fewer than 1% defective products to maintain high quality, identifying areas of improvement if targets aren’t met. 3. Innovation and Learning Perspective: Encourages continuous improvement and adaptability, which are essential for long-term success. o KPIs:  Number of sustainability training workshops  Patents applied for (innovation activity)  Employee training hours or satisfaction levels o Example: Tech companies may track the number of patents applied for annually as a measure of innovation, signaling investment in research and development. 4. Financial Perspective: Assesses traditional financial performance to ensure profitability and return to stakeholders. o KPIs:  Return on Investment (ROI)  Residual Income (RI)  Revenue growth or cost reduction targets o Example: A division with a 15% ROI goal might compare actual ROI to track financial health while balancing short-term profit with longterm value. Balanced Scorecard Implementation Example for Investment Centers Let’s assume a company with two divisions, LCD and Phone, implements the Balanced Scorecard to improve performance evaluation beyond just ROI and residual income. Perspective Customer Internal Processes Innovation & Learning Financial • LCD Division KPI On-time delivery rate (goal: 98%) Defective product rate (goal: <1%) Phone Division KPI Customer satisfaction score (goal: 90%) Production cycle time reduction by 5% Patents filed for new tech Employee satisfaction survey ROI of 30% Residual income target: $250,000 Example Analysis: o Customer Perspective: If the LCD division’s on-time delivery rate is 96%, below the 98% target, management might address logistics bottlenecks to meet customer expectations. o Internal Processes Perspective: If the Phone division’s production cycle is reduced by only 2% (goal: 5%), process adjustments might be needed to streamline operations. o Innovation and Learning Perspective: Employee satisfaction for the Phone division may indicate underlying issues; a drop in satisfaction might signal potential future challenges in quality and productivity. o Financial Perspective: Both divisions meet ROI targets, but with the Balanced Scorecard, these financial results are balanced with insights into customer experience, efficiency, and innovation. Limitations of Solely Financial Evaluation and Advantages of the Balanced Scorecard Limitations of Financial Measures: 1. Missed Long-Term Opportunities: Financial metrics alone may encourage managers to decline profitable projects if they lower ROI. 2. Size Bias: Residual income is less effective for comparing divisions of different sizes. 3. Short-Term Focus: Financial goals may inadvertently prioritize immediate gains over sustainable, long-term objectives. Balanced Scorecard Benefits: 1. Holistic Performance View: Incorporates customer satisfaction, operational quality, and employee development, aligning with both short- and long-term goals. 2. Strategic Alignment: Supports broader company objectives, encouraging managers to consider multiple performance aspects. 3. Enhanced Decision-Making: Encourages investment in projects that benefit customer satisfaction, innovation, and process efficiency, not just ROI. Example Classification of KPIs by Balanced Scorecard Perspective • • • • Customer (C): On-time delivery rate, customer complaints Internal Processes (P): Accident-free days, defective products made Innovation and Learning (I): Sustainability training workshops, patents applied for Financial (F): Residual income, sales returns By using the Balanced Scorecard, companies can integrate financial and nonfinancial metrics, offering a comprehensive framework to evaluate and enhance the performance of investment centers in a way that drives long-term value and aligns with strategic goals.