The Balanced Scorecard: A Tool to Implement

Strategy 181
CHAPTER 7 balanced scorecard consists of an
A integrated system of performance measures
that are derived from and support the
company's strategy. Different companies
THE BALANCED sCORECARD: will have different balanced scorecards because they have different strategies. A
well-constructed balanced scorecard provides a means for guiding the company
A TOOL TO IMPLEMENT STRATEGY and also provides feedback concerning the effectiveness of the company's strategy.

It is called the balances scoreard because it balances the use of financial and
THE BALANCED ScORECARD
nonfinancial pertormance measures to evaluate short-run and
long-run
performance in a single report. The balanced scorecard reduces managers,
The balanced scorecard translates an organization's mission and strategy into a
emphasis on short-run financial petrformance, such as quarterly earnings. That's
set of performance measures that provides the framework for implementing the
because the nonfinancial and operational indicators, such as product quality and
strategy. The balanced scorecard does not focus solely on achieving financial
customer satisfaction,
measure à company is making for the long run.
changes that
objectives. lt also highlights the nonfinancial objectives that an organization must
The financial benefits of these long-run changes may not appear immediately in
achieve to meet its financial objectives. The scorecard measures an organization's short-run earnings, but strong improvement in nonfinancial measures is an
performance from four perspectives: (1) financial, (2) customer, (3) internal indicator of economic value creation in the future.
processes, and (4) learning and growth. A company's strategy influences the
measures it uses to track performance in each of these perspectives.
The balanced scorecard is depicted in Figure 7-1.

Strategic information using critical success factors such as growth in sales and
cash flow, stock price, market share, product quality, customer Figure 7-1: The Balanced Scorecard
carnings. and
satisfaction, opportunities provides a road map for a firm to chart its
growth How do we look
and Financial Perspective
competitive course serves as a benchmark for competitive success. To
emphasize the importance of using strategic information, both financial and
to the fim's
Owners? Goals Measures
nonfinancial, accounting reports of a firm's performance are now often based on
critical success factors in different dimensions.
n which
How do our
activities must
Financial performance customers
measures summarize the results of past actions and are We excel?
seeus?
important to a firm's owners, creditors,
employees and so forth. Nonfinancial
performance measures concentrate on current activities which will be the drivers Internal Operations Perspective
of future financial performance. Thus, effective Customer Perspective
management requires a balanced
prospective on performance measurement, a viewpoint that some call thee Goals Measures Goals Measures
balanced scorecard" perspective. The balance scorecard
measures in four key areas: integrates performance
(1) financial perspective,
(2) customer satisfaction,
(3) internal business processes, and
(4) innovation and learning. Innovation and Learning Perspective

Goals Measures

How can we continually

improve and create value?
 The Balanced Scorecard: A Tool to Implement Strategy 1883
182 Chapter 7
SCORECARD (3) Internal Business Processes. Measures of the efficiency and effectiveness
FOUR PERSPECTIVES OF THE BALANCED
with which the firm produces the product or service.
and market value among
() Financial Perspective. Measures of profitability
others, as indicators of how well the firm satisfies its owners and shareholders Objectives Measures
These financial measures show the impact of the firm's policies and Innovation:

procedures on the firm's current financial position and therefore its current Increase the number of new produces Number of new products vs. planned
Increase proprietary products Percentage revenue from proprietary
return to the
shareholders products
Objectives Measures Decrease new product development time Time to market (from start to finish)
Revenue Growth: Operations:
Increase the number of new products Percentage of revenue from new products
Increase process quality Quality costs
Create new applications Percentage of revenue from new
applications
Output yields
Percentage of defective units
Develop new customers and markets Percentage of revenue from new sources
Increase prOcess efficiency Unit cost trends
Adopt a new pricing strategy Product and customer profitability
Output/ inputts)
Cost Reductio: Decrease process time Cycle time and velocity
Reduce unit product cost Unit product cost MCE
Reduce unit customer cOst Unit customer cost
Reduce distribution channel cost Cost per distribution channel
Postsales Service
Increase service quality First-pass yields
Asset Utilization: Increase service efficiency Cost trends
Improve asset utilization Return on investment Output/ input
Economicvalue added Decreaseservicetime Cycletime
(2) Customer Satisfaction. Measures of quality service and low cost, nnovation and Learning. Measures of the firm's ability to develop
and utilize
others, as indicators of how well the firm satisfies its customers. among (4)
the future.
human resources to meet the strategic goals now and into
Objectives Measures
Core: Objectives Measures
Increase market share Employee satisfaction ratings
Market share (percentage of market) Increase employee capabilites
Increase customer retention Employee turnover percentages
Percentage growth of business from Employee productivity (revenue / employee)
existing customers Hours of training
Percentage of repeating customers
Increase customer acquisition
Number of new customers Strategicjob coverage rato (percentage of
Increase customer satisfaction critical job requirements filled)
Increase customer profitability Ratings from customer surveys
Customer profitability Increase motivation and alignment Suggestions per employee
Performance Value: Suggestions implemented per employee
Decrease price
Price Increase information systems capabilities Percentage of processes with real-time
Decrease postpurchase costs feedback capabilities
Improve product functionality Postpurchase costs Percentage of customer-facing employees
Improve product quality Ratings from customer with on-line access to customer and
Increase delivery reliability Percentage of returns surveys productinformation
On-time delivery percentage
ImproveprOduct image and reputation Aging schedule
Ratings from customer surveys
184 Chapter7 The Balanced Scorecard: A Tool to Implement
LLearming and Growth Perspective
Strategy 185
Ilustrative Balanced Seorecard
Figure 7-2:
Balanced Scorecard for
XYZ Inc., for the Year 20X3 Develop process Percentage of
The skill employees Employee 90% 92%
trained in training
Actual
Terget process and
programs
Initietives PoriomenCe_ Performance quality
Objectives Measures
Financial management
Perspective Empower Percentage of Have
Manage costs
P40,000,000 P42,000,000 workforce frontine
85% 90%
Operating
income from and unused workers
Supervisors act
as coaches
productivity gain capacty empowered to rather than
Increased Operating Build strong P30,000,000 P68,400,000 manage decision
income from custom processes makers
shareholder
value growtn relationships Align employee Employee
% 6.48% and organization satisfaction Employee 80% of 88% of
Revenue Build strong goals Suvey
participation
and employees employees
growth Customer give top two give top two
relationships Suggestons
program to
ratngs rabngs
Customer build teamwork
Perspective
Increase market Market share in ldentihyfuture 5% %
Enhance Percentage of Improve of-ine 80% 80%
information manufacturing data gathering
share Communication neeas
networks segment customers
system processes with
capabilities real-time
feedback
New customers ldentity new 5 6 Improve Number of Organize R &D 5 5
target customer manufacturing major /manutactunng
segments processes improvements teams modify
90% of In process processes
Increase Customer
satsfaction
Increase 87% of controls
Customer Customer focus Customers give Customers give
satisfacton sUvey of sales top two ratngs top two ratngs
(Revenues in 20X1-Revenues in 20X0 Revenuesin20X0=(P28,750,000-P27,000,000) P27,000,000
organizaton 6.48%.
Internal Business Process Customers increased from 40 to 46 in the year20X1.
Perspective Yield =
Units of CM1 produced Units of CM1 started x 100 =
1,150,000 1,450,000 x 100 79.3%.
=

Improve Percentage of Organize R& D 75% 75%

manutactunng processes with
manufacturing Features of a Good Balanced Scorecard
capability advanced teams to
controls implement
advanced . The balanced scorecard should tell the story of a company's strategy by
controls For example, if the
Improve Yield articulating a sequence of cause-and-effect relationships.
low-cost producer with
manufactuning
ldentfy root 78% 79.3% objective of XYZ Manufacturing Co. is to be a
causes of
scorecard describes the specific objectives
quality and problems and emphasis on growth, the balanced
productvity that lead to improvements
mprove quality and measures in the learning and growth perspective
Reduce delivery Order delivery would lead to increased customer
Reengineer 30 days n internal business processes. These
time to ume order delivery 30 days well as higher operating income and
customers
process satisfaction and market share as
in the scorecard is part of a cause-and-
Meet specified On-time shareholder wealth. Each measure
delivery dates Reenginer 92% 90% formulation to financial results.
delivery order delivery effect chain, a linkage from strategy
process
 The Balanced Scorecard: ATool to Implement 187
186 Chapter 7
Strategy
communicate the strategy to all members of the organization b 6. Don't use too
many measures. It clutters the balanced scorecard and takes
.It helps to and attention away from the measures that are critical for
the strategy into a coherent and linked set to understandable
translating and employees are guided by the
implementing strategy.
measurable operational targets. Managers that aim to achieve the Evaluating the Success of a Strategy
decisions
scorecard and take actions and make
company's strategy.
In for-profit companies, the balanced
scorecard places strong emphasis on To evaluate the success of a company's strategy, 'we analyze changes in operating
financial objectives and measures.
When financial and nonfinancial income into components that can be identified with growth, product
of the nonfinancial measures serve as differentiation, and cost ledership. Subdividing the change in operating income
performance measures are linked, many to evaluate the success of a company'sstrategy is similar to variance analysis. The
leading indicators of future financial performance.
on key measures to be used by focus here. however, is on comparing actual operating performance over two
The balanced scorecard should focus only
most critical ones.
different time periods and explicitly linking it to strategic choices. A company is
identifying only the considered to be successful in implementing its strategy when the amounts of the
5. The scorecard should highlight suboptimal tradeoffs that managers may make
when they fail to consider operational and financial measure together. product differentiation, cost leadership, and growth components align closely with
its straiegy.
Pitfalls in Implementing a Balanced Scorecard
The folowing analytical relationships may be used:
Pitfalls to avoid in implementing a balanced scorecard include the following:
. Growth componemt
1. Don't assume the cause-and-effect linkages are precise.
They are
merely
the strength and The calculations for the growth component are similar to Sales-Volume or
hypotheses. evidenceof
Over time, a company must gather
speed of the linkages among the nonfinancial and financial measures Quantity Factor.
2. Don't seek improvements across all of the measures all of the time. Trade Pevenue effect of growth component (Quantity Factor)
off may need to be made across various strategic goals. For example, strive Pxx
Actual units of output sold this year
for quality and on-time performance but not beyond a point at which further Less: Actual units of output sold last year
improvement in these objectives may be inconsistent with long-run profit Pxx
Increase (Decrease)
maximization. last year
Multiply by: Output price
Don't use only objective measures in the balanced scorecard. The balanced Favorable (Unfavorable) Pxx
scorecard should include both objective measures (such as operating income Cost effect of growth component"
from cost
leadership, market share and manufacturing yield) and subjective
measures (such as customer and employee satisfaction ratings). When using Actual units of input or capacity that would
subjective measures, though, management must be careful to trade off the have been used to produce this year's output
benefits of the richer information these measures provide against the assuming the same input-output relationship PXX
imprecision and potential for manipulation. that existed last year
Don't fail to consider both costs and benefits of initiatives such as Less: Actual units of inputs or capacity
on information technology and R&D before
spending to produce last year's output
including these objectives in the Increase (Decrease)
Pxx
balanced scorecard. Otherwise, management may focus the
measures that will not result in overall organization
on
Multiply by: Input prices
last year
long-run financial
benefits (Favorable) Unfavorable
PAXX
Don't ignore nonfinancial measures when evaluating managers and
employees. Managers tend to focus on what their performance is measured
by. Excluding nontinancial measures when evaluating each cost element such as direct materials cost,
performance wil *This will be computed for
reduce the significance and importance that customer-service cost.
managers give nonfinancial conversion costs, selling and
measures.
 The Balanced
188 Chapter7 Scorecard: ATool to lImplement Strategy 189
1Illustrative Problem 7-1: Strategy; Balanced Scorecard; Strategic Analysis
2. Price-Recovery component
of Operating Income; ldentifying and Managing Unused Capacity
Revenue effect of price-recovery component (Price Factor)
Pxx Metro Corporation makes a
special-purpose machine OM used in the textile
Output price this year
ndustry. Metro has designed the OM machine for 20X3 to be distinct from its
Less: Output price last year XX
Increase (Decrease) in Output price PXX ompetitors. It has been generally regarded as a superior machine. Metro presents
the following data for the years 20X2 and 20X3.
this year
Multiply by: Actual units of output sold XX
Favorable (Unfavorable) PXX
20X2 20X3
Cost effect of price-recovery component . Units of OM produced and sold 200 210
Input prices this year Px 2. Selling price
Less: Input prices last year XX P40,000 P42,000
Increase (Decrease* Pxx 3. Direct materials (kilograms) 300,000 310,000
Multiply by: Actual units of inputs or capacity 4. Direct materials cost per kilogram P8 P8.50
that would have been used to produce this
year's output assuming the same input-output 5. Manufacturing capacity in units of OM 250 250
relationship that existed last year XX 6. Total conversion costs P2,000,000 P2,025,000
(Favorabie) Unfavorabie* PxX
7. Conversion costs per unit of capacity P8,000 P8,100
*To be computed for each cost element.
8. Selling and customer-service capacity 100 customers 95 customers
3. Productivity component
9 Total selling and customer-service costs P1,000,000 P940,500
Actual units of inputs or capacity
used to produce this year's output 10. Selling and customer-service capacity P10,000 P9,900
Pxx
Less: Actual inputs or capacity that would cost per customer

have been used to produce this year's 12 12

11. Design staff
output assuming the same input-output
relationship that existed last year 12. Total design costs P1,200,000 P1,212,000
Increase (Decrease) Pxx 13. Design costs per employee P100,000 P101,000
Multiply by: Input price last year XX
Favorable (Unfavorable)* reduce direct materials
PXX Metro produces defective machines, but it wants to
no
Conversion costs in each year depend on
Favorable if it increases operating income. Unfavorable if it decreases usage per OM machine in 20X2.
operating OM units that be produced, not the
production capacity defined in terms of
can
income.
customer-service costs depend on the
actual units of OM produced. Selling and
can support, not the actual
number of customers
number of customers that Metro 20X2 and 80 customers in 20X3. At
the
Metro serves. Metro has 75 customers in of
determine the number
uses its discretion to
Start of each year, management staff and costs have no direct relationship
design staff for the year. The design
or the number of customers
to whom OM is
wIith the quantity of OM produced
sold.
190 Chapter 7 TheBalanced Scorecard: A Tool to Implement
Strategy 191
Required Improvements in these customer measures are leading indicators of superior financial
I. Is Metro's strategy one of the product differentiation or cost leadership? performance.

Explain briefly. Internal Business Process Perspective

2. Describe briefly key elements that you would include in Metro's balanced
(1) Manufacturing quality
scorecard and the reasons for doing so.
3. Calculate the operating income of Metro Corporation in 20X2 and 20X3.
(2) New product features added
(3) Order delivery time
Calculate the growth. price-recovery: and productivity components that Improvements in these measures are expected to result in more satisfied customers and
explain the change in operating income from 20X2 to 20X3. in turn superior financial performance.
Comment on your answer in requirement 4. What do these components
indicate? Learning and Growth Perspective

Where possible, calculate the amount and cost of unused capacity for (a) (1) Development time for designing new machines
manufacturing. (b) selling and customer service, and (c) design at the (2) Improvements in manufacturing processes
beginning of the year 20X3 based on year 20X3 production. If you could not (3) Employee education and skill levels
calculate the amount and cost of unused capacity, indicate why not. 4) Employee satisfaction

Improvements in these measures have a cause-and-effect relationship with

Suppose Metro can add reduce its manufacturing capacity in increments of
or
30 units. What is the maximum amount ofcosts that Metro could save in 20X3 improvements in internal business processes, which in turn lead to customer
by downsizing manufacturing capacity? satisfaction and financial performance.
8. Metro, in fact, does not eliminate any of its unused manufacturing capacity. 3. Operating income for each year is as follows:
Why might Metro not downsize?

Answer: 20X2 20X3

Revenue (P40,000 x 200, PA42,000 x 210) P8.000.000 P&,820,000
1. Metro Corporationfollows a product differentiation Costs
machine is distinct from its competitors and strategy in 20X3. Metro's OM Direct materials costs (P8 x 300,000;
generally
competitors' products. To succeed, Metro must continue toregarded
as superior to
P8.50 x 310,000) 2,400,000 2,635,000
and charge a premium price. differentiate its product
Manufacturing conversion costs
(P8,000 x 250; P8,100x 250) 2,000,000 2,025,000
2. Balanced Scorecard measures for 20X3 follow:
Selling &customer service costs
Financial Perspective
(P10,000 x 100; P9,900 x 95) 1,000,000 940,500
Design costs (P100,000 x 12; 1,200.000 1,212,000
(1) Increase in operating income from P101,000 x 12)
(2) Price premium earned on products
charging higher margins
Total costs 6,600,000 6,812.500
These measures indicate whether Metro has
been able to Operating income P1.400.000 P2.007.500
achieve operating income increases charge premium prices and
through product differentiation. P607,500 F
Change in operating income
Customer Perspective
(1) Market share in high-end
(2) Customer satisfaction
special-purpose textile machines
(3) New customers
192 Chapter 7 The Balanced Scorecard: ATool to Implement
Strategy193
In summary, the net increase in
4. The Growth Component operating income as a result of the growth
component equals:
Revenue effect Actual units of Actual units of
Output
output sold price
of growth output sold in
in 20X2
Revenue effect of growth component P400,000 F
20X3 n 20X2
component Cost effect of growth component
120,000 U
Increase in operating income due to growth component P280.000 F
(210 200) x P40,000 P400,000 F*
The Price-Recovery Component
Alternative Presentation: Revenue effect of Actual units
Revenue effect of growth component (Quantity Factor)
price-recovery Output price Output pricee of output
in 20X3 in 20X2
Actual units of output sold this year 210 component sold in 20X3
Less: Actual units of output sold last year 200 (P42,000- P40,000) x 210 P420,000 F
Increase (Decrease) 10
Multiply by: Output price last year P 40-000
Favorable Actual units of inputs or
P400.000 Cost effect of Input Input capacity that would have been
price prices prices x used to produce year 20x3
Actual units of input or Actual units of in year in year
capacity that would have been inputs or
recovery Output assuming the same
Cost effect of Input comnonent 20X3 20X2
used to produce year 20X3 input-output relationship that
growth
capacity used to prices
output assuming the same X in 20X2 existed in 20X2
component produce
input-output relationship that 20X2 output
existed in 20X2

Direct materials costs that would be Direct materials costs (P8.50-P8) x 315,000 =
P157,50 U
of the 200 units produced in
required in 20X3 to produce 210 units instead Manufacturing conversion costs (P8,100-P8,000) x 250 25,000 U
20X2, assuming the 20X2
continued into 20X3, equal 315,000 input-output relationship Selling and customer-service costs (P9,900-P10,000) x 100 10,000 U
kilogram [(300,000 200) x 210J.. Design costs (P101,000-P100,000) x 12 12000 U
Manufacturing conversion costs and
selling and customer-service costs will not P184.500 U
change since adequate capacity exists in 20X2 to Total cost effect of price-recovery component
customers. R& D costs would not support year 20X3 output and
sell the higher 20X3 volume in change in 20X2 if Metro had to produce and In summary, the net increase in operating income as a result of the price-
20X2.

The cost effects of recovery component equals:

growth component are:
Revenue effect of price-recovery component P420,000 F
Direct materials costs 184,500 U
Manufacturing conversion costs (315,000-300,000) x P8 P120,000 U Cost effect of price-recovery component
Selling and customer-service costs (250-250)x P8,000 Increase in operating income due to price-recovery component P235.500 F
Design costs (100-100) x P25,000 =
Cost effect of growth component (12-12)xP100,000
P120.000 U
 TheBalanced Scorecard: A Tool to
194 Chapter 7 Implement Strategy195
6. The amount and cost of unused capacity at the beginning of year 20X3
The Productivity Component year 20X3 production follows: based on

Actual units of inputs or Amount of

Actual units of Input Cost of

Productivity inputs or capacity that would have prices Manufacturing, 250-210; (250-210) x P8,100 Unused Capacity Unused Capacity_
component = been used to produce year X in 20X3
Selling and customer service, 100-80; (100-80)
40 P324,000
capacity used
20X3 output assuming the x P9,900
to produce 20 198,000
same input-output Design
Discretionary
year Discretionary
20X3 output relationship that existed in cost, so cannot cost so cannot be
20X2 determine unused calculated*
capacity*
The absence of a cause-and-effect relationship makes
The productivity component of cost changes are: identifying unused capacity for
discretionary costs difficult. Management cannot determine the R & D resources used for
Direct materials costs (310,000-315,000) x P8.50 =P42,500 F the actual output produced to compare R & D
capacity against.
Manufacturing conversion costs (250-250) x P8,1000 =

7. Metro can reduce manufacturing capacity from 250 units to 220 (250 -30) units.
Selling and customer-service costs (95-100)x P9,900
49,500 F Metro will save 30 x P8.
Design costs (12-12)x P101,000 = P243,000. This is the maximum amount of costs
=

Metro can save in 2013. It cannot reduce capacity further (by another 30 units to
Change in operating income due to productivity component P92.000 F 190 units) because it would then not have enough capacity to manufacture 210
units in 20X3 (units that contribute significantly to operating income).
The change in operating income between 20X2 and 20X3 can be analyzed
as follows:
8. Metro may choose not to downsize because it projects sales increases that would
Revenue lead to a greater demand for and utilization of capacity. Metro may have also
Revenue and Cost decided not to downsize because downsizing requires a significant reduction in
and Cost Effects of Cost Effect Income capacity. For example, Metro may have chosen to downsize some more
Income Efeets of Price Statement manufacturing capacity if it could do so in increments, of say, 10, rather than 30
Statement Growth Recovery
Productivity Amounis units. Also, Metro may be focused on product differentiation, which is key to its
Amounts in Component Component Component in 20X3 strategy, rather than on cost reduction. Not reducing significant capacity also
20X2 in 20X3 in 20X3 in 20X3 (5)=
(1) (2) helps to boost and maintain employee morale.
(3) (4) (++9+4
Revenues P8,000,000 P400,000 F P420,000 F
Costs 6.600.000 120.000U 184,500 U P8,820,000
p92.000 F 6.812,500
Operating
income P1400,000 P280.000 F 235.500 F P92.000 F P2,007,500

P607.500 F
Change in operating income
5. The analysis of
operating income indicates that a
increase in operating income resulted from Metro'ssignificant amount of the
strategy. The company was able to continue product differentiation
growing sales. Metro was als0 able to earn to charge a premium price while
improving its productivity. additional operating income by
 196 Chapter 7 The Balanced Scorecard: A Tool to Implement Strategy 197
Internal Business Process Performance As shown in the diagram, the throughput time, or manufacturing cycle time, is
made up of processoftime, inspection time, move time, and queue time. Process
self-explanatory. However, three are not time is the amount time
work is actually done the product. Inspection time
Most ofthe performance measures are

cycle efficiency (MCE)

on

delivery cycle time, throughput time, and manufacturing below. is the amount ume spent ensuring that the product is not defective. Move time
of
discussed
move materials or partially completed products from
are time
These three important performance measures
is the required to
workstation to workstation. Queue time is the amount of time a product spends
Figure 7-3: Delivery Cycle Time and Throughput waiting to be worked on, to be moved, to be inspected, or to be shipped.
(Manufacturing Cycle) Time
As shown at the bottom of the diagram, only one of these four activities adds value
Customer's to the product-process
time. "The other three activities inspecting, moving, and
-

Order Production Goods queuing- add no value and should be eliminated as much as possible.
Received Started Shipped
Manufacturing Cycle Eficieney (MCE). Through concerted efforts to eliminate
the non-value-added activities of inspecting, moving, and queuing, some
levels.
companies have reduced their throughput time to only a fraction of previous
weeks
Wait Time Process Time +Inspection Time + Move Time+Queue Time In turn, this has helped to reduce the delivery cycle time from months to only
to be a key measure in delivery-
or hours. Throughput time, which is considred
can be put into better perspective by computing the manufacturing
Throughput (Manufacturing Cycle) Time performance, value-added time
cycle efficiency (MCE). The MCE is computed by relating the
Delivery Cycle Time to the throughput time. The formula is:

Value-Added Time Non-Value-Added Time

-

Value-added time
Process Time Wait Time MCE
Inspection Time
Throughput (manufacturing cycle) time
Move Time in the production
If the MCE is less than 1, then non-value-added time is present
Queue Time that half of the total production
process. An MCE of 0.5, for example,
would mean

similar non-value-added activities. In

time consisted of inspection, moving, and
Delivery Cycle Time. The amount of time from when an order eceived from a many manufacturing companies, the
MCE is less than 0.1 (10%), which means
customer to when the completed order is activities that do not add value
time is clearly a key concem to shipped is called delivery time cycle. This that 90% of the time a unit is in process is spent on
are able to reduce non-value-
many customers, who would like the to the product. By monitoring the MCE. companies
time to be as short as possible. Cutting
the delivery cycle hands of customers more quickly
added activities and thus get products into the
a key competitive advantage and may bedelivery cycle time may give a company
necessary for survival. and at a lower cost.
many companies would include this
performance Consequently,
scorecard. measure on their balanced

Throughput (Manufacturing Cycle) Time. The

raw materials into completed products is called amount of time required to turn
cycle time. The relation between throughput time, or manufacturing
the delivery cycle time and the
(manufacturing cycle) time is illustrated in the diagram
above.
throughput
 TheBalanced Scorecard: A Tool to Implement Strategy 199
198 Chapter 7
llustrative Problem 7-2: Measures of Internal Business Proces Performance REVIEw QUESTIONS AND PROBLEMS

Southwest Company keeps careful track of the time relating to orders and their Questions

production. During the most recent quarter, the following average times were
1. Give the major weakness of each of the three competitive strategies: (1)
recorded for each unit or order:
cost leadership, (2) differentiation, and (3) focus.
Days
Wait time 17.0 2. What is a balanced scorecard? What is the primary objective when using
Inspection time 0.4 a balanced scorecard?
Process time 2.0
Move time 0.6 3. Contrast using the balanced scorecard with using only financial measures

Queue time 5.0 of succesSs.

Goods are shipped as soon as production is completed. 4. How can an analyst incorporate the industry-market-size factor and the
interrelationships between the growth, price-recovery, and productivity
income?
REQUIRED: components into a strategic analysis of operating
1. Compute the throughput time, or velocity of production. company?
5. Why does balanced scorecard differ from company to
2. Compute the manufacturing cycle efficiency (MCE).
3. What percentage ofthe production time is spent in non-value-added activities? time and the
6. What is the difference between the delivery cycle
4. Compute the delivery cycle time. elements make up the throughput time?
throughput time? What four
elements be placed?
Into what two classes can these four
Solution:
does the balanced scorecard include financial performance
. Throughput time =Process time + 7. Why internal business processes are
Inspection time+ Move time +Queue time measures as well as measures of how well
2.0 days + 0.4 days + 0.6 days + 5.0 days
8.0 days doing?
manufacturing cycle efficiency
(MCE) of less than 1,
2. Only process time is value-added time; therefore, the computation of the MCE
8. If a company has a would interpret an MCE of 0.40?
would be as follows: what does it mean? How you

Business Process Performance)

MCE = Value-added time 2.0 days Problem (Measures of Internal
Throughput time 0.25
8.0 days Cavite, has recently begun
a
Fabrications, Ltd., of Dasmariñas, JIT
Thus, once put into production, a typical unit is actually Melody in conjunction with a
move toward

25% of the time. being worked on only continuous improvement campaign

has developed new performance
Management
production and purchasing. operating data have been
of this campaign. The following
Since the MCE is 25%, the complement of this measures as part
figure, or 75% of the total over the last
four months:
production time, is spent in non-value-added activities. gathered

4. Delivery cycle time Wait time +

17.0 days +
Throughput time
8.0
= 25.0 days
days