CHAPTER 13
THE BALANCED SCORECARD: STRATEGIC-BASED CONTROL
The Balanced Scorecard is a strategic management system that translates the vision and strategy of an
organization into operational objectives and measures. The Balanced Scorecard is compatible with
activity-based responsibility accounting because it focuses on processes and requires the use of activity–
based information to implement many of its objectives and measures.
LEARNING OBJECTIVES
After studying Chapter 13, students should be able to:
1. Compare and contrast activity-based and strategic-based responsibility accounting systems.
2. Discuss the basic features of the Balanced Scorecard.
3. Explain how the Balanced Scorecard links measures to strategy.
4. Describe how an organization can achieve strategic alignment.
KEY TOPICS
The following major topics are covered in this chapter (related learning objectives are listed for each
topic):
1. Activity-Based versus Strategic-Based Responsibility Accounting (LO 1)
2. Basic Concepts of the Balanced Scorecard (LO 2)
3. Linking Measures to Strategy (LO 3)
4. Strategic Alignment (LO 4)
I. ACTIVITY-BASED VERSUS STRATEGIC-BASED RESPONSIBILITY ACCOUNTING
Activity-based responsibility accounting represents a significant change in how responsibility is assigned,
measured, and evaluated. The activity-based system added a process perspective to the financial
perspective of the functional-based responsibility accounting system. In effect, responsibility accounting
changed from a one-dimensional system to a two-dimensional system, and from a control system to a
performance management system.
Continuous improvement efforts associated with responsibility accounting in an activity-based
environment are often fragmented, and they fail to connect with the organization’s overall mission and
strategy. Directed continuous improvement requires managers to carefully specify a mission and strategy
for their organization and identify the objectives, performance measures, and initiatives necessary to
accomplish this overall mission and strategy.
A strategic-based responsibility accounting system (strategic-based performance management system)
translates the strategy of an organization into operational objectives and measures. A strategic
performance management system can assume different forms, the most common being that of the
Balanced Scorecard (more fully explained in Learning Objective 2).
A. Assigning Responsibility
The strategic-based responsibility accounting system adds direction to improvement efforts by tying
responsibility to the firm’s strategy. Ideally, all individuals in the organization should understand the
organization’s strategy and know how their specific responsibilities support achievement of the strategy.
B. Establishing Performance Measures
In a strategic-based responsibility accounting system, performance measures must be integrated so that
they are mutually consistent and reinforcing. The performance measures must be balanced and linked to
the organization’s strategy. When the measures selected are balanced between lag measures and lead
measures, between objective measures and subjective measures, between financial measures and
nonfinancial measures, and between external measures and internal measures, the measures are
considered to be balanced.
C. Performance Measurement and Evaluation
In a strategic-based performance management system, customer and learning and growth perspectives are
included in the performance measurement and evaluation. Additional measures such as customer
satisfaction, customer retention, employee capabilities, and revenue growth from new customers and new
products should be included.
Performance evaluation should drive organizational change. Stretch targets are targets that are set at
levels, that, if achieved will transform the organization within a period of three to five years. The
measures used as stretch targets should be linked by causal relationships, and the targets are set through a
consensus of everyone in the organization.
D. Assigning Rewards
The activity- and strategic-based systems both use the same financial instruments to provide
compensation to those who achieve targeted performance goals. A key difference for both systems from
the traditional control system is the fact that records are based on much more than financial measures. In
order for the Balanced Scorecard to be effective, compensation must be tied to the scorecard measures.
Team-based rewards present another set of difficulties.
Teaching hint: Ask students how strategic-based responsibility accounting differs from activity-based
responsibility accounting. This question should provide the opportunity for some good discussion.
Exercises 13.4, 13.5 and 13.6 can be used effectively here.
II. BASIC CONCEPTS OF THE BALANCED SCORECARD
The Balanced Scorecard permits an organization to create a strategic focus by translating an
organization’s strategy into operational objectives and performance measures. The Balanced Scorecard
typically identifies objectives and measures for four different perspectives.
1. The financial perspective
2. The customer perspective
3. The internal business process perspective
4. The learning and growth (infrastructure) perspective
Strategy is defined as choosing the market and customer segments the business unit intends to serve,
identifying the critical internal and business processes that the unit must excel at to deliver the value
propositions to customers in the targeted market segments, and selecting the individual and organizational
capabilities required for the internal, customer, and financial objectives.
A. The Financial Perspective, Objectives and Measures
The financial perspective establishes the long- and short-term financial performance objectives expected
from the organization’s strategy and simultaneously describes the economic consequences of actions
taken in the other three perspectives. Thus, the objectives and measures of the other perspectives should
be chosen so that they cause or bring about the desired financial outcomes. The financial perspective has
three strategic themes: revenue growth, cost reduction, and asset utilization. The three themes are
constrained by the need for managers to manage risk.
A summary of the objectives and measures of the financial perspective can be found in Exhibit 13.6 on
page 686.
B. Customer Perspective, Objectives and Measures
The customer perspective is the source of the revenue component for the financial objectives. This
perspective defines the customer and market segments in which the business unit will compete and
describes the way that value is created for customers. Failure to deliver the right kinds of products and
services to the targeted customers means revenue will not be generated.
Once the customers and segments are defined, then core objectives and measures are developed which
will be common across all organizations. There are five key core objectives:
1. Increase market share
2. Increase customer retention
3. Increase customer acquisition
4. Increase customer satisfaction
5. Increase customer profitability
In addition to the core measures and objectives, measures are needed that drive the creation of customer
value and, thus, drive the core outcomes. Customer value is the difference between realization and
sacrifice, where realization is what the customer receives and sacrifice is what is given up.
A summary of the objectives and measures of the customer perspective can be found in Exhibit 13.7 on
page 688.
C. Process Perspective, Objectives and Measures
The internal business process perspective describes the internal processes needed to provide value for
customers and owners. Processes are the means by which strategies are executed. Thus, the process
perspective entails the identification of the processes needed to achieve customer and financial objectives.
To provide the framework needed for this perspective, a process value chain is defined. The process value
chain is made up of three processes: the innovation process, the operations process, and the post-sales
service process.
A summary of the objectives and measures of the process perspective can be found in Exhibit 13.8 on
page 693.
Cycle time (manufacturing) is the length of time it takes to produce a unit of output from the time
materials are received (starting point of the cycle) until the good is delivered to finished goods inventory
(finishing point of the cycle). Velocity is the number of units of output that can be produced in a given
period of time.
Manufacturing cycle efficiency (MCE) can be found as follows:
MCE = Processing time/(Processing time + Move time + Inspection time + Waiting time + Other non-
value-added time)
Cornerstone 13.2 (p. 691) provides a detailed illustration of MCE.
D. Learning and Growth Perspective
The learning and growth (infrastructure) perspective defines the capabilities that an organization needs to
create long-term growth and improvement. It is the source of the capabilities that enable the
accomplishment of the other three perspectives’ objectives. This perspective has three major objectives:
1. Increase employee capabilities
2. Increase motivation, empowerment, and alignment
3. Increase information systems capabilities
A summary of the objectives and measures of the learning and growth perspective can be found in Exhibit
13.9 on page 694.
III. LINKING MEASURES TO STRATEGY
The Balanced Scorecard is a collection of critical performance measures that have some special
properties, including:
1. The performance measures are derived from a company’s vision, strategy, and objectives.
2. Performance measures should be chosen so that they are balanced between outcome and lead
measures.
3. All scorecard measures should be linked by cause-and-effect relationships.
This cause-and-effect relationship is vital to the success of the Balanced Scorecard. Cause-and-effect
relationships are the means by which lead and lag measures are integrated and simultaneously serve as the
mechanism for expressing and revealing the firm’s strategy.
A testable strategy can be defined as a set of linked objectives aimed at an overall goal. The testability of
the strategy can be achieved by restating the strategy into a set of cause-and-effect hypotheses that are
expressed by a sequence of if-then statements.
Strategic feedback is available that allows managers to test the reasonableness of the strategy. Double-
loop feedback occurs whenever managers receive information about both the effectiveness of strategy
implementation as well as the validity of the assumptions underlying the strategy. It is the foundation for
strategic learning. Single-loop feedback emphasizes only effectiveness of implementation.
The strategy map is a useful tool that graphically illustrates the cause-and-effect relationships and
connects the Balanced Scorecard strategy with an organization’s operating activities. The strategy map
provides a concise and pictorial representation of the firm’s strategy. Cornerstone 13.3 (p. 696) illustrates
strategy mapping.
IV. STRATEGIC ALIGNMENT
The Balanced Scorecard is designed to bring about organizational change. In order for this change to
occur, the following must take place:
1. Employees must be fully informed of the strategy.
2. Employees must share ownership for the objectives, measures, targets, and initiatives.
3. Incentives must be structured to support the strategy.
4. Resources must be allocated to support the strategy.
V. INFORMATION ABOUT EXERCISES, PROBLEMS, AND CASES
Exercises and problems are described on the following page according to coverage of content, learning
objective(s), and level of difficulty. The time required to solve the problems is roughly proportional to the
level of difficulty.
In general, basic exercises/problems are fairly simple and straightforward. The text material is relatively
brief; only one or two concepts are covered. Basic exercises and problems should take about 15 to 20
minutes each.
Moderate exercises/problems may take longer and involve more concepts. These problems may have a
“twist” and require more thought. Moderate exercises and problems may take 20 to 40 minutes each.
Challenging problems are more comprehensive and may cover more concepts. The text material is
relatively longer and may include some ambiguity. Challenging problems may take 60 to 90 minutes
each.
Cornerstone
Exercise (CS)/
Exercise/
Problem/Case
Topic
Learning
Objective
Degree of
Difficulty
CS 13.1
Cycle Time and Velocity
LO 2
Basic
CS 13.2
MCE
LO 2
Basic
CS 13.3
Strategy Map
LO 3
Basic
13.4
Activity-Based Responsibility Accounting versus
Strategic-Based Responsibility Accounting
LO 1
Basic
13.5
Activity-Based Responsibility Accounting versus
Strategic-Based Responsibility Accounting
LO 1
Basic
13.6
Activity-Based Responsibility Accounting versus
Strategic-Based Responsibility Accounting
LO 1, 3
Basic
13.7
Balanced Scorecard, Perspectives, Classification of
Performance Measures
LO 1, 2
Basic
13.8
Cycle Time and Conversion Cost per Unit
LO 2
Basic
13.9
Cycle Time and Velocity, MCE
LO 2
Basic
13.10
Cycle Time and Velocity, MCE
LO 2, 3
Basic
13.11
Balanced Scorecard, Lead and Lag Variables, Double-
Loop Feedback
LO 1, 2, 3
Moderate
13.12
Testable Strategy, Strategy Map
LO 3
Moderate
13.13
Balanced Scorecard, Strategy Translation, Strategy
Map, Double-Loop Feedback
LO 2, 3
Moderate
13.14
Balanced Scorecard, Strategic Alignment
LO 4
Moderate
13.15
CPA-Type Exercise
LO 3
Basic
13.16
CPA-Type Exercise
LO 2
Basic
13.17
CPA-Type Exercise
LO 2
Basic
13.18
CPA-Type Exercise
LO 2
Basic
13.19
CPA-Type Exercise
LO 2
Basic
13.20
Activity-Based Responsibility Accounting versus
Strategic-Based Responsibility Accounting
LO 1
Moderate
13.21
Scorecard Measures, Strategy Translation
LO 2, 3
Moderate
13.22
If-Then Statements, Strategy Map
LO 2, 3
Moderate
13.23
Strategic Objectives, Scorecard Measures, Strategy
Map
LO 2, 3
Moderate
13.24
Cycle Time, Conversion Cost per Unit, MCE
LO 2
Moderate
13.25
MCE, Testable Strategy, Strategy Map
LO 2, 3
Moderate
13.26
Cycle Time, Velocity, Product Costing
LO 3
Challenging
13.27
Balanced Scorecard, Non-Value-Added Activities,
Strategy Translation, Kaizen Costing
LO 1, 2, 3, 4
Challenging
13.28
Cyber Research Case
LO 1, 2, 3, 4
Challenging
LIST OF ILLUSTRATIONS
Illustration
Topic
Exhibit 13.1
Responsibility Assignments Compared
Exhibit 13.2
Performance Measures Compared
Exhibit 13.3
Performance Evaluation Compared: Activity-Based versus Strategic-Based
Exhibit 13.4
Rewards Compared
Illustration
Topic
Exhibit 13.5
Strategy Translation Process
Exhibit 13.6
Summary of Objectives and Measures: Financial Perspective
Exhibit 13.7
Summary of Objectives and Measures: Customer Perspective
Exhibit 13.8
Summary of Objectives and Measures: Process Perspective
Exhibit 13.9
Summary of Objectives and Measures: Learning and Growth Perspective
Exhibit 13.10
Strategy Map for Cornerstone 13.3
Exhibit 13.11
Targets and Weighting Scheme Illustrated