Balanced Scorecard

Balanced Scorecard

During this activity, you learn what a balanced scorecard is, the information it provides, and how to best utilize this information. After viewing an example, you will have an opportunity to practice identifying gaps. For your graded assignment, you will identify gaps and make appropriate recommendations.

What is a balanced scorecard?

At its core, the balanced scorecard is a tool an organization can use to measure its performance. Unlike other tools that may focus just on financial measures, for example, the balanced scorecard takes many segments of the organization into account. This creates a more holistic view of the organization’s performance without focusing too heavily on any one set of controls. The balanced scorecard generally looks at four aspects of company performance: financial, customer, internal processes, and people/innovation/growth assets. When using a balanced scorecard, a manager will set goals in each of these four areas and measure the organization’s process against these goals.

Worked Example

Now that you know what a balanced scorecard is, study the following example to learn how you can use it to identify gaps and develop recommendations to address those gaps.

The balanced scorecard shown is for Palmer Pickles, a medium-sized, family owned organization located in Nashville, TN that creates, packages, and sells gourmet, artisanal pickles. The Palmer family controls the management of the company and makes all major decisions for the organization. The organization buys cucumbers from local farms and pays a freight company to ship them to the Palmer Pickles manufacturing, packaging, and warehouse facility. Once the pickles arrive at the facility, they are brined in large wooden barrels for a certain length of time in different spices and solutions. Once the brining is complete, the pickles are moved to glass bottles which are sealed, labeled, packaged, and shipped out to customers, who are made up of specialty grocery stores and independent restaurants. The company also sells its pickles at several farmers’ markets local to its area. The workforce at the facility is around 100 employees, and many of them have been with the company since it started in 1994. Currently, the Palmer family is thinking of expansion, since they recently signed a contract with a national grocery retailer to carry their products.

Aspect of Company Performance Factors to be Considered Organizational Goal (per quarter) Actual Performance (most recent quarter)
Financial Quarterly Profit Results Inventory Turnover (rate of product manufactured in that quarter sold within 1-2 months) $20,000 90% $25,000 110%
Customer Customer Satisfaction Rate Customer Recommendation Rate (rate of new business generated by recommendations from existing customers) 95% 40% 80% 45%
Internal Processes Duplicate Activities Across Functions (percent of the activities completed that are duplicated in another function) Process Automation (percent of the processes employed in production activities that are automated) 5% 50% 10% 48%
People/Innovation/Growth Assets Employee Turnover Employee Job Satisfaction 10% 95% 15% 90%

Worked Example

Gaps Between Organizational Goals and Actual Organizational Performance

Aspect of Company Performance Factors to be Considered Organizational Goal (per quarter) Actual Performance (most recent quarter) GAPS
Financial Quarterly Profit Results Inventory Turnover (rate of product manufactured in that quarter sold within 1-2 months) $20,000 90% $25,000 110% Quarterly profits were higher than anticipated ($25,000 versus $20,000), as was inventory turnover rate (110% versus 90%).
Customer Customer Satisfaction Rate Customer Recommendation Rate (rate of new business generated by recommendations from existing customers) 95% 40% 80% 45% Customer satisfaction was lower than expected (80% versus 95%), while customer recommendation rates were higher (45% versus 40%).
Internal Processes Duplicate Activities Across Functions (percent of the activities completed that are duplicated in another function) Process Automation (percent of the processes employed in production activities that are automated) 5% 50% 10% 48% Duplicate activities across functions were higher than the goal (10% versus 5), while process automation was just a bit lower (48% versus 50%).
People Innovation Growth Assets Employee Turnover Employee Job Satisfaction 10% 95% 15% 90% Employee turnover was higher than anticipated (15% versus 10%), while job satisfaction was lower (90% versus 95%).

Recommendations based on identified Gaps: Financial

Aspect of Company Performance Factors to be Considered Organizational Goal (per quarter) Actual Performance (most recent quarter) GAPS
Financial Quarterly Profit Results Inventory Turnover (rate of product manufactured in that quarter sold within 1-2 months) $20,000 90% $25,000 110% Quarterly profits were higher than anticipated ($25,000 versus $20,000), as was inventory turnover rate (110% versus 90%).
Customer Customer Satisfaction Rate Customer Recommendation Rate (rate of new business generated by recommendations from existing customers) 95% 40% 80% 45% Customer satisfaction was lower than expected (80% versus 95%), while customer recommendation rates were higher (45% versus 40%).
Internal Processes Duplicate Activities Across Functions (percent of the activities completed that are duplicated in another function) Process Automation (percent of the processes employed in production activities that are automated) 5% 50% 10% 48% Duplicate activities across functions were higher than the goal (10% versus 5), while process automation was just a bit lower (48% versus 50%).
People Innovation Growth Assets Employee Turnover Employee Job Satisfaction 10% 95% 15% 90% Employee turnover was higher than anticipated (15% versus 10%), while job satisfaction was lower (90% versus 95%).

Recommendations based on identified Gaps: Financial

Profits were higher than anticipated, as was inventory turnover. This was tied to the findings that inventory from the current quarter was all sold, and due to the surge in popularity for the company’s products, inventory left over from last quarter was sold to customers as well. Given the recent contract, the company will probably need to expand its production and warehousing capacity to make enough pickles to satisfy future demand.

Recommendations based on identified Gaps: Customer

Aspect of Company Performance Factors to be Considered Organizational Goal (per quarter) Actual Performance (most recent quarter) GAPS
Financial Quarterly Profit Results Inventory Turnover (rate of product manufactured in that quarter sold within 1-2 months) $20,000 90% $25,000 110% Quarterly profits were higher than anticipated ($25,000 versus $20,000), as was inventory turnover rate (110% versus 90%).
Customer Customer Satisfaction Rate Customer Recommendation Rate (rate of new business generated by recommendations from existing customers) 95% 40% 80% 45% Customer satisfaction was lower than expected (80% versus 95%), while customer recommendation rates were higher (45% versus 40%).
Internal Processes Duplicate Activities Across Functions (percent of the activities completed that are duplicated in another function) Process Automation (percent of the processes employed in production activities that are automated) 5% 50% 10% 48% Duplicate activities across functions were higher than the goal (10% versus 5), while process automation was just a bit lower (48% versus 50%).
People Innovation Growth Assets Employee Turnover Employee Job Satisfaction 10% 95% 15% 90% Employee turnover was higher than anticipated (15% versus 10%), while job satisfaction was lower (90% versus 95%).

Recommendations based on identified Gaps: Customer

Actual customer satisfaction was much lower than the goal, and this may be due to Palmer Pickles being oversold on products, so all customer orders could not be accommodated. However, recommendation rates were higher than expected, so the product still seems to be viewed as high quality and worthy of recommendation. Palmer Pickles will need to make sure that once production scales up, quality is not lost. Since the company currently outsources its freight function and distribution needs will grow as a result of the grocery contract, the profitability of acquiring its own freight and distribution division should also be assessed.

Recommendations based on identified Gaps: Internal Processes

Aspect of Company Performance Factors to be Considered Organizational Goal (per quarter) Actual Performance (most recent quarter) GAPS
Financial Quarterly Profit Results Inventory Turnover (rate of product manufactured in that quarter sold within 1-2 months) $20,000 90% $25,000 110% Quarterly profits were higher than anticipated ($25,000 versus $20,000), as was inventory turnover rate (110% versus 90%).
Customer Customer Satisfaction Rate Customer Recommendation Rate (rate of new business generated by recommendations from existing customers) 95% 40% 80% 45% Customer satisfaction was lower than expected (80% versus 95%), while customer recommendation rates were higher (45% versus 40%).
Internal Processes Duplicate Activities Across Functions (percent of the activities completed that are duplicated in another function) Process Automation (percent of the processes employed in production activities that are automated) 5% 50% 10% 48% Duplicate activities across functions were higher than the goal (10% versus 5), while process automation was just a bit lower (48% versus 50%).
People Innovation Growth Assets Employee Turnover Employee Job Satisfaction 10% 95% 15% 90% Employee turnover was higher than anticipated (15% versus 10%), while job satisfaction was lower (90% versus 95%).

Recommendations based on identified Gaps: People/Innovation/Growth Assets

Aspect of Company Performance Factors to be Considered Organizational Goal (per quarter) Actual Performance (most recent quarter) GAPS
Financial Quarterly Profit Results Inventory Turnover (rate of product manufactured in that quarter sold within 1-2 months) $20,000 90% $25,000 110% Quarterly profits were higher than anticipated ($25,000 versus $20,000), as was inventory turnover rate (110% versus 90%).
Customer Customer Satisfaction Rate Customer Recommendation Rate (rate of new business generated by recommendations from existing customers) 95% 40% 80% 45% Customer satisfaction was lower than expected (80% versus 95%), while customer recommendation rates were higher (45% versus 40%).
Internal Processes Duplicate Activities Across Functions (percent of the activities completed that are duplicated in another function) Process Automation (percent of the processes employed in production activities that are automated) 5% 50% 10% 48% Duplicate activities across functions were higher than the goal (10% versus 5), while process automation was just a bit lower (48% versus 50%).
People Innovation Growth Assets Employee Turnover Employee Job Satisfaction 10% 95% 15% 90% Employee turnover was higher than anticipated (15% versus 10%), while job satisfaction was lower (90% versus 95%).

Recommendations based on identified Gaps: People/Innovation/Growth Assets

Since employee turnover was higher than expected and job satisfaction was lower, it seems as though employees are dissatisfied with some factors within the company, and this needs to be studied. Since these measures are tied to so many different contingencies within the company, a focus group to study these measures further has been recommended.

Practice

Now that you have seen how to use a balanced scorecard to identify gaps and develop recommendations, complete the following practice exercise. Given a new scenario, balanced scorecard, and some gaps and recommendations, determine the missing gap and recommendation.

The balanced scorecard shown below is for the art department of Sherman Ceramics, a large corporation that manufactures collectible ceramic figurines based on comic book, television, and film characters. The company has an automated assembly line to manufacture the figurines, but most of the work done in the art department is by hand, since the figurines are produced in small runs and are considered to be exclusive collectibles. The employees of the art department hand paint the features and apparel on the figurines, as well as any accessories that accompany the figurine. The corresponding price point for these items is high, and they are generally sold in independent comic book stores and through online sites, although certain national toy store chains carry the figurines as well. The art department currently has a staff of 40 employees and 5 managers; the managers all served as line staff in the assembly department prior to their promotions. Art department employees are generally high skilled in their field, but they tend to not have degrees in higher education.

Aspect of Company Performance Factors to be Considered Organizational Goal (per quarter) Actual Performance (most recent quarter)
Financial Return on Investment Return on Capital Employed 90% 95% 80% 90%
Customer Customer Satisfaction Rate Customer Retention Rate 95% 90% 98% 95%
Internal Processes Duplicate Activities Across Functions (percent of the activities completed that are duplicated in another function) Process Bottlenecks (percent of the process that becomes bottlenecked in an average run cycle) 30% 40% 40% 60%
People Innovation Growth Assets Employee Turnover Employee Job Satisfaction 20% 90% 25% 60%

Practice

Aspect of Company Performance Factors to be Considered Organizational Goal (per quarter) Actual Performance (most recent quarter) Gaps
People Innovation Growth Assets Employee Turnover Employee Job Satisfaction 20% 90% 25% 60% ?

Please select the answer that most accurately identifies the gaps for the art department of Sherman Ceramics in the area of People/Innovation/Growth Assets.

· AEmployee turnover was higher than anticipated (30% versus 25%), while job satisfaction was lower (90% versus 60%).

· BEmployee turnover was lower than anticipated ( 20% versus 25%), while job satisfaction was higher (40% versus 60%).

· CEmployee turnover was higher than anticipated (25% versus 20%), while job satisfaction was higher (60% versus 90%).

· DEmployee turnover was higher than anticipated (25% versus 20%), while job satisfaction was lower (60% versus 90%).

The correct answer is D. Because employee turnover was 25% as opposed to 20% (the figure the company predicted), the actual employee turnover was less positive than expected for the Art Department. This means that more employees left or were terminated from the Art Department than expected during the quarter. Furthermore, because employee satisfaction was 60% as opposed to 90% (the figure the company predicted), the actual employee satisfaction was less positive than expected for the Art Department. This means that fewer employees are satisfied with their jobs in the Art Department than the company realized. The fact that this figure is quite different from expected is a cause for concern.

ecommendations based on identified Gaps: Financial

Aspect of Company Performance Factors to be Considered Organizational Goal (per quarter) Actual Performance (most recent quarter) Gaps
Financial Return on Investment Return on Capital Employed 90% 95% 80% 90% Both return on investment and return on capital employed were lower than anticipated (80% versus 90% and 90% versus 95%).
Customer Customer Satisfaction Rate Customer Retention Rate 95% 90% 98% 95% Both customer satisfaction and customer retention rates were higher than expected (98% versus 95% and 95% versus 90%).
Internal Processes Duplicate Activities Across Functions (percent of the activities completed that are duplicated in another function) Process Bottlenecks (percent of the process that becomes bottlenecked in an average run cycle) 30% 40% 40% 60% Both duplicate activities across functions and process bottlenecks were higher than the goal (40% versus 30% and 60% versus 40%).
People Innovation Growth Assets Employee Turnover Employee Job Satisfaction 20% 90% 25% 60% Employee turnover was higher than anticipated (25% versus 20%), while job satisfaction was lower (60% versus 90%).

Recommendations based on identified Gaps: Financial

Since the actual performance on the financial measures was lower than expected, the art department may need to figure out a way to cut investment-related expenses (in research into new paint colors, for example); alternatively, the company may want to consider a study as to whether the prices paid by customers of the collectibles truly covers the costs of producing the figurines.

Recommendations based on identified Gaps: Customer

Aspect of Company Performance Factors to be Considered Organizational Goal (per quarter) Actual Performance (most recent quarter) Gaps
Financial Return on Investment Return on Capital Employed 90% 95% 80% 90% Both return on investment and return on capital employed were lower than anticipated (80% versus 90% and 90% versus 95%).
Customer Customer Satisfaction Rate Customer Retention Rate 95% 90% 98% 95% Both customer satisfaction and customer retention rates were higher than expected (98% versus 95% and 95% versus 90%).
Internal Processes Duplicate Activities Across Functions (percent of the activities completed that are duplicated in another function) Process Bottlenecks (percent of the process that becomes bottlenecked in an average run cycle) 30% 40% 40% 60% Both duplicate activities across functions and process bottlenecks were higher than the goal (40% versus 30% and 60% versus 40%).
People Innovation Growth Assets Employee Turnover Employee Job Satisfaction 20% 90% 25% 60% Employee turnover was higher than anticipated (25% versus 20%), while job satisfaction was lower (60% versus 90%).

Recommendations based on identified Gaps: Customer

Since both customer measures were higher than expected, the art department is to be congratulated for its success in maintaining the quality customers have come to expect from the company’s figurines. This lends support to the idea of raising prices on the collectibles; if customers are happier than expected and continue to purchase products, a small increase in price may keep these measures above or equal to the goals, while helping decrease performance gaps in the financial measures.

Practice

Aspect of Company Performance Factors to be Considered Organizational Goal (per quarter) Actual Performance (most recent quarter) Gaps
Internal Processes Duplicate Activities Across Functions (percent of the activities completed that are duplicated in another function) Process Bottlenecks (percent of the process that becomes bottlenecked in an average run cycle) 30% 40% 40% 60% Both duplicate activities across functions and process bottlenecks were higher than the goal (40% versus 30% and 60% versus 40%).

Now you give it a try. Please select the answer or answers that identify recommendations Sherman Ceramics should make to narrow its performance gaps in the area of Internal Processes:

· AHire additional line employees for the art department to help with the bottleneck issue.

· BOffer additional training to art department employees, to allow them to increase efficiency in their processes.

· CDouble the orders processed by the manufacturing department and then sent to the art department for painting.

· DAutomate part of the painting process.

The correct answers are A and B. Since at least one part of the process is bottlenecking more than expected (and thus, holding up the line more than it should), hiring additional employees to help with this part of the process should reduce this figure. Also, the problem with the bottlenecking issue may be that employees are less efficient than they could be. Thus, additional training could help the existing employees become more efficient, which should help with this problem.

Practice

Aspect of Company Performance Factors to be Considered Organizational Goal (per quarter) Actual Performance (most recent quarter) Gaps
People Innovation Growth Assets Employee Turnover Employee Job Satisfaction 20% 90% 25% 60% Employee turnover was higher than anticipated (25% versus 20%), while job satisfaction was lower (60% versus 90%).

Please select the answer or answers that identify recommendations Sherman Ceramics should make to narrow its performance gaps in the area of People/Innovation/Growth Assets:

· AFire any employees who are shown to have a poor attitude about the company.

· BOffer additional training to art department employees, to allow them to increase efficiency in their processes.

· CTry to recruit future managers from the art department, so art department line employees feel as though management understands their concerns.

· DSend the current managers through on the job training with current line employees in the art department, to allow managers to better understand the process.

The correct answers are B, C, and D. Employees in the Art Department may be leaving their jobs due to feelings of being overwhelmed. If additional training is offered, this can show employees that the company values them and is giving them extra tools to perform at their best. Because the existing managers did not come from the Art Department, line employees in the Art Department may start to see their work as a dead end. Trying to promote from within the art department will give line employees in this part of the company the hope that if they succeed, they will also be recognized. Additionally, because the existing managers did not come from the Art Department, line employees in the Art Department may not see the managers as well versed in the jobs of the employees they are managing. Sending everyone through training together can make sure everyone is on the same page, and it can help build team rapport and camaraderie.

Assignment

In this assignment, use the scenario and balanced scorecard to fill in the gaps. Then, develop recommendations based on these gaps for each section of the balanced scorecard.

The balanced scorecard shown below is for Spinner Pet Sitters, a small pet sitting service run by Shelly, a student at the local state university to make extra income. While the service is small, Shelly has four other pet sitters who work for her; these sitters can be considered Shelly’s contract employees, as she employs their services as needed on a part-time basis. Spinner Pet Sitters pet sitting services include coming to the customer’s house between one and three times a day, walking the animals, feeding the pets, playing with them, cleaning up any waste, and bringing in the home’s mail and newspaper.

After viewing the scenario and balanced scorecard, input the Gaps in the chart below by clicking on the box. Click next when you have filled in all of the Gaps.

Aspect of Company Performance Factors to be Considered Organizational Goal Actual Performance Gaps
Financial Quarterly Profit Results Return on Capital Employed $5,000 $4,000 $6,000 $1,500
Customer Customer Satisfaction Rate Customer Recommendation Rate (rate of new business generated by recommendations from existing customers) 95% 80% 95% 100%
Internal Processes Duplicate Activities Across Functions (percent of the activities completed that are duplicated in another function) Process Bottlenecks (percent of the process that becomes bottlenecked in an average run cycle) 25% 15% 20% 15%
People Innovation Growth Assets Employee Turnover Employee Job Satisfaction 25% 90% 0% 50%

Assignment

Aspect of Company Performance Factors to be Considered Organizational Goal Actual Performance Gaps
Financial Quarterly Profit Results Return on Capital Employed $5,000 $4,000 $6,000 $1,500 INPUT GAPS
Customer Customer Satisfaction Rate Customer Recommendation Rate (rate of new business generated by recommendations from existing customers) 95% 80% 95% 100% INPUT GAPS
Internal Processes Duplicate Activities Across Functions (percent of the activities completed that are duplicated in another function) Process Bottlenecks (percent of the process that becomes bottlenecked in an average run cycle) 25% 15% 20% 15% INPUT GAPS
People Innovation Growth Assets Employee Turnover Employee Job Satisfaction 25% 90% 0% 50% INPUT GAPS

Use the tabs and text fields below to provide recommendations based on the above balanced scorecard.

Financial:Customer:Internal Process:People/Innovation/Growth Assets:


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