Support Quarterly Note: What is the cumulative balanced scorecard?

By | February 20, 2013

The Cumulative Balanced Scorecard is used to measure the teams’ performance within the simulation. Teams receive a scorecard at the end of each quarter detailing their performance in the previous quarter relative to their competition. The balanced scorecard metrics require students to be accountable for managing all aspects of the firm. Focusing on multiple performance indicators ensures no decision area can be overlooked.

The simulation computes Total Business Performance by multiplying nine indicators. This model underscores the importance of all measures: any strength or weakness has a multiple effect on the final outcome, the action potential of the firm.

Financial performance measures how well the executive team has been able to create profits for its shareholders. It is computed by dividing net operating profit from current operations by the number of shares of stock issued, yielding operating profit per share.

Market performance is a measure of how well your firm is able to create and fulfill demand in its target segments. Demand creation is measured by the firm’s average market share in its primary and secondary target segments. Customer fulfillment is measured as the proportion of orders filled. Market performance is the product of these two numbers. Thus, the firm is penalized if it overstimulates demand, leading to customer dissatisfaction and wasted marketing expenditures.

Marketing effectiveness is a measure of how well your executive team has satisfied the needs of your customers. The quality of your brands and ads is evaluated by your primary and secondary target segments, and the satisfaction scores are averaged to obtain a measure of your marketing effectiveness.

Investments in the firm’s future reflects the willingness of the executive team to spend current revenues on future business opportunities. It is measured by computing the proportion of current revenues spent on activities that have a long-term payback, such as research and development, factory improvements, and training programs for employees.

Human resource management is a measure of your executive team’s ability to recruit, compensate, motivate, and satisfy the firm’s employees. Human resource management is measured by computing employee satisfaction, productivity, and stability. Employee satisfaction is directly affected by your compensation package. Productivity is related to the units produced per employee in your factory. And stability measures your ability to maintain a stable and growing workforce. Layoffs and transfers are especially disruptive to employee morale.

Asset management is a measure of the executive team’s ability to use the firm’s assets to create sales revenue. Total sales are divided by total assets to yield asset turnover (ATO). To discourage the buildup of excess inventories (which would increase demand fulfillment), ATO is adjusted downward based upon the percent of production that remains in inventory at the end of the quarter.

Manufacturing productivity measures your executive team’s ability to create reliable products efficiently. Efficiency is measured as the percent of scheduled capacity that is ultimately used to produce products. Efficiency is negatively affected by the scheduling of what turns out to be unneeded production capacity and by the amount of production time lost due to brand changeover. When too much capacity is scheduled, workers must be laid off rather than build excessive inventory. High changeover times are the result of brand diversity (marketing’s desire to have a wide assortment of brands) and the failure to make improvements in the time required to change the production line from one brand to another. Reliability is measured through the eyes of your customers and reflects product defects and warranty claims, all correctable. Manufacturing productivity is the product of the efficiency and reliability measures.

Wealth is a measure of how well your executive team has been able to add wealth to the initial investments of the stockholders. Creation of wealth is measured by dividing the net equity of the firm (retained earnings + common and preferred stock) by the total investments of the stockholders (common + preferred stock). Retained earnings represent the sum of all profits from the inception of the firm.

Financial risk measures the executive team’s ability to manage debt as a financial resource. The financial risk indicator is based upon the degree to which debt is part of the capital of the firm. As debt increases relative to the total capital, then the financial risk associated with the company increases. Conversely, as the proportion of equity in the total capital increases, then the perceived financial risk in the firm decreases.

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