What is the purpose of the following EVA, Balanced Scorecard and Activity Based Costing? Discuss the advantages and the disadvantages of why a company would use these performance measures. How are these three measures related?
EVA, Balanced Scorecard and Activity Based Costing What is the purpose of the following EVA, Balanced Scorecard and Activity Based Costing? Discuss the advantages and the disadvantages of why a company would use these performance measures. How are these three measures related?
Let us analyze each of them one by one:
The Balanced Scorecard is one of many performance management measurement tools that have become very popular in recent years. The balance scorecard first came to prominence in the early 1990's. Dr Robert Kaplan and Dr David Norton of the Harvard Business School developed this system of performance management measurement. Perspectives of Balance scorecard
As in the attached article, the scorecard seeks to measure a business from the following perspectives:
* Financial perspective - measures reflecting financial performance, for example number of debtors, cash flow or return on investment.
* Customer perspective - measures having a direct impact on customers, for example time taken to process a phone call, results of customer surveys, number of complaints or competitive rankings.
* Business process perspective - measures reflecting the performance of key business processes, for example the time spent prospecting, number of units that required rework or process cost.
* Learning and growth perspective - measures describing the companies learning curve, for example number of employee suggestions or total hours spent on staff training.
As opposed to most previous measurement tools, the balanced scorecard didn't just focus on the financial perspective.
The balanced scorecard aims to have a balance over the four areas rather than one area being much more focused upon "The BSC (Balanced Scorecard) divides the business environment into four key business areas" (Hepworth 1998) , e.g. a business putting most of their efforts into trying to gain short term profit.
One of the main advantages of the Balanced Scorecard is considered to be the opinion that it allows managers to view levels of performance all over an organisation at the same time "Primarily, the "balanced scorecard" gives managers the ability to view performance in several areas simultaneously" (Kippenberger 1996).
The Balanced Scorecard tends to focus more on critical performance indicators and missing out what can be considered less important indicators (Kippenberger 1996).
It is important that businesses implementing the balanced scorecard do not completely move away from financially driven targets or revenue may decrease dramatically, Neale & McElroy (2004) back up this point "The trick is to settle on a set of critical metrics which influence the financial results". They also argue that for the balanced scorecard to operate successfully there could be clear linkages between success drivers, e.g. Business growth and the achievement of financial goals. Only when there is a successful balance has the balanced scorecard been implemented properly.
Balancedscorecard.biz explains "it is most often the new and "missing measures" and their interplay with other indicators that drive the value emanating from a Balanced Scorecard. Many of the measures needed to tell the story of the strategy may already be present, but in the vast majority of cases they must be supplemented with new and innovative metrics to ensure the execution of strategy" this suggests that if new metrics are brought in to replace the "missing measures" then there should be no problems with implementing it. From the evidence it appears that the balanced ...
The solution examines the purpose of EVA, Balanced Scorecard and Activity Based Costing. The advantages and disadvantages of why a company would use these performance measures are given.