Balanced Scorecard: Investments and Long Term Strategy

This essay explains the use of a balanced scorecard to lead a strategic investment decision. It also provides a clearer trade-offs when compared to other non-financial, financial and hybrid approaches as the balanced scorecard measures by assigning weightings to each measure. Unfortunately, the balanced scorecard literature is silent on how these weightings are best determined. In addressing this, the paper agues for and suggests that the managers should be using a balanced scorecard approach that relies on multi-attribute decision model.

Strategic Investment Decision (SID) is the process of identifying, evaluating, and selecting among the projects that impact an organisation’s competitive advantages. The SID influences an organisation’s decisions like what it does, where it does, and how it does the work.

The challenges of a Senior Manager are to know when as well as when not to invest. Firms that choose rightly will get a boost and have a competitive advantage leading to improvements in the financial performance. Those that get the wrong decision will incur losses and erosion of their competitiveness in the field. The importance of choosing the right decision is overstated by the authors. As financial measures  

Managers who use balanced scorecards for evaluating investments could face a dilemma of whether to improve, while others are predicted to remain unchanged or declined.

The authors overcame this mixed message problems is by assigning weightings to each of the balanced scorecard measures. This solution allows trade-offs to be made between scorecard measures.

This essay has a twofold purpose. Firstly, it describes how the weightings can be assigned to balanced scorecard measures. Second, the paper shows using a hypothetical example for a balanced scorecard approach to SID.

The paper elaborates on 4 SID Evaluation methods:- Traditional evaluation methods, modified-traditional evaluation method, new evaluation methods, and mixed evaluation methods. An example of the mixed evaluation method is the balanced scorecard. The measures included are the balanced scorecard’s 4 dimensions– financial, customer, internal business and learning and growth. These are used to evaluate the potential investments.

Determining weightings for the balanced scorecard measures:

It is believed that the scorecards provide a mechanism to use strategic considerations into the resource allocation process. Although these weightings can help with the start, but it unwise to use the same annual performance-based weightings for evaluating strategic investments. 2 ways:- Delphi technique or a survey approach can do the adaptation of weightings.

Delphi technique uses the idea of harnessing and unlocking expert knowledge, whereas the Survey approach uses information collected on individuals’ preferences.

An example is used to illustrate a balanced scorecard to test strategic investment. It uses MADAM for quantifying the measures’ ratings. Assuming a company is considering a strategic investment for improving its ordering and billing process. The company although has its customers attracted to their low prices, they know that their ordering and billing process has led to customer disquiet. The company believes in customer first and foremost, but the customer retention rates and market share are relatively small. While improving and upgrading will promote them, but it will also cost them. However, this system will produce a higher level of employee satisfaction among the organization’s sales force and staff.  

The advantage of the balanced scorecard/MADM approach is that the evaluation process allows the consideration of a broader set of factors than is heeded under the traditional or modified-traditional methods. The balanced scorecard/MADM approach permits this broader view without sacrificing the ability to make comparisons between different strategic investment proposals.

Conclusion: The typical method used for evaluating strategic investment proposal are usually criticized for being narrow and their inability to offer meaningful comparisons. Using a balanced scorecard approach that uses MADM for quantifying the utilities of various potential investments offers a chance for a broader and strategic view without sacrificing comparability.

Using balanced scorecard measures for the companies’ investments will reinforce employee attention to key performance measures and help in the future decisions. It may also help in revealing opportunities for synergy in strategic investments across business units. It may also help in highlighting strategic gap that should be addressed.