Solutions Manual - Chapter 24: Balanced Scorecard and Other Performance Measures

Multiple Choice Questions - Solutions

1. The Balanced Scorecard framework includes how many perspectives?

   • Answer: c) The Balanced Scorecard includes four perspectives: Financial, Customer, Internal Business Process, and Learning & Growth.

2. Which perspective of the Balanced Scorecard focuses on how shareholders view the company?

   • Answer: c) The Financial perspective focuses on how shareholders view the company and measures profitability, growth, and shareholder value.

3. Customer satisfaction is a measure in which Balanced Scorecard perspective?

   • Answer: b) Customer satisfaction is a key measure in the Customer perspective.

4. Which perspective measures the company's ability to innovate and improve?

   • Answer: d) The Learning & Growth perspective measures the company's ability to innovate, improve, and develop capabilities.

5. A strategy map shows:

   • Answer: b) A strategy map shows cause-and-effect relationships between objectives across the four perspectives.

6. Non-financial measures are important because:

   • Answer: c) Non-financial measures often lead financial performance and provide early warning signals about future financial results.

7. For a Luxembourg SME, which Balanced Scorecard perspective might include "Achieve 95% on-time delivery"?

   • Answer: c) On-time delivery is an internal process measure that affects customer satisfaction.

8. Variance analysis in the Balanced Scorecard context:

   • Answer: b) Variance analysis can be applied to both financial and non-financial measures in a Balanced Scorecard.

9. The Balanced Scorecard helps managers:

   • Answer: b) The Balanced Scorecard helps managers balance short-term and long-term objectives across all four perspectives.

10. For Luxembourg SMEs, the Balanced Scorecard is particularly useful for:

• Answer: b) The Balanced Scorecard helps Luxembourg SMEs respond to requests from banks, investors, and regulators for broader performance metrics.

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Questions - Solutions

Question 1: Balanced Scorecard Framework

The balanced scorecard (BSC) is a strategic performance management framework that translates an organization's mission and strategy into a comprehensive set of performance measures across four perspectives: financial, customer, internal processes, and learning & growth.

Key features:

• Focuses on four perspectives
• Connects long-term strategy to daily operations
• Balances lagging indicators (financial) with leading indicators (non-financial)
• Provides framework for strategy execution
• Encourages continuous improvement

Structure: For each perspective, the BSC includes objectives, measures (KPIs), targets, and initiatives.

Question 2: Four Perspectives

1. Financial Perspective: How do we appear to shareholders?

   • Measures: Profitability, growth, shareholder value
   • Type: Lagging indicators (results of past efforts)
   • Examples: Revenue growth, profit margin, ROI

2. Customer Perspective: How do customers see us?

   • Measures: Customer satisfaction, loyalty, market share
   • Type: Leading indicators that drive financial results
   • Examples: Customer satisfaction score, retention rate, market share

3. Internal Process Perspective: What must we excel at?

   • Measures: Process efficiency, quality, innovation
   • Purpose: Ensures operations support strategy
   • Examples: Cycle time, defect rate, innovation index

4. Learning & Growth Perspective: Can we continue to improve and create value?

   • Measures: Employee skills, culture, IT systems
   • Purpose: Foundation for long-term success
   • Examples: Training hours, employee satisfaction, system uptime

Question 3: Developing Objectives Aligned with Strategy

Steps:

1. Define strategy: Clarify mission and strategic goals
2. Identify strategic themes: Customer focus, innovation, efficiency
3. Link to perspectives: Map strategy to four perspectives
4. Develop objectives: Create specific, measurable objectives for each perspective
5. Create strategy map: Show cause-and-effect relationships
6. Prioritize: Focus on critical objectives

Example: If strategy is "customer excellence," objectives might include:

• Financial: Increase revenue from repeat customers
• Customer: Achieve 95% satisfaction
• Internal: Reduce service time by 20%
• Learning: Train all staff in customer service

Question 4: Selecting and Defining Performance Measures

KPI Selection Criteria:

• Relevant: Directly linked to objectives
• Measurable: Can be quantified
• Actionable: Can be influenced by actions
• Timely: Available when needed
• Cost-effective: Worth the cost of measurement

Defining KPIs:

• Name: Clear, descriptive name
• Definition: Precise definition of what is measured
• Formula: Calculation method
• Data source: Where data comes from
• Frequency: How often measured
• Target: Desired level of performance
• Owner: Who is responsible

Example: Customer Satisfaction Score

• Definition: Average rating from customer surveys (1-5 scale)
• Formula: Sum of ratings ÷ Number of responses
• Data source: Monthly customer surveys
• Frequency: Monthly
• Target: 4.5 out of 5
• Owner: Customer service manager

Question 5: Integrating BSC with Budgeting and Variance Analysis

Linking BSC to Budgeting:

• Financial KPIs align with budget targets
• Non-financial KPIs support financial goals
• Budgets allocate resources to BSC initiatives
• Budget reviews include BSC performance

BSC Variance Analysis:

• Compare actual KPIs to targets
• Identify variances (favorable/unfavorable)
• Investigate causes
• Take corrective action
• Update targets if needed

Example: If customer satisfaction target is 4.5 but actual is 4.2, investigate causes (service quality, training, processes) and take action.

Question 6: Variance Analysis Beyond Financial Metrics

Companies use variance analysis for:

• Customer metrics: Satisfaction, retention, complaints
• Process metrics: Cycle time, quality, efficiency
• Learning metrics: Training completion, employee satisfaction
• Operational metrics: Productivity, utilization, capacity

Benefits:

• Early warning of problems
• Identify improvement opportunities
• Support decision-making
• Track progress on non-financial goals

Example: If on-time delivery target is 95% but actual is 88%, analyze causes (supplier delays, production issues, logistics) and improve processes.

Question 7: Non-Financial Performance Measures for Decision-Making

How they improve decisions:

• Leading indicators: Provide early signals of future performance
• Comprehensive view: Balance financial and non-financial factors
• Root cause analysis: Identify underlying issues
• Strategic alignment: Ensure decisions support strategy
• Stakeholder perspective: Consider customer, employee, process views

Example: Low employee satisfaction (non-financial) may predict future turnover (cost) and service quality issues (customer impact). Addressing satisfaction improves financial results.

Question 8: Applying BSC to Luxembourg SMEs

Implementation steps:

1. Define strategy and objectives
2. Develop strategy map
3. Select KPIs (10-15 total)
4. Align initiatives
5. Communicate and train
6. Monitor and review

Luxembourg considerations:

• Focus on critical priorities (simplified scorecard)
• Use existing data where possible
• Consider compliance and ESG metrics
• Address multilingual and cross-border operations
• Support stakeholder reporting (banks, investors, regulators)

Example: Luxembourg restaurant might focus on:

• Financial: Revenue growth, profit margin
• Customer: Satisfaction, repeat visits
• Internal: Food quality, service speed
• Learning: Staff training, employee retention

Question 9: Benefits and Challenges

Benefits:

• Aligns strategy and operations
• Balances short-term and long-term priorities
• Improves communication of strategy
• Provides comprehensive performance view
• Supports data-driven decision-making
• Encourages continuous improvement

Challenges:

• Requires cultural change and management commitment
• Needs clear strategy and objectives
• Requires data collection and IT systems
• Potential for metric overload
• Must be maintained and updated regularly

Success factors:

• Strong executive sponsorship
• Cross-functional team involvement
• Clear link between metrics and strategy
• Employee training
• Integration with budgeting and incentives
• Regular review and refinement

Question 10: Ensuring BSC Relevance Over Time

Steps:

1. Regular reviews: Quarterly reviews, annual updates
2. Strategy alignment: Ensure BSC reflects current strategy
3. Metric evaluation: Remove irrelevant metrics, add new ones
4. Target adjustment: Update targets based on performance and conditions
5. Stakeholder feedback: Incorporate feedback from employees, customers, management
6. Continuous improvement: Refine based on lessons learned
7. Communication: Keep stakeholders informed of changes
8. Training: Update training as BSC evolves

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Problems Set A - Solutions

Problem A-1: Identify BSC Perspectives

For each objective, identify the BSC perspective: a) Increase customer satisfaction → Customer Perspective

b) Improve profit margin → Financial Perspective

c) Reduce production defects → Internal Process Perspective

d) Increase employee training hours → Learning & Growth Perspective e) Improve on-time delivery → Internal Process Perspective

Problem A-2: Select KPIs

For objective "Improve customer satisfaction," suggest three KPIs:

1. Customer Satisfaction Score: Average rating from surveys (1-5 scale)
2. Customer Retention Rate: Percentage of customers who return
3. Number of Customer Complaints: Count of complaints per month

Problem A-3: Calculate KPI

Customer Satisfaction Score:

• Survey responses: 4, 5, 4, 5, 3, 5, 4, 5
• Average = (4+5+4+5+3+5+4+5) ÷ 8 = 35 ÷ 8 = 4.375

Target: 4.5 Variance: 4.375 - 4.5 = -0.125 (Unfavorable)

Problem A-4: Strategy Map

Strategy: Improve customer service excellence

Cause-and-effect chain:

1. Learning & Growth: Train staff in customer service →
2. Internal Process: Reduce service time, improve quality →
3. Customer: Increase satisfaction, retention →
4. Financial: Increase revenue, profit

Problem A-5: BSC Integration with Budget

Financial KPI: Revenue growth target 15% Budget: Allocate €50,000 for marketing (customer perspective initiative) Link: Marketing supports customer acquisition (customer KPI), which drives revenue (financial KPI)

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Problems Set B - Solutions

Problem B-1: Develop BSC for Service Company

Luxembourg Consulting Firm BSC:

Financial:

• Objective: Increase profitability
• KPI: Profit margin (target: 25%)
• Initiative: Improve pricing strategy

Customer:

• Objective: Improve client satisfaction
• KPI: Client satisfaction score (target: 4.5/5)
• Initiative: Client feedback program

Internal Process:

• Objective: Improve project delivery
• KPI: On-time project completion (target: 95%)
• Initiative: Project management training

Learning & Growth:

• Objective: Develop expertise
• KPI: Training hours per employee (target: 40 hours/year)
• Initiative: Professional development program

Problem B-2: Non-Financial Variance Analysis

On-Time Delivery:

• Target: 95%
• Actual: 88%
• Variance: -7% (Unfavorable)

Analysis:

• Causes: Supplier delays, production issues, logistics problems
• Impact: Customer dissatisfaction, potential lost sales
• Action: Improve supplier relationships, optimize production, enhance logistics

Problem B-3: BSC Dashboard

Quarterly BSC Dashboard:

Perspective	KPI	Target	Actual	Status
Financial	Revenue Growth	15%	18%	✅ Favorable
Financial	Profit Margin	20%	19%	⚠️ Slightly below
Customer	Satisfaction	4.5	4.6	✅ Favorable
Customer	Retention	85%	82%	⚠️ Below target
Internal	On-Time Delivery	95%	93%	⚠️ Below target
Internal	Defect Rate	2%	1.8%	✅ Favorable
Learning	Training Hours	40	42	✅ Favorable
Learning	Employee Satisfaction	4.0	3.9	⚠️ Below target

Summary: 4 favorable, 4 below target. Focus on retention, on-time delivery, and employee satisfaction.

Problem B-4: BSC Implementation Plan

Steps for Luxembourg SME:

1. Week 1-2: Define strategy and objectives
2. Week 3-4: Develop strategy map and select KPIs
3. Week 5-6: Set targets and define data collection
4. Week 7-8: Communicate and train employees
5. Week 9+: Monitor, review, and refine

Key considerations:

• Start with 10-15 KPIs
• Use existing data where possible
• Assign responsibility for each KPI
• Review quarterly
• Integrate with existing reports

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Comprehensive Problem 24 - Solutions

Comprehensive Problem 24: Balanced Scorecard for Le Petit Bistro

Company: Le Petit Bistro - Luxembourg restaurant with catering services

Strategy: Become the preferred restaurant in the area through excellent food, service, and customer experience while maintaining profitability and employee satisfaction.

1. Financial Perspective

Objectives:

• Increase revenue and profitability
• Improve cash flow management
• Maintain financial stability

KPIs:

• Revenue Growth: Target 15% annual growth
• Gross Profit Margin: Target 35%
• Net Profit Margin: Target 20%
• Cash Flow: Maintain minimum €35,000 cash balance

Targets:

• Revenue: €1,260,000 (from budget)
• Gross margin: 35%
• Net margin: 20%
• Cash balance: €35,000 minimum

Initiatives:

• Implement pricing strategy
• Cost control program
• Cash flow monitoring

2. Customer Perspective

Objectives:

• Improve customer satisfaction
• Increase customer retention
• Expand customer base

KPIs:

• Customer Satisfaction Score: Target 4.5/5 (from surveys)
• Customer Retention Rate: Target 70% (repeat customers)
• Net Promoter Score (NPS): Target 50
• Number of New Customers: Target 100 per month
• Average Customer Rating (Online): Target 4.5/5

Targets:

• Satisfaction: 4.5/5
• Retention: 70%
• NPS: 50
• New customers: 100/month
• Online rating: 4.5/5

Initiatives:

• Customer feedback program
• Loyalty program
• Marketing campaigns
• Service training

3. Internal Process Perspective

Objectives:

• Improve food quality and consistency
• Enhance service efficiency
• Optimize operations

KPIs:

• Food Quality Score: Target 4.5/5 (internal inspections)
• Service Time: Target <20 minutes (order to table)
• Table Turnover Rate: Target 2.5 turns per evening
• Kitchen Efficiency: Target 95% on-time order completion
• Waste Reduction: Target <5% of food cost
• Inventory Turnover: Target 12x per year

Targets:

• Food quality: 4.5/5
• Service time: <20 minutes
• Table turnover: 2.5/evening
• Kitchen efficiency: 95%
• Waste: <5%
• Inventory turnover: 12x

Initiatives:

• Quality control program
• Process improvement
• Waste reduction program
• Inventory management system

4. Learning & Growth Perspective

Objectives:

• Develop employee skills
• Improve employee satisfaction
• Build strong team culture

KPIs:

• Employee Satisfaction Score: Target 4.0/5
• Training Hours per Employee: Target 40 hours/year
• Employee Retention Rate: Target 85%
• Staff Certification: Target 80% certified in food safety
• Internal Promotion Rate: Target 20%

Targets:

• Employee satisfaction: 4.0/5
• Training: 40 hours/employee/year
• Retention: 85%
• Certification: 80%
• Promotion: 20%

Initiatives:

• Training program
• Employee development
• Recognition program
• Career development paths

5. Strategy Map

Cause-and-Effect Chain:

Learning & Growth → Internal Process → Customer → Financial

1. Learning & Growth:

   • Train staff (satisfaction, skills) →

2. Internal Process:

   • Improve food quality, service efficiency →

3. Customer:

   • Increase satisfaction, retention, new customers →

4. Financial:

   • Increase revenue, profit, cash flow

6. KPI Definitions and Data Sources

Customer Satisfaction Score:

• Definition: Average rating from customer surveys (1-5 scale)
• Formula: Sum of ratings ÷ Number of responses
• Data Source: Monthly customer surveys (paper and online)
• Frequency: Monthly
• Owner: Front-of-house manager

Service Time:

• Definition: Average time from order placement to food delivery
• Formula: Sum of service times ÷ Number of orders
• Data Source: POS system timestamps
• Frequency: Daily
• Owner: Kitchen manager

Employee Satisfaction:

• Definition: Average rating from employee surveys (1-5 scale)
• Formula: Sum of ratings ÷ Number of employees
• Data Source: Quarterly employee surveys
• Frequency: Quarterly
• Owner: General manager

7. BSC Dashboard (Example Quarter)

Perspective	KPI	Target	Actual	Variance	Status
Financial	Revenue Growth	15%	18%	+3%	✅ Favorable
	Gross Margin	35%	34%	-1%	⚠️ Below
	Net Margin	20%	19%	-1%	⚠️ Below
	Cash Balance	€35,000	€40,000	+€5,000	✅ Favorable
Customer	Satisfaction	4.5	4.4	-0.1	⚠️ Below
	Retention	70%	68%	-2%	⚠️ Below
	NPS	50	48	-2	⚠️ Below
	New Customers	100	105	+5	✅ Favorable
Internal	Food Quality	4.5	4.6	+0.1	✅ Favorable
	Service Time	<20 min	18 min	-2 min	✅ Favorable
	Table Turnover	2.5	2.4	-0.1	⚠️ Below
	Waste	<5%	4.5%	-0.5%	✅ Favorable
Learning	Employee Satisfaction	4.0	3.9	-0.1	⚠️ Below
	Training Hours	40	38	-2	⚠️ Below
	Retention	85%	83%	-2%	⚠️ Below

Summary: 7 favorable, 8 below target. Focus areas: Customer satisfaction, employee satisfaction, training.

8. Variance Analysis and Action Plans

Customer Satisfaction (4.4 vs. 4.5 target):

• Variance: -0.1 (Unfavorable)
• Causes: Service speed issues, occasional food quality problems
• Actions: Additional service training, quality control review
• Owner: Front-of-house manager
• Timeline: Improve to 4.5 within 2 months

Employee Satisfaction (3.9 vs. 4.0 target):

• Variance: -0.1 (Unfavorable)
• Causes: Workload, limited advancement opportunities
• Actions: Review workload, create development plans, recognition program
• Owner: General manager
• Timeline: Improve to 4.0 within 3 months

Training Hours (38 vs. 40 target):

• Variance: -2 hours (Unfavorable)
• Causes: Scheduling conflicts, limited training resources
• Actions: Schedule dedicated training time, provide online options
• Owner: General manager
• Timeline: Reach 40 hours by year-end

9. Integration with Budgeting

Budget Allocations for BSC Initiatives:

• Customer Initiatives: €15,000 (loyalty program, marketing)
• Internal Process: €10,000 (quality control, process improvement)
• Learning & Growth: €12,000 (training, development)
• Total: €37,000

Link to Financial KPIs:

• Customer initiatives → Customer satisfaction → Revenue growth
• Process initiatives → Efficiency → Cost reduction → Profit margin
• Learning initiatives → Employee satisfaction → Service quality → Customer satisfaction

10. Luxembourg-Specific Considerations

Compliance Metrics:

• VAT Compliance: 100% on-time filing
• Social Charges: 100% on-time payment
• Food Safety: 100% compliance with inspections
• Labor Law: 100% compliance

ESG/Sustainability Metrics:

• Waste Reduction: Target 10% reduction
• Local Sourcing: Target 60% local suppliers
• Energy Efficiency: Target 5% reduction

Multilingual Operations:

• Customer Service: Service in French, German, English, Luxembourgish
• Staff Training: Multilingual training materials
• Customer Communication: Multilingual menus, signage

11. Implementation Plan

Phase 1 (Months 1-2): Setup

• Define strategy and objectives
• Develop strategy map
• Select KPIs and set targets
• Define data collection methods

Phase 2 (Months 3-4): Launch

• Communicate BSC to employees
• Provide training
• Begin data collection
• Create dashboard

Phase 3 (Months 5-12): Monitor and Refine

• Monthly KPI reviews
• Quarterly BSC reviews
• Adjust targets and initiatives
• Continuous improvement

12. Success Factors and Challenges

Success Factors:

• Management commitment
• Employee involvement
• Clear communication
• Regular reviews
• Integration with operations

Challenges:

• Data collection (solutions: use existing systems, start simple)
• Employee buy-in (solutions: involve employees, show benefits)
• Metric overload (solutions: focus on critical few, 10-15 KPIs)
• Maintaining momentum (solutions: regular reviews, link to incentives)

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Case Solutions

Case 24-1: Implementing BSC in Luxembourg SME

1. Should Implement BSC?

• Yes, if:
  • Clear strategy exists
  • Management committed
  • Resources available
  • Need for better performance measurement
  • Stakeholder expectations (banks, investors)

2. Key Activities:

• Define strategy
• Develop objectives
• Select KPIs
• Set targets
• Collect data
• Review and adjust

3. Appropriate KPIs:

• Financial: Revenue, profit, cash flow
• Customer: Satisfaction, retention, market share
• Internal: Quality, efficiency, innovation
• Learning: Training, satisfaction, retention

4. Simple Implementation:

• Start with 10-15 KPIs
• Use existing data
• Focus on critical priorities
• Assign responsibility
• Review quarterly

5. Expected Benefits:

• Better strategy alignment
• Comprehensive performance view
• Improved decision-making
• Enhanced communication
• Continuous improvement

6. Justifying Cost:

• Calculate implementation cost
• Estimate benefits (improved performance, better decisions)
• Compare to benefits
• Show stakeholder value
• Consider long-term impact

Case 24-2: BSC Performance Issues

1. Why Financial Metrics Good but Others Poor:

• Short-term focus on financial results
• Neglect of leading indicators (customer, process, learning)
• Financial success may be temporary if non-financial issues not addressed

2. Why Non-Financial Metrics Poor:

• Lack of focus on non-financial areas
• Insufficient resources allocated
• Poor execution of initiatives
• Targets too ambitious
• Data collection issues

3. Actions Needed:

• Immediate: Address critical non-financial issues (customer satisfaction, employee satisfaction)
• Short-term: Allocate resources to non-financial initiatives
• Long-term: Balance focus across all perspectives
• Ongoing: Regular BSC reviews, adjust strategy

4. Improving Non-Financial Performance:

• Set realistic targets
• Allocate adequate resources
• Assign clear responsibility
• Provide training and support
• Monitor progress regularly
• Take corrective action

5. Preventing Future Issues:

• Balance focus across all perspectives
• Regular BSC reviews
• Adjust strategy and targets
• Ensure resource allocation
• Link to incentives
• Continuous improvement

6. Luxembourg Considerations:

• Address compliance requirements
• Consider stakeholder expectations
• Support sustainability goals
• Multilingual operations
• Cross-border considerations

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End of Chapter 24 Solutions