EMBA630-notes7

Notes: Economic Value Added and the Balanced Scorecard

Economic Value Added

Economic Value Added (EVA) is a technique for assessing the degree to which operations (fulfilling the needs of customers by developing and selling them products and services) have added value to the firm over a specific period of time. Value has been added to the extent the firm has earned more on its assets during the period than that required by its investors. In other woprds, economic value has been added when the firm exceeds the expectations of its investors (i.e., the earned return is greater than the cost of capital).

What "add value" mean in this context? The amount of "value added" to a firm is the amount by which the current value of a firm exceeds the value expected by the firm's common stockholders. In other words, the amount of this extra value represents the value added to the firm by its managers. The difficulty in operationalizing the concept of EVA is quantifying the exact amount of this extra value.

In theory, the amount of "value added" for a particular investment is equal to the amount of its Net Present Value (NPV). Remember, the term "investment" is really referring to a set of assets a firm is thinking about buying in order to generate additional revenue. If an investment's NPV is expected to be positive, then the value of the firm will increase by the amount of the NPV. Of course, a negative NPV means that the value of the firm will drop by the amount of the NPV.

NPV = present value of expected cash inflows - present value of expected cash outflows

EVA can be thought of as calculating the value added or NPV of the total assets of the firm (a portfolio of investments) for a single year. Traditionally, NPV is used to evaluate individual projects before the investment decision is made. If the expected NPV > 0, then the project is approved because it will add value to the firm (enough money is earned on the project to provide the necessary return on the money invested in the project and still have something left over).

The EVA calculation is a little different from the typical NPV calculation. The NPV approach is used to calculate EVA at the end of a year after all investment decisions have been made. The EVA calculation determines how much value has been added to the firm by the end of the year. If EVA > 0, then value has been added to the firm during the current period and would expect to result in a higher stock price.

Basic EVA Model: EVA equals the operating profit after taxes (OPAT) minus the cost of capital multiplied by the capital employed in the firm.

Typically, OPAT equals earnings before interest and taxes (EBIT) multiplied by (1 minus the tax rate). OPAT is sometimes referred to as net operating profit after taxes (NOPAT). OPAT, which is an accounting measure of income, is converted to an economic measure by deducting a charge for the capital employed in the firm. The capital employed in the firm, also called invested capital, is equal to total liabilities minus all short-term non-interest bearing liabilities, such as accounts payable and accrued expenses, plus total stockholders' equity. This is the capital that is used to generate operating profit after taxes. A charge for the use of the capital invested in assets is subtracted from the amount earned from operations. If the EVA > 0, value has been added to the firm.

For many firms, there are certain operating expenses that do in fact help generate revenue beyond the current period. The best examples are research and development (R&D) expenses and marketing expenses. Identification of these expenses and a determination as to how much of these expenses can be expected to contributue to future revenues is left to the discretion of company management. In other words, management deternies how much of these expenses should be capitalized. This is a major criticism of EVA. Management can manipulate EVA to yield a desired result. Unlike the information presented in financial statements, there is no independent auditing of EVA (or MVA) information provided by a company.

The amount of the operating expenses that is added back into OPAT must be net of income taxes. Because these operating expenses, such as R&D and marketing, are tax-deductible they shield the same amount of revenue from income tax. If they are added back into OPAT, the corresponding amount of revenue is now subject to income tax. The amount of the added income tax must be subtracted from the amount of the operating expenses before being added back into OPAT. The amount of the income tax to be subtracted is equal to the amount of the expenses multiplied by the income tax rate.

The cost of capital (COC), which is also referred to as the weighted average cost of capital (WACC) or discount rate, is the opportunity cost associated with the money invested in a company. It represents the weighted average of the returns required by the bondholders and stockholders on the money they have provided to the firm. When bondholders buy a firm's debt, they are contractually entitled to interest payments as well as to the return of their initial investment. When investors purchase shares of common stock, they do so with the expectation of earning a return on their investment, which may consist of both dividends and a higher stock price. The returns that a firm's bondholders and stockholders require on their investment are used to calculate the minimum required rate of return that managers must earn on their investments. If an investment does not earn this minimum required return, which is also called the discount rate or cost of capital, the result is a negative NPV for the investment. If a firm fails to earn the COC on the capital invested in the firm, shareholder expectations are not met and the EVA is negative. A negative EVA means that the value of the firm and, therefore, the value of the stockholders investment has declined. As a result, the price of the firm's common stock would be expected to drop.

When a firm's management decides that certain operating expenses, net their tax effect, are to be capitalized, these expenses abecome part of the capital employed in the firm. These expenses would be added to total liabilities, minus short-term non-interest bearing liabilities, plus total stockholders' equity. This amount is then multiplied by COC to get the capital charge that is subtracted from OPAT.

Economic Value Added Exercise

Balance Sheet for ACE Microcircuits for the beginning of FY 1999

NOTE: The figures are in thousands.

Assets
Cash	$500
Account Receivable	850
Inventory	1,250
Net Plant & Equipment	7,800
Total Assets	$10,400

Liabilities & Shareholders' Equity
Accounts Payable	$950
Accruals	550
Long-term Debt	3,650

Common Stock	4,000
Retained Earnings	1,250

Total Liabilities & Shareholders' Equity	$10,400

Income Statement for Ace Microcircuits

Revenue	$15,000
R&D Expenses	(2,500)
Other Operating Expenses	(12,500)
Operating Income (EBIT)	2,500
Interest	(275)
Earnings Before Tax (EBT)	2,225
Taxes (40%)	(890)
Net Income	$1,335

Other information:

K_d (interest rate on long-term debt) = 7.5%

Tax rate (T) = 40%

K_s (required return on common stock) = 15%

Ace has 2 million shares outstanding and its shares are selling at $10 per share in the market.

The market value of the firm's long-term debt is equal to its book value.

The management of Ace Microcircuits has determined that $2,000 of the R&D expenses have future value.

Questions

1. Calculate the economic value added for 1999. Explain what it implies about the firm's performance in 1999.

2. Discuss the usefulness of EVA as a measure of the overall performance of a firm.

3. Discuss how EVA affects the decisions managers make. Devise a compensation plan using EVA that will motivate managers to make those decisions that create shareholder wealth.

Solution to question #1
Step 1: Calculate the Operating Profit After Taxes.

OPAT = EBIT (1-T) = 2,500 (1 - .4) = 1,500

Step 2: Add back in the $2,000 of R&D expenses, net of tax.

OPAT = $1,500 + [$2,000 x (1 - .40)] = $2,700

Step 2: Determine the capital employed (net assets).

Capital employed = $3,650 + $5,250 + $1,200 = $10,100

Step 3: Determine the cost of capital.

COC = W_d*k_d (1-T) + W_p*k_p + W_e*k_e, where

W_d = the weight/proportion of debt in the (adjusted) capital structure

W_p = the weight/proportion of preferred stock in the (adjusted) capital structure

W_e = the weight/proportion of equity in the (adjusted) capital structure

And W_d + W_p + W_e = 1.0 (here W_p =0, since the firm has no preferred stock outstanding).

W_d = 3,650(3,500 + 150)/8,900 = .41

W_e = 5,250/8,900 = .59

The before-tax cost of debt (k_d) is 7.5%, and the cost of equity (k_e) is 15%.

COC = (.41) x [.075)(1-.40)] + (.59) x (.15) = .0185 + .0885 = .107 (10.7%)

Step 4: Calculate EVA = $2,700 - (.107) x ($10,100) = $2,700 - $1,080.70 = $1,619.30

For FY 1999, Ace had a positive EVA of $1,610,300. Through its operations during the year, the firm was able to earn enough to meet the required return of the common stockholders and add over $1 million to the value of the firm. The COC serves as a benchmark for performance. When the firm earns in excess of this benchmark, they exceed the stockholders' expectations. As a result, value is added to the firm. Its stock price rises, and top management should be rewarded accordingly. When calculating EVA, balance sheet data from the beginning of the year is used. If the firm issued new debt or equity during the year, then average balance sheet data should be used.

Solution to question #2
There are two reasons why EVA is a good measure of performance. First, it is consistent with the theory of finance and the criteria for maximizing the value of a firm. EVA discounts the overall benefits and costs by the firm's minimum required return (Cost of Capital) and represents the net benefit after all costs have been recovered. Second, analyses of empirical data have shown that changes in a firm's EVA correlate well with changes in the firm's stock price (r > .6). Empirical tests using traditional measures of financial performance, such as Return On Equity (ROE), net income, Return On Assets (ROA), Price/Earnings (P/E) ratio, and Earnings Per Share (EPS) tend to correlate poorly (r < .15) with changes in a firm's stock price. This is surprising, given the fact that EVA is a measure of historical performance and the stock price is primarily based on future expected performance. EVA appears to be a good predictor of future stock price.

Market Value Added (MVA)

Market Value Added is a concept that similar to EVA. Whereas EVA measures the contribution to shareholder value in the current year, MVA represents the expected present value of all future EVAs. It is the market's estimate of the company's ability to increase shareholder value in the future. MVA is equal to the market value minus the book value of a firm's interest-bearing debt plus its equity.

For Ace Microcircuits,
MVA = ($10 per share * 2 million shares) + $3,650,000 - $5,250,000 - $3,650,000 = $20,000,000 - $5,250,000
MVA = $14,750,000

Based on past performance and expected future performance, the market has priced the company's shares to reflect a NPV of all future EVAs of $14.75 million. If the firm exceeds these expectations, the price of its stock will rise. If the firm does not live up to these expectations, the price of the stock will fall.

Solution to question #3
First, we need to examine the EVA equation and identify those factors under the control of management that affect EVA.

EVA equals OPAT minus [COC multiplied by (Total Liabilities minus non-interest bearing short-term liabilities plus Total Stockholders' Equity)]

By examining the above equation, EVA can be increased from managerial decisions that:

Increase operating profit without increasing the investment in assets. This motivates managers to find ways to increase sales and to reduce costs without investing in more assets.

Reduce the amount of money invested in assets without a commensurate decline in operating profit. This motivates management to improve the management of its assets (asset management ratios), such as decreasing inventory level through improved management (e.g., just-in-time), and decreasing the amount of receivables (e.g., account receivables, notes receivables), decreasing the investment in fixed assets in a manner that maintains the level of operating profit. Management seeks to get a 'bigger bang for the buck' invested in assets.

Increase capital investment in projects that earn a return on capital in excess of the cost of capital. Companies that identify and invest in projects that earn a return greater than the minimum rate of return (Cost of Capital) required by its investors will find its stock price going up and investors willing to buy more shares. Management is motivated to identify and implement those investments that add value to the firm (positive NPV projects). Projects whose NPV > 0 add value to the firm.

Withdraw capital from businesses that do not earn at least the minimum rate of return required by its investors. EVA motivates management to identify assets that are not earning the COC. These assets can then be sold to someone else who might be able to make better economic use of them. Another possibility is for the company to spin the assets off into a separate business. This can provide the new management with the ability to better focus on improving the return that these assets generate. As an example, about a decade ago Coca Cola took all of its bottling operations and formed a separate company. The new company was a separate legal entity with its own shares of common stock. This allowed the management at Coca Cola to concentrate on selling its product lines instead of dividing its time between marketing and bottling.

Capitalize expenses that management feels will contribute to future revenue. EVA increases when management takes expenses out of OPAT and adds them to the capital employed. This is a primary area of concern when evaluating EVA. If management compensation is based on EVA results, management has an incentive to capitalized more and more expenses.

Secondly, we need to develop an EVA compensation plan that motivates management to focus on actions that will create shareholder value. A compensation plan, if structured properly using EVA, can motivate managers to make decisions that create shareholder wealth.

Here's an example of a compensation plan that motivates management to increase shareholder wealth.

Annual manager's salary = $100,000

EVA bonus plan (FULLY DISCLOSED AND UNDERSTOOD AT ONSET)

The bonus is zero if the current year's EVA equals last year's EVA.
The percentage change in the EVA (positive or negative) is applied to the manager's salary to determine the amount of the bonus (positive or negative). increase or decrease in salary as the bonus percent tied to salary level, e.g., 10% EVA increase produces $10,000 bonus
One third of the bonus is paid in each of next 3 years; each year's balance is "BANKED" (discussed below)
50% paid in cash; 50% in stock (or equivalents)

Current year INCREMENTAL IMPROVEMENT in manager's performance metric (EVA) = +30%

bonus = 30% of salary = $30,000
payout schedule

current year: $10,000 (50% each in cash and stock)
banked for year 2: $10,000 (cash & stock)
banked for year 3: $10,000 (cash & stock )
current year total compensation = $110,000 (salary and bonus)

Year 2 INCREASE IN EVA = +60%

bonus = 60% of salary = $60,000
payout schedule

current year (2): $20,000 (cash & stock)
from bank for year 1 bonus: $10,000
banked for year 3: $20,000
banked for year 4: $20,000

year 2 total compensation = $130,000 ($100,000 salary + $20,000 year 2 bonus + $10,000 year 1 bonus from bank)

Year 3 DECREASE IN EVA = -30%

"bonus" = -30% of salary = ($30,000)
payout schedule

current year (3): ($10,000)
from bank for year 1 bonus: $10,000
from bank for year 2 bonus: $20,000
banked for year 4: ($10,000)
banked for year 5: ($10,000)

year 3 total compensation = $100,000 + $10,000 + $20,000 - $10,000 = $120,000

bank balances, end of year 3:

due in year 4:

from year 2 bonus: $20,000
from year 3 bonus: ($10,000)
total for year (before year 4 bonus) = $10,000

due in year 5:

from year 3 bonus: ($10,000)
from year 4 bonus: ?
from year 5 bonus: ??

Several items in the plan above have been highlighted because they demonstrate the link between the shareholder value-based metric (EVA), the manager's performance with regard to this metric, and the compensation plan that is tied to this metric. The integration of these links is essential if the manager's effort is expected to increase shareholder value.

The first is the statement that the EVA plan was "fully disclosed and understood at the onset". This is a corollary to the statement: "what gets measured is what gets done" and "what gets rewarded is what gets done". It is unlikely that goals will "get done" if managers do not buy into the reward system. Second, no bonus is to be paid if there is no increase in EVA from last year. This is consistent with the principle that MVA increases when EVA increases. If the manager's performance has not contributed to an increase in shareholder value, the manager is not entitled to a bonus. A related outcome is illustrated in year 3 of the example when the EVA metric declines by 30% in that year. In that year, the manager receives a negative "bonus" commensurate with the decline in EVA.

The payment schedule and the payment form also are integral links in any performance based reward system. In this example, the manager's salary is compensation for maintaining the shareholder value at its current level. Any change in compensation level will be proportional to the manager-related changes in EVA. The payment form recognizes the need to reward both short-term and long-term performance. Therefore, one-third of the reward for this year's contribution is paid in the current year. However, long-term contribution may vary, as illustrated in the example. In response, two-thirds of each year's reward (or penalty) is "banked," to be received (or lost) in later years. This illustrates the fact that current share prices, in part, reflect current year performance.

The other aspect of the payment is the equal division between cash and stock (or common stock equivalents like stock options) in this example. In each year in which a bonus is paid, the future value of the stock received is tied to future shareholder value. As the manager's stock ownership grows, the manager's interests become more aligned with those of the other common stockholders. This is the ultimate goal of any shareholder-value based management system.

EVA is not the perfect measure of corporate financial performance.

1. EVA uses balance sheet values for net investment, based on the rules (GAAP) for financial accounting. These values can be significantly different from market values estimated by the investment community when they assess a share price based on their required return. Stern & Stewart have identified more than 160 potential distortions generated by following GAAP. An example is R&D costs. Generally, GAAP requires these costs to be expensed in the period in which they are incurred. Stern & Stewart (the originator of EVA) argue that R&D drive benefits (income/cash flows) in future periods and should be amortized over the periods benefited. Other areas of potential major distortions are strategic investments, accounting for acquisitions, expense recognition, depreciation, restructuring charges, taxes, and various balance sheet adjustments. In devising the EVA program for a company, Stern & Stewart recommend tailoring the program and the modifications made to its financial statement data to the specific situation, based on the costs and benefits of doing so. Other practitioners have recommended using the raw data from the financial statements, as in the previous example, on the basis that keeping it simple has a high value that is lost when a multitude of adjustments are made. A complicated derivation of EVA significantly detracts from its usefulness in compensation plans, unless there is buy-in and understanding of the basis for the adjustments.

2. While EVA may be appropriate and effective for some situations, it may not be an indicator of value creation in others. If we have a company that has a substantial amount of intangible assets (e.g., intellectual property), a calculated EVA would be overstated and could be meaningless. Certainly, asset amounts could be adjusted upward by an estimate of these intangibles, but this puts us into the very difficult area of valuing intangible assets. For example, Microsoft's market value exceeds its book value by about $320 billion ($360B - $40B). A major portion of this difference is true MVA (ability in the future to earn higher returns than its cost of capital). However, Microsoft's intellectual property (e.g., Windows and Office software) account for a significant amount of this difference. To the extent that the asset value that is used in the EVA formula is understated, EVA will be overstated.

3. For firms whose assets are primarily tangible and in an industry that is fairly stable (low sales growth), EVA tends to work well. The EVA calculated in this case is a good estimate of the value added to the firm during the most recent period of operations. However, if the industry is experiencing high sales growth, EVA will not generally be a good indicator of the value added. Firms in this situation (or if they are assimilating new technologies independent of what is happening in the industry) will tend to experience low current operating earnings (and thus low EVA) that are not indicative (or predictive) of the future prospects/earnings for the company.

4. Finally, EVA uses an income-based measure of performance, whereas cash flow is generally considered the most relevant measure of performance.

Balanced Scorecard

Introduction

The Balanced Scorecard (BSC), like the dials in an airplane cockpit, provides managers with complex information at a glance. The BSC was developed by Professor Kaplan who teaches accounting at the Harvard Business School and Mr. Norton, president of a Massachusetts based IT consulting firm.

Measurement systems affect the behavior of employees. What you measure is what you get. The traditional financial accounting measurements can give an organization misleading information for continuous improvements. Managers should not have to choose between financial and operational measures. Managers want a balanced presentation of both financial and operational measures.

The authors studied several companies and devised a set of measures for top management to review. The scorecard includes financial and operational measures, that include customer satisfaction, internal processes, and the organization's innovation and improvement activities.

The Balanced Scorecard provides answers to the following four basic questions:

How do customers see us? (customer perspective)
What must we excel at? (internal perspective)
Can we continue to improve and create value? (innovation & learning perspective)
How do we look to shareholders? (financial perspective)

This scorecard keeps an organization from having too many measurements and it forces managers to focus on the handful of measures that are most critical. It also guards against suboptimization. In other words, it forces managers to consider whether improvements in one area are being achieved at the expense of another.

I. Customer Perspective: How Do Customers See Us?

The balanced scorecard demands that managers translate their general mission statement on customer service into specific measures that reflect the factors that really matter to customers:

Time
Quality
Performance/Service
Cost

Goals should be articulated for each category and measured/tracked on the balanced scorecard. For example, one company measured performance by gathering internal sales data from within the company, and external data from customers. They found that each customer defined reliable, responsive supply differently. Also they allowed customers to define what on time meant so that it matched customer expectations. Other ways to define customer requirements are to:

Conduct customer surveys,
Compare the company to industry or government standards, or
Use benchmarking to compare itself to competitor's best practices.

Measurements must remain sensitive to the cost of their products. Cost is not just the price of the goods, but the supply driven costs like ordering, scheduling, delivery, receiving, inspecting, handling, storing, etc. An excellent supplier may charge a higher price for efficient customer service.

II. Internal Business Perspective: What Must We Excel At?

Managers must focus on the critical internal operations that enable them to satisfy customer concerns. This is the second part of the balanced scorecard.

Internal measures should stem from the business processes that have the greatest customer impact, such as:

Cycle Time
Quality
Employee Skills
Productivity

Goals are influenced by employees' actions. Since much of the action takes place at the department and workstation levels, managers need to be involved in defining the measurements to link with top management judgment about key internal processes.

Information Technology must be available to provide data for the balanced scorecard. If the information system is unresponsive, it can be the Achilles' heel of performance measurement.

III. Innovation and Learning Perspective: Can We Continue to Improve and Create Value?

Intense global competition requires that companies make continual improvement which ties directly to the company's value. For example, measures of manufacturing improvement could focus on achieving stability in creating new products versus improving the manufacturing process of existing products. The percent of sales from new products could be the metric.

Other measures in this area include the specific rate of improvement for on-time delivery, cycle time, defect rate and yield as well as measures that focus on process defects, missed deliveries and the reduction of scrap.

All of these examples emphasize the role of internal continuous improvement as the means for attaining customer satisfaction.

IV. Financial Perspective: How Do We Look to Shareholders?

The Financial performance measure indicate whether the company's strategy, implementation, and execution are contributing to bottom line improvement. Most financial goals deal with profitability, growth and shareholder value. Examples of financial goals are:

Survival - measured by cash flow
Success - measured by quarterly sales growth
Prosperity - measured by segment and return on equity

Kaplan and Norton question whether managers should even look at the business from a financial perspective since this data has been criticized as being inadequate and backward looking. The authors suggest that Shareholder Value Analysis (SVA) is an attempt to make financial analysis more forward looking. But that SVA is still based on cash flow rather than on the activities and processes that drive cash flow.

Some critics argue that traditional financial measures do not improve customer satisfaction, quality, cycle time and employee motivation. They argue that by making fundamental improvements to operations, the numbers will take care of themselves.

But the authors assert that properly designed financial measurement systems can improve an organization's quality program. They also demonstrate how the link between operations and financial success is uncertain. They show how a New York Stock Exchange electronics company improved its defect rate from 70 to 90 percent and its yield jumped from 26 to 51 percent in a three year period. But, its stock price dropped by one third.

So, even a balanced scorecard does not guarantee a winning strategy. It can only translate a company's strategy into specific measurable objectives. Companies use continuous improvement measurements to succeed. The BSC says that ideally, companies should specify how improvements in quality, cycle time, quoted lead times, delivery and new production introduction will lead to higher market share, operating margins and asset turnover or to reduced operating expenses. The challenge is to make the link between operations and finance.

Conclusion

Kaplan and Norton say that the balanced scorecard could not be implemented without the involvement of senior managers who have the complete picture of the company's visions and priorities. Controllers would need to be heavily involved in presenting the balanced scorecard to senior managers.

They explain that the balanced scorecard is not based on the engineering mentality which attempts to see if employees have taken the actions specified by management. It is suited towards putting the strategy and vision, not control, at the center. Goals are established with the assumption that people will take the necessary actions to achieve those goals.

This new approach to performance measurement is consistent with the initiatives in many companies. The balanced scorecard helps managers transcend traditional notions about functional barriers and lead to improved decision making and problem solving. It keeps them looking ahead instead of looking backwards.

PowerPoint Presentation

This PowerPoint presentation illustrates the key concepts behind the Balanced Scorecard and offers steps to implement this management system in an organization.

Example

Suppose you are the owner/manager of a business that provides food catering services.

(a) Identify the stakeholder groups.

(b) Identify three different approaches that you may use to compete in the food-catering market.

(d) Specify what your plan expects to receive from and expects to give to each stakeholder group; from this information, specify your organization's primary and secondary objectives.

(e) Construct a balanced scorecard to assess the performance of your cooking staff.

Solution

(a) The stakeholder groups for this organization are present and potential customers, employees, suppliers, the owner, and the community served by the firm.

(b) Three common alternatives are: (1) to compete based on lowest price for a standard group of products and services while meeting or exceeding existing quality standards; (2) to compete based on continuously offering new products that are unavailable elsewhere; and (3) to compete by offering a specialty service to a well-defined market niche - for example, birthday party catering only. Here's another approach to the market segmentation:

To develop a particular market specialization or "niche", such as celebratory events (weddings), business conferences (training), or corporate catering accounts (cafeterias). The business would then become well reputed as "experts" in that particular forum.

To develop a "food theme" marketing specialization or "niche", such as international specialties, health food, vegetarian cuisine, etc. The business would then utilize corresponding propaganda to solicit business in this novelty market segment.

To develop a combination of the "food theme" with a variety of event offerings, while promoting the "individually designed and customized" catering services available for any event.

(c) Each of the competitive approaches would have to be evaluated relative to the capabilities, resources and expectations of the organization's stakeholders. If any portion of the primary plan is unacceptable to any stakeholder group, it must be revised to their satisfaction. Environmental, cultural, regional, socioeconomic, and market preference statistics should be evaluated to determine the best competitive approach for the catering business in their target area.

(d) The owner of the catering business determined that the best competitive approach to initiate as their primary objective would be to develop a market specialty for catering to corporate conferencing requirements and related events. The catering business, located in the business district of Atlanta, GA, currently has numerous existing corporate contacts, and unlimited "un-tapped" new client potential due to the huge influx of new corporations in the city. The secondary objectives that the catering business should address are also extremely important. The employees are expected to provide high quality, courteous, prompt and flexible service, while being rewarded with, excellent working conditions, good compensation packages and flexible schedules. The owner is expected to provide all of the necessary resources to complete the tasks involved in the business operations, while being rewarded with increased revenues, and satisfied stakeholders. The suppliers are expected to provide high quality, affordably priced, prompt goods and services, while being rewarded with long-term, increasing volume, profitable contracts. The customers expect to receive high quality, professional, comprehensive, detail-oriented catering services, while providing the necessary financial resources to the company, and improving the catering company's community reputation. The community provides the regulatory criteria regarding food preparation and handling, working conditions, and employee regulations, while establishing a precedent for acceptance of new businesses locally. They receive satisfied community stakeholders and loyal citizens in return.

(e) The balanced scorecard for the cooking staff again will reflect the competitive strategy. Note that the cooks would affect relations primarily with customers -- they would have little influence on suppliers and the community and would affect owners primarily through their ability to control costs and produce products that meet customers' expectations. The low cost producer strategy will require someone to develop recipes and cooking methods that ensure consistent quality at low cost. The cooks would then be subject to task control to ensure that they followed rules. In this case, the balanced scorecard would be trivial -- as it is in all cases of task control. For the innovator strategy, the balanced scorecard would reflect the cooks' ability to develop commercially viable new products. For the niche strategy, the balanced scorecard would reflect cost control and quality issues.

Here's one approach to the balanced scorecard.

Dimension	Metric	Key Performance Indicator
Customer	1. Consistently satisfied with product	1. Customer Survey
Internal	1. Clear policies 2. Anticipate future changes 3. Safety	1. Survey of Employees 2. Proposal put forward to modernize 3. Number of injuries
Innovation	1. Foster teamwork 2. Retain skilled staff 3. High degree of innovation	1. Number of Teams and Changes in membership 2. Employee turnover 3. Proposed process changes
Financial	1. Provide food in cost-effective manner 2. Support primary objective	1. Price changes (up or down) 2. Contribution to income

Last Update: 18 February 2001