B. Aligning the Balanced Scorecard to Strategy
Ginsberg Engineering Company manufactures electric motors for sale to producers of washing machines. In the past, Stan Grossman, the Operations Manager at Ginsberg Engineering, has been rewarded based on the number of units produced each month, and this has led to actions that are inconsistent with maximising shareholder value. Near the end of each quarter, Grossman estimates expected production in relation to his target. If expected production is below the target, he runs extra shifts in an attempt to meet his production target. As Ginsberg Engineering has limited storage space, this often results in the delivery of motors to customers ahead of time. This is a problem for many customers, who also have limited storage space.
Sheryl Hoover, the CEO of Ginsberg Engineering, decided to implement a balanced scorecard (BSC) for the Operations Division, with the specific purpose of eliminating the perverse incentive described above. Hoover believes it is inefficient to build a new BSC, and so she simply copied the BSC used in her last firm. An extract of this BSC is as follows:
PERSPECTIVE OBJECTIVE LAG INDICATOR LEAD INDICATOR
Financial Improved profitability Profit Cost per unit
Customer Improve customer satisfaction Customer satisfaction Customer returns
Internal Business Increase product quality Customer returns Defect rates
Learning & Growth Improve staff capability Staff quality skills audit score Quality training programs delivered
Also, while Hoover believes the BSC is useful in monitoring performance, she believes that all managers need to be rewarded in a consistent way, and so she based all divisional managers' (including Grossman's) bonuses on their profit compared to budget. After twelve months of using this BSC, the perverse incentive still exists