1. Performance Evaluation and the Balanced Scorecard
Chapter 23

2. Explain why and how companies decentralize
Learning Objective 1
Explain why and how companies decentralize

3. Decentralized Operations
Companies decentralize as they grow
Split operations into different divisions or operating units
Top management delegates decision-making to unit managers
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4. Advantages and Disadvantages of Decentralization
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5. Advantages Outweigh Disadvantages
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6. Responsibility Centers
Manager is responsible for:
Cost center ?
Revenue center
Profit center
Investment center
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7. Explain why companies use performance evaluation systems
Learning Objective 2
Explain why companies use performance evaluation systems

8. Performance Measurement
When companies decentralize, top management needs a system to communicate goals to subunit managers
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9. Limitations of Financial Performance Measures
Financial measures tend to be lag indicators
Management also needs lead indicators
Tendency to focus on short-term achievements
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10. Learning Objective 3
Describe the balanced scorecard and identify key performance indicators for each perspective

11. Balanced Scorecard
Management must consider both financial and operational performance measures
Measures should be linked with company goals and strategy
Financial measures are only one measure among many
Uses key performance indicators
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12. Examples of critical factors and corresponding KPIs
COMPANY GOALS
Examples of critical factors and corresponding KPIs
CRITICAL FACTORS
Customer satisfaction
Operational efficiency
Employee excellence
Financial profitability
KEY PERFORMANCE INDICATORS
Market share
Yield rate
Training hours
Revenue growth
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13. Four Perspectives
Financial
Customer
Internal Business
Learning and Growth
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14. Financial Perspective
How do we look to shareholders?
KPIs:
Sales revenue growth
Gross margin growth
Return on investment
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15. Customer Perspective How do customers see us? Customer concerns: KPIs:
Customer satisfaction
Market share
Number of customers and repeat customers
Rate of on time deliveries
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16. Internal Business Perspective
At what business processes must we excel?
Three factors:
Innovation
Operations
Post-sales service
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17. Learning and Growth Perspective
How can we continue to improve and create value?
Three factors:
Employee capabilities
System capabilities
Company’s climate for action
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18. Exercise 23-15, letters a thru k
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19. Exercise 23-15, letters l thru w
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20. Use performance reports to evaluate cost, revenue, and profit centers
Learning Objective 4
Use performance reports to evaluate cost, revenue, and profit centers

21. Performance Reports
Report financial performance of responsibility centers
Cost center
Revenue center
Profit center
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22. Performance Reports Management by exception
Should focus on information, not blame
Some variances are uncontrollable
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23. Use ROI, RI, and EVA to evaluate investment centers
Learning Objective 5
Use ROI, RI, and EVA to evaluate investment centers

24. Investment Centers Performance measures: Return on investment (ROI)
Residual income (RI)
Economic value added (EVA)
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25. Return On Investment (ROI)?
ROI ? ? ?
ROI
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26. ROI ? Profit margin ? ? Capital turnover ?
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27. Exercise 23-18 ? % ? % Operating income ROI Total assets Residential
? %
$63,700
$196,000
Professional
$162,400
? %
$406,000
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28. Exercise 23-18 (continued)
Operating income
Profit margin
Sales
Residential
$63,700
? %
$580,000
Professional
$162,400
? %
$1,100,000
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29. Exercise 23-18 (continued)
Capital turnover
Sales
Total assets
Residential
$580,000 ?
$196,000
Professional
$1,100,000 ?
$406,000
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30. Exercise 23-18 (continued)
Profit margin
Capital turnover
ROI
Residential
? %
2.96
10.98%
Professional
2.71
? %
14.76%
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31. Residual Income (RI)
Compares division’s operating income with minimum operating income expected given the size of the division’s assets
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32. Residual Income RI ? Minimum acceptable income
minus
Minimum acceptable income
Minimum acceptable income ?
Total assets
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33. Residual Income Advantages
Promotes goal congruence better than ROI
Incorporates management’s minimum required rate of return
Can use different target rates of return for divisions with different levels of risk
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34. Economic Value Added (EVA)
Special type of RI calculation
Considerations:
Income available to stakeholders
Assets used to generate income for stakeholders
Minimum rate of return required by stakeholders
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35. Economic Value Added EVA ? Total assets Current liabilities ? % minus
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36. Advantages of Performance Measures
Return on investments
Residual income
Economic value added
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37. Limitations of Performance Measures
Measurement issues
Short-term focus
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38. End of Chapter 23