Read Online The Balanced Scorecard: Translating Strategy Into Action by Robert S. Kaplan, David P. Norton - Free Book Online
Authors: Robert S. Kaplan, David P. Norton
Tags: Non-Fiction, Business
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capital invested in the business unit as given (or exogenous) and ask the managers to maximize the income that can be generated from the invested capital. Other, more autonomous business units, are asked not only to manage income flows but also the level of invested capital in the business unit. The measures used for these business units relate accounting income earned to the level of capital invested in the business unit; measures such as return-on-investment, return-on-capital-employed, and economic value-added are representative of those used to evaluate the performance of such business units.
Some business units will have reached a mature phase of their life cycle, where the company wants to
harvest
the investments made in the two earlier stages. These businesses no longer warrant significant investment—only enough to maintain equipment and capabilities, not to expand or build new capabilities. Any investment project must have very definite and short payback periods. The main goal is to maximize cash flow back to the corporation. The overall financial objectives for harvest-stage businesses would be operating cash flow (before depreciation) and reductions in working capital requirements.
Thus, the financial objectives for businesses in each of these three stages are quite different. Financial objectives in the growth stage will emphasize sales growth—in new markets and to new customers and from new products and services—maintaining adequate spending levels for product and process development, systems, employee capabilities, and establishment of new marketing, sales, and distribution channels. Financial objectives in the sustain stage will emphasize traditional financial measurements, such as ROCE, operating income, and gross margin. Investment projects for businesses in this category will be evaluated by standard, discounted cash flow, capital budgeting analyses. Some companies will employ newer financial metrics, such as economic value-added and shareholder value. These metrics all represent the classic financial objective—earn excellent returns on the capital provided to the business. And the financial objectives for the harvest businesses will stress cash flow. Any investments must have immediate and certain cash paybacks. Accounting measurements—such as return-on-investment, economic value-added, and operating income—are less relevant since the major investments have already been made in these business units. The goal is not to maximize return-on-investment, which may encourage managers to seek additional investment funds based on future return projections. Rather, the goal is to maximize the cash that can be returned to the company from all the investments made in the past. There will be virtually no spending for research or development or to expand capabilities because of the short time remaining in the economic life of business units in the harvest phase.
The development of a Balanced Scorecard, therefore, must start with an active dialogue between the CEO of the business unit and the CFO of the corporation about the specific financial category and objectives for the business unit. This dialogue will identify the role for the business unit in the company’s portfolio. Of course, this dialogue requires that the company CEO and CFO have an explicit financial strategy for each business unit. The positioning of divisions in a financial category is not immutable. A normal progression, which could occur over decades, moves units from growth, to sustain, to harvest, and finally to exit. 4 But occasionally, a business even in a mature, harvest stage might unexpectedly find itself with a growth objective. A sudden technological, market, or regulatory change may take what had previously been a mature, commoditized product or service, and transform it into one with high-growth potential. Such a transformation would completely shift the financial and investment objectives for the business unit. That is why the
Some business units will have reached a mature phase of their life cycle, where the company wants to
harvest
the investments made in the two earlier stages. These businesses no longer warrant significant investment—only enough to maintain equipment and capabilities, not to expand or build new capabilities. Any investment project must have very definite and short payback periods. The main goal is to maximize cash flow back to the corporation. The overall financial objectives for harvest-stage businesses would be operating cash flow (before depreciation) and reductions in working capital requirements.
Thus, the financial objectives for businesses in each of these three stages are quite different. Financial objectives in the growth stage will emphasize sales growth—in new markets and to new customers and from new products and services—maintaining adequate spending levels for product and process development, systems, employee capabilities, and establishment of new marketing, sales, and distribution channels. Financial objectives in the sustain stage will emphasize traditional financial measurements, such as ROCE, operating income, and gross margin. Investment projects for businesses in this category will be evaluated by standard, discounted cash flow, capital budgeting analyses. Some companies will employ newer financial metrics, such as economic value-added and shareholder value. These metrics all represent the classic financial objective—earn excellent returns on the capital provided to the business. And the financial objectives for the harvest businesses will stress cash flow. Any investments must have immediate and certain cash paybacks. Accounting measurements—such as return-on-investment, economic value-added, and operating income—are less relevant since the major investments have already been made in these business units. The goal is not to maximize return-on-investment, which may encourage managers to seek additional investment funds based on future return projections. Rather, the goal is to maximize the cash that can be returned to the company from all the investments made in the past. There will be virtually no spending for research or development or to expand capabilities because of the short time remaining in the economic life of business units in the harvest phase.
The development of a Balanced Scorecard, therefore, must start with an active dialogue between the CEO of the business unit and the CFO of the corporation about the specific financial category and objectives for the business unit. This dialogue will identify the role for the business unit in the company’s portfolio. Of course, this dialogue requires that the company CEO and CFO have an explicit financial strategy for each business unit. The positioning of divisions in a financial category is not immutable. A normal progression, which could occur over decades, moves units from growth, to sustain, to harvest, and finally to exit. 4 But occasionally, a business even in a mature, harvest stage might unexpectedly find itself with a growth objective. A sudden technological, market, or regulatory change may take what had previously been a mature, commoditized product or service, and transform it into one with high-growth potential. Such a transformation would completely shift the financial and investment objectives for the business unit. That is why the
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