Return on Investment (ROI) and Balanced Scorecard:
Simply exhorting managers to
increase return on investment (ROI) is not sufficient. Managers who
are told to increase return on investment (ROI) will naturedly
wonder how this is to be accomplished.
Generally speaking, ROI
can be increased by increasing sales, decreasing costs, and/or decreasing
investments in operating assets. However it may not be obvious to managers
how they are supposed to increase sales, decrease costs, and decrease
investments in a way that is consistent with the company's strategy. For
example, a manager who is given inadequate guidance may cut back on
investments that are critical to implementing the company's strategy. For
this reason when managers are evaluated on ROI, a balanced scorecard
approach is advised. And indeed, ROI, or residual income, is typically
included as one of the financial performance measures on a company's
balanced scorecard. The balanced scorecard provides a way of communicating a
company's strategy to managers throughout the organization. The scorecard
indicates how the company intends to improve its financial performance. A
well constructed balanced scorecard should answer questions like: "What
internal business processes should be improved?" and "which customer should
be targeted and how will they be attracted and retained at a profit?" In
short, a well constructed balanced scorecard can provide managers with a
road map that indicates how the company intends to increase its return
on investment (ROI). In the absence of such a road map of the company's
strategy, managers may have difficulty understanding what they are supposed
to do to increase ROI and they may work at cross-purposes rather than in
harmony with the overall strategy of the company. |
