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.

 

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