Chemico: Evaluating performance based on the Balanced Scorecard

J. of Acc. Ed. 28 (2010) 221–236

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J. of Acc. Ed.

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Educational case

Chemico: Evaluating performance based on the BalancedScorecard

Monte Wynder ⇑University of the Sunshine Coast Maroochydore DC, Qld 4556, Australia

a r t i c l e i n f o a b s t r a c t

Article history:Available online 23 April 2011

Keywords:Balanced ScorecardStrategy mapPerformance evaluationSustainabilityEnvironmental performance measurement

0748-5751/$ - see front matter � 2011 Elsevier Ltdoi:10.1016/j.jaccedu.2011.03.006

⇑ Tel.: +61 7 5430 1263; fax: +61 7 5430 1210.E-mail address: [email protected]

For the past decade Chemico Inc. has been pursuing a successfulstrategy producing an innovative type of plastic that is replacingsteel in the production of cars. Chemico has plants around theworld, and demand continues to grow. Operations have recentlycommenced at three new plants in China. You have obtained per-formance data for the three plants in the form of a Balanced Score-card (BSC) in which each manager’s performance is comparedagainst the company’s targets. As the Financial Controller forChemico it is time for you to evaluate the three plant managersand distribute the bonus pool between them.

� 2011 Elsevier Ltd. All rights reserved.

1. Introduction

Chemico Inc. produces an innovative type of plastic that is replacing steel in the production of cars.The industry is very competitive and prices continue to fall as the production process is improved.Chemico has a very successful strategy focused on continually reducing production costs and theeffective utilization of its expensive plant and equipment. Chemico seeks to capture market shareby providing the cheapest product on the market; however, quality is also important.

The production process involves thousands of variables that must be monitored and adjusted todetermine the energy requirements and yield (output compared with input). Furthermore, the highlytoxic waste associated with the production process must be managed carefully and must undergoexpensive treatment before being released. Highly trained and experienced engineers are the key toensuring that the process is efficient and that improvements are continually identified.

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222 M. Wynder / J. of Acc. Ed. 28 (2010) 221–236

In summary, Chemico’s strategy is to invest in training and workplace conditions to improve theengineers’ innovation and process management skills. This then results in more efficient operationsand lower production costs. Market share then increases through low prices while maintaining a highgross margin.

The production process requires huge amounts of energy, which has led Chemico to set up threenew plants in China where there is an abundance of low-cost coal. The plants were established6 months ago and it is now time to evaluate the performance of each plant. In this regard, please com-plete Exhibits 1 and 2.

2. Implementation guidance and teaching note

2.1. Case synopsis

This case provides an engaging tool for teaching the principles of the Balanced Scorecard (BSC) withan emphasis on the relationships between lead and lag performance measures. In addition to the cau-sal relationships between Learning and Growth, Internal Processes, Customer, and Financial measures,the impact of environmental performance can also be recognized by integrating environmental mea-sures into the organization’s strategy map (SM).

In evaluating the managers, students make judgments about the relative importance of the differ-ent performance measures thereby exposing their implicit weightings and biases. An important fea-ture of the case is that students are evaluating the managers’ first 6 months of operations. Thisallows the relationships between lead and lag indicators to be clearly tracked across time. Further-more, the subsequent debriefing of the evaluations demonstrates the power of the SM andclearly highlights the time lag between implementing the company’s strategy and achieving financialtargets.

3. Overview of the task

Students assume the role of Financial Controller and evaluate the performance of three managersbased on measures presented in the BSC format (Exhibit 1). The task is based on a research instrumentdeveloped by Lipe and Salterio (2000). Of particular interest in their research was the finding that indi-viduals may not be using the BSC effectively for performance evaluation. For example, subsequent re-search found that evaluators focus on common measures of performance rather than the measuresthat are specific to the organization’s strategy (for example, Dilla & Steinbart, 2005).1 Determiningthe implicit importance that students place on various measures within the BSC exposes the typicalbiases and cognitive limitations identified in this previous research. Reflecting on their experience inevaluating the three managers provides a rich basis for a discussion of the behavioral issues involvedin implementing the BSC.

Performance of the three managers is contrived such that the sum of all the percentages above andbelow target is approximately the same. Therefore, an equal weighting placed on each measure wouldlead to equal evaluations and rewards. Manager A’s performance, however, is consistent with aninvestment in the lead indicators of performance identified in the organization’s strategy, but whichhas not yet flowed through into satisfactory financial performance. In contrast, Manager B achieveswell above target in the financial (i.e., lag) indicators of performance. Upon further analysis, however,it can be seen that this is achieved at the expense of performance that, according to the organization’ssuccessful strategy, will determine financial performance in the future. Specifically, results indicatethat Manager B has not invested in employee training and the result is beginning to be seen in em-ployee dissatisfaction and turnover. In summary, financial performance is significantly above target,but the lead indicators of performance suggest that the organization’s strategy is not being pursued,and the superior financial performance is unlikely to continue.

1 Further discussion of the research findings is presented in Table 2.

Measure Target for the six months

Plant A Plant B Plant C

Actual % better (or worse) than

target


target


target

Financial Perspective

1. Return on Investment 12% 10 -16.67% 15.2 26.67% 13 8.33%

2. Revenue Growth 15% 12.5 -16.67% 18 20.00% 15.5 3.33%

3. Net Profit Margin 8% 6.5 -18.75% 10 25.00% 9.5 18.75%

4. Reduction in Production Costs

10% 11.5 15.00% 8 -20.00% 11 10.00%

Customer perspective

1. Customer retention 85% 86 1.18% 79 -7.06% 88 3.53%

2. Price per kg 79 79 0.00% 72 8.86% 78 1.27%

3. Customer satisfaction rating 90 94.5 5.00% 83 -7.78% 89 -1.11%

4. Market Share 35% 30 -14.29% 43 22.86% 37 5.71%

Internal process perspective

1. Quality measure 75% 73 -2.67% 69 -8.00% 76 1.33%

2. Number of improvements implemented

10 12 20.00% 8 -20.00% 11 10.00%

3. Employee productivity (output per employee hour)

50kg per hr

53 6.00% 65 30.00% 63 26.00%

4. Capacity utilization percentage

80% 77 -3.75% 90 12.50% 83 3.75%

Learning and growth perspective

1.Employee satisfaction survey 80 95.5 19.38% 66 -17.50% 82 2.50%

2. Employee suggestions 25 24 -4.00% 26 4.00% 26 4.00%

3. Employee turnover (engineers)

10% 7.5 25.00% 12 -20.00% 9 10.00%

4. Hours of employee training 70 hr 79.5 13.57% 55 -21.43% 66 -5.71%

Environmental perspective

1. Toxicity of air emissions 1000ppm 1010 -1.00% 995 0.50% 1200 -20.00%

2. Toxicity of water emissions 500ppm 490 2.00% 495 1.00% 550 -10.00%

3. Energy efficiency (tons of coal per 10,000kg of output)

50 tons 51 -2.00% 52.5 -5.00% 55 -10.00%

4. Accidental release of untreated waste

20 liters 18.5 7.50% 18 10.00% 26 -30.00%

Exhibit 1. Balanced scorecard for Chemico’s three plants for the first 6 months.

M. Wynder / J. of Acc. Ed. 28 (2010) 221–236 223

Evaluation of the manager of Plant A: (place an X somewhere on the scale below)

Reassign:sufficient

improvement unlikely

Very Poor:

Considerably below

expectation

Poor: Somewhat below

expectations

Average: meets

expectations

Good: somewhat above

expectations

Very Good:

considerably above

expectations

Excellent:far beyond

expectations, manager excels

0 2 4 6 8 10 12

------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------

Evaluation of the manager of Plant B: (place an X somewhere on the scale below)

Reassign:sufficient


Very Poor:

Considerably below

expectation


expectations

Average: meets

expectations


expectations

Very Good:

considerably above

expectations



0 2 4 6 8 10 12

------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------

Evaluation of the manager of Plant C: (place an X somewhere on the scale below)

Reassign:sufficient


Very Poor:

Considerably below

expectation


expectations

Average: meets

expectations


expectations

Very Good:

considerably above

expectations



0 2 4 6 8 10 12

------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------

The total year-end bonus is $300,000. Determine how much you would allocate to each manager:

Manager A: $______________

Manager B: $______________

Manager C: $______________ (note that the total should equal, but not exceed $300,000)

Explain how you arrived at your decision:

Exhibit 2. Balanced Scorecard Response Sheet. As the Financial Controller of Chemico, Inc. it is your responsibility to evaluateperformance and determine the distribution of the bonus pool of $300,000 across the three managers. Your decision will need tobe presented at the upcoming remuneration committee meeting so it is important to explain and justify in writing how youarrived at your decision.



3.1. Incorporating sustainability

The strategic importance of sustainability is now widely recognized (Molina-Azorín, Claver-Cortés,López-Gamero, & Tarí, 2009). A number of authors have advocated a separate sustainability scorecard(Perrini & Tencati, 2006; Graham, 2009; Kittiya & James, 2006). Others have argued for incorporatingsustainability in the organization’s existing BSC (Figge, Hahn, Schaltegger, & Wagner, 2002), either as aseparate perspective or integrated throughout the existing perspectives. There are pros and cons ofthese various approaches that can be explored based on the students’ experience with the format pro-vided in this case.

Manager C’s performance is positive on all four of the BSC perspectives commonly used, but signif-icantly below target on the environmental measures. This provides the basis for a discussion of thestrategic importance of environmental performance. Note that, although the environmental perspec-tive is included in the BSC, students tend to ignore these measures when making their evaluations.This tendency can be explored and the merits of alternative approaches, such as integrating environ-mental measures into the other perspectives, can be considered. Furthermore, other dimensions ofsustainability, such as social performance, could be incorporated either in place of, or in addition toenvironmental performance.

In this case the organization has a purported commitment to environmental performance, but theconnections to financial performance are not explicated in the strategy. This is typical of many orga-nizations and provides a point for discussion. The extent to which students ignore environmental per-formance in their evaluations indicates the importance of explicitly linking environmentalperformance to financial performance. After these relationships are illustrated in the SM even themost economic-oriented students can see that investing in environmental performance can haveimportant long-term financial consequences.

4. Implementing the case

4.1. Preparation (30–40 min)

The case encourages students to reflect on the difficulty and resultant biases that often emerge inthe implementation and use of the BSC (de Waal, 2003). Therefore, I recommend its use at the begin-ning of a discussion of the BSC, after students have been introduced to the mechanics of the BSC (mostmanagement accounting texts describe the BSC’s structure). After identifying the four typical perspec-tives, and the potential for additional perspectives, students can then be given the evaluation exerciseas an illustration of a particular organization’s BSC.

A copy of the BSC and the evaluation form (Exhibits 1 and 2) are provided to each student, or groupof students. After a brief discussion of the organization’s strategy (it is not necessary to go into detail)the performance measures chosen to implement the strategy can be defined. Simple definitions ofeach measure used at Chemico are provided in Table 1. The case can also be used to illustrate theuse of a BSC in service organizations and the right hand column of Table 1 provides measures foran alternative setting that is described in Section 5.2. These measures for BrightWorld were used tomake the case applicable to students studying public policy. They demonstrate how the case can beadapted for service providers, or a specific industry. Although Table 1 could be provided to students,a feature of this case is parsimony (the case can be printed on two pages). Therefore I recommend ver-bal clarifications where necessary.

A brief discussion of specific performance measures provides an opportunity to emphasize theimportance of choosing measures that are specific to the organization’s strategy. This can be achievedby building the organization’s SM with students, one measure at a time (available as a Microsoft Pow-erPoint file from the author). Students are asked at each step to evaluate the plausibility of each arrowas a series of if-then statements. For example, the SM in Exhibit 3 (disregard plant specific perfor-mance at this stage) can be read as follows:

� Chemico has found that employee training increases employee satisfaction. When employees aremore satisfied they are more likely to stay and hence employee turnover is reduced. Employees

Table 1Definitions of performance measures and alternative measures for an alternative strategy.

Measures for Chemico Definition for Chemico Alternative measures forBrightWorld (Healthcare)

Financial perspective1. Return on investment Net profit after tax divided by total assets. Return on investment (%)2. Revenue growth Percentage increase in sales revenue. Revenue growth (%)3. Net profit margin Net income/net sales Net profit margin (%)4. Reduction in productioncosts

Percentage reduction in production costs. Reduction in OperatingCosts (%)

Customer Perspective1. Customer retention Percentage of customers making repeat purchases. Customer retention (%)2. Price per kg Sales price Average daily rate (in $)3. Customer satisfaction rating Based on a survey of existing customers, score is out

of 100.Customer acquisition

4. Market share Sales revenue as a percentage of total industry salesin the country.

Market share (%)

Internal process perspective1. Quality measure The product’s score on an aggregate measure of

quality.Service quality(independent rating)

2. Number of improvementsimplemented

Number of employee suggestions chosen to beimplemented.

Employee skills(independent evaluations)

3. Employee productivity(output per employee hour)

Total output of completed product divided by totaloperating employee hours.

Employee productivity ratio

4. Capacity utilizationpercentage

Actual production level as a percentage of idealoperating capacity.

Occupancy rate (%)

Learning and growth perspective1.Employee satisfaction survey Score (out of 100) on an employee satisfaction

survey.Employee satisfaction(survey)

2. Employee suggestions Number of employee suggestions submitted throughthe formal employee suggestion scheme.

Relative pay (% industryaverage)

3. Employee turnover(engineers)

Percentage of engineers that cease employment. Employee turnover (%)

4. Hours of employee training Hours of training per employee (cumulative measurefor the year to date).

Employee training (Hrs)

Environmental perspective1. Toxicity of air emissions Parts per million of toxic substances in the air

emissions.Laundry (kg/patient day)

2. Toxicity of water emissions Parts per million of toxic substances in thewastewater.

Energy efficiency (Kw)

3. Energy efficiency (tons ofcoal per 10,000 kg of output)

Quantity of coal used for each 10,000 kg of completedproduct.

Waste (kg)

4. Accidental release ofuntreated waste

Quantity of waste released into the environment(cumulative measure for the year to date).

Environmental ranking(independent rating)


who have worked longer at their jobs are more likely to understand the processes and be able tomake suggestions for improvements. How many of those suggestions are implemented, however,will depend on the employees’ experience (as determined by turnover) and their level of training(both determinants of job-specific knowledge). Successful implementations lead to increasedemployee productivity and/or capacity utilization, both of which can reduce the production costsand thereby increase the net profit margin and ROI.� Improvements may also relate to the quality of the product which will increase customer satisfac-

tion and hence the extent to which customers continue to use Chemico as their supplier. Retainingcustomers is an important determinant of Chemico’s share of the total market. Market share is alsodetermined by the price. In addition to a direct effect on market share, price also affects marketshare by influencing customer satisfaction, given the level of quality. Also note, however, that lowerprices will have a negative effect on net profit.

Employee Satisfaction

Quality

Customer Retention

ROI 27%

Reduction in Prod Costs

Net Profit Margin

Revenue Growth

Hours of Employee Training

Employee Turnover

Employee Suggestions

Capacity Utilisation

Employee Productivity

Number of Improvements

Customer Satisfaction

Market Share

Price per Kg

25

21

2020

20

4

20

18

8

20

30

13

9

9

8

7

23

20

20

TIME

21

RISK

Air emission toxicity

Energy Efficiency

Water emission toxicity

Release untreated

waste

1

1

5

10

Strategy MapChemicoPlant B

9

Exhibit 3. Strategy map for Plant B (Different shapes are used here to represent the different perspectives of the BSC. The size ofthe arrow and the shading indicate the extent above or below target (with the percentage given in the arrow). Shades of color(from light to dark red or green), however, are the most effective way to illustrate the deviation from target. Microsoft Word andPowerPoint files using color are available from the author). (For interpretation of the references to colour in this figure legend,the reader is referred to the web version of this article.)


Note that other stories might have been told, and other links drawn between the performance mea-sures. Class discussion may explore the possibilities but, ultimately, it is important to note that this isthe organization’s preferred strategy, that it has been successful in the past, and that managers are ex-pected to implement it. In other words, no matter what the relationships might be, these have beenidentified as the measures of strategy implementation and success. Environmental performance hasnot been integrated in the preceding story, but is seen as a determinant of risk that should be consid-ered when evaluating ROI (i.e., the risk–return relationship). Alternatively, these environmental per-formance measures could be integrated through their impact on customer satisfaction and/orproductivity.

Further explanation of the BSC document (Exhibit 1) should include a discussion of the targets andpercentages. Consistent with management by exception, targets that have not been achieved are bold.It is also worth noting that the targets for each manager are the same, that each plant has only been inoperation for 6 months, and that the strategy has been effective in the other plants operated by Chem-ico. Attention can then be drawn to the evaluation form. After resolving any queries, students can begiven time to evaluate each manager on the 11-point scale, allocate the bonus pool between the threemanagers, and justify their evaluations. Allocating the bonus emphasizes the consequences of the per-formance evaluation and also makes students explicitly rank the performance of the three managers.

4.2. Completing the evaluations (20–40 min)

Students can generally complete the evaluations in 20–30 min if working alone, and 30–40 min ifworking in groups. Although some students would like to have more time, this is long enough to dis-tinguish between the performance of the three managers in preparation for the subsequent discus-sion. The emphasis is not on making a definitive evaluation, but to recognize the difficulty in doingso. It is also important to encourage students to reflect on the processes by which they are makingtheir evaluations, hence the importance of the justification section (Exhibit 2).


The ability to complete the task quickly makes it an ideal activity for inclusion in a 2 h lecture for-mat (I have used it in lectures of 100 + students and seminars of 20 students). Completion of the taskprovides students with a break from the lecture, and an opportunity to apply what they have learnedso far.

4.3. Debriefing – multi-dimension performance measurement (15–40 min depending on learningobjectives)

Importantly, the task exposes the difficulty in actually applying the BSC and provides the basis for adiscussion of alternative approaches (i.e., subjective versus objective weightings) to making evalua-tions. A show of hands demonstrates the different approaches taken by students and these can be dis-cussed in terms of the benefits and weaknesses identified in the literature. Various strategies aretypical: equal weighting, a focus on financial measures, or an emphasis on particular measures (suchas environmental) that the student personally values. Importantly, some students will not be able toexpress the basis for their evaluations.

Making a correct evaluation is not the objective. Rather, learning occurs as the student’ recognizesthe difficulty in dealing with the multitude of measures and the biases that they have exhibited. Ulti-mately, however, students should see the importance of evaluating the measures within the context ofthe organization’s strategy, and the importance of recognizing the drivers of future financial perfor-mance. This is illustrated by recasting the SM for each manager to show their performance on the var-ious measures (Exhibit 3).

4.4. The strategy map

Comparing separate SMs for each manager, with performance now highlighted with shades of redor green, or arrow size as shown in Exhibit 3, emphasizes the lead and lag nature of the measures.Since the plants have only been operating for 6 months, students can clearly see two very different‘stories’ in the performance of Plants A and B. At this point it is also useful to highlight that thecause-effect relationships unfold across time. The story that is unfolding from Manager A’s SM is thatan investment in the lead indicators of performance has not yet flowed through into the lagged finan-cial measures. In contrast, Manager B is performing well on financial measures but the lead indicatorssuggest that this performance is not sustainable (Exhibit 3). Students can be encouraged in thedebriefing to ‘tell the rest of the story’, i.e., to predict the likely impact on the lag performance mea-sures from Manager B’s failure to invest in employee training. Some possible points in the interpreta-tion are as follows:

Manager B has very high levels of ROI, but let us consider how that has been achieved. Employeeproductivity is very high, but employee satisfaction is very low. Employee suggestions are above tar-get, but the number of those suggestions actually implemented is very low indicating that the qualityof those recommendations is low. Price per kg is very competitive, but quality is low – it seems thatManager B is achieving revenue growth through lowering the price per kg, but with low customerretention we can predict that market share will decrease with a diminishing pool of potential newcustomers.

As noted, the relationship between lead and lag indicators can be illustrated by color-coding thestrategy map and including an arrow along the bottom to highlight the temporal dimension of thoserelationships. Future performance can be predicted by looking to the left of the SM. Increasingly dar-ker shades of green toward the left can be expected to ‘flow through’ to the right as their positive im-pact is felt in the lagging indicators. The converse is also true, with dark red indicators to the left beingindicative of poor performance in subsequent periods. When the strategy map is presented in this wayit clearly shows the differences between Managers A and B.2

2 Color SMs for each of the three managers in Microsoft Word and PowerPoint formats can be obtained from the author.


In summary, the ‘story’ is told by discussing the relationship between each performance measurethat is connected by an arrow. Since managers have only been operating for 6 months this flowthrough from lead to lag indicators is not complete, but can be predicted. Using greenfield operationsis an important feature of the case. For operations that have been going for a longer period of time thelag indicators will be affected by previous managerial decisions. At this point it is appropriate to revisitthe discussion of how individual measures might be weighted. Whereas lead and lag indicators maybe equally weighted for an established business, a new operation or the implementation of a newstrategy may be better served by a heavier reliance on lead indicators.

Manager C is performing reasonably well on all measures of performance except environmental.Therefore, the student’s evaluation of Manager C indicates the extent to which they have been influ-enced by the poor environmental performance. Interesting discussions arise as students who havepreviously asserted that environmental performance is important find themselves evaluating perfor-mance solely on the financial measures. Students can be encouraged to speculate on the potential con-sequences of Manager C’s poor environmental performance. This provides the basis for a discussion ofthe strategic benefits and risks associated with environmental performance, and how environmentalmeasures can be integrated into the SM.

4.5. Links to theory

An understanding of the theoretical background and some relevant research findings is useful toenrich the discussion of the case, particularly when used for advanced undergraduate or postgraduatecourses. As students experience difficulty in evaluating the three managers they can then identify withthe research findings in the area.

An important feature of the BSC is that it focuses attention on a limited number of measures, i.e.,20–25, designed to encapsulate the organization’s strategy. Individuals must still, however, find waysto deal with the cognitive complexity of what remains a relatively large number of performance cues(Rich, 2007). Kaplan and Norton argue that the BSC provides a causal map of the organization’s strat-egy. This provides a schema by which the performance measures can be understood.

Empirical research indicates, however, that most organizations do not understand the causal link-ages in their own BSCs. In 2002/01 Speckbacher, Bischof, and Pfeiffer (2003) conducted a survey of the200 most publicly traded firms in Germany, Austria and Switzerland. Their respondents were boardmembers and heads of departments. Of the firms that used the BSC only half employed cause-effectchains. Without an understanding of the relationships between lead and lag indicators, that is, howinvestment in lead indicators will ultimately increase lag indicators, such as financial performance,it is difficult to see how the BSC can guide the implementation of strategy. Furthermore, despite thelack of a SM, more than two-thirds of users linked their reward system to the BSC.

Linking rewards to performance measures is important in driving performance and so is an impor-tant step in transforming the BSC from a measurement system to a management system (Kaplan &Norton 1996). However, if the causal linkages are not clearly understood, rewards may magnify unsus-tainable and short-sighted behavior, as illustrated in the performance of Manager B. Students can beasked to speculate on how Manager B’s performance is consistent with evaluations and rewards thatfocus on financial performance.

In this case students are told that the strategy is effective in creating financial performance. It canbe noted that poor performance on financial measures may be the result of an ineffective strategy(Wong-On-Wing, Guo, Li, & Yang, 2007). Students can be reminded, however, that a manager has aresponsibility to implement the organization’s strategy. Furthermore, a certain degree of faith maybe required given the lagged nature of the financial measures of performance. In their quasi-experi-mental field study of actual BSC implementation in a banking institution, Davis and Albright (2004)found that financial measures do increase with improving lead indicators, but not initially. Indeed,in their study the financial performance of the control group (i.e., non-BSC adopters) initially rose rel-ative to the BSC adopters for the first 6 months. Similarly, Crabtree and DeBusk (2008) find an associ-ation between lead indicators and shareholder returns. But again, in their longitudinal studyshareholder returns were not significantly better until the second year after adoption.


Despite these findings that demonstrate the importance of lead indicators, Ittner, Larcker, and Ran-dall (2003) find that superiors evaluate BSCs subjectively with a focus on financial measures. Althoughthis subjectivity can introduce biases toward lagged indicators, (Gibbs, Merchant, Van der Stede, andVargus, 2004; Gibbs, Merchant, Van der Stede, and Vargus, 2005) note that subjectivity may be impor-tant to deal with limitations in quantitative measures (2004; 2005). There is certainly room for debateon the advantages and problems of subjectivity in performance evaluation compared with a rigidweighting system.

Commencing with a study by Lipe and Salterio (2000), a number of recent studies have consideredthe cognitive limitations and biases that might explain the failure to effectively use the BSC. Attentionhas focused on the emphasis placed on common measures of performance, rather than unique mea-sures that are more pertinent to the organization’s specific strategy. Consistent with previous judg-ment and decision-making research (Slovic & MacPhillamy, 1974), the finding is that individualsrely more heavily on common measures (Lipe & Salterio, 2000). In a later paper they explain why:

The Balanced Scorecard with its large number of performance measures presents a complex task toa manager asked to use the scorecard to evaluate a division’s performance. The manager could, theo-retically, weight and combine the many measures into an overall evaluation of the business unit butthis is, cognitively, a very difficult thing to do. Research in cognitive psychology has repeatedly shownthat humans are able to retain and use only a small number of items in working memory (Baddeley,1994; Miller, 1956). With this limit on working memory, holding 20 or more individual measures inone’s head and mentally manipulating them simultaneously is extremely difficult, if not impossible.Thus, the volume of data in a Balanced Scorecard suggests that it may overload human decision mak-ers with information. (Lipe & Salterio, 2002, 532).

Subsequent research has sought to identify ways to debias the application of the BSC (Banker,Chang, & Pizzini, 2004; Libby, Salterio, & Webb, 2004; Roberts, Albright, & Hibbets, 2004). Because thiscase uses a similar instrument to prior research, the student’s experience can be compared with theresults of previous research (including the responses of accounting controllers provided in Section 5.3).The discussion can focus on ways to overcome the cognitive load (such as the SM), thereby reducingthe biases that have been demonstrated. Connections between learning objectives, discussion ques-tions, and research are provided in Table 2.

5. Evidence of the benefit of case usage

5.1. Learning objectives

This short case provides a rich discussion for the role of the BSC in implementing an organization’sstrategy. An important feature of the BSC that distinguishes it from other performance measurementsystems is its emphasis on causal links (Kaplan & Norton, 1992; Kaplan & Norton, 1993; Kaplan & Nor-ton, 2000a; Hoque & James, 2000; Speckbacher et al., 2003). It has been argued that such an approachdrives performance (Iselin, Mia, & Sands, 2008) and is important in overcoming an over-reliance onfinancial measures of performance (DeBusk, Killough, & Brown, 2005; Kaplan & Norton, 1992). Recog-nizing the lagged nature of financial measures, the BSC identifies the lead indicators (Learning andGrowth, Internal Processes, and the Customer Perspective) which can be linked in a set of cause-effectrelationships that Kaplan and Norton (1992) call a strategy map.

This case demonstrates the power of the SM as a way to understand the relationships between per-formance measures. By building the SM with students they see how the SM helps to overcome thecognitive limitations faced when evaluating performance based on the BSC alone. They are encouragedto see the ‘story’ told by the performance measures that is unfolding across time. Furthermore, byincorporating environmental performance measures into the SM the ultimate impact on financial per-formance can be seen. Color-coding the SM based on actual performance then illustrates the imple-mentation of the organization’s strategy and allows students to make predictions about futureperformance.

Students also see firsthand the difficulties associated with using the BSC as a performance mea-surement tool. Their implicit weightings on the various performance measures are exposed and the


implications considered. For example, espoused commitment to environmental performance can becompared with the performance evaluation and rewards assigned to a manager with poor environ-mental performance.

This case can be used during the introduction to the BSC as a means of demonstrating its use inpractice, highlighting that the performance measures used should be consistent with the organiza-tion’s strategy (DeBusk, Brown, & Killough, 2003). As an experiential task, the case also provides a richbasis for discussion of performance evaluation and reward, the implementation of the BSC, the devel-opment of a SM, the cognitive limitations that can undermine the use of multi-dimensional perfor-mance evaluation schemes, and the strategic importance of environmental performance.Furthermore, because the case is similar to an experimental task used in research, there is a wealthof interesting research findings that students can be referred to. A list of possible learning objectives,depending on the emphasis chosen by the instructor, is provided in Table 2.

5.2. Reflections on usage- different levels and majors

The case has been used effectively for undergraduate and postgraduate students and only requiresa minimal explanation of the basic principles and structure of the BSC. Various textbooks provide suchan introduction. Journal articles, such as Kaplan and Norton’s Harvard Business Review papers (e.g.,1992, 1993, 2000b, 2008), also provide an excellent introduction. I have also used the case in lectureswithout any preassigned readings. After approximately 40 min of introduction to the BSC students areready to see how it is applied. I have even used the case effectively with Grade 10 high school students.The depth of discussion, of course, differs as the students’ experience in completing the case can beevaluated at different levels.

The first iteration of the case was used in 2008 with third-year management accounting students ata small regional university in Australia. Since then, variations have been used in introductory and cap-stone accounting courses in Australia, and Accounting Controlling courses for first, second, and third -year students at three Universities of Applied Science in Germany. Previous management accountingstudies are not necessary. First-year, non-accounting business majors, social economics majors, andaccounting majors all indicated that they found the case reasonably easy to understand (mean5.93/10 for first year students).

The following is an example of an alternative strategy that is appropriate for another setting chosento be of interest to social economics majors (based on a nursing home). Specific performance measurescan then be chosen to be consistent with the strategy (see Table 1). If the performance percentages arekept the same as for Chemico, the evaluation of the managers and debriefing will be fundamentallythe same:

� BrightWorld Ltd. is an aged care provider that has been growing rapidly over the past 10 yearsbased on a successful strategy that focuses on increasing market share, reducing operating costs,and carefully managing its environmental impact. This is achieved by providing patients with greatservice from friendly and efficient staff in an environmentally friendly way. BrightWorld’s visionstatement is to be the community’s provider of choice and their mission statement is:

‘‘BrightWorld nursing homes are committed to providing the highest quality of health care through ser-vice excellence, compassionate care and careful environmental management’’

In summary, BrightWorld’s strategy is to hire and train local people to empower them to provideoutstanding service. Empowered staff are more satisfied and this also contributes to a better experi-ence for patients. Market share and revenues then increase as reputation and customer retention im-prove. Highly trained and experienced staff are also important in reducing operating costs as theylearn to be more productive. The company is also committed to improving their environmental per-formance by reducing waste and energy consumption.

BrightWorld recently established three new nursing homes. The nursing homes were opened6 months ago and it is now time to evaluate their performance. The nursing homes are equivalentin all other respects and so your evaluation should be based entirely on the reported results.

Table 2Learning objectives and associated questions for discussion.

Possible learning objectives Additional questions for discussion Relevant research finding

Upon completion of this case,students will

Understand the importance oflinking performance measures tothe organization’s strategy

1. Explain how performancemeasures drive performance

� There is a link between measuring adimension and performance on thatdimension. Aligning strategic goals andthe reporting system improvesperformance (Iselin et al., 2008)

2. Predict the effect of includingmeasures in the BSC that areinconsistent with the organization’sstrategy

� Implementing the BSC leads toimproved financial performance (Davis& Albright, 2004)

� Evaluate managerial performancebased on a range of lead andlagged measures

1. Should performance evaluations bebased entirely on past performance, orshould consideration be given to futureperformance? What are the issuesassociated with taking eitherapproach?

� Performance measurement systemspresent a cognitively complex task andindividuals often respond byemphasizing historical financialmeasures compared with nonfinancialmeasures. Evaluators also suffer from ahalo bias in that perceptions ofnonfinancial performance areinfluenced by financial performance(DeBusk et al., 2005)

� Understand the cognitiveprocesses and potential problemsinvolved in evaluatingperformance based on the BSC.

2. On what basis did you evaluate themanager’s performance? How wereyour evaluations influenced by theorganization’s strategy?

� There are a range of behavioralfactors which are important in thesuccessful implementation and use ofthe Balanced Scorecard (de Waal, 2003)

3. The BSC may be used objectively orsubjectively to evaluate a manager’sperformance. Explain the differencebetween these two approaches and theimplications for the evaluator and theindividual being evaluated

� Managers use simplifying strategies,are biased, and do not realize whichmeasures they rely on when evaluatingperformance (Rich, 2007)

� Top management ignore underlyingstrategic links thereby creating conflictin performance evaluations (Wong-On-Wing et al., 2007)� Evaluators focus on commonmeasures and ignore measures that areunique to the managers strategy (Lipe& Salterio, 2000)

4. Describe the benefits of using a SMwhen evaluating the managersperformance

� The common measure bias can beovercome by providing detailedinformation about the business unit’sstrategy (Banker et al., 2004)

5. How does color-codingperformance help you to understandthe relative performance of Managers Aand B?

� Disaggregating the BSC allowssuperiors to utilize unique as well ascommon measures. The BSC is usedextensively in compensation decisions(Roberts et al., 2004)� Subjective bonuses complementquantitative measures and insureemployees against downside risk. Astrust increases, subjective measuresbecome more effective and lead togreater employee satisfaction (Gibbset al., 2004)

Explain the significance of leadand lag indicators ofperformance.

Predict the effect of investments inlearning and growth upon the

1. Consider Manager’s A and B atChemico. Assuming that these two

� The BSC can be an effective meansof improving sustainability


Table 2 (continued)

Possible learning objectives Additional questions for discussion Relevant research finding

subsequent measures ofperformance.

managers continue to make the samerelative level of investment inemployee training, predict who willhave the highest Return on Investmentin 2-years time

management. Various approaches canbe taken to create a SustainabilityBalanced Scorecard (Figge et al., 2002)

2. Consider Manager C at Chemico.What risks to financial performancearise from the poor environmentalperformance?

� From a review of 32 studies, mostfind a positive relationship betweenenvironmental performance andfinancial performance (Molina-Azorínet al., 2009)

Construct a strategy map based onthe cause-effect relationshipsimplicit in an organization’sstrategy.

1. Consider the measures in the BSC.Develop a SM in which all of theLearning and Growth, InternalProcesses, Customer, and Financialmeasures are linked in series of cause-effect relationships

� The BSC is used to various levels ofeffectiveness: from a combination offinancial and non financial measures toan integrated strategic managementsystem which focuses on cause-effectrelationships and is linked to rewards(Speckbacher et al., 2003)

2. Consider the environmentalperformance measures. How mightthese be incorporated into the BSC?

� The number of performancemeasures, and the performancemeasures used in a BSC, depend heavilyon the strategy of the organization(DeBusk et al., 2003)


5.3. Analysis of practitioner feedback

In 2009 the Chemico case was completed by 31 financial controllers at a conference in Germany.These controllers had at least 1 year of experience at a managerial level (range 1–36 years, mean7.17 years, s.d. = 7.785 years). On separate 11-point scales with 0 being lowest and 10 being highest,they indicated the extent to which they believed the case was: easy to understand, difficult to make anevaluation, and realistic. Recognizing the complexity of the performance evaluation, practicing con-trollers found it somewhat difficult to evaluate the manager’s performance. Their mean responsewas 6.42 (s.d. = 2.233) on a scale with 10 labeled as ‘‘Extremely difficult.’’ This is an important pointto make when using the case with students, i.e., that performance evaluation is not straight forwardand that even practicing accountants find it difficult. The financial controllers did, however, find thecase easy to understand (mean = 7.42, s.d. = 1.336) and realistic (mean = 6.97, s.d. = 2.041) (with 10being extremely easy and extremely realistic, respectively).

The evaluations made by these practicing controllers also provide interesting comparisons that canbe made during the debriefing stage of the case (see Table 3). For example, practitioners with exten-sive experience (greater than 10 years at a managerial level) were more likely to reward Manager Aand penalize Manager B based on lead indicators of performance, even though the financial perfor-

Table 3Practitioner evaluations and bonus allocation.

1–4 years exp(n = 16)

5–10 years exp(n = 8)

10 + years exp(n = 7)

Average(n = 31)

Evaluation Manager A (negative lagindicators)

6.69 5.75 8.57 6.87

Bonus Manager A $94,714 $83,812 $125,960 $98,956Evaluation Manager B (negative lead

indicators)6.32 5.88 4.86 5.87

Bonus Manager B $83,938 $96,052 $59,437 $81,531Evaluation Manager C (negative

environmental measures)8.63 7.00 8.71 8.23

Bonus Manager C $121,347 $120,135 $114,601 $119,511

Table 4Student feedback of understandability, difficulty, and realism. Mean and (s.d.).

1st year students(n = 46)

2nd year students(n = 27)

3rd year students(n = 80)

Average(n = 153)

How easy did you find the case tounderstand?

5.93 (2.187) 6.46 (1.896) 6.59 (1.527) 6.37 (1.824)

How difficult did you find it to make anevaluation?

5.02 (1.849) 5.59 (2.094) 5.67 (1.904) 5.46 (1.932)

How realistic did you find the case? 6.59 (1.861) 5.67 (0.827) 6.93 (1.440) 6.83 (1.532)

Scale: 1 = ‘‘Not at all (easy to understand, difficult, realistic)’’,. . ., 10 = ‘‘Extremely (easy to understand, difficult, realistic)’’.


mance of Manager B was superior. This is consistent with more experienced managers recognizing thestrategic consequences of poor lead indicators and therefore a long-term perspective on performanceevaluation.

5.4. Analysis of student feedback

So far, 153 students have provided feedback on the understandability, difficulty, and realism of thecase (see Table 4). On 11-point scales, students found it somewhat easy to understand with a mean of6.37 (s.d. = 1.824) compared to 10 which was labeled ‘‘Extremely easy to understand’’. The mean re-sponse to difficulty in evaluating the manager’s performance is 5.46 (s.d. = 1.932), compared with 0 for‘‘Not difficult at all’’ and 10 for ‘‘Extremely difficult.’’ Students also indicated that they found the caseto be realistic (mean = 6.83, s.d. = 1.532), with 10 being ‘Extremely realistic’’.

Three groups of students (44 social economics students, 28 tourism students, and 16 general busi-ness students) at two different Universities of Applied Science in Germany provided feedback on theimpact of the case on their understanding of the BSC and SMs. On 13-point scales students indicated

Table 5Pre and post questions.

Question Mean (Min 0Max 12)

N Standarddeviation (s.d.)

To what extent do you believe that the Balanced Scorecard is useful forstrategy development and implementation in the Tourism (Health)Industry?

Pre 8.01 69 1.819

Rate your understanding of the Balanced Scorecard Pre 4.47 72 2.454Rate your understanding of the Strategy Map Pre 2.59 71 2.845

Scale: 1 = ‘‘Not at All’’ or ‘‘No understanding’’ ,. . ., 12 = ‘‘Extremely useful’’ or ‘‘Complete Understanding’’.

Table 6Student evaluations and bonus allocations. Means and (s.d.).

1st year students(n = 80)

2nd year students(n = 99)

3rd year students(n = 133)

Average(n = 312)

Evaluation Manager A(negative lag indicators)

5.66 (1.904) 5.55 (2.213) 6.04 (1.961) 5.79 (2.036)

Bonus Manager A $84,615 (33,510) $83,730 (43,059) $90,879 (38,988) $86,999 (39,062)Evaluation Manager B

(negative lead indicators)6.22 (2.081) 5.59 (2.092) 6.45 (2.139) 6.11 (2.136)

Bonus Manager B $94,059 (34,325) $87,109 (46,631) $98,645 (39,183) $93,803 (40,747)Evaluation Manager C

(negative environmentalmeasures)

7.29 (2.044) 7.09 (2.263) 7.19 (1.996) 7.18 (2.091)

Bonus Manager C $121,326(37,163)

$124,070(47,339)

$109,617(41,922)

$117,216(42,974)


the extent to which they believed the BSC was useful in strategy development and implementationwithin their field and rated their understanding of the BSC and SM. Students provided this feedbackbefore and after completing the case. Significant improvements were achieved on all three measures,as indicated in Table 5. All differences between pre and post case responses are significant at p < 0.001.Particularly interesting is the increase in rated understanding of the SM. Many of the students hadheard of the BSC in previous courses, but had not heard of the SM or seen its use. This is particularlyconcerning since BSC implementation failure is often attributed to a failure to tie the performancemeasures to the organization’s unique strategy (Speckbacher et al., 2003).

The evaluations and bonuses from 312 students in first, second, and third year can be seen inTable 6.

6. Conclusion

The major contribution of this case is that students experience the importance of viewing the indi-vidual BSC measures within the context of the organization’s strategy, and hence the importance ofthe SM. Furthermore, by using color-coding and emphasizing the passage of time in the cause-effectrelationships, students are able to see the importance of anticipating the effects of the manager’sinvestment (or lack thereof) in the lead indicators of future financial performance. Environmental per-formance can be recognized as a driver of financial performance, or a risk factor to be considered whenevaluating financial returns, and incorporated into the SM.

Acknowledgements

I offer my sincere appreciation to the Editor-in-Chief, David E. Stout, the Associate Editor and thetwo anonymous reviewers who took the time to provide extensive and very helpful comments andsuggestions. Furthermore, the research instrument developed by Lipe and Salterio (2000) providedthe inspiration for this case study.

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Documents

Chemico: Evaluating performance based on the Balanced Scorecard