Microeconomic analysis of the balanced scorecard: a case of Nokia Corporation

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Abstract:

Purpose ? The purpose of the research is to analyse the theoretical foundations of the balanced scorecard (BSC) with the aid of a microeconomic model and to illustrate the results in an empirical case. Design/methodology/approach ? The model includes demand, production, and objective functions. Demand is presented as a function of price and customer relationship management (CRM) costs. Production depends on labour, capital, and development and learning (D&L) costs. The strategy is depicted by objective function based on profit and net sales. The output variables are classified as four perspectives of BSC. Shadow prices and performance measures are analysed. The theoretical model is applied to the annual financial statement data from Nokia Corporation. Simulation is used to find appropriate estimates for the parameters of the model. Findings ? It is shown that a shift in the objective function (strategy) towards revenue maximization may alter the importance order of the BSC perspectives. Non-financial and financial performance ratios may change into opposite directions, when the strategy is shifted. The figures extracted from the data of Nokia Corporation give support to these interpretations. Research limitations/implications ? The theoretical model is based on the traditional assumptions of microeconomic analysis. Empirical analysis is only based on a naive estimation methods. The sensitivity of the results with respect to the assumptions should be analysed in further studies. The parameters should be estimated with more advanced statistical methods. Practical implications ? The focus of the BSC should be elastic and react to changes in the strategy. When evaluating the causal relationships between non-financial and financial performance measures, attention should be paid to potential shifts in the strategy. The present model for example in a worksheet version would be useful in analysing the optimal behaviour of a firm and the causal relationships within the firm. It would be useful also in teaching the BSC and in general the behaviour of the firm to university students and managers. The model offers a platform for teaching and learning how the market (demand) and production (technology) environments affect the performance measures in the BSC. Originality/value ? There is a lack of theoretical modelling and analysis of the BSC. The present mathematical model is discussed earlier in Managerial Finance. However, this paper throws light to modelling the approach in a real-life case of the Nokia Corporation and shows the value of the approach in interpreting the BSC in practice.

Keywords: Balanced scorecard; Microeconomics; Performance measures; Prices; Resource allocation

Document Type: Research Article

DOI: http://dx.doi.org/10.1108/17410400510604502

Publication date: July 1, 2005

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