Balanced Scorecard

The control instrument that has arguably attracted the most attention in recent decades is the balanced scorecard (BSC) proposed by Kaplan and Norton (1996). This is a specific, four-dimensional performance measurement system that comprises financial objectives as well as non-financial measures (see Figure 23.1). “The balanced scorecard translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system. […] The BSC enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth” (Kaplan/Norton 1996, p. 2). More specifically, the BSC is built on the assumption of leading and lagging indicators with financial indicators considered to be “lagging” and other indicators (like learning & growth) seen as “leading” indicators that are closer to the root of long-term company success.

Figure 23.1

Source: Kaplan/Norton 1996, p. 9; Gowthorpe 2011, p. 425.

With regards to international control within an MNC, the BSC offers the opportunity to break down superordinate strategies and detailed performance measures on the corporate level into specific and clear objectives for subunits (see Figure 23.2).

Figure 23.2

Source: Adapted from Rieg/Gleich 2002, p. 697; Zentes/Swoboda/Morschett 2004, p. 830.

Thus, a detailed set of performance indicators comprising both financial and non-financial measures is produced for each subunit, guaranteeing coherence in the organisation.

Shareholder Value

From the shareholder perspective, one major objective of management is to increase the value of the company for its owners. Thus, company decisions should be based on their expected influence on shareholder value. Translating this to MNC management, the performance of a subsidiary or investment project is measured in terms of its contribution to the value of the MNC (Zentes/Swoboda/Morschett 2004, pp. 839-844).

This dynamic investment perspective investigates expected future cash flows and is calculated, e.g., based on discounted cash flow (i.e. the net present value of future free cash flows). An example of value-based performance measurement is presented in the Henkel case study to this Chapter.

One of the most frequently applied models of value management is the economic value added (EVA) developed by Stern Stewart (Stern/Shiely/Ross 2001). EVA is calculated according to formula (1) (Merchant/Stede 2012, pp. 427428):

( 1 ) EVA net operating profit (after taxes) WACC x capital

Thus, EVA considers not only the company's profit but also whether this profit is sufficient to appropriately compensate its capital providers. It is calculated as profit (using an adjusted profit measure) minus the cost of capital, thus, as a kind of residual income over the required rate of return for the capital investment (which also considers the opportunity costs for the investor). One problem is in defining the weighted average cost of capital (WACC), which is averaged across the costs of debt and the costs of equity capital. The costs of debt are simply the interest expenses required to serve the debt. But the cost of equity capital is more difficult to calculate, because it depends on uncertain factors such as overall stock market risk, return expectations and the risk-free rate of return available to investors (Merchant/Stede 2012, pp. 418419). Particularly for MNCs, a required rate of return that includes a risk premium can differ for investments in different countries or different investment projects that carry different risks. For each investment project in a subsidiary, this project creates shareholder value if EVA is greater than zero; but if EVA is below zero, the project destroys shareholder value (Estrada 2005, p. 286). Across potential investment projects or subsidiaries, capital should be invested in the one with the greatest expected EVA.

 
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