4.DBA-1703_STRATEGIC MANAGEMENT

DBA-1703 - STRATEGIC MANAGEMENT
ASSIGNMENT – I
1. Apply porter’s five forces Model for the model like Maruthi 800 during the present time of “Tata Nano”.
Porter's 5 Forces Model of the NANO car
The auto manufacturing industry is considered to be highly capital intensive and labour intensive. The major costs for producing and selling automobiles includes labour, material and advertising. There are other developments in the automobile industry that you must consider when analyzing an automobile company.
Threat of New Entrants:
Indian compact car market seems to be getting hotter, with not only better car models, but also the intensity of the competition in the segment. The market which is growing at 20-25% annually is attracting international player like Volkswagen, Toyota, Nissan and Ford, all of whom are expected to come up with a number of new launches in this segment of the Indian car market. The new players plan to differentiate their products through competitive pricing and additional features like added space, fuel efficiency and better performance. It seems like competition is set to go to a whole new level for existing players in the market.
The way in which Nano is produce such a methods will lead to even more new manufacturing innovations to offer affordable cars to consumers. New entrants in this category need to address various challenges such as inflation, low-price barriers, substantial changes in raw material prices, and government regulations, for example vehicles above 650cc pay excise taxes in India, but with 624cc engine, the Nano is exempt. Achieving a US$2,500 will be difficult for any carmaker, but going forward more automakers will develop low cost cars. It takes 4 to 5 years and a huge investment for a car maker to design and build a low cost car, which itself has low margins.
So, there is threat of new entrant to Nano in the long run.
1. Rivalry Among existing Firms:
The small car market in India is very competitive with players like Maruti Suzuki, Tata Motors, Huyndai etc. which was pretty much dominated by Maruti. But with launch of Nano the 1 lakh car the whole momentum of the market has shifted.
Maruti is planning to first slash the price of its best-selling model 800cc Alto which is priced at Rs2.3 lakh. And the price change would be effective only from 2010 once Tata Motors begins rolling out Nano from its Sanand plant in Gujarat in big number. Earlier, the news was that Maruti may slash the price of its 800 model to compete with Nano.
The Nano is alleged to have severely affected the used car market in India, as many Indians opt to wait for the Nano's release rather than buying used cars, such as the Maruti 800, which is considered as the Nano's nearest competitor. Sales of new Maruti 800s have dropped by 20%, and used ones by 30% following the unveiling of the Nano. As one automotive journalist summarises; “People are asking themselves—and us—why they should pay, say, 250,000 Rupees for a Maruti Alto, when they can wait and get a brand new Nano for less in a few months’ time, a car that is actually bigger
The launch of Tata Nano is expected to diminish the sales of the used cars under Rs. 1 Lakh - 2 Lakhs range and also the sales of the other entry level cars like Maruti 800, Alto, Chevrolet Spark etc. Some companies such as Bajaj is working on a much less priced car and companies such as Maruti will think of reducing the price of their small cars.
A source in the automobile industry with direct knowledge of the plans said Alto will have a stripped down version (i.e. basic) to compete with Tata Motors’ small car Nano.
It shows there is threat of rivalry for Nano car.
2. Threat of substitutes:

The threat of substitute for Nano car is that of electric car, the new entrant in the small car sector is the Morbi-based world famous clock-maker Ajanta group. The company is planning to manufacture an electric car at its unit at Kutch district and market it at a price lower than Rs 1-lakh Nano. The company is already manufacturing electric scooters and bikes under ‘Oreva' brand. Production of electric car is not difficult for them as the technology is almost similar and 70 per cent of its parts can be produced in-house, giving them an edge over the vehicle's pricing. The Ajanta group is serious in its attempt to keep the basic price of the proposed car as low as Rs 85,000.
At present, in the electric car segment only Reva car is available in India. Another player in the small car segment, the Rajkot-based Field Marshal group, is in negotiations with Australian company Farnow Technologies for a joint venture for a low cost electric car.
Tata itself is believed to be making an electric version of the Nano, called the E-Nano which might well turn out to be the "world's cheapest electric car" which is more eco-friendly. It's supposed to be as cheap as the conventional gasoline version. Economic Times reported that the "electric Nano" would still make good sense for economic, clean and green personal mobility in countries around the world.
Since two-wheeler owners are used to getting 60-70 km per litre, as compared to the Nano's 20+, the cost of ownership of a Nano is likely to be far higher than that of a two-wheeler. One time investment of buying car can be done by the lower income group people but it will be difficult for them to overcome maintenance cost and cost of running i.e. fuel these people would like to remain in bike segment only.
So there is a high threat of substitutes for Nano as electric cars trying to keep prices lower, less cost of running as a product differentiation.
3. Threat of bargaining power of buyer:
Tata Motors has to work out their strategies to meet the challenges of sales and after-sales. The first is to meet the high demand that is likely to get created. As there would be many first-time customers, the sales force will have to advise them on issues like running and maintenance of the car. Further, the Indian consumer is very discerning and the product and after-sales service quality will need to live up to the consumers' expectations for the Nano to be successful.
As the Nano car is made for lower income group people we can say there is no power in the hands of buyer at present as only Nano is available in Indian market but soon there will be cheaper car in the Indian market and buyers will have power to switch to other cars.
4. Threat of bargaining power of supplier:
For Nano about 60 suppliers collectively spent about Rs. 500 crores ($112.7 million) to locate on the Singur complex. Suppliers have said that they have the capacity in existing plants to be part of the Tata Nano launch, if the Tata plant moves to Pantnagar, or even Pune. Other suppliers are willing to stay, put and use their sheds as warehouses to store the components.
The company said most of its vendor relationships are covered by a “bill marketing” system, where Tata’s bank makes payments to the vendors, and Tata Motors pays the bank.
Tata Motors had set up a so-called suppliers’ council to address several issues, including delayed payments that were causing friction between the auto maker and its parts’ suppliers.
Rather than a threat to Nano, suppliers were supporting Tata Motors for launch of Nano and there are overall thousands of suppliers to TATA Motors.
Is Nano a Rising Threat ?
These methods will lead to even more new manufacturing innovations to offer affordable cars to consumers. Tata Motors is expecting to build around 250,000 units annually, excluding the markets of Africa, Southeast Asia, Latin America and Europe. In the next couple of years, more than a million of Nano’s are expected to be on the road. In addition, Nissan and Renault are planning to form alliance with Bajaj Auto to develop a car with a price tag of around US$3000 by 2011. Volkswagen is also considering in developing a low cost car, under a separate brand name and China's Guangzhou Motors had announced its collaboration with an Indian-based company, Global Automobiles, to roll out a low cost car. As this continues, the growing small segment car industry is set to expand exponentially.
According to United Nations, at the start of 2008 about 12 in 1,000 Indians have a car. Due to the low-cost innovations like Nano, the ratio is expected to increase rapidly in the coming years. If the same trend happens in China and its neighboring countries, the situation might become worse. Today, light duty vehicles account for more than 10 percent of global carbon emissions. As Asia, where Tata Motors are aggressively promoting its Nano, accounts more than 60 percent of the world's population, the contribution of carbon emissions from light duty vehicles is set to increase swiftly.
2. Suggest the possible strategies for Indian IT companies to sustain the present competiveness created by other countries like china.

Infrastructure Development:
India, as we all know, is still a developing country. By harping upon the term developing, we
stress upon the fact that we are still to reach the basic requirements of infrastructure development,
GDP etc .But the question remains, why does Infrastructure requirements have top priority?
In an International conference, Lee Kuan Yew, architect of Modern day Singapore, when asked
about his views on India, replied that there was much that needed to be done. He said that
production should have been the primary concern for any developing country. If you don’t
produce, even after equitable distribution, you would still be dirt poor. Thus manufacturing has to
be the base upon which India’s growth must be based. For that we need Infrastructure in place.
You cannot produce much with your bare hands. So you need factories, you need power to run
those factories. You have to have roads and ports and airports to bring inputs to the factory and
take the output out.
Despite labor costs that are often 1/25th that of the West, India's transportation costs are among
the highest in the world. India's export-driven progress is hampered by some of the world's
highest port and rail costs. The cost of transporting one TEU one kilometer in India is 53% higher
than in the United States and if India continues to ignore the competitive world market, things
will only get worse. The above referenced article refers to the fact that by late 2008 some 25% of
world container ship capacity will be comprised of vessels of at least 6,000 TEU (twenty-foot
equivalent units) but that India does not yet have a port that can handle this class of ship. Given
the rise of the Indian manufacturing sector -- and its strengths in such areas as metals and textiles
-- it would be an absolute shame if the country's roads and ports continue to hold back economic
progress.
India is a largely agricultural economy. If we look at the statistics, the years in which the growth
has suffered has been ones when agriculture has suffered due to either untimely or inexistent rains
.If India has to prosper, it has to forgo its dependence on the rains and needs to establish a well
connected irrigation system and have proper Dams in place .This again brings up the
Infrastructure requirement.
Thus the importance of Infrastructure in the long term plans.
Untapped rural population
India with all its growth still remains a largely untapped powerhouse. Most of the growth is
concentrated in the urban pockets, which is still insignificant considering that India is the second
most populated country with more than 1 billion inhabitants. If India can work on bringing even
50% of the rural population in the mainstream, we suddenly have an even larger pool of
workforce to eliminate the workforce windfall/crunch that the Indian Industry expects to be hit
with sometime in the next decade.
Derogatory state of state owned PSU’s
At the time of Independence, India had one of the most developed private sectors in
manufacturing in the Third World .However it is also true that at that point of time, it lacked the
ability to mobilize resources for the heavy industries that Prime Minister Nehru regarded as a
priority.
The pre-eminence of the public sector was secured through the Industrial Policy Resolution of
1956, which excluded the private sector from basic industries such as power, oil, heavy
engineering, steel and several others. This was carried on by the Indira Gandhi led government ,
who nationalized 14 leading banks followed by the nationalization of coal, general insurance,
copper , wholesale wheat trading and even part of the textile industry .This caused a major
stagnation in the Industry in the first half of the 1970’s and a widespread economic discontent .
Here were sown the first seeds of economic liberalization, generally associated with the Rajiv
Gandhi government .This was the time when it was realized that the State owned Enterprises
(SOE) had to show a better financial performance.
When Rajiv Gandhi came to power, a quick analysis informed that the public sector far from
generating surpluses and fostering accumulation in the economy, was getting in the way of it .The
focus had changed from attempting additional investments to getting more out of the existing
ones.
By the 1990’s, SOE’s had helped create a diversified Industrial economy, also having laid the
foundation of research and development .They were also model employers , paying wages and
benefits to workers that were superior to what much of the private sector had to offer. But with
the deteriorating fiscal conditions, it was acknowledged that the SOE’s had to deliver better
returns, also a thought process had started where the better performing SOE’s needed to
contribute more than just the dividends. That is how the concept of disinvestment came.
The state meanwhile had picked up an idea that it ought to concentrate on its central role of
providing physical and social infrastructure. Running businesses, irrespective of whether some
SOE’s were performing well or not, was best left to the private sector.
In the budget for 1999-2000 for the first time the word privatization was used. Privatization was
selling off a controlling stake of a SOE’s to a private buyer, a form of disinvestment now better
known as “strategic sale”.
Many well performing SOE’s have since been sold by the strategic sale method. In short we are
selling off the better performing SOE’s and keep the loss making ones for ourselves and still
blaming the SOE’S for not giving dividends .
With the fast increasing energy and development needs of the country, its time for the SOE’s to
finally deliver on their promise. With an efficient management at helm , and a little autonomy ,
the SOE’s have shown equal efficiency to that of the private sector .While the private sector is
profit mongering machine , the SOE’s or PSU’s have to also fulfill their social obligations. Hence
it is unable to maximize its profits. It is relevant to note here that one of the biggest tax payers in
the country are the state owned PSU’s.
Government policies on FDI
It is now acknowledged worldwide the foreign investment brings extra investment, new
technology and access to global markets, and so is wooed.
Capital account liberalization has allowed India to attract large portfolio flows, but reforms are
needed to raise FDI, which remains a disappointment. FDI can bring with it—in addition to
increased capital—cutting-edge technology and managerial know-how. But India is not fully
reaping these benefits. In 2003, the stock of FDI to India totaled just 5 percent of GDP compared,
for example, to 31 percent for Thailand and 35 percent for China. But the most striking fact is
that, at the same time that FDI lags, surveys consistently point to India as one of the top two or
three destinations for FDI in the coming years. So, the opportunity is there for the taking. The
analysis suggests that while sectoral restrictions on FDI have played some role, India’s FDI
regime is not overly restrictive by international standards. Rather, what is mainly holding back
FDI is broader difficulties of doing business? A few statistics serve to define the problem: to start
a business in Korea takes 22 days and in China 41. But in India, it takes 89 days. And enforcing a
contract takes 425 days in India, more than five times longer than Korea and nearly double that in
China.
At one time, all foreign investment was considered a loot of the country, and so discouraged.
Some economists complained out that foreign-controlled companies generally imported more
than they exported. However, we find that the ratio of imports to exports is lowest for foreign
investors, higher among Indian private sector companies, and highest of all for public sector
companies. It is appropriate for Third World industries to be net importers, using aid and foreign
capital to plug the trade gap.
Foreign Direct Investment (FDI) is permitted as under the following forms of investments.
• Through financial collaborations.
• Through joint ventures and technical collaborations.
• Through capital markets via Euro issues.
• Through private placements or preferential allotments.
India has high tariff barriers, and even after the Chelliah Committee reforms import duties will
range up to 30 per cent. These barriers keep imports out, and this protection gives a windfall gain
to all producers in India, including foreign investors. Domestic companies keep their windfall in
India, but foreign investors can remit theirs abroad. By insisting on some Indian shareholding, we
ensure that enough profits stay in India, mitigating or even completely offsetting the windfall
repatriated abroad. There is no such windfall for foreign investors producing in India for export.

Assigment II
1. Strategic alliances and diversification are the tools used by all the corporate”-Discuss the process and concepts.

A number of contributions explore firms’ technological and business diversification. As far as
technological diversification is concerned, these studies show that during the past decades the
complexity and multi-technology nature of products and processes led firms to broaden their
technological base in order to develop new products and processes (Granstrand and Sjolander, 1990;
Patel and Pavitt, 1994; Granstrand and Oskarsson, 1994; Granstrand et al., 1997). The literature

suggests that firms might develop technologies that are different but highly interdependent with
their distinctive capabilities. They can also invest in complementary fields in order to be able to
adopt and integrate technologies developed by external suppliers. Moreover, firms may want to
develop some knowledge in non-core technologies in order to have a window on emerging
technological opportunities. Or, still, they can internalise some “general purpose technologies”
which are used in different products and processes.
Some authors, however, point out that firms’ technological profiles are difficult to change. They
tend to be stable over time and evolve in a path-dependent fashion according to strong intersectoral
differences. Furthermore, firms that successfully diversify technologically maintain a certain
coherence between existing and new fields (Patel and Pavitt, 1997; Teece et al., 1994; Breschi et al.,
1998).
Unlike technological diversification, product diversification decreased over time due to the
process of restructuring and refocusing of large diversified firms (Scott, 1993; Hoskisson and Hitt,
1994; Markides, 1995a). Hence, firms broaden their technological knowledge, but they do not use all
their competence to enter new businesses. Empirical studies witness the difference between
technological diversification and product diversification (Granstrand, 1997; Granstrand et al., 1997).
Some of them point out that while in principle multi-technology firms can develop a wide range of
different products, there are severe limitations to the acquisitions of the downstream assets needed
to produce and commercialise these products in many different markets (Gambardella and Torrisi,
1998). Other studies focus on the impact of related and unrelated product diversification on firm
performance. The results indicate that related diversifiers outperform unrelated diversifiers (Robins
and Wiersema, 1995; Berger and Ofek, 1995; Markides and Williamson, 1994; Varadarajan and
Ramanujam, 1987; Dubofsky and Varadarajan, 1987), and that refocusing has a positive effect on
firms’ performance (Markides, 1995a; Comment and Jarrell, 1995).
A branch of the literature on technological diversification focuses on the strategies that firms
adopt to build up technological competencies internally. The distribution of patents across
technological classes is used to measure the extent to which firms diversify technologically. In-house
R&D investment, however, is not the only means that firms can use to enlarge their technological
base. External collaborations help acquire competencies that are more “exogenous” to the firm
(Hagedoorn and Duysters, 1999). They are a means to strengthen firms’ critical technological
competencies, to acquire general purpose technologies that companies do not develop internally, to
get access to frontier technologies produced by firms in other sectors, and to expand knowledge in
complementary or more marginal fields. Some contributions explore the trade-off between the
internal development and the “outsourcing” of technologies. Richardson (1972) suggests that similar
and complementary activities should be maintained within the firm, while activities which are

complementary but dissimilar can be accessed externally. Prahalad and Hamel (1990) claim that
firms should invest internally in related areas or in core technologies, and use external alliances to
acquire technological competencies in unrelated areas or in non core technologies. In addition, firms
can use strategic alliances to get access to new and complementary technologies (Teece, 1986), to
speed up firms’ learning processes, to share the costs and risks of R&D activities, to exploit
economies of scale and scope in research, to access new markets or production facilities, or to
monitor the evolution of non core-technologies (Hagedoorn, 1993). These issues have been studied
intensively during the past two decades, when there has been a steep increase in the use of
collaborative agreements between domestic firms in related markets and foreign companies in global
markets (von Tunzelmann, 1995; Freeman and Hagedoorn, 1994; Hagedoorn and Schakenraad,
1993; Chesnais, 1988).
This paper focuses on strategic alliances as a means to exchange technological knowledge and
other downstream assets. The “competence-based” theories of the firm provide a valid support to
the study of this issue. The basic idea is that economic institutions have different abilities to support
the acquisition and development of knowledge or other assets. These abilities are firm-specific, they
are cumulative, and determine firms’ competitive advantages. Inter-firm linkages can help combine
these firm-specific assets that require time to build up and that are hard to reproduce. Moreover,
since the shared assets can be accessed without separating them from the developer firm, the
problem of tradability is also bypassed (see, for example, Richardson, 1972; Kogut and Zander,
1992).
The empirical evidence suggests that various factors influence the choice between different types
of external agreements, such as the pace of technological change, the complexity and the objectives
of the transaction. Pisano (1991) and Teece (1992) demonstrate that when technological change
proceeds fast, companies prefer flexible forms of organisation – i.e. strategic alliances vs. mergers
and acquisitions. Other contributions show that in industries characterised by rapid technological
change, the scope for learning, the organisational change and the quick strategic response require
flexible forms of organisation (Hagedoorn, 1993; Eisenhardt and Schoonhoven, 1996). By contrast,
when transactions are complex, hierarchical organisations have superior monitoring and incentive
aligning properties. Some contributions also shows that the larger the number of partners, the
broader the product and/or technology scope, and the wider the functional activities covered by an
alliance, the higher the likelihood of the alliance being a joint venture or, more generally, an equity
arrangement (Pisano, 1989; Garcia Canal, 1996; Oxley, 1997). Even though the empirical evidence
on the relationship between the technological content and the organisational form of the alliances
are mixed (Osborn and Baughn, 1990; Gulati, 1995), the preference for more hierarchical
arrangements is more likely also when firms develop or transfer tacit know-how.

To conclude, in recent years there has been a trend towards the increasing technological
diversification of firms and the intensification in the use of strategic technological alliances.
Although the relationship between technological diversification and firms’ performances deserves
further attention, so far the empirical results suggest that there is a positive correlation between the
two. The same positive relationship holds for strategic technological alliances and firms’
performances, although the results are not clear across sectors (Hagedoorn and Shakenraad, 1994).
By contrast, firms’ performances are positively affected by the process of refocusing and
restructuring of productin and marketing activities (among others Markides, 1995a,b; Montgomery
and Wernerfelf, 1988; Amit and Livnat, 1988; Hitt and Ireland, 1986).
This work adds empirical evidence to some of these issues. It investigates the relationship
between internal technological diversification and diversification through strategic alliances, and
highlights differences across countries and sectors. It also explores the relationship between internal
and external technological diversification and firms’ economic performances. More specifically, we
explore the following issues.
First, the paper compares firms’ internal technological diversification with external technological
diversification. We expect the former to be more pronounced than the latter. Firms develop in-house
critical technologies and try to maintain a frontier position in these fields. However, the multitechnology
nature of products and processes leads companies to internalise knowledge in a wider
range of technological fields. Competencies developed internally are also needed to evaluate,
understand and assimilate outside technologies (Cohen and Levinthal, 1989, 1990; Rosenberg, 1990),
and allow firms to guide the evolution of external collaborations by avoiding that the partners
entirely shape the scope of the relationships.
Second, this work compares firms’ internal technological diversification with external market diversification
(see also Granstrand, 1997; Patel and Pavitt, 1994, 1997; Granstrand et al., 1997). The expectation is
that internal technological diversification is more pronounced than external market diversification.
Although firms develop competencies in several technological fields, they may find it difficult to get
access to production and commercialisation assets for entering different markets (Gambardella and
Torrisi, 1998). The internalisation of a wide range of technologies does not imply the presence in
“all potential” markets in which these technologies can be applied. Entry in different markets
requires investments in downstream assets, some of which are extremely specific.
Third, by means of multiple correlation analysis, this paper describes the relationship between
firms’ performances, internal technological diversification, and diversification through strategic
alliances. We expect the results to be sector-specific, with some sectors like transportation
equipment displaying a positive correlation between firms’ performances and technological
diversification. This is because, compared to industries like the ICTs, the transportation equipment
sector requires the integration of a wider range of different technologies to develop the products.
production and marketing alliances : alliances aimed at obtaining downstream assets in
marketing and production activities – i.e. Joint Marketing and Joint Manufacturing operations.
The total number of market alliances is 5,840.
− technological alliances : alliances in which some technological knowledge is exchanged trough
technology transfer or joint innovative projects – i.e. Licensing Agreements and Joint Research
Agreements. The number of technological alliances is 6,502. Technological alliances are divided
into alliances through which firms acquire technological knowledge and alliances through which
firms transfer their knowledge to third parties. To differentiate between these two types of
alliances we use the information on the direction of the technological flow involved in the
alliance. The analysis below will focus only on the alliances used to acquire knowledge.

2. How to prepare and use Balance Score card practices in Non-profit organization

The Reason for a Balanced Scorecard
Historically, organizations have measured their performance primarily, if not exclusively, with
measures derived from financial data. In the 1990s, a group of researchers and consultants from
the Nolan Norton Institute, the research arm of the accounting firm KPMG, began to study
commonly used organizational performance measures. Their hypothesis was that organizations
were being hindered by these measurement practices because the measurement focus was too
narrow.
After working with a number of ideas, the researchers suggested that companies ought to balance
the way they assess their organizations by looking at more than simply financial performance.
For the best single summary of this research, get a copy of The Balanced Scorecard by Robert S.
Kaplan and David P. Norton (Boston: Harvard Business School Press, 1996).
The original balanced scorecard formulation, which has been carried forward formulaically by
most companies that use it today, was organized around four perspectives that were given these
labels: financial, customer, internal, and innovation and learning. To reinforce the idea of
balance, the authors also promoted the use of lagging and leading indicators and performance
measures that were external as well as internal.
Another innovative idea emerging from this work was to tie performance measures closely to a
company’s strategic plan. In short, start with planning; then create a measurement process to
gauge how well you are executing against your plan. By doing this, the measures graduated from
simply providing descriptive data to being the basis for a management tool.
While this sounds straightforward, indeed almost simple minded, it was not a common practice
in the early 1990s. Nor, I suspect, is this common practice today.
Balanced Scorecard Pitfalls
As a manager and consultant, I have worked at or with a half dozen large organizations that were
(or at least claimed to be) using a balanced scorecard. Only one of them (a county government)
had any real success with it. In that group, I attribute the success to the presence of one very
bright young woman who truly understood the process, had complete intellectual and budgetary
support from her senior management and whose job was 100 percent committed to the balanced
scorecard process.
Rather than understanding what a balanced scorecard is supposed to accomplish, why, and how,
many managers simply implement a balanced scorecard as if it were a recipe. While the
technique described in professional literature accumulates the wisdom and experience of many
people and represents a form of best practice, it should not be copied blindly under the
assumption that one size fits all. In particular, the four major dimensions (financial, customer,
internal, and innovation and learning) can and should (in my opinion) be modified to fit an
organization. This is particularly true when the organization is a nonprofit.
Another problem that organizations frequently make is jumping into a measurement program too
fast and making the program too complicated. Deriving meaningful measurements, gathering
reliable data, developing useful analytical techniques, and educating managers about how to use
the data are all difficult steps. Doing all this at one time with a bucket full of 50 different
measures is doomed to failure. Organizations in which managers do not have experience with
measurement programs, or fail to heed the warnings of those who do, typically underestimate the
difficulties of implementing a balanced scorecard program.
Creating Organizational Metrics1
Despite the pitfalls, balanced scorecard is a useful management tool. It can be done successfully
if managers take a careful and thoughtful approach to the process.
The real trick behind any measurement program is to figure out first what you want to measure,
and then to figure out how to measure it. Many times, managers who want to evaluate their work
groups simply jump into collecting measures, not because the measures relate to organizational
attributes in which they are interested, but more because the measures are simple and available.
So it is that managers build assessments based upon measures such as: attendance data;
production and fulfillment records; budget deviances; and computer system up-time. When you
1 The words “measures” and “metrics” are often used as synonyms. Technically, they are not. A measure is a basic
quantitative or qualitative evaluative label, derived through a specified process, and assigned to a fundamental
attribute of a concept that we are trying to characterize. A metric is a derivation and/or combination of one or more
primary measures. For example, a category 3 hurricane earns its designation by being in a certain spot on the earth,
and having winds that rotate in a particular direction with speeds over a predetermined threshold. For the hurricane,
the category designation is a metric; the location, wind direction, and wind speed are primary measures.
The Balanced Scorecard Categories
A balanced scorecard is a management tool. Like any tool, it is supposed to be a means to an
end, not an end in itself.
In some organizations, a higher power simply and thoughtlessly mandates that the organization
shall implement a balanced scorecard. In this case, the balanced scorecard foolishly becomes the
end in itself. For this event, simply go to the literature and follow the balanced scorecard recipe
as best you can. Eventually, the management group will realize that the benefits accruing from
the balanced scorecard (as they have implemented it) are too few to justify the work going into it.
If you understand the ideas behind a balanced scorecard, you will be free to modify the classic
formula so it becomes a better tool for your organization. In particular, I think a nonprofit
organization should make some fundamental changes to the four basic measurement
perspectives. Specifically, I suggest using an approach based on these six categories, which are
clearly related to the four measurement categories originally formulated by the balanced
scorecard research group:
• Revenue and funding
• Resource allocation (including budgets)
• Donors and Board members
• Product and service recipients
• Internal operations
• Staff development
The first two categories are a refinement of the classical perspective of “financial.” The goals
and strategies around revenues (the first category above) are extremely important for any
nonprofit organization. These are primarily external-facing goals and strategies, aimed at the
question of how best to bring in monetary resources. For most organizations, this includes
questions of fundraising strategies, investment strategies, alternative funding sources, costs of
fundraising, use of fundraising consultants, and so on.
The second category above relates to monetary and perhaps other non-financial resources from
an internal perspective. The question is resource allocation. Organizations always start the year
with a spending plan (a budget), which should have been created in order to support the
organization’s program plan, and reflecting the organization’s policies and priorities for the
upcoming year. Alas, every year brings with it unforeseen events, changes in priorities,
emergency allocations, and the like. Therefore, a complete budget plan also should include
principles and practices for budgetary reviews and, as necessary, reallocations. That is the focus
for this category of measurement.
In the classical for-profit company, a major goal is to satisfy the wants and needs of customers,
since customers are the primary source of revenues. So, a balanced scorecard can focus simply
on customers. The situation is more complex for nonprofits. Most nonprofits deliver some type
of product or service, which often is the source of only a portion of revenues, and may be a
source of no revenue at all (e.g., a charity kitchen). In a drug treatment facility, for example, the
customer (i.e., an abuser) not only does not pay for the treatment, but arguably his or her
personal satisfaction with the facility’s treatment may be irrelevant to the most important
measures of organizational performance. Nonetheless, even in this type of case, the nonprofit is
most likely concerned about how it interacts with its service recipients and it will want to
measure that somehow.
For the nonprofit, donors and Board members are more often treated as though they were the
customer even though they may not be recipients of the nonprofit’s services or products. These
are the people who contribute with dollars, labor, and advice to support the nonprofit. It is their
satisfaction, often more than that of direct service recipients, that is crucial to keeping a nonprofit
operation going. It is therefore totally appropriate to separate out these two types of customers
(i.e., service recipients vs donors and Board members) within an organization’s strategic plan
and thus within the balanced scorecard.