Constant growth model of the firm: theoretical analysis of the balanced scorecard
Erkki K. Laitinen
Purpose – The purpose of this paper is to develop a simple microeconomic model of the firm to give theoretical foundations for the balanced scorecard concept (BSC). Design/methodology/approach – The model consists of demand, production, and objective functions integrated into a resource allocation model. Costs, sales volume, and sales revenue grow at constant rates. Strategy is depicted by a weighted objective function of profit and net sales. Output variables are classified according to the four perspectives of BSC. Findings – The effects of the parameters, especially growth and strategy, on the importance of the perspectives and on performance measures, are shown. Research limitations/implications – Many results are based on assumptions of a constant growth; and of constant demand and production functions. Empirical research is welcome to give evidence on demand and production elasticities, the shifts of strategy, their effects on performance measurement; and tension between profit and revenue maximization. Practical implications – BSC should be elastic to respond to shifts of strategy towards revenue maximization. When a shift is happened, the focus in BSC should be transferred towards customer relationship management and development and learning; and the time-series of performance measures should be interpreted cautiously. Even for a constant strategy, the time-series of non-financial and financial measures may give a contradicting signal. Originality/value – This research paper introduces a new growth model of the firm useful in the theoretical analysis of BSC. It can be applied to assess the importance of the four perspectives of BSC, trade-offs between them, and relationships between non-financial and financial measures.
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