Tuesday, September 1, 2009

Optimization, nonprice factors, risk, and the balanced scorecard

In my last post I argued in favor of optimizing returns in business by minimizing the risk of failing to meet quality, cost and delivery targets. And to blazes with profit maximization.

This post is an addendum. I wish to point out that my position is already implicit in the so-called balanced scorecard. (My readers will know that the balanced scorecard is largely derived from hoshin kanri.)

The balance in the balanced scorecard arises from the inclusion in the normal profit maximizing calculus of nonprice factors such as quality and delivery (from the so-called process perspective) as well as people development (from the so-called growth perspective).

One can easily extend the notion of "balance" to include risk, as demonstrated by McKinsey and Conference Board research on ERM (enterprise risk management) (links to follow in a subsequent post). See, e.g., Kevin S. Buehler and Gunnar Pritsch, "Running with Risk," McKinsey Quarterly, Winter 2004, pp. 7-12, and Carlyn Kay Brancato, "Enterprise Risk Management System: Beyond the Balanced Scorecard," Conference Board Report No. E-0009-05-RR.

The inclusion of nonprice factors already pushes us beyond the confines of profit maximization, at least in competitive markets. The inclusion of risk, however, moves us quite firmly into the world of optimization. We are forced to open price theory's "black box" and ask, "How to leaders really think," instead of adopting the mathematically convenient and, one might argue, socially disastrous convention of profit maximization.

-- Post From My iPhone

1 comment:

Mike Davis said...

Hi Tom,
You said (in prior blog)
.."The combination of target profit, target costing, and kaizen costing is referred to as profit management."
It is also referred to as "Cost Planning Activity" and this is just one of those really really great cross-functional empowerments.
Mike Davis