Aligning the Balanced Scorecard and a Firm’s Strategy Using the Analytic Hierarchy Process B Y D E WAY N E L . S E A R C Y, C M A , C PA , C I A
IS USED TO PROVIDE INSIGHTS TO SIX
THE ANALYTIC HIERARCHY PROCESS (AHP)
COMPANIES TO DETERMINE IF EACH COMPANY’S PERFORMANCE SYSTEM IS ALIGNED WITH ITS STRATEGIC OBJECTIVES OF IMPLEMENTING LEAN ENTERPRISE POLICIES.
STEP-BY STEP PROCESS FOR USING -
n the Spring 2002 issue of Management Accounting Quarterly, B. Douglas Clinton, Sally A. Webber, and John M. Hassell illustrated the use of the Analytic Hierarchy Process (AHP) in implementing a balanced scorecard. Their article demonstrated the power of the AHP in resolving multicriteria decisions such as developing a balanced scorecard. They mentioned that the first level of a balanced scorecard hierarchy contains the four balanced scorecard (performance) categories, while the second level of the hierarchy contains the metrics used within each category. The authors demonstrated how the AHP can be used to help select the metrics of a balanced scorecard as well as to help understand the relative importance of each
metric for a firm’s management. The purpose of this article is to investigate the use of the AHP at the first level of the balanced scorecard hierarchy with data from six firms. Using the AHP to determine the relative weight of the performance categories may give some insight into the alignment between the balanced scorecard and a company’s strategic initiatives. In addition, the article will demonstrate the use of Excel in AHP applications. T H E C O M PA N I E S
The six companies involved were part of an overall assessment project aimed at measuring the extent that lean enterprise tools are implemented successfully.1
M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY
SUMMER 2004, VOL.5, NO.4
The common thread among all six companies was their involvement with implementing lean enterprise principles. In other words, lean was the strategic initiative undertaken across all six companies. Robert Kaplan and David Norton state, “The scorecard should be the translation of the business unit’s strategy into a linked set of measures that define both the long-term strategic objectives and the mechanisms for achieving those objectives.”2 For the companies under study, any scorecard developed should align with the strategic initiative of implementing lean. LEAN ENTERPRISES
In their book Lean Thinking, James P. Womack and Daniel T. Jones state that lean thinking can be summarized in five principles: “precisely specify value by specific product, identify the value stream for each product, make value flow without interruptions, let the customer pull value from the producer, and pursue perfection” (italics theirs).3 They also state that by clearly understanding these five principles and integrating them
together, managers can make full use of lean tools and techniques to compete in the marketplace. Lean can be defined as the effective utilization of various tools and techniques in a systematic, customer-focused manner that increases the flexibility of the manufacturing/ logistical processes with the goal of producing the highest-quality product and/or service within an environment of continuous improvement through the absolute elimination of all forms of waste. The overarching values of lean are customer prosperity and the view that the workforce is the most important resource of an organization. As implied by the definition, lean is multidimensional. Two important characteristics of a lean enterprise are customer focus and employee empowerment. The customer is the driving force behind lean, which suggests that customer-focused measures should be an integral part of any performance system. In a similar vein, lean enterprises empower their employees to make operational decisions. The employees are trained to...