A constant growth model of the firm: empirical analysis of the balanced scorecard

Abstract

Purpose

Seeks to present a microeconomic model to analyse theoretically BSC, to develop a simplified model version and to apply it empirically.

Design/methodology/approach

The model assumes exponential production and demand functions with constant scale factors and elasticities. It is estimated for Nokia's time‐series 1993‐2002 and partly for 35 Compustat firms.

Findings

Direct statistical estimates act properly only as initial values iteratively adjusted for the level of the model. Model parameters show in experiments a significant effect on decision variables such as selling price. Most firms show decreasing returns to scale that are found also in a cross‐sectional analysis.

Research limitations/implications

The model assumes constant elasticities and growth which should be relaxed. Most numerical experiments are limited to Nokia's data. Estimates applied in experiments are not fully justified on statistical grounds. More effort should be made to reach a consistent set of estimates at the level of the model.

Practical implications

In growth strategy, price discounts may lead to declining profitability, while productivity is increasing. This results in peculiar causal relationships in strategic mapping of BSC. If strategy is shifted towards revenue maximization, more focus should be given to customer relationships and development and learning in BSC. Firms should in strategic planning pay special attention to rate of discount and planning horizon, because they affect selling price.

Originality/value

This research paper presents a new model specification. It gives novel empirical evidence on parameter estimation and strategic behaviour in BSC framework.

Citation

Laitinen, E.K. (2006), "A constant growth model of the firm: empirical analysis of the balanced scorecard", Review of Accounting and Finance, Vol. 5 No. 2, pp. 140-173. https://doi.org/10.1108/14757700610668976