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Article
Publication date: 1 June 2004

Erkki K. Laitinen

The study develops a mathematical model of the firm to derive theoretical foundations for the balanced scorecard concept (BSC). The model is based on several parts which are…

1503

Abstract

The study develops a mathematical model of the firm to derive theoretical foundations for the balanced scorecard concept (BSC). The model is based on several parts which are integrated into a company model. This model includes the demand function, the production function and the objective function of the firm which are depicted by traditional microeconomic concepts. Demand is presented as a function of price and customer relationship management (CRM) costs. Production is assumed to depend on labor, capital, and development and learning (D&L) costs. Simple dynamics is included both in the demand and production function. The strategy of the firm is depicted by the objective function based on profit and net sales. The output variables of the model are classified as the four perspectives of BSC. The effects of the objectives (strategies) on the importance (shadow prices) of the constraints are analysed. It is shown that a change in the objectives may alter the order of their importance. Thus, a change in the strategy should be accompanied with a change in the focus of BSC. Furthermore, non‐financial and financial performance ratios may change in opposite directions, when the strategy is shifted towards revenue maximization. Thus, inconsistencies with the interpretation of cause and effects may emerge, when the strategy is shifted. Numerical examples are presented to demonstrate the results.

Details

Managerial Finance, vol. 30 no. 6
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 8 May 2017

Mickael Terrien, Nicolas Scelles, Stephen Morrow, Lionel Maltese and Christophe Durand

The purpose of this paper is twofold. First, to highlight the heterogeneity of the organizational aims within the professional football teams in Ligue 1. Second, to understand why…

1120

Abstract

Purpose

The purpose of this paper is twofold. First, to highlight the heterogeneity of the organizational aims within the professional football teams in Ligue 1. Second, to understand why some teams swing from a win orientation towards a soft budget constraint from year to year, and vice versa.

Design/methodology/approach

Financial data from annual reports for the period 2005/2015 was collected for the 35 Ligue 1 clubs. To define the degree of compliance with the intended strategy for those clubs, an efficiency analysis was conducted thanks to the data envelopment analysis method. This measure of performance was supplemented with the identification of productivity and demand shocks to identify whether clubs suffered from such shock or changed their strategy. It enables to precise the nature of the evolution in the utility function, with regards to the gap between expectation and actual performance.

Findings

The paper suggests that a team can switch from one orientation to another from year to year due to the uncertain nature of the sports industry. The club director’s utility function could also be maximized under inter temporal budget function in order to adjust the weight between win and profit according to the opportunities in the environment.

Originality/value

The paper sheds new light on the win/profit maximization. The theoretical model provides an assessment of the weight between win and profit in Ligue 1 and then identifies a new explanation for persistent losses in the sports industry.

Details

Sport, Business and Management: An International Journal, vol. 7 no. 2
Type: Research Article
ISSN: 2042-678X

Keywords

Article
Publication date: 1 February 1984

John D. Stowe, Manchunath Vadakkepat and Todd Willoughby

While shareholder wealth maximization is accepted by finance theoreticians as the financial goal of the firm, the implementation of this goal is not simple. There can be…

Abstract

While shareholder wealth maximization is accepted by finance theoreticians as the financial goal of the firm, the implementation of this goal is not simple. There can be significant economic impacts of using an alternative goal such as return on investment (ROI) maximization instead of net present value maximization. Many areas of management discretion can be affected by the choice of ROI maximization versus profit maximization. Differential managerial decisions for these two alternative goals have been noted in such areas as investments in new plant and equipment, investments in research and development, and maintenance of plant and equipment. In addition, managers may have preferences among alternative accounting policies (depreciation schema and inventory valuation methods) that depend on their objective.

Details

Managerial Finance, vol. 10 no. 2
Type: Research Article
ISSN: 0307-4358

Article
Publication date: 1 August 1996

Windham B. Hornby and Miles Macleod

Aims to: determine the degree of association between the setting of pricing objectives and the firm’s financial performance in the Scottish computer industry; to determine the…

1213

Abstract

Aims to: determine the degree of association between the setting of pricing objectives and the firm’s financial performance in the Scottish computer industry; to determine the extent of the relationship between prime pricing objectives and the nature of competition; to analyse the relationship between pricing objectives and firm size; and to determine the degree of association between setting pricing objectives and stages of market evolution. Finds that most firms within the Scottish computer industry had some control over pricing decisions. Furthermore, there was no strong evidence to suggest that the setting of pricing objectives varied systematically with financial performance, levels of competition, firm size or stages of market evolution. Finds, however, that the most profitable firms placed more importance on market share, whereas less profitable firms regarded cash‐flow objectives as more important.

Details

Management Decision, vol. 34 no. 6
Type: Research Article
ISSN: 0025-1747

Keywords

Article
Publication date: 1 July 2006

Erkki K. Laitinen

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).

2134

Abstract

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.

Details

Review of Accounting and Finance, vol. 5 no. 3
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 9 February 2023

Xinsheng Xu, Ping Ji and Felix T.S. Chan

Optimal ordering decision for a retailer in a dual-sourcing procurement is an important research area. The main purpose of this paper is to explore a loss-averse retailer’s…

Abstract

Purpose

Optimal ordering decision for a retailer in a dual-sourcing procurement is an important research area. The main purpose of this paper is to explore a loss-averse retailer’s ordering decision in a dual-sourcing problem.

Design/methodology/approach

For a loss-averse retailer, the study obtains the optimal ordering decision to maximize expected utility. Based on sensitivity analysis, the properties of the optimal ordering decision are well discussed.

Findings

Under the optimal ordering quantity that maximizes expected loss aversion utility, the relevant expected profit of a retailer turns to be smaller under a bigger loss aversion coefficient. For this point, a retailer needs to balance between expected loss aversion utility maximization and expected profit maximization in deciding the optimal ordering policy in a dual-sourcing problem.

Originality/value

This paper reveals the influence of loss aversion on a retailer’s ordering decision in a dual-sourcing problem. Managerial insights are suggested to devise the optimal ordering policy for retailers in practice.

Details

Industrial Management & Data Systems, vol. 123 no. 3
Type: Research Article
ISSN: 0263-5577

Keywords

Article
Publication date: 1 June 2001

Laura J. Spence and Robert Rutherfoord

In this paper, a new analysis is presented of the social and ethical orientation of small firm owner‐managers. Using exploratory qualitative empirical evidence, it is proposed…

7601

Abstract

In this paper, a new analysis is presented of the social and ethical orientation of small firm owner‐managers. Using exploratory qualitative empirical evidence, it is proposed that there are four “frames” of perceiving the social perspective of the small business. These are profitmaximisation priority, subsistence priority, enlightened self‐interest and social priority. If policy makers wish to influence the ethics of small firms, they need to be aware of this diversity of viewpoints and move beyond the notion of the profit‐maximising, rational economic entrepreneur as the standard image of the small business owner‐manager.

Details

Journal of Small Business and Enterprise Development, vol. 8 no. 2
Type: Research Article
ISSN: 1462-6004

Keywords

Article
Publication date: 1 January 1978

Christopher Pass and Bryan Lowes

The continuing growth in the size and importance of very large joint‐stock companies in the modern economy has prompted a search for new theories of the firm which are more…

1032

Abstract

The continuing growth in the size and importance of very large joint‐stock companies in the modern economy has prompted a search for new theories of the firm which are more relevant in explaining the behaviour of giant enterprises. For whilst the traditional profit‐maximising theory of the firm derived from neo‐classical economics may be an appropriate generalised approximation of the behaviour of firms operating in competitive markets, the need for broader theories to explain the behaviour of large manager‐controlled, oligopolistic companies has been recognised.

Details

Managerial Finance, vol. 4 no. 1
Type: Research Article
ISSN: 0307-4358

Article
Publication date: 1 July 2005

Erkki K. Laitinen

The purpose of the research is to analyse the theoretical foundations of the balanced scorecard (BSC) with the aid of a microeconomic model and to illustrate the results in an…

8401

Abstract

Purpose

The purpose of the research is to analyse the theoretical foundations of the balanced scorecard (BSC) with the aid of a microeconomic model and to illustrate the results in an empirical case.

Design/methodology/approach

The model includes demand, production, and objective functions. Demand is presented as a function of price and customer relationship management (CRM) costs. Production depends on labour, capital, and development and learning (D&L) costs. The strategy is depicted by objective function based on profit and net sales. The output variables are classified as four perspectives of BSC. Shadow prices and performance measures are analysed. The theoretical model is applied to the annual financial statement data from Nokia Corporation. Simulation is used to find appropriate estimates for the parameters of the model.

Findings

It is shown that a shift in the objective function (strategy) towards revenue maximization may alter the importance order of the BSC perspectives. Non‐financial and financial performance ratios may change into opposite directions, when the strategy is shifted. The figures extracted from the data of Nokia Corporation give support to these interpretations.

Research limitations/implications

The theoretical model is based on the traditional assumptions of microeconomic analysis. Empirical analysis is only based on a naive estimation methods. The sensitivity of the results with respect to the assumptions should be analysed in further studies. The parameters should be estimated with more advanced statistical methods.

Practical implications

The focus of the BSC should be elastic and react to changes in the strategy. When evaluating the causal relationships between non‐financial and financial performance measures, attention should be paid to potential shifts in the strategy. The present model for example in a worksheet version would be useful in analysing the optimal behaviour of a firm and the causal relationships within the firm. It would be useful also in teaching the BSC and in general the behaviour of the firm to university students and managers. The model offers a platform for teaching and learning how the market (demand) and production (technology) environments affect the performance measures in the BSC.

Originality/value

There is a lack of theoretical modelling and analysis of the BSC. The present mathematical model is discussed earlier in Managerial Finance. However, this paper throws light to modelling the approach in a real‐life case of the Nokia Corporation and shows the value of the approach in interpreting the BSC in practice.

Details

International Journal of Productivity and Performance Management, vol. 54 no. 5/6
Type: Research Article
ISSN: 1741-0401

Keywords

Article
Publication date: 1 February 1995

Windham B. Hornby

Examines the gap between the microeconomic theory of the firm andbusiness reality. In particular, it seeks to redress the balance betweentheory and practice by examining the…

1571

Abstract

Examines the gap between the microeconomic theory of the firm and business reality. In particular, it seeks to redress the balance between theory and practice by examining the objectives of top Scottish companies. The survey confirms initial expectations that Scottish companies are more owner‐controlled than their UK counterparts. In addition, it also appears that Scottish companies are more likely to pursue profit maximization as a goal than companies elsewhere in the UK. It was found that the majority of Scottish companies were financially conservative and risk‐averse but in the absence of comparable data for UK no conclusions can be drawn from this. Nevertheless, in common with other studies, it is confirmed that Scottish companies are similar to their UK counterparts in so far as they tend to be satisficers and pursue multiple objectives. There appears to be no evidence to support links between size and ownership type and profit maximization. Contrary to expectations, owner‐controlled companies are more likely to operate with a minimum profit constraint than managerially controlled companies. Finally, it is confirmed that the majority of firms are “full‐cost pricers” although hypotheses linking this type of pricing policy with size and market structure, while suggestive of such links, were not statistically significant.

Details

Management Decision, vol. 33 no. 1
Type: Research Article
ISSN: 0025-1747

Keywords

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