System dynamics modelling for a balanced scorecard: Computing the influence of skills, customers, and work in process on the return on capital employed

Abstract

Purpose – This paper seeks to construct a dynamic model/framework inspired by a case study based on an international company. As described by the theory, one of the main difficulties of balanced scorecard (BSC) is to foresee the time lag dimension of different types of indicators and their combined dynamic effects. Design/methodology/approach – A case study model is used to develop time or dynamic dimensions by using a system dynamics modelling approach. The model includes five perspectives and a number of financial and non‐financial measures. All indicators are defined and related to a coherent number of different cause‐and‐effect relationships based on knowledge and experience. Through three different scenarios we demonstrate the effects of different drivers on the profit and on Return on Capital Employed are demonstrated. Findings – The results show that a minimal change in one of the base variables (skills, customer base or work in process) may have a major influence on other indicators and profit and may be impossible to predict without using a dynamic model. Practical implications – The model may be used as the first step in quantifying the cause‐and‐effect relationships of an integrated BSC model. Using the system dynamics model provides added insight in the BSC and may also serve as a teaching exercise of BSC. Originality/value – Work on dynamic aspects of BSCs is just in an early state, so the aim of any work is to contribute to both scholars' and practitioners' basic understanding of how such delayed dynamics propagate through systems and time.

Citation

Nielsen, S. and Nielsen, E.H. (2008), "System dynamics modelling for a balanced scorecard: Computing the influence of skills, customers, and work in process on the return on capital employed", Management Research News, Vol. 31 No. 3, pp. 169-188. https://doi.org/10.1108/01409170810851276