Constant growth model of the firm: theoretical analysis of the balanced scorecard

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.

Citation

Laitinen, E.K. (2006), "Constant growth model of the firm: theoretical analysis of the balanced scorecard", Review of Accounting and Finance, Vol. 5 No. 3, pp. 298-315. https://doi.org/10.1108/14757700610686453