On this page, we’ll give an introduction to Balanced Scorecards.
An important topic, but don’t worry – to make it not too boring for you, we’re gonna put it in some kind of telling a story.
So what is a Balanced Scorecard, and how does it work? – does it show a world in balance?
What’s the benefit using them, how do you calculate them, and how do you use them for business simulations with forecast included?
Now don’t you wonder if the next paragraph seems to be a little side step, at first. It’s much about which arrow on a balanced scorecard is important, at all. Remember we’re always addressing a problem in a top-down approach.
Many Questions, so let’s see.
If you look at the picture above, you’ll wonder why it looks like a sketch, right? – we have designed it this way, on purpose. First of all, every company is working this way. You got various costs, so count them together. Then, you produce something, so give it a Price tag, sell it, and accumulate your income.
The difference between the sum of your Income, and the sum of your cost, will yield your Net Profit. Then, there’s always Tax, you know, the contribution that polititians or some people who call themselves gouvernment require us to pay for society, gouvernment, military, peacemaking, healthcare, sugar, other useful things, young people, old people, poor people, unemployed people, people who want to work, and last, but not least, politicians in parliament, where they talk about what’s important.
Then you know, there’s always a few people who are just working and producing any useful goods. These guys are paying the Tax.
We substract Tax from Net Income, and you got your real Net Profit. That’s the money in your pocket at the end of the month, as a company owner. It’s pretty much the same when being a worker.
By the way, in System Dynamics theory, we have different words for basically the same thing, here: in many books, they also use the terms Causal Loop Diagram or Stock-Flow diagram for what we define as Balanced Scorecards, here. See Wikipedia for more.
In some countries of the western world, as being an employee, they force company owners to pay more things for you, and then company owners buy more robots as they can afford to pay less people, or can’t afford to pay more people anymore, and that’s what some people call progress.
We’re not saying that all these societies necessarily produce values, but people have been pretty smart in defining gross social productivity and other measures, to prove to every one of us that this kind of progress exists.
At Dynamic Applications, we don’t know much about it. We prefer to work on innovations and useful new things. While people are still discussing, negotiating or trading, we are working on producing more useful goods. We take our pride and self-respect from working, and we think there’s a lot of honesty and passion involved when you do it this way. It feels alright. And we always try to make the best price in the market. Competition never sleeps. It starts slowly, you know, like any exponential success curve does, but this way, we see our business accelerate over time, already. Do we pay our tax? – you bet.
So what’s innovation at all, then?
A true innovation is something that we can say is better than anything before, and we thought it was missing, so we built it and here it is.
As nobody has seen anything like that before, people start wondering what it is. Then, they try to help us innovators with all kinds of funny remarks, like,
what’s that?, haven’t seen it before., does it work already?, and how much is it? (here! someone wants to buy today, but only if the price is exceptionally good as well!), you’re still working on that same thing, really?, can’t believe you’re still working on it, and is it more or less expensive now?, and isn’t that forbidden to charge that much?, oh, it’s a rocket!!! ah! never seen one in reality, do they exist?, and is that allowed to build one?, i think it’s an airplane, don’t you need a licence to operate airplanes, oh i see!!! never thought of anything like that, whow, that’s weird, but isn’t moon much like a desert?, and why do you think would anyone want to fly there for holidays, then?, would you be willing to ever use your own device?, listen, are you ready to go today, cause i’m in a hurry, but today i would fly with you for free if you need a test driver for your air car, and so on.
You know it, i know it, that’s how normal people are. It’s daily reality to us. We use our brand-new devices all the time, and listen to them in infinite boredom. Sometimes we manage to escape to dreamland, but we gotta be careful here, as they will feel insulted as soon as they find out when asking the next question in row, and you mix up your answers.
When they finish, we thank them for their kind contribution and invite them to come back and ask more questions anytime, as it was a really interesting discussion. We’re smart as well.
The good news is that some of them look really awesome – they’d never go with an inventor before you’ve finished your machine, it’s part of the game – and some of them seem really interested to come back and releave us from total isolation of mind, anyways.
So they give us hope, and we give them inspiration (that’s getting an idea of what we are about and why), and so we can share our ideals of a better world even before they buy.
And if you listen closely, and compare their reaction to your older and newer collection of standard answers, we can learn a lot about what they want, how much they want it, and, most important, if they want it at all or are totally against it from day one, when we told them what it is in answer one, and why we do it in answer two.
Don’t worry, it’s really good and helpful if some people are totally against it. It requires a little bit of courage, honesty, and a good plan. That’s the information you sell them one by one, just by teaching, telling, and explaining. Be as nice to them as to everyone, they can’t bear it.
These kind of people hate your project, because they see how good it is, and they think they haven’t got the courage to go all your way down the road.
And then they are going to tell everyone what you are planning to do, in their own negative words, and with the arrival of socialmedia, in 21st century, you won’t imaging how fast people from all over the world can find your project.
So don’t expect any kingdoms in today’s money if you work on future expectations, that’s unrealistic. We recommend you charge 25% of your best competitor (or what you’ll really need if there is none, like in our case) in the beginning, as it’ll keep them discussing how is that price possible, as long as you can dig up any money from things you can sacrifice. This way, your business attraction keeps expanding at maximum speed, even on sundays now, where they got time to read and share within the International Network.
In case you want to be the really smart one in this game, we recommend you calculate the best price you can ever make as long as you can see forward, say, 48 months for a start, like, this year, next year, the year hiding from behind, and the last year.
We thought a lot about it, and we think it’s the best default we can give you on your way. Use it, or change default starting point in time, and duration of your journey in PD’s product settings from 10 to 120 months or years, a lifetime, the absolute maximum that we can support in theory.
If you accumulate every month’s Net Profit, you’ll get something like a Balance, the sum of your income over time. It works pretty much like your Personal Bank Account.
Before we continue with the technical stuff, remember the first paragraph, society, opinions, politicians, gouvernments. In being inventors, we keep the good and go for the better. It’s very important to define an excellent company culture and follow it consequently, right from the beginning, when you’re all on your own.
It’s inventors who change the world.
People, Opinions, Politicians, Gouvernments, Countries, they come and go. True innovations stay. Isn’t our world been designed much like that?
You invent any single thing that’s never been there, and people see it’s any better than before, they either follow you, buy it from you, want to partner with you, copy it, or hate you for it.
Follow, Copy, Hate.
Three times of excellent promotion in a row. Even the copycats, looking for fast money. They forget to copy your culture.
In being copycats, they can’t copy your culture. Their culture is different by definition. All these people want the cheap part of success, no matter if bogus or not. Let customers buy from them, no problem at all. Just take a look is any competitor adding something really useful as well.
As we see it, it’s allowed to copy a thought, a basic idea, the very way you understand it, and build it into your product your own way. Once understood, it will have influenced you and your team, anyways.
Much better feeling than buying yourself a couple of thiefs, and steal products, tools, or original plans from an inventor.
Remember we all, the readers and writers on the Dynamic Applications Website, we wanted to be 21st century builders, here?
I think it will be much like that.
So stealing goods, or playing unfair, may help you in shorts terms, but it’s certainly not going to make you feel better for long.
The true inventor is driven by belief, and going to work on, and all you really earn is (s)he’s gonna surpass you once again.
Additional fact is, copycats and thieves are going to tell everyone that their (cracked or stolen, maybe even malwared or spywared) product is better than yours, be sure of that.
Honesty, for example.
Our company culture decides how we proceed from any single point in time. Now who’s going to offer the best deal to customers in future.
See? – in median or statistical expectation, the company with the best or most attractive culture and reputation in the world will surpass any other company over time. And culture leads directly to reputation, over time.
In the sketch above, your Bank Account Balance still signed with a (T) for Target. It’s a historic document, you know.
In the meantime, we’re using a different symbol for these kinds of accumulators: (S). And that’s a special kind of Target.
(S) is an abbreviation for Stock.
To remember it, think of your company as a Stock of bees. A bee arrives and brings you some honey, more bees in stock. A bee departs and takes a fly into unknown explorations, hopefully trying to collect more honey: a bee less in your stock. Compare this to your R&D budget, Research and Development, there you go. In a traditional company, we separate between production of goods you’ve already designed, called production, and researching your next generation of products, called R&D.
In a 21st century company, this is really another word for the same thing. As a 21st century company, in the way we understand it, is really about producing knowledge. Our daily work is been done by machines, more and more, so the knowledge society, sometimes called the information society or digital society, is really the self-selected refugium for mankind. What’s a Blogger, a Writer, a SocialMedia activist, a Software Developer, or a Consultant of any kind doing? – transferring knowledge from one person to the next one, or between them by using social media. Tools.
If you’re alone at home, working as a blogger or software developer, think of it as the thoughts running through your head. Collecting them, sorting them out, running them to your fingers, there you write it down. The robot is uploading your stuff, people are going to see it, find it useful or not, send back some kind feedback to you. And, in the end, you’ll have to ask them to contribute to your life’s expenses, and all the time it’s a give-and-take. If you think about Balanced Scorecards, you’ll find out that there’s a lot of balance variables you could define.
A company is never about creating money.
That’s a common misunderstanding. Money is only a placeholder, created from belief. Money stands for the belief in the existance of a universal exchange medium, much like a give-and-take variable, right? – all the paperworks we call money are worth nothing, if we don’t believe in them. A company’s value comes from a good value offering. Efficiency, for example, and a good culture that describes how we are going to proceed from a given situation.
Money is basically the idea of producing a value or service, exchanging them to the universal Balance Variable we call money, and exchanging that into any kind of product or service you want, later. For everyone. So it’s a really cool idea, and that’s why many company owners concentrate on creating a lot of money.
No matter what company you’re working for, you should always try to produce a value, every day. It’s the basis of worldwide markets, of society. Others will come by and take it from you, sell it for you, gain value from others, exchange values with money. They’re going to tell your company how much the things you produce are worth. And your company will pay your salary from it.
So a Balance Variable is a Stock Variable, and it really tries to express the accumulation of all values of your production. Your total effort. And efficiency comes from dividing your total sales by your total production time, and material cost. The world-wide criteria for optimizing a company. And if you stop producting values, and start concentrating on profit alone, that’s the beginning of your road downwards, as you start looking at a very small piece of the whole story.
What else do we see? – let’s take a look at the other side, where everything comes from.
In the picture above, you’ll find circles that have got no incoming arrows. We’ve placed them where the picture starts, on the left. Here, we see things like:
Material Cost, Ingredients, Production Energy, Production Time, Product Price, Salary, Work hours a day, Work days a month. Fixed Cost. Tax.
In System Dynamics, every such field where there are just arrows departing, is called an Input Variable. Oh, we almost forgot to explain the connection between System Dynamics and the Balanced Scorecard. Well, as Wikipedia says it, System Dynamics is basically the quantification of a Balanced Scorecard. Expert language…
What they mean here is that we take the Scorecard and write Numbers and Formula on it. Numbers for Input Values, obviously. So where do we find formula? – everywhere else.
Any circle with incoming arrows is influenced by something. There is coincidence, of course, but it doesn’t keep occuring in high numbers from the same location. So we look for a structure, a schema here. What’s the influence of your daily work time on your salary? – of course. The longer you work, the more you produce, the more you should earn. With the arrival of work-time reporting tools, more and more people are writing down the number of hours they work daily, and a formula in the background will calculate their excess hours, or overtime work. Some companies are paying extra bonus for extra work, some follow a more sustainable approach, pay you on a regular basis. In a company based on fairness, they should allow you to collect extra hours for holidays.
So the formula becomes obvious:
Salary per hour * Work hours per day => Daily Salary.
In Predicted Desire, we write it down like you’ve learned, formulated in simple school math: to separate formula from calculation symbols and blank space, we draw all key words together, capitalising them for ease of read, and put the result up front:
T_DailySalary = i_SalaryPerHour * i_WorkHoursPerDay.
So this formula defines T_DailySalary as a Target Value, defined by the multiplication of two Input Values. This leads us to the fact that every Target Value in Predicted Desire will carry a formula. As formulas in mass would soon get too complicated to overlook, we hide them, and they’re shown in ToolTips on demand, one by one.
Now if you take all those simple statements together, leading us from defining Work Hours, Work per Day, Work Days per Month, Salary per Month, Total Cost, what is it?
It is an Equation System.
And a Balanced Scorecard is, mathematically seen, a fairly simple Representation of a complex mathematical Equation System on a sheet of paper. It just looks easier.
And there we go. In Predicted Desire, all we do is identify our Input Values by looking for Circles with no incoming arrows, no influence. In research about society, people, and their various interactions, the Social Styles Model uses the word “Driver” for people not heavily influenced by others. So our Input Values are the Driving Wheels of a Balanced Scorecard. The numbers where everything else is calculated upon. We collect them in a list and display them in the Input Value Panel.
Then, as we said, about every other circle on a Balanced Scorecard defines an interconnection formula. We use Target Values to describe them. The formula on the left side calculate pretty simply target values, like your Daily Income, a simple multiplication.
Of course, such a Target Value could as well be used in the next formula, which will calculate your monthly income. So in general, a formula doesn’t have to consist of input values alone. It could consist of subsidiary input values and subsidiary formula.
At the moment, we make no difference in whether a Target Value is used for another calculation (an “intermediate target” in a way), or placed on the right side, with no other formula behind. As well as world’s details are endless, you could as well argue that there’s always a target behind. So once we’ve understood something, we’re ready to see what’s behind.
And that’s why we say that System Dynamics is really a Top-Down Approach. We use a simple sheet of paper, like a sketch, for a first picture of reality. At this stage, it is important to listen to everyone attending in the meeting where we discuss it, or show it to collegues and gather input on the completeness of the picture. Otherwise, we may overlook something important.
Naturally, the more people you ask, the more details they will come up with. Details are everywhere, Interconnections are everywhere. Learn to live with that, and concentrate on the most important connections. If one influence on a formula is 79%, one is 20%, and another is 1% sometimes, we could as well leave the last one away. It’s not relevant. Just think about whether it’s not relevant in all cases. Is there a situation where an arrow could become most important? – there you go.
If you make the picture too complex, there is no gain, as nobody except you will be able to understand it anymore – without lengthy explanations – as soon as it reaches the size of your desktop’s table. This is also why Predicted Desire uses a pretty compact visualization.
The System Dynamics approach is all about reducing complexity. So please don’t try to bring in complexity trough the back door, by discussing endlessly about connections that are not relevant. Reduce a situation by reducing it to its relevant, influencing, driving parameters. Now you are able to overlook the situation in its complexity, as a whole, without exploding your mind. Our minds are designed, or trained, to hold a few numbers, but nobody is able to concentrate on 10 numbers at the same time. We rather store them in a Computer Software and remember the way to find them.
So that’s why Predicted Desire really just concentrates two lists of values, altogether.
A Balanced Scorecard of about any complexity can be represented, this way. You can inspect it at any single location, and none of them will reduce to a fairly simple formula, quite easy to understand. That’s the base of our next important, cultural element: Full Transparency on the underlying calculation process.
Roundup, Overview, and Outlook.
So, what we do in Predicted Desire is really to create any kind of formula system from a sketch on paper that we call Balanced Scorecard. However, since it is really too easy for today’s computer to calculate through a small number of additions and multiplications, in System Dynamics we’re also looking at the described system’s balance, at its proceedings and development over time, much like in Nature itself.
We define a measurement for time, which could be a second, a minute, an hour, a day, a week, a month, a year. Predicted Desire will support any of these, but you have to decide how fine-grained it should be. It doesn’t make sense to calculate a company’s salaries for a second, you’d do that on a monthly basis. As well, you look at the amortization of a Photovoltaic System over 25 years, as that’s how long it’s gonna produce energy until it’s rotten. Nevertheless, if there are daily interconnections, we can always use the known formula that 60 seconds are a minute, 60 minutes an hour, 24 hours a day, 30 days a month, and 12 months a year to get an accumulation over time in good approximation.
Consider if you look closely, how many invisible interconnections there really are in this world! Now do you really want to argue whether a year has got 360 (30*12), or 365 days, anymore? – use formula where relevant, and live with the slight uncertainties. If you got a computer system based on exact formula, there – a second is gone – and they are no longer true, if you look really close.
So what the computer system does is really based on the idea that the Formula System we described should remain valid over the foreseeable future, and so, if we estimate each single value’s proceedings, all dependent formula will show their dependent proceedings, and so on, until finally all values accumulate in the final targets, the Balance Variables describing the sustainability, or long-time behaviour, of the system we describe.
Now, we concentrate on fine-tuning the values, right? – skip the boring stuff, read on in PD Input and Target Documentation, and you’ll find out how to operate our user interface, and dig out some really interesting predictions about your optimal company strategy, using this simple tool.
We’ll also tell you why you’re already able to solve complex differential equations by just modifyng a few values over time, and concentrate on the simple rule of three, all the time.
The heaviest part, the fundamental Theory of System Dynamics, is already behind you.
Congratulations, Young Modeler!
Get Ready. Prepare to Drive. We think you’re more than ready to go.