Donnally Department Store is located in the downtown area of a medium-sized city in western Canada. While the store had been profitable for many years, it is facing increasing competition from large national chains that have set up stores in the city’s suburbs. Recently, the downtown area has been undergoing revitalization, and the owners of Donnally Department Store are cautiously optimistic that profitability can be restored. In an attempt to accelerate the return to profitability, the management of Donnally Department Store is designing a balanced scorecard for the company. Management believes the company should focus on two key problems. First, customers are taking longer and longer to pay the bills they incur on the department store’s credit card, and they have far more bad debts than are normal for the industry. If this problem were solved, the company would have more cash to make much-needed renovations. Investigation has revealed that much of the problem with late payments and unpaid bills is apparently due to disputed bills that are the result of incorrect charges on the customer bills. These incorrect charges usually occur because sales- clerks enter data incorrectly on the credit card machine. Second, the company has been incur- ring large losses on unsold seasonal apparel. Such items are ordinarily resold at a loss to discount stores that specialize in such distress items.

Required:

1. As someone with more knowledge of the balanced scorecard than anyone else in the company, you have been asked to build an integrated balanced scorecard. In your scorecard, use only performance measures suggested by the managers above. You do not have to use all of the performance measures suggested by the managers, but you should build a balanced scorecard that reveals a strategy for dealing with the problems with accounts receivable and with unsold merchandise. Construct the balanced scorecard following the format used in Exhibit 11–5. Do not be particularly concerned about whether a specific performance measure falls within the learning and growth, internal business process, customer, or financial perspective. However, use arrows to clearly show the causal links between the performance measures and decide whether the performance measures should show increases or decreases.

2. Assume that the company adopts your balanced scorecard. After a year, there are improvements in some performance measures but not in others. What should management do next?

3. a. Suppose that customers express greater satisfaction with the accuracy of their charge account bills but the performance measures for the average age of accounts receiv- able and for bad debts do not improve. Explain why this might happen.

b. Suppose that the performance measures for the average age of accounts receivable, bad debts, and unsold inventory improve, but total profits do not. Explain why this might happen. Assume in your answer that the explanation lies within the company.