Causal Relationships in the Balanced Scorecard: A Path Analysis Approach

Abstract

We use path analysis to identify causal relationships between different performance measures in each of the four perspectives defined in the balanced scorecard and examine the influence of time lag on relationships between perspectives. We analyze performance data from a real high-tech company. Our results point to a direct relationship between leading measures in the learning and growth perspective and lagging measures in the financial perspective. Our findings also support the existence of a path of “Learning → Production Efficiency → Quality”, reflecting the fact that the more the organization invests in learning and in developing its human capital, the better the production efficiency and product quality will be in the same year. We identify an additional direct path “Customer Service → Profit”, reflecting a significant positive relationship between the customer and profit in the same year. Finally a “Growth →Sales” path exists implies that improvement in the growth of the firm is followed by a positive effect on the firm’s sales one year later.