Using the Balanced Scorecard As a Strategic Management System
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BEST OF HBR Using the Balanced Scorecard as a Strategic Management System
by Robert S. Kaplan and David P. Norton •
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1 Article Summary The Idea in Brief—the core idea The Idea in Practice—putting the idea to work
2 Using the Balanced Scorecard as a Strategic Management System
14 Further Reading A list of related materials, with annotations to guide further exploration of the article’s ideas and applications
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B EST OF HBR Using the Balanced Scorecard as a Strategic Management System
The Idea in Brief The Idea in Practice Why do budgets often bear little direct The balanced scorecard relies on four processes identify the most influential “drivers” of the relation to a company’s long-term strategic to bind short-term activities to long-term desired outcomes and then set milestones objectives? Because they don’t take objectives: for gauging the progress they make with enough into consideration. A balanced these drivers. scorecard augments traditional financial 1. TRANSLATING THE VISION. measures with benchmarks for perfor- By relying on measurement, the scorecard 4. FEEDBACK AND LEARNING. mance in three key nonfinancial areas: forces managers to come to agreement on By supplying a mechanism for strategic feed- • a company’s relationship with its the metrics they will use to operationalize back and review, the balanced scorecard customers their lofty visions. helps an organization foster a kind of learning often missing in companies: the ability to re- Example: • its key internal processes flect on inferences and adjust theories about A bank had articulated its strategy as pro- cause-and-effect relationships. • its learning and growth. viding “superior service to targeted custom- When performance measures for these ers.” But the process of choosing operational Feedback about products and services. New areas are added to the financial metrics, the measures for the four areas of the scorecard learning about key internal processes. Tech- result is not only a broader perspective on made executives realize that they first nological discoveries. All this information can the company’s health and activities, it’s also needed to reconcile divergent views of be fed into the scorecard, enabling strategic a powerful organizing framework. A sophis- who the targeted customers were and refinements to be made continually. Thus, at ticated instrument panel for coordinating what constituted superior service. any point in the implementation, managers and fine-tuning a company’s operations can know whether the strategy is working— and businesses so that all activities are 2. COMMUNICATING AND LINKING. and if not, why. aligned with its strategy. When a scorecard is disseminated up and down the organizational chart, strategy be- comes a tool available to everyone. As the high-level scorecard cascades down to indi- vidual business units, overarching strategic objectives and measures are translated into objectives and measures appropriate to each particular group. Tying these targets to individual performance and compensation systems yields “personal scorecards.” Thus, individual employees understand how their own productivity supports the overall strategy.
3. BUSINESS PLANNING. Most companies have separate procedures (and sometimes units) for strategic planning and budgeting. Little wonder, then, that typi- cal long-term planning is, in the words of one executive, where “the rubber meets the sky.” The discipline of creating a balanced score- card forces companies to integrate the two functions, thereby ensuring that financial budgets do indeed support strategic goals. After agreeing on performance measures for the four scorecard perspectives, companies OPYRIGHT © 2005 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. BUSINESS SCHOOLOPYRIGHT © 2005 HARVARD PUBLISHING CORPORATION. C
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BEST OF HBR Using the Balanced Scorecard as a Strategic Management System
by Robert S. Kaplan and David P. Norton
Editor’s Note: In 1992, Robert S. Kaplan and tion of this change, we introduced a concept David P. Norton’s concept of the balanced score- we called the balanced scorecard. The bal- card revolutionized conventional thinking about anced scorecard supplemented traditional performance metrics. By going beyond tradi- financial measures with criteria that mea- tional measures of financial performance, the sured performance from three additional concept has given a generation of managers a perspectives—those of customers, internal better understanding of how their companies are business processes, and learning and growth. really doing. (See the exhibit “Translating Vision and These nonfinancial metrics are so valuable Strategy: Four Perspectives.”) It therefore en- mainly because they predict future financial abled companies to track financial results performance rather than simply report what’s while simultaneously monitoring progress already happened. This article, first published in in building the capabilities and acquiring 1996, describes how the balanced scorecard can the intangible assets they would need for help senior managers systematically link current future growth. The scorecard wasn’t a re- actions with tomorrow’s goals, focusing on that placement for financial measures; it was place where, in the words of the authors, “the their complement. rubber meets the sky.” Recently, we have seen some companies move beyond our early vision for the score- As companies around the world transform card to discover its value as the cornerstone themselves for competition that is based on of a new strategic management system. Used information, their ability to exploit intangi- this way, the scorecard addresses a serious ble assets has become far more decisive deficiency in traditional management systems: than their ability to invest in and manage their inability to link a company’s long-term physical assets. Several years ago, in recogni- strategy with its short-term actions. OPYRIGHT © 2007 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. BUSINESS SCHOOLOPYRIGHT © 2007 HARVARD PUBLISHING CORPORATION. C
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Most companies’ operational and man- pointments with the programs’ results. But agement control systems are built around fi- when managers use the ambitious goals set nancial measures and targets, which bear for balanced scorecard measures as the basis little relation to the company’s progress in for allocating resources and setting priorities, achieving long-term strategic objectives. they can undertake and coordinate only those Thus the emphasis most companies place initiatives that move them toward their long- on short-term financial measures leaves a term strategic objectives. gap between the development of a strategy The fourth process—feedback and learning— and its implementation. gives companies the capacity for what we Managers using the balanced scorecard do call strategic learning. Existing feedback and not have to rely on short-term financial mea- review processes focus on whether the com- sures as the sole indicators of the company’s pany, its departments, or its individual em- performance. The scorecard lets them intro- ployees have met their budgeted financial duce four new management processes that, goals. With the balanced scorecard at the separately and in combination, contribute to center of its management systems, a company linking long-term strategic objectives with can monitor short-term results from the three short-term actions. (See the exhibit “Manag- additional perspectives—customers, internal ing Strategy: Four Processes.”) business processes, and learning and growth— The first new process—translating the vision— and evaluate strategy in the light of recent helps managers build a consensus around performance. The scorecard thus enables the organization’s vision and strategy. De- companies to modify strategies to reflect spite the best intentions of those at the top, real-time learning. lofty statements about becoming “best in None of the more than 100 organizations class,” “the number one supplier,” or an “em- that we have studied or with which we have powered organization” don’t translate easily worked implemented their first balanced into operational terms that provide useful scorecard with the intention of developing a guides to action at the local level. For people new strategic management system. But in to act on the words in vision and strategy each one, the senior executives discovered statements, those statements must be expressed that the scorecard supplied a framework and as an integrated set of objectives and mea- thus a focus for many critical management sures, agreed upon by all senior executives, processes: departmental and individual goal that describe the long-term drivers of success. setting, business planning, capital allocations, The second process—communicating and strategic initiatives, and feedback and learn- linking—lets managers communicate their ing. Previously, those processes were uncoor- strategy up and down the organization and dinated and often directed at short-term link it to departmental and individual objec- operational goals. By building the scorecard, tives. Traditionally, departments are evaluated the senior executives started a process of by their financial performance, and individual change that has gone well beyond the origi- incentives are tied to short-term financial nal idea of simply broadening the company’s goals. The scorecard gives managers a way of performance measures. Robert S. Kaplan is the Marvin Bower ensuring that all levels of the organization un- For example, one insurance company—let’s Professor of Leadership Development derstand the long-term strategy and that both call it National Insurance—developed its first at Harvard Business School, in Boston, departmental and individual objectives are balanced scorecard to create a new vision for it- and the chairman and a cofounder aligned with it. self as an underwriting specialist. But once Na- of Balanced Scorecard Collaborative, The third process—business planning— tional started to use it, the scorecard allowed in Lincoln, Massachusetts. David P. enables companies to integrate their business the CEO and the senior management team not Norton is the CEO and a cofounder of and financial plans. Almost all organizations only to introduce a new strategy for the organi- Balanced Scorecard Collaborative. They today are implementing a variety of change zation but also to overhaul the company’s are the coauthors of four books about programs, each with its own champions, management system. The CEO subsequently the balanced scorecard, the most re- gurus, and consultants, and each competing for told employees in a letter addressed to the cent of which is Alignment: Using the senior executives’ time, energy, and resources. whole organization that National would Balanced Scorecard to Create Corporate Managers find it difficult to integrate those thenceforth use the balanced scorecard and Synergies (Harvard Business School diverse initiatives to achieve their strategic the philosophy that it represented to manage Publishing, 2006). goals—a situation that leads to frequent disap- the business. harvard business review • managing for the long term • july–august 2007 page 3 This article is made available to you with compliments of Microsoft. Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.
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Translating Vision and Strategy: Four Perspectives
Managing Strategy: Four Processes
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National built its new strategic management ment. I’m here with my customer. What am system step-by-step over 30 months, with each I supposed to do?” step representing an incremental improve- The mission statement, like those of many ment. (See the exhibit “How One Company other organizations, had declared an intention Built a Strategic Management System…”) The to “use high-quality employees to provide iterative sequence of actions enabled the services that surpass customers’ needs.” But company to reconsider each of the four new the project manager in the field with his em- management processes two or three times ployees and his customer did not know how before the system stabilized and became to translate those words into the appropriate an established part of National’s overall man- actions. The phone call convinced the CEO agement system. Thus the CEO was able to that a large gap existed between the mission transform the company so that everyone statement and employees’ knowledge of how could focus on achieving long-term strategic their day-to-day actions could contribute to re- objectives—something that no purely financial alizing the company’s vision. framework could do. Metro Bank (not its real name), the result of a merger of two competitors, encountered a Translating the Vision similar gap while building its balanced score- The CEO of an engineering construction card. The senior executive group thought it company, after working with his senior man- had reached agreement on the new organiza- agement team for several months to develop tion’s overall strategy: “to provide superior a mission statement, got a phone call from a service to targeted customers.” Research had project manager in the field. “I want you to revealed five basic market segments among know,” the distraught manager said, “that I existing and potential customers, each with believe in the mission statement. I want to different needs. While formulating the mea- act in accordance with the mission state- sures for the customer-perspective portion
How One Company Built a Strategic Management System...
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of their balanced scorecard, however, it be- senior managers to arrive at a consensus and came apparent that although the 25 senior then to translate their vision into terms that executives agreed on the words of the strat- had meaning to the people who would real- egy, each one had a different definition of ize the vision. superior service and a different image of the targeted customers. Communicating and Linking The exercise of developing operational “The top ten people in the business now un- measures for the four perspectives on the derstand the strategy better than ever before. bank’s scorecard forced the 25 executives to It’s too bad,” a senior executive of a major oil clarify the meaning of the strategy state- company complained, “that we can’t put this ment. Ultimately, they agreed to stimulate in a bottle so that everyone could share it.” revenue growth through new products and With the balanced scorecard, he can. services and also agreed on the three most One company we have worked with de- desirable customer segments. They devel- liberately involved three layers of management oped scorecard measures for the specific in the creation of its balanced scorecard. products and services that should be deliv- The senior executive group formulated the ered to customers in the targeted segments financial and customer objectives. It then as well as for the relationship the bank mobilized the talent and information in the should build with customers in each seg- next two levels of managers by having them ment. The scorecard also highlighted gaps formulate the internal-business-process in employees’ skills and in information sys- and learning-and-growth objectives that tems that the bank would have to close in would drive the achievement of the financial order to deliver the selected value proposi- and customer goals. For example, knowing tions to the targeted customers. Thus, creat- the importance of satisfying customers’ ex- ing a balanced scorecard forced the bank’s pectations of on-time delivery, the broader
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group identified several internal business ing and educating, setting goals, and linking processes—such as order processing, sched- rewards to performance measures. uling, and fulfillment—in which the com- Communicating and educating. Implement- pany had to excel. To do so, the company ing a strategy begins with educating those would have to retrain frontline employees who have to execute it. Whereas some organi- and improve the information systems avail- zations opt to hold their strategy close to able to them. The group developed perfor- the vest, most believe that they should dis- mance measures for those critical processes seminate it from top to bottom. A broad-based and for staff and systems capabilities. communication program shares with all Broad participation in creating a scorecard employees the strategy and the critical objec- takes longer, but it offers several advantages: tives they have to meet if the strategy is to Information from a larger number of manag- succeed. Onetime events such as the distribu- ers is incorporated into the internal objectives; tion of brochures or newsletters and the the managers gain a better understanding of holding of “town meetings” might kick off the the company’s long-term strategic goals; and program. Some organizations post bulletin such broad participation builds a stronger boards that illustrate and explain the balanced commitment to achieving those goals. But scorecard measures, then update them with getting managers to buy into the scorecard is monthly results. Others use groupware and only a first step in linking individual actions to electronic bulletin boards to distribute the corporate goals. scorecard to the desktops of all employees The balanced scorecard signals to everyone and to encourage dialogue about the mea- what the organization is trying to achieve for sures. The same media allow employees to shareholders and customers alike. But to make suggestions for achieving or exceeding align employees’ individual performances the targets. with the overall strategy, scorecard users gen- The balanced scorecard, as the embodiment erally engage in three activities: communicat- of business unit strategy, should also be com-
...Around the Balanced Scorecard
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municated upward in the organization—to encourage individuals to set goals for them- corporate headquarters and to the corporate selves that were consistent with the organiza- board of directors. With the scorecard, business tion’s. It created a small, fold-up, personal units can quantify and communicate their scorecard that people could carry in their long-term strategies to senior executives using shirt pockets or wallets. (See the exhibit “The a comprehensive set of linked financial and Personal Scorecard.”) The scorecard contains nonfinancial measures. Such communication three levels of information. The first de- informs the executives and the board in spe- scribes corporate objectives, measures, and cific terms that long-term strategies designed targets. The second leaves room for translating for competitive success are in place. The mea- corporate targets into targets for each busi- sures also provide the basis for feedback and ness unit. For the third level, the company accountability. Meeting short-term financial asks both individuals and teams to articulate targets should not constitute satisfactory per- which of their own objectives would be con- formance when other measures indicate that sistent with the business unit and corporate the long-term strategy is either not working or objectives, as well as what initiatives they not being implemented well. would take to achieve their objectives. It also Should the balanced scorecard be communi- asks them to define up to five performance cated beyond the boardroom to external share- measures for their objectives and to set targets holders? We believe that as senior executives for each measure. The personal scorecard gain confidence in the ability of the scorecard helps to communicate corporate and busi- measures to monitor strategic performance ness unit objectives to the people and teams and predict future financial performance, they performing the work, enabling them to will find ways to inform outside investors translate the objectives into meaningful tasks about those measures without disclosing com- and targets for themselves. It also lets them petitively sensitive information. keep that information close at hand—in Skandia, an insurance and financial services their pockets. company based in Sweden, issues a supple- Linking rewards to performance measures. ment to its annual report called “The Busi- Should compensation systems be linked to ness Navigator”—“an instrument to help balanced scorecard measures? Some compa- us navigate into the future and thereby nies, believing that tying financial compensa- stimulate renewal and development.” The tion to performance is a powerful lever, have supplement describes Skandia’s strategy and moved quickly to establish such a linkage. the strategic measures the company uses to For example, an oil company that we’ll call communicate and evaluate the strategy. It Pioneer Petroleum uses its scorecard as the also provides a report on the company’s per- sole basis for computing incentive compensa- formance along those measures during the tion. The company ties 60% of its executives’ year. The measures are customized for each bonuses to their achievement of ambitious operating unit and include, for example, targets for a weighted average of four financial market share, customer satisfaction and re- indicators: return on capital, profitability, tention, employee competence, employee cash flow, and operating cost. It bases the empowerment, and technology deployment. remaining 40% on indicators of customer Communicating the balanced scorecard satisfaction, dealer satisfaction, employee sat- promotes commitment and accountability to isfaction, and environmental responsibility the business’s long-term strategy. As one exec- (such as a percentage change in the level of utive at Metro Bank declared, “The balanced emissions to water and air). Pioneer’s CEO scorecard is both motivating and obligating.” says that linking compensation to the score- Setting goals. Mere awareness of corporate card has helped to align the company with goals, however, is not enough to change many its strategy. “I know of no competitor,” he people’s behavior. Somehow, the organiza- says, “who has this degree of alignment. It is tion’s high-level strategic objectives and mea- producing results for us.” sures must be translated into objectives and As attractive and as powerful as such linkage measures for operating units and individuals. is, it nonetheless carries risks. For instance, The exploration group of a large oil com- does the company have the right measures on pany developed a technique to enable and the scorecard? Does it have valid and reliable
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Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR
data for the selected measures? Could unin- balanced scorecard. They have discovered that tended or unexpected consequences arise from dialogue among executives and managers the way the targets for the measures are about the scorecard—both the formulation of achieved? Those are questions that companies the measures and objectives and the explana- should ask. tion of actual versus targeted results—provides Furthermore, companies traditionally han- a better opportunity to observe managers’ dle multiple objectives in a compensation performance and abilities. Increased knowl- formula by assigning weights to each objec- edge of their managers’ abilities makes it tive and calculating incentive compensation easier for executives to set incentive rewards by the extent to which each weighted objec- subjectively and to defend those subjective tive was achieved. This practice permits sub- evaluations—a process that is less susceptible stantial incentive compensation to be paid if to the game playing and distortions associated the business unit overachieves on a few objec- with explicit, formula-based rules. tives even if it falls far short on others. A bet- One company we have studied takes an ter approach would be to establish minimum intermediate position. It bases bonuses for threshold levels for a critical subset of the business unit managers on two equally strategic measures. Individuals would earn weighted criteria: their achievement of a no incentive compensation if performance in financial objective—economic value added— a given period fell short of any threshold. over a three-year period and a subjective This requirement should motivate people to assessment of their performance on measures achieve a more balanced performance across drawn from the customer, internal-business- short- and long-term objectives. process, and learning-and-growth perspectives Some organizations, however, have reduced of the balanced scorecard. their emphasis on short-term, formula-based That the balanced scorecard has a role to incentive systems as a result of introducing the play in the determination of incentive com-
The Personal Scorecard
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pensation is not in doubt. Precisely what that will drive them toward their targets, identify role should be will become clearer as more the measures they will apply to those drivers companies experiment with linking rewards to from the four perspectives, and establish the scorecard measures. short-term milestones that will mark their progress along the strategic paths they have Business Planning selected. Building a scorecard thus enables a “Where the rubber meets the sky”: That’s company to link its financial budgets with its how one senior executive describes his strategic goals. company’s long-range-planning process. He For example, one division of the Style Com- might have said the same of many other pany (not its real name) committed to achiev- companies because their financially based ing a seemingly impossible goal articulated management systems fail to link change pro- by the CEO: to double revenues in five years. grams and resource allocation to long-term The forecasts built into the organization’s strategic priorities. existing strategic plan fell $1 billion short of The problem is that most organizations this objective. The division’s managers, after have separate procedures and organizational considering various scenarios, agreed to units for strategic planning and for resource specific increases in five different performance allocation and budgeting. To formulate their drivers: the number of new stores opened, strategic plans, senior executives go off-site the number of new customers attracted into annually and engage for several days in new and existing stores, the percentage of active discussions facilitated by senior plan- shoppers in each store converted into actual ning and development managers or external purchasers, the portion of existing customers consultants. The outcome of this exercise is a retained, and average sales per customer. strategic plan articulating where the com- By helping to define the key drivers of rev- pany expects (or hopes or prays) to be in enue growth and by committing to targets three, five, and ten years. Typically, such for each of them, the division’s managers plans then sit on executives’ bookshelves for eventually grew comfortable with the CEO’s the next 12 months. ambitious goal. Meanwhile, a separate resource-allocation The process of building a balanced scorecard— and budgeting process run by the finance clarifying the strategic objectives and then staff sets financial targets for revenues, ex- identifying the few critical drivers—also penses, profits, and investments for the next creates a framework for managing an organi- fiscal year. The budget it produces consists zation’s various change programs. These almost entirely of financial numbers that initiatives—reengineering, employee empow- generally bear little relation to the targets in erment, time-based management, and total the strategic plan. quality management, among others—promise Which document do corporate managers to deliver results but also compete with one discuss in their monthly and quarterly meet- another for scarce resources, including the ings during the following year? Usually only scarcest resource of all: senior managers’ time the budget, because the periodic reviews and attention. focus on a comparison of actual and budgeted Shortly after the merger that created it, results for every line item. When is the strate- Metro Bank, for example, launched more gic plan next discussed? Probably during the than 70 different initiatives. The initiatives next annual off-site meeting, when the senior were intended to produce a more competitive managers draw up a new set of three-, five-, and successful institution, but they were inad- and ten-year plans. equately integrated into the overall strategy. The very exercise of creating a balanced After building their balanced scorecard, scorecard forces companies to integrate their Metro Bank’s managers dropped many of strategic planning and budgeting processes those programs—such as a marketing effort and therefore helps to ensure that their bud- directed at individuals with very high net gets support their strategies. Scorecard users worth—and consolidated others into initia- select measures of progress from all four tives that were better aligned with the com- scorecard perspectives and set targets for each pany’s strategic objectives. For example, the of them. Then they determine which actions managers replaced a program aimed at en-
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hancing existing low-level selling skills with research.” That is exactly the capability that a major initiative aimed at retraining sales- the scorecard should give senior managers: the persons to become trusted financial advisers, ability to know at any point in its implementa- capable of selling a broad range of newly tion whether the strategy they have formu- introduced products to the three selected lated is, in fact, working, and if not, why. customer segments. The bank made both The first three management processes— changes because the scorecard enabled it to translating the vision, communicating and gain a better understanding of the programs linking, and business planning—are vital for required to achieve its strategic objectives. implementing strategy, but they are not suffi- Once the strategy is defined and the drivers cient in an unpredictable world. Together are identified, the scorecard influences man- they form an important single-loop-learning agers to concentrate on improving or reengi- process—single-loop in the sense that the ob- neering those processes most critical to the jective remains constant, and any departure organization’s strategic success. That is how from the planned trajectory is seen as a defect the scorecard most clearly links and aligns to be remedied. This single-loop process does action with strategy. not require or even facilitate reexamination The final step in linking strategy to actions of either the strategy or the techniques used is to establish specific short-term targets, or to implement it in light of current conditions. milestones, for the balanced scorecard mea- Most companies today operate in a turbu- sures. Milestones are tangible expressions of lent environment with complex strategies that, managers’ beliefs about when and to what though valid when they were launched, may degree their current programs will affect lose their validity as business conditions those measures. change. In this kind of environment, where In establishing milestones, managers are new threats and opportunities arise constantly, expanding the traditional budgeting process companies must become capable of what Chris to incorporate strategic as well as financial Argyris calls double-loop learning—learning goals. Detailed financial planning remains that produces a change in people’s assump- important, but financial goals taken by tions and theories about cause-and-effect rela- themselves ignore the three other balanced tionships. (See “Teaching Smart People How to scorecard perspectives. In an integrated Learn,” HBR May–June 1991.) planning and budgeting process, executives Budget reviews and other financially continue to budget for short-term financial based management tools cannot engage performance, but they also introduce short- senior executives in double-loop learning— term targets for measures in the customer, first, because these tools address perfor- internal-business-process, and learning-and- mance from only one perspective, and sec- growth perspectives. With those milestones ond, because they don’t involve strategic established, managers can continually test learning. Strategic learning consists of gath- both the theory underlying the strategy and ering feedback, testing the hypotheses on the strategy’s implementation. which strategy was based, and making the At the end of the business-planning pro- necessary adjustments. cess, managers should have set targets for the The balanced scorecard supplies three ele- long-term objectives they would like to ments that are essential to strategic learning. achieve in all four scorecard perspectives; First, it articulates the company’s shared they should have identified the strategic initi- vision, defining in clear and operational terms atives required and allocated the necessary the results that the company, as a team, is resources to those initiatives; and they should trying to achieve. The scorecard communi- have established milestones for the measures cates a holistic model that links individual that mark progress toward achieving their efforts and accomplishments to business strategic goals. unit objectives. Second, the scorecard supplies the essential Feedback and Learning strategic feedback system. A business strategy “With the balanced scorecard,” a CEO of an en- can be viewed as a set of hypotheses about gineering company told us, “I can continually cause-and-effect relationships. A strategic test my strategy. It’s like performing real-time feedback system should be able to test, vali-
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Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR
date, and modify the hypotheses embedded capability would be. in a business unit’s strategy. By establishing Another organization attempted to validate short-term goals, or milestones, within the its hypothesized cause-and-effect relation- business-planning process, executives are ships in the balanced scorecard by measuring forecasting the relationship between changes the strength of the linkages among measures in performance drivers and the associated in the different perspectives. (See the exhibit changes in one or more specified goals. For “How One Company Linked Measures from example, executives at Metro Bank estimated the Four Perspectives.”) The company found the amount of time it would take for improve- significant correlations between employees’ ments in training and in the availability of morale, a measure in the learning-and-growth information systems before employees could perspective, and customer satisfaction, an sell multiple financial products effectively important customer perspective measure. to existing and new customers. They also esti- Customer satisfaction, in turn, was correlated mated how great the effect of that selling with faster payment of invoices—a relation- ship that led to a substantial reduction in accounts receivable and hence a higher return on capital employed. The company also found correlations between employees’ morale and How One Company Linked Measures the number of suggestions made by employ- from the Four Perspectives ees (two learning-and-growth measures) as well as between an increased number of suggestions and lower rework (an internal- business-process measure). Evidence of such strong correlations help to confirm the orga- nization’s business strategy. If, however, the expected correlations are not found over time, it should be an indication to executives that the theory underlying the unit’s strategy may not be working as they had anticipated. Especially in large organizations, accumu- lating sufficient data to document significant correlations and causation among balanced scorecard measures can take a long time— months or years. Over the short term, manag- ers’ assessment of strategic impact may have to rest on subjective and qualitative judg- ments. Eventually, however, as more evidence accumulates, organizations may be able to provide more objectively grounded estimates of cause-and-effect relationships. But just get- ting managers to think systematically about the assumptions underlying their strategy is an improvement over the current practice of making decisions based on short-term operational results. Third, the scorecard facilitates the strategy review that is essential to strategic learning. Traditionally, companies use the monthly or quarterly meetings between corporate and division executives to analyze the most recent period’s financial results. Discussions focus on past performance and on explanations of why financial objectives were not achieved. The balanced scorecard, with its specification of
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Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR
the causal relationships between performance companies expand their use of the balanced drivers and objectives, allows corporate and scorecard, employing it as the foundation of an business unit executives to use their periodic integrated and iterative strategic management review sessions to evaluate the validity of the system. Companies are using the scorecard to unit’s strategy and the quality of its execution. • clarify and update strategy; If the unit’s employees and managers have •communicate strategy throughout the delivered on the performance drivers (retrain- company; ing of employees, availability of information • align unit and individual goals with the systems, and new financial products and ser- strategy; vices, for instance), then their failure to • link strategic objectives to long-term tar- achieve the expected outcomes (higher sales gets and annual budgets; to targeted customers, for example) signals • identify and align strategic initiatives; that the theory underlying the strategy may and not be valid. The disappointing sales figures •conduct periodic performance reviews to are an early warning. learn about and improve strategy. Managers should take such disconfirming The balanced scorecard enables a com- evidence seriously and reconsider their pany to align its management processes and shared conclusions about market conditions, focuses the entire organization on imple- customer value propositions, competitors’ menting long-term strategy. At National In- behavior, and internal capabilities. The result surance, the scorecard provided the CEO and of such a review may be a decision to reaffirm his managers with a central framework their belief in the current strategy but to ad- around which they could redesign each piece just the quantitative relationship among the of the company’s management system. And strategic measures on the balanced scorecard. because of the cause-and-effect linkages in- But they also might conclude that the unit herent in the scorecard framework, changes needs a different strategy (an example of in one component of the system reinforced double-loop learning) in light of new knowl- earlier changes made elsewhere. Therefore, edge about market conditions and internal every change made over the 30-month pe- capabilities. In any case, the scorecard will riod added to the momentum that kept the have stimulated key executives to learn about organization moving forward in the agreed- the viability of their strategy. This capacity upon direction. for enabling organizational learning at the Without a balanced scorecard, most organi- executive level—strategic learning—is what zations are unable to achieve a similar consis- distinguishes the balanced scorecard, making tency of vision and action as they attempt to it invaluable for those who wish to create a change direction and introduce new strategies strategic management system. and processes. The balanced scorecard pro- vides a framework for managing the imple- Toward a New Strategic mentation of strategy while also allowing the Management System strategy itself to evolve in response to Many companies adopted early balanced changes in the company’s competitive, mar- scorecard concepts to improve their perfor- ket, and technological environments. mance measurement systems. They achieved tangible but narrow results. Adopting those Reprint R0707M concepts provided clarification, consensus, To order, see the next page and focus on the desired improvements in or call 800-988-0886 or 617-783-7500 performance. More recently, we have seen or go to www.hbrreprints.org
harvard business review • managing for the long term • july–august 2007 page 13 This article is made available to you with compliments of Microsoft. Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.
B EST OF HBR Using the Balanced Scorecard as a Strategic Management System
Further Reading ARTICLES Putting the Balanced Scorecard to Work Profit Priorities from Activity-Based by Robert S. Kaplan and David P. Norton Costing Harvard Business Review by Robin Cooper and Robert S. Kaplan September–October 1993 Harvard Business Review Product no. 4118 May–June 1991 Product no. 3588 In this article, the authors argue that the bal- anced scorecard is more than a measurement When used as the financial metric of a bal- system. Four characteristics make it distinctive: anced scorecard, activity-based costing (ABC) It is a top-down reflection of the company’s can help managers find the places in their or- mission and strategy; it is forward-looking; it ganizations where improvement is likely to integrates external and internal measures; and have the greatest payoff. Any way you slice it— it helps a company focus. Together, these char- by product, customer, distribution channel, or acteristics enable a scorecard to serve as a reading—ABC helps you see how an activity means for motivating and implementing generates revenue and consumes resources. breakthrough performance. Once you understand these relationships, you’re better positioned to take the actions that will increase your selling margins and reduce operating expenses.
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page 14 This article is made available to you with compliments of Microsoft. Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.