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Using the Balanced Scorecard As a Strategic Management System www.hbrreprints.org BEST OF HBR Using the Balanced Scorecard as a Strategic Management System by Robert S. Kaplan and David P. Norton • Included with this full-text Harvard Business Review article: 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 Reprint R0707M 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. OPYRIGHT © 2005 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. C page 1 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. 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. OPYRIGHT © 2007 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. C harvard business review • managing for the long term • july–august 2007 page 2 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. Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR 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.
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