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Focusing Your Organization on Strategy—With the Balanced Score- Card, 2Nd Edition Putting the Balanced Scorecard to Work

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Focusing Your Organization on Strategy—With the Balanced Score- Card, 2Nd Edition Putting the Balanced Scorecard to Work C O L L E C T I O N www.hbr.org Focusing Your Organization Your strategy’s on Strategy—with the brilliant—but can you execute it? Balanced Scorecard, 2nd Edition Included with this collection: 2 Putting the Balanced Scorecard to Work by Robert S. Kaplan and David P. Norton 19 Measuring the Strategic Readiness of Intangible Assets by Robert S. Kaplan and David P. Norton 35 Using the Balanced Scorecard as a Strategic Management System by Robert S. Kaplan and David P. Norton 49 Having Trouble with Your Strategy? Then Map It by Robert S. Kaplan and David P. Norton Product 5933 Collection Overview The Articles The Balanced Scorecard has transformed 3 Article Summary companies around the globe. This revolu- tionary performance management sys- 4 Putting the Balanced Scorecard to Work by Robert S. Kaplan and David P. Norton tem has been helping top executives set Your Balanced Scorecard provides a top-down description of your company’s strategy and corporate strategy and objectives—and your assumptions about the corporate objectives and measures needed to implement that translate them into a coherent set of mea- strategy. sures—since 1992. To begin building your scorecard, ask: “If we successfully implement our strategy, how will What makes the Balanced Scorecard so we look different to our shareholders and customers? How will our internal processes powerful? It transforms strategy into a change? What will happen to our ability to innovate and grow? What are each scorecard perspective’s critical success factors? What metrics will tell us whether we’re addressing continuous process owned by every em- those factors as planned?” ployee, not just top managers. It also en- ables you to communicate high-level 18 Further Reading goals down to all organizational levels. Employees know not only what to do, but 20 Article Summary why. 21 Measuring the Strategic Readiness of Intangible Assets But most important, the Balanced Score- by Robert S. Kaplan and David P. Norton card doesn’t treat strategy from only a fi- It’s not enough to clarify your strategy; you must measure your intangible assets’ strategic nancial perspective; it augments financial readiness—how well your employees’ skills, information and technical systems, and leader- measures with objectives and metrics in ship and culture align with your strategy. These intangible assets directly enhance the inter- nal processes that generate revenue needed to meet your long-term financial goals. three additional “perspectives”—cus- tomer relationships, internal processes, To measure strategic readiness, identify the intangible assets you need to perform the inter- and learning and growth. nal processes most critical to your strategy. Then assess your current capabilities in all these areas, identifying changes needed to improve alignment. These less tangible areas are notoriously 34 Further Reading difficult to measure and influence. In VED. 2004, Robert Kaplan and David Norton augmented the Scorecard methodology 36 Article Summary to include new tools that enable you to 37 Using the Balanced Scorecard as a Strategic Management System further unleash the power of intangible by Robert S. Kaplan and David P. Norton ALL RIGHTS RESER assets. In the article “Measuring the Strate- You’ve defined strategic objectives and measures and measured your intangible assets’ stra- TION. gic Readiness of Intangible Assets,” they tegic readiness. Now link employees’ everyday actions to your company’s long-term goals: A OR describe how to assess how prepared translate your vision into metrics everyone can understand; communicate high-level goals ORP and link them to individual performance and compensation; and use scorecard data to test your company’s people, systems, and cul- and revise your theories about which actions generate which results. ture are to carry out your strategy—and turn it into long-term tangible results. 48 Further Reading OL PUBLISHING C The four articles in this collection, all writ- Article Summary ten by Kaplan and Norton, give you the 50 tools to start building and using a Bal- 51 Having Trouble with Your Strategy? Then Map It anced Scorecard in your firm. by Robert S. Kaplan and David P. Norton BUSINESS SCHO D To execute your strategy, you must communicate it throughout your organization so em- R A V ployees see how their everyday actions support—or hamper—the strategy. How to send a clear, compelling message? Use a strategy map—a one-page, graphic depiction of the cause-and-effect connections among your Balanced Scorecard’s four perspectives. Concise and clear, your strategy map tells employees throughout your organization how to turn re- sources (especially intangible ones) into the tangible results promised by your strategy. OPYRIGHT © 2004 HAR 61 Further Reading C page 1 1st article from the collection: Focusing Your Organization on Strategy—with the Balanced Score- card, 2nd Edition Putting the Balanced Scorecard to Work by Robert S. Kaplan and David P. Norton Included with this full-text Harvard Business Review article: 3 Article Summary The Idea in Brief—the core idea The Idea in Practice—putting the idea to work 4 Putting the Balanced Scorecard to Work 18 Further Reading A list of related materials, with annotations to guide further exploration of the article’s ideas and applications Product 4118 page 2 Putting the Balanced Scorecard to Work The Idea in Brief The Idea in Practice What makes a balanced scorecard special? Linking measurements to strategy is the heart Example: Four characteristics stand out: of a successful scorecard development pro- Rockwater, an underwater engineering and cess. The three key questions to ask here: construction firm, crafted a five-pronged 1. It is a top-down reflection of the com- strategy: to provide services that surpassed pany’s mission and strategy. By contrast, 1. If we succeed with our vision and customers’ expectations and needs; to the measures most companies track are strategy, how will we look different achieve high levels of customer satisfaction; bottom-up: deriving from local activities or • to our shareholders and customers? to make continuous improvements in ad hoc processes, they are often irrelevant safety, equipment reliability, responsive- to the overall strategy. • in terms of our internal processes? ness, and cost effectiveness; to recruit and 2. It is forward-looking. It addresses cur- • in terms of our ability to innovate and retain high-quality employees; and to real- rent and future success. Traditional financial grow? ize shareholder expectations. Using the bal- measures describe how the company per- anced scorecard, Rockwater’s senior man- 2. What are the critical success factors in formed during the last reporting period— agement translated this strategy into each of the four scorecard perspectives? without indicating how managers can im- tangible goals and actions. prove performance during the next. 3. What are the key measurements that • The financial measures they chose in- will tell us whether we’re addressing those 3. It integrates external and internal mea- cluded return-on-capital employed and success factors as planned? sures. This helps managers see where they cash flow, because shareholders had indi- have made trade-offs between perfor- The balanced scorecard also brings an organi- cated a preference for short-term results. mance measures in the past, and helps en- zational focus to the variety of local change • Customer measures focused on those sure that future success on one measure programs under way in a company at any clients most interested in a high value- does not come at the expense of another. given time. As the benchmark against which added relationship. all new projects are evaluated, the scorecard 4. It helps you focus. Many companies • The company introduced new bench- functions as more than just a measurement track more measures than they can possi- marks that emphasized the integration system. In the words of FMC Corp. executive bly use. But a balanced scorecard requires of key internal processes. It also added Larry Brady, it becomes “the cornerstone of managers to reach agreement on only a safety index as a means of controlling the way you run the business,” that is, “the those measures that are most critical to the indirect costs associated with accidents. core of the management system” itself. success of the company's strategy. Fifteen • Learning and growth targets emphasized to twenty distinct measures are usually the percentage of revenue coming from enough, each measure custom-designed new services and the rate of improve- for the unit to which it applies. ment of safety and rework measures. COPYRIGHT © 2000 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. page 3 What do companies like Rockwater, Apple Computer, and Advanced Micro Devices have in common? They’re using the scorecard to measure performance and set strategy. Putting the Balanced Scorecard to Work by Robert S. Kaplan and David P. Norton Today’s managers recognize the impact that a measurement exercise, the balanced score- measures have on performance. But they card is a management system that can moti- rarely think of measurement as an essential vate breakthrough improvements in such criti- part of their strategy. For example, executives cal areas as product, process, customer, and may introduce new strategies and innovative market development. operating processes intended to achieve The scorecard presents managers with four breakthrough performance, then continue to different perspectives from which to choose use the same short-term financial indicators measures. It complements traditional financial they have used for decades, measures like re- indicators with measures of performance for turn-on-investment, sales growth, and operat- customers, internal processes, and innovation ing income. These managers fail not only to and improvement activities. These measures introduce new measures to monitor new goals differ from those traditionally used by compa- and processes but also to question whether or nies in a few important ways: not their old measures are relevant to the new Clearly, many companies already have myr- initiatives.
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