Using the Balanced Scorecard as a Strategic Management System

The Idea in Brief

Why do budgets often bear little direct relation
to a company's long-term strategic objectives?
Because they don't take enough into
consideration. A balanced scorecard augments traditional
financial measures with benchmarks for performance in
three key nonfinancial areas:

• a company's relationship with its customers
• its key internal processes
• its learning and growth.

When performance measures for these areas are
added to the financial metrics, the result is not only a
broader perspective on the company's health
and activities, it's also a powerful
organizing framework. A sophisticated instrument panel
for coordinating and fine-tuning a company's
operations and businesses so that all activities are
aligned with its strategy.

The Idea in Practice

The balanced scorecard relies on four processes
to bind short-term activities to long-term objectives:

1. Translating the vision.

By relying on measurement, the scorecard forces
managers to come to agreement on the metrics they will
use to operationalize their lofty visions.

A bank had articulated its strategy as providing
"superior service to targeted customers."
But the process of choosing operational measures for the four
areas of the scorecard made executives realize that they first
needed to reconcile divergent views of who the targeted
customers were and what constituted superior service.

2. Communicating and linking.

When a scorecard is disseminated up and down the
organizational chart, strategy becomes a tool available
to everyone. As the high-level scorecard cascades down
to individual 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 typical long-term planning is,
in the words of one executive, where "the
rubber meets the sky." The discipline of
creating a balanced scorecard 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 identify the most
influential "drivers" of the desired
outcomes and then set milestones for gauging the
progress they make with these drivers.

4. Feedback and learning.

By supplying a mechanism for strategic feedback
and review, the balanced scorecard helps an organization
foster a kind of learning often missing in companies:
the ability to reflect on inferences and adjust theories
about cause-and-effect relationships.

Feedback about products and services. New
learning about key internal processes. Technological
discoveries. All this information can be fed into the
scorecard, enabling strategic refinements to be made
continually. Thus, at any point in the implementation,
managers can know whether the strategy is
working—and if not, why.

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Copyright 2005 Harvard Business School Publishing Corporation. All rights reserved.

Further Reading

Articles

Putting the Balanced Scorecard to Work

Harvard Business Review

September–October 1993

by Robert S. Kaplan and David P. Norton

In this article, the authors argue that the
balanced scorecard is more than a measurement
system. Four characteristics make it distinctive: It
is a top-down reflection of the company's
mission and strategy; it is forward-looking; it
integrates external and internal measures; and it
helps a company focus. Together, these
characteristics enable a scorecard to serve as a
means for motivating and implementing breakthrough
performance.

Profit Priorities from Activity-Based Costing

Harvard Business Review

May–June 1991

by Robin Cooper and Robert S. Kaplan

When used as the financial metric of a
balanced scorecard, activity-based costing (ABC) can
help managers find the places in their organizations
where improvement is likely to have the greatest
payoff. Any way you slice it—by product,
customer, distribution channel, or
reading—ABC helps you see how an activity
generates revenue and consumes resources. Once you
understand these relationships, you're
better positioned to take the actions that will
increase your selling margins and reduce operating
expenses.