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JAOC
8,4 The causal relationships between
performance drivers
and outcomes
528
Reinforcing balanced scorecards’
implementation through system dynamics
models
Federico Barnabè
Department of Social and Business Studies, Faculty of Economics,
University of Siena, Siena, Italy, and
Cristiano Busco
National University of Ireland, Galway, Galway, Ireland

Abstract
Purpose – The purpose of this paper is to speculate on the potentials of the system dynamics
methodology to contribute to the balanced scorecard (BSC) design and implementation by producing a
detailed causal relationships model that links strategic and operational objectives in a more accurate
and effective way.
Design/methodology/approach – The work is based on the methodological principles and the
operational tools provided by the system dynamics methodology and the BSC framework.
Findings – One of the main areas that both the relevant literature and Kaplan and Norton identified
as critical in developing the original BSC framework is related to the identification and the
quantification of “causal relationships” across the BSC, and to the subsequent opportunity to use a
mathematical-computer model to test and simulate such assumptions and their impacts on strategy
implementation. Such issues are addressed in this paper.
Practical implications – The paper provides information and consideration on how to model and
assess causality and cause-and-effect relationships in BSC environments. Subsequently, it provides
some reflections on the contribution of the system dynamics methodology for the design and
implementation of the BSC.
Originality/value – The value of this paper is two-fold: first, it shows that relying on system
dynamics tools and methodological principles is possible to better define the concept of causality in
BSC frameworks; second, it shows that by integrating system dynamics modelling principles and the
BSC framework it is possible to develop a comprehensive approach to performance management and
strategy formulation and strategy implementation.
Keywords Balanced scorecard, Strategic management, Strategic performance
Paper type Research paper

Introduction: the role of causal relationships within the BSC

Journal of Accounting &
Organizational Change
Vol. 8 No. 4, 2012
pp. 528-538
q Emerald Group Publishing Limited
1832-5912
DOI 10.1108/18325911211273518
Robert Kaplan and David Norton introduced the balanced scorecard (BSC) in a 1992
milestone Harvard Business Review article (Kaplan and Norton, 1992). The purpose of
this multi-company research project was to explore performance measurement in
companies in which intangible assets played a central role in value creation. After
publication of the 1992 article and during the last two decades, the BSC has been
adopted by a multitude of private, public, and non-profit enterprises around the world Reinforcing
with the intention of broadening performance measurement by linking financial and BSC’s
non-financial indicators, as well as better describing, communicating and
implementing organizational strategy. implementation
Furthermore, during the last 20 years, the need for strategy-oriented and
multidimensional performance measurement systems has been widely recognized in
the management and accounting literature (see, amongst others, Neely, 1998; Dyson 529
and O’Brien, 1998; Epstein and Manzoni, 2004; Kaplan and Norton, 2008; Micheli and
Manzoni, 2010). Throughout this literature, the BSC has increasingly acquired a
well-recognized relevance as demonstrated by the large number of publications
highlighting its advantages and strengths (Hepworth, 1998; Hoque and James, 2000;
Rigby, 2001; Davis and Albright, 2004; Akkermans and Van Oorschot, 2005;
Busco et al., 2007), its adoption in the private and public sector (Olve et al., 1999; Niven,
2003), its diffusion in specific geographic areas (Malmi, 2001; Speckbacher et al., 2003;
Ax and Biørnenak, 2005), and its ability to link and build on enterprise resource
planning systems (Marr and Neely, 2003). In addition, Kaplan and Norton have
constantly enriched the literature through their productive series of publications
(Kaplan and Norton, 1992, 1996a, b, 2001, 2006, 2008) that offer additional evidence and
updates on the role and challenges of BSC adoption in a large number of case studies
related to public, private and non-profit organisations.
Although an extensive review regarding the evolution of the concept of the BSC is
outside the scope of this contribution, it is definitely worth noting that since its first
appearance the BSC framework has been continuously evolving, capturing and
integrating new ideas and tools. In its first theorization (Kaplan and Norton, 1992,
1996b), the BSC was primarily a tool meant for performance measurement, aimed at
integrating financial/non-financial, internal/external and leading/lagging information
in a coherent fashion. Later, Kaplan and Norton built on the potentialities of the BSC in
playing a crucial role in the strategic management process of modern companies,
helping managers to clarify and obtain consensus on strategic objectives, assisting
them in communicating the chosen strategy, and consequently aligning the efforts of
both individuals and organisational units (Kaplan and Norton, 1996a, 2001, 2006).
During the last decade, Kaplan and Norton have been constantly working on
improvements and additions to the overall BSC framework. Moreover, during this
period many authors have made further contributions highlighting areas of possible
improvements, as well as identifying methodological and operational issues to be
addressed in order to improve the BSC. One of the main areas that both the relevant
literature and Kaplan and Norton themselves identified as being critical, is related to
the identification and the quantification of causal relationships across the BSC, and to
the subsequent opportunity to use a mathematical-computer model to test and simulate
such assumptions and their impacts on strategy implementation. In this respect,
Kaplan and Norton (1996a, pp. 67-68) claimed the following:
[. . .] the Balanced Scorecard, unlike ad hoc performance measurement systems, should
articulate the ‘theory of the business’. By having an explicit set of linkages among the
Balanced Scorecard measures, managers can test the business theory’s hypothesized causal
chain of performance drivers and outcomes. Executives should establish short-term targets
that reflect their best forecast about the lags and impacts between changes in performance
drivers and the associated changes in one or more outcomes measures. [. . .] With specification
JAOC of the relationship, in both time and magnitude, between performance drivers and outcomes,
monthly and quarterly reviews become opportunities to learn about the validity of the
8,4 strategy and how well it is being executed. [. . .] Obviously, specifying such relationships is
much easier said than done.
Kaplan and Norton not only identified the presence of “cause-and-effect relationships”
as a fundamental characteristic of any BSC, but they also stressed the necessity to
530 correctly gauge the “impact” of these relationships. In other words, they recognized an
area of improvement for the BSC framework, hinting at the need for a complementary
analytical approach able to rigorously define, quantify and test the causal relationships
within any given BSC.
Such a critical issue has also been emphasized by several authors who referred to the
concept of causality in the BSC as “not extensively explained” and sometimes “unclear”
(Akkermans and Van Oorschot, 2005, p. 933). Along these lines, the BSC has been
criticized (Nørreklit, 2000, 2003) for providing poor guidance on causality, specifically
highlighting that “the relationship between measures on the BSC is ambiguously
described” (Nørreklit, 2000, p. 72) and is “assumed to be unidirectional” (Nørreklit, 2000,
p. 77). Additionally, as Neely and Bourne (2000) suggest, when a firm designs its initial
BSC the causal relationships could mainly reflect management’s subjective
understanding of the critical success factors in their business, not the organization’s
strategy. Such a shortage in the design process may subsequently lead to partial
implementation (Dinesh and Palmer, 1998), lack of alignment between strategic
objectives, divisional performance and operational/individual actions or even
implementation failures (Nørreklit, 2000, 2003; Akkermans and Van Oorschot, 2005;
Bessire and Baker, 2005).
These concerns were also clear to Kaplan and Norton (2000, 2004) who attempted to
address them with the introduction of a new tool, the Strategy Map. Compared to the
original BSC architecture, Strategy Maps aim to increase guidance on causal links and
their representation. However, as suggested by Kaplan and Norton, the need to
quantify and test cause-and-effect linkages may justify the introduction of further
improvement based on system dynamics (SD) models. In particular, they claim:
[. . .] initially, these impacts must be done subjectively and qualitatively. Eventually, however,
as more data and evidence are accumulated, organizations may be able to provide more
objectively grounded estimates of cause-and-effect relationships. At this point, the Balanced
Scorecard can be captured in a system dynamics model that provides a comprehensive,
quantified model of a business’s value creation process (Kaplan and Norton, 1996a, p. 67).
Unfortunately, despite Kaplan and Norton’s auspices, research in the field of SD applied
to BSCs has been extremely limited (Akkermans and Van Oorschot, 2005; Bianchi and
Montemaggiore, 2009; Capelo and Ferreira Dias, 2009; Barnabè, 2011). In this regard,
we firmly believe that the use of SD modeling principles would assist in positively
overcoming some limitations of the original BSC framework, particularly because they
provide a number of methodological principles and tools needed, not only to describe
and formalize the cause-and-effect relationships within a given BSC, but also to capture
the effects of strategy execution in a particular business domain. This would eventually
allow a better exploration and understanding of the causal relationships between
performance drivers and outcomes in a specific business environment. Once again, our
claims are supported by Kaplan and Norton’s view (2009). In particular, discussing
the potential future opportunities for further BSC developments, especially in the area of Reinforcing
strategy formulation and implementation, Kaplan (2010, p. 32) claims that: BSC’s
[. . .] strategy maps still represent a highly-aggregated view of causal relationships among implementation
strategic objectives. In order to make strategy maps more visually appealing to managers and
employees, we have simplified the causal relationships assumed within the strategy map
(one might even describe the generic strategy map as a “dumbed-down” representation of
causal linkages). Norton and I, both trained as electrical engineers, have been aware from the 531
outset that systems dynamics techniques could help produce a more detailed model that links
both strategic and operational objectives in a more elaborate mapping exercise. A detailed
system dynamics model would incorporate causal linkages that have estimates of magnitude
and time delay, as well as more complex feedback loops than are presently visualized in the
generic strategy map. [. . .] And the causal linkages need not be uni-dimensional. The model
could include multiple leading indicators and impacts that can be a combination of linear,
multiplicative, or even Boolean.
In light of the above reflections, within the next section we illustrate and briefly discuss
the potential of a SD approach to BSC formulation and implementation.

A brief description of computer models and the SD methodology

Computer models and simulation techniques have been developing since the early
1960s. The first applications of these techniques were often oriented towards specific
industrial problems (e.g. inventory management) or solving structured problems of
prediction, optimization and financial planning. More recently, computer models have
been used in a variety of fields, often as instruments to support strategic thinking,
group discussion and team learning. In particular, computer models and management
flight simulators are considered powerful tools for analyzing and enhancing the
understanding of systems with significant dynamic complexity, thus providing
low-cost laboratories for learning (Sterman, 2000, p. 35).
The basic steps in the development of computer simulations can be summarized as
follows (Vennix, 1990, pp. 15-16):
[. . .] in the first stage a model of the reference system is constructed. This is done by selecting
from the reference system the relevant variables to be included in the model (abstraction).
In the second stage the model is analyzed and this reveals certain conclusions (deduction).
In the third stage these conclusions are implemented in the reference system (realization and
implementation).
In general, computer models can be developed and simulated according to three main
paradigms:
(1) Discrete event simulations (DES) are process-oriented models simulated with
discrete variables and calculations.
(2) Agent-based simulations (ABS) are individual-centric, being focused on specific
“agents” with their own thread of control and active objects.
(3) SD simulations, based on the concept of feedback loops, focus on the ways in
which system structures affect system behavior, and are simulated with
continuous change.

Throughout these three paradigms, SD has been used to support decision-making when
dealing with complex, dynamic and highly competitive business domains – eventually
JAOC characterized by nonlinearities and a high level of interdependence among the key
8,4 variables. During recent decades, SD has proved its validity, being applied in a variety
of fields such as manufacturing, healthcare, business process reengineering,
environmental and natural sciences, and strategic management.
First theorized by Jay Forrester in the book Industrial Dynamics (1961), and based
on the concept of feedback and on information-feedback control theory, SD (Forrester,
532 1961, 1968; Richardson and Pugh, 1981; Sterman, 2000) can be described as:
[. . .] a perspective and a set of conceptual tools that enable us to understand the structure and
dynamics of complex systems. System Dynamics is also a rigorous modeling method that
enables us to build formal computer simulations of complex systems and use them to design
more effective policies and organizations. [. . .] Together, these tools allow us to create
management flight simulators – microworlds where space and time can be compressed and
slowed so we can experience the long-term side effects of decisions, speed learning, develop
our understanding of complex systems, and design structures and strategies for greater
success (Sterman, 2000, p. vii).
The primary role of a SD modelling intervention is to gain insight into a complex
problem and influence the thinking and actions of management teams (Forrester, 1961).
To achieve these goals and support decision-making, SD uses a number of tools that
are both “qualitative” (diagramming tools) and “quantitative” (mathematical models
and management flight simulators). Using mapping tools is particularly relevant for
developing a shared, broader understanding of the reality under investigation:
by building the maps, the modeller filters and organises knowledge from mental
models and from real data, consequently gaining and formalizing knowledge about
complex systems.
The most common maps used in SD are “causal loop diagrams” (CLDs) and “stock
and flow diagrams” (SFDs). A CLD consists of variables connected by arrows denoting
their causal influences. Moreover, each causal link is assigned a polarity, either positive
(þ ) or negative (2 ) in order to clarify how the dependent variable changes as the
independent variable changes. The polarities describe the structure of the system and
not the behaviour of such variables, i.e. they describe what would happen “if” there were
a change. Notably, CLDs do not distinguish between stocks and flows (the accumulation
or resources in a system and the rates of change that alter those resources). This issue is
addressed using the previously mentioned maps referred to as SFDs, which have been
developed for taking into consideration that any resource (tangible/intangible;
financial/non-financial) within a system may be represented as a stock (a state
variable) that characterizes the state of the system and that generates the information
upon which decisions and action are based. The only way to influence stocks is through
their inflows and outflows (Dierickx and Cool, 1989). Thus, these maps are particularly
useful since they capture the structure of a system, identify the key resources within that
system and reveal the key leverage points. Moreover, these maps fully incorporate the
basic assumptions and principles of the resource based view of the firm approach
(Wernerfelt, 1984; Barney, 1991).
It is important to note that CLDs and SFDs not only describe the causal linkages
among the key variables, but also allow the identification of the interlinked
substructures, referred to as “feedback loops” and even more complex structures,
known as “systemic archetypes” (Senge, 1990; Wolstenholme, 2004). The SD approach
to complex problems focuses on feedback processes. According to Richardson and
Pugh (1981, p. 15) in the following quotation, it takes the philosophical position that Reinforcing
feedback structures are responsible for the changes we experience over time: BSC’s
“The premise is that dynamic behaviour is a consequence of system structure”.
With this in mind, mapping tools, on one hand, can contribute to the investigation implementation
and understanding of the dynamics of complex systems, while on the other hand they
are not sufficient for inferring all the possible dynamics (and their magnitude) arising
from the interaction of those sub-structures, including the effects generated by 533
time-delays and nonlinearities. For this reason, a SD intervention also requires the
development of a “quantified” computer model.
Building and using the computer model facilitates learning about complex
dynamics and developing managerial understanding and skills due to the fact that the
SD model is a realistic, although simplified, representation of the business domain
under analysis, the computer model refers to the business system and the
decision-making policy. In fact, any SD model:
.
contains a representation of the physical world relevant to the problem under
analysis; and
.
has to portray the behaviour of the actors in the system and consequently
embeds their decision-making rules.

In principle, a SD intervention is usually structured as follows:

.
articulate the problem that needs to be addressed;
.
formulate a dynamic hypothesis or theory about the causes of the problem;
.
build the simulation model to test the dynamic hypothesis;
.
test the model; and
.
design and evaluate policies.
This process leads to a mathematical model that represents the real system under
analysis (and fits with historical data), and is subsequently used as a future-oriented
tool (especially in the form of a “management flight simulator”) to explore an entire
range of feasible options, supporting policy analysis and scenario planning, “and”
furthermore is also used for developing managers’ and employees’ mental models and
strategic thinking skills (Senge, 1990; Vennix, 1996).
In summary, at the core of SD there are four key concepts. First, systems are
considered as a whole. Second, emphasis is placed on the internal structure of the
system as the cause of its dynamic behavior (here the concept of feedback is a central
notion). Third, rather than considering relationships in a model as being linear, for the
sake of simplicity emphasis is placed on the non-linear character of many relationships.
Fourth, process delays (e.g. information delays) in social systems are considered
important (Vennix, 1990, p. 20).
Following the description of computer models and of the SD methodology presented
in this section, the paper concludes with several reflections on the possible contribution
of SD in the design and implementation of the BSC.

The contribution of SD to the design and implementing of the BSC

The methodological principles and the operational tools that we have illustrated in the
previous section can support the development of a comprehensive strategic
JAOC management approach centred on the BSC architecture. In particular, the SD
8,4 methodology can contribute to the BSC design and implementation by addressing the
following important issues (see Table I for a summary), in other words, it:
. clarifies the concept of causality in BSCs, visualizing causal linkages and their
polarities in light of the use of specific mapping tools (e.g. CLDs – Senge, 1990);
.
separates causes and effects in time through the notion of time-delays and their
534 mathematical representation and takes into account the presence and the effect of
non-linearities (Sterman, 2000);

Issue Traditional BSC approach Contribution of SD to the BSC

Cause-and-effect Mainly visualized in strategy Causal linkages are explicitly

relationships maps
Very often assumed to be
unidirectional
Time-delays Taken into account when
differentiating between lagging
and leading indicators
No explicit representation or
formalization is provided
Non-linearity Non-linearity affecting specific
variables is not a primary issue
Feedback loops Not explicitly identified or
considered
Validation No specific procedure to validate
the underlying assumptions and
test their coherence
Simulation and Not performed in traditional
Table I. scenario analysis BSCs
The contribution of the
SD methodology in
designing and
implementing the BSC
visualized in CLDs, SFDs
Each link is assigned a specific
polarity
Bi-directionality is allowed
Causal linkages are mathematically
formalized in computer models
Explicit visual representation in
CLDs, SFDs
Mathematically formalized in
computer models according to their
typology
Their effect is tested during the
simulation phase
Considered relevant when dealing
with specific issues or variables
Mathematically formalized in
computer models
The effect of non-linearity is
analysed during the simulation
phase
Feedback loops (and their typology)
are explicitly identified
Structure-behaviour relationship is
analysed and explained
Specific validation tests are
performed to assess the coherence of
assumptions and the validity of the
model
Validation tests include: structure
validity and behavior validity tests
The model has to fit with historical
data
The mathematical model allows us to
perform simulations
When converted into a management
flight simulator, it is recommended
and easy to perform scenario
analysis and test what if hypotheses
 .
provides a better representation of the structure of the system under analysis Reinforcing
applying the concept of the feedback loop (Sterman, 2000), eventually combining BSC’s
key performance indicators and factors with “key success loops” (Kim, 1997);
implementation
.
identifies, formalizes and analyses the systemic structure of the specific business
environment, in terms of the relationship between structure and behaviour
(Davidsen, 2000);
.
filters performance measures and parameters in order to select the most relevant
535
to be included in the BSC (Akkermans and Van Oorschot, 2005);
.
relies on mechanisms for rigorous testing and validation (Barlas, 1996) of
assumptions, relationships, parameter choices and strategy development; and
.
answers “what if” questions and performs policy analysis and scenario testing
(Morecroft, 2007).

Additionally, the use of SD can also provide some additional benefits, allowing to:
.
Elicit mental models and share knowledge among all the people involved in the
modelling process (Ford and Sterman, 1998).
.
Expand at will the boundaries of the analysis, eventually including a wider range
of stakeholders’ and their rivals’ policies (Warren, 2002; Bianchi and
Montemaggiore, 2008).
.
Better link strategy at the operational level, since a SD modelling intervention
begins by identifying the main operational flows and the basic resources in a
system and concludes with a comprehensive analysis of the policies developed
by managers and their effects through quantification in the model (Morecroft,
2007); this also permits the identification of potential side-effects of management
policies (Forrester, 1971) and make substantial improvements in corporate
performance (Warren, 2008).
. Sustain individual and organizational learning and support improvements in
mental models, thanks to the use of hypothetical scenarios (Capelo and Ferreira
Dias, 2009).

Taking into consideration the previous statements and the information we have
provided in this paper, it is possible to summarize the contribution of this article as
follows. We firmly believe that the methodological principles and the modelling tools
provided by SD methodology can greatly contribute to strategy formulation and
implementation in a variety of business domains. In particular, when these principles
and tools are used with the specific aim of designing and implementing a “dynamic
strategy map” and a “dynamic BSC”, the development of a detailed causal relationship
model, which links strategic and operational objectives in a more accurate and effective
way, becomes possible.
In doing this, both mapping (qualitative) and modeling (quantitative) tools provided
by SD can greatly contribute to a better representation of the causal structure of the
business domain under investigation and facilitate policy analysis and scenario
analysis in reference to a specific quantified, simulation model.
With this objective in mind, this short article seeks to provide a brief review of the
literature that has animated the debate on the BSC’s ability to translate strategy into
JAOC action by linking performance drivers and outcomes. Furthermore, we have also pointed
8,4 out that the literature has identified the necessity to further define the concept of
causality within the overall BSC framework, in the direction of relying on specific
quantitative tools needed to translate the BSC into a quantified model. Moreover,
we have highlighted how Kaplan and Norton themselves have acknowledged the
identification and the quantification of causal relationships across the BSC as critical
536 issues to be further developed in future research, above all, by taking into consideration
the use of SD methodology. Therefore, by building on the existing literature on SD,
we have subsequently illustrated the main characteristics of this methodology and, in
particular, we have stressed the potentialities of using SD to more broadly explore the
concept of causality in BSCs and, consequently, better understand the links between
performance drivers and outcomes.

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Further reading
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Review, Vol. 15 No. 4, pp. 379-401.

Corresponding author
Cristiano Busco can be contacted at: Cristiano.Busco@nuigalway.ie

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