Balanced Scorecard

The Balanced Scorecard addresses an ever-increasing accounting problem, measuring current companies using old accounting techniques. The book explains that we are now in the information age and the old accounting from the industrial age doesnt properly reflect or measure a company. The theory is that there are many other intangible assets that a company possesses that are not reflected on the balance sheet but do contribute greatly to the performance of the company. The accounting from the industrial age focuses solely on financial performance neglecting a growing contributor to financial health, the intangible assets. The Balanced Scorecard describes a method in which a company can measure and even manage using these intangible assets. A Balanced Scorecard involves developing one strategy or mission for the company. The idea is to incorporate every aspect of the company that will contribute to achieving this mission. In the process, a company gains a new understanding of their business and a new way of managing it. Chapter One Measurement and Management in the Information Age Imagine entering the cockpit of a modern airplane and seeing only a single instrument there. This is the first sentence of the book, and it captures the mood beautifully. We would never consider operating machinery or embarking on an endeavor with the knowledge of only one of its factors; so why should operating a business be any different? Thats where the Balanced Scorecard comes into play. The Balanced Scorecard measures a companys performance through a balance of four perspectives: financial, customers, internal business processes, and learning and growth. These measurements include the traditional financial measurement of

past transactions, but they also give a measurement strategy for future operations. The business environment has changed from industrial based to an information based one. This change has brought the focus from tangible assets to intangible ones. No longer can operations be evaluated at a later time, as it is done now through the analysis of financial data. Operations must be conducted in real-time, which means they must operate without boundaries of intercompany segment or even the supply chain. Traditional methods of measuring performance dont work today. The Balanced Scorecard is designed to take a balanced look at all of the companys business factors and formulate performance measures accordingly. The goal is not to have a new measurement system; the goal is, in the end, to have a management system. (See a graphic illustration of the Balanced Scorecard framework adapted from Chapter 1). Chapter Two Why Does Business Need a Balanced Scorecard In todays information environment, a company can no longer be measured solely on past performance. Although past performance is usually a good indicator of future results, it cannot be the sole base for measurement. The financial perspective is critical to the success of the Balanced Scorecard. It accurately measures how well improvements in the other three perspectives have worked. The Balanced Scorecard is needed because there are limitations on financial measurement of business performance. By its very nature, financial measurement is not forward-looking and is exclusionary to non-financial measures. To better gage a companys performance, one must balance all areas of the business. The Balanced Scorecard helps form a strategy for this implementation, but it is not designed to be used as a blueprint because every company is different. Companies have different goals, different customers, and different industries. This is precisely

the reason why the Balanced Scorecard is needed to help form one strategy for the business and bring all areas of that business to work in harmony for the achievement of that one goal. Chapter Three Financial Perspective This is the most important perspective of the Balanced Scorecard since it is the measurement basis of all the others. Financial objectives should be linked to the one corporate strategy with a strong emphasis on the cause-and-effect relationships that every change can have. Financial objectives are used to represent the long-term goal of an organization. The drivers should be customized to the specific industry in which the company resides, the competitive environment, and the strategy of the business unit. The business unit doesnt necessarily need to be the overall company. In many cases, it is far easier to install a Balanced Scorecard to the identifiable units, or strategic business units, that can identify unique customers, strategies, and goals, then work upwards toward a consolidation of all of the scorecards. In any case, the overall company strategy should traverse through all four perspectives, thereby linking all towards a common goal. Often times, one change in the financial perspective will have changes in the other areas because of the cause-and-effect relationship. That is the reason why the overall strategy must be consistent throughout the Balanced Scorecard implementation and the basis for all changes. Only with this in place, will a Balanced Scorecard be effective. Chapter Four Customer Perspective The customer perspective is designed solely to measure how well the company is meeting the demands of the customer and its market segment. It is most critical to

the success of a company, but it is overlooked by traditional measures. The goal is to supply the customers with what they want. By measuring customer satisfaction, loyalty, retention, acquisition, and profitability, a company can excel in their market segment and plan for the future. The one problem with these measures is that they are lagging measures, meaning that the affect of any change will only be measurable after the event that caused them has occurred. The solution is the management of three classes of attributes: 1. Product and service attributes: functionality, quality, and price. 2. Customer relationships: quality of purchasing experience and personal relationships 3. Image and reputation. Managing across these three classes will provide value for a companys customers and help stabilize the lagging measures. A company must also be aware that in todays environment, they must provide, first and foremost, a quality product. Without this, there will not be any customers to worry about, and customers are now demanding quality, timely service, whether it is in the delivery of the product or in customer service following the sale. Not to be forgotten is the price of the product. The other two factors are more important than the price, but the price plays a pivotal role in the decision of the customer to contract with a company. These are three of the most important factors that need to be considered in formulating a customer perspective, but the bottom line is the customers satisfaction. Chapter Five Internal-Business-Process Perspective

This perspective is usually formulated after the financial and customers perspectives. This enables a business to focus on internal processes to deliver the goals of the customer and shareholder. The approach should focus on finding completely different solutions rather than improving existing ones. The idea is to go back to basics and add one layer at a time. The Balanced Scorecard provides a generic model that can be customized for each company. It has a three-step process: innovation, operation, and post sale service. The first step involves identifying the market and creating the product. In the second step the product is constructed and delivered to the customer. The final step, and the most important, is service to the customer. These three steps focus on specific external wants or needs of customers and the processes in which to deliver them. This contrasts conventional methods that focus on monitoring and improving costs, quality, and production time of existing processes. The internal-business-process perspective sets itself apart from other strategies by focusing on improving internal methods to achieve the goals set forth by the one strategy of the company. This involves thinking outside-of-the-box. Chapter Six Learning and Growth Perspective The last of the four perspectives is the one that cements all the others. The learning and growth perspective is characterized into three categories: 1. Employee capabilities. 2. Information systems capabilities. 3. Motivation, empowerment, and alignment.

Employees are the key to growth of innovations. Resources must be allocated in order to educate them on the processes of the company and the mission of the company. This is often overlooked and is tossed to the wayside when short-term goals need to be met, but this can contribute greatly to the success of an organization. This education must be coupled with the motivation to improve. This often starts by granting more autonomy to the employee. This allows the employee to suggest or make changes in the organization, but the glue that holds all of this together is the sharing of information. An innovation on one side of the plant might work well on the other side, but only by sharing the information can this knowledge be conveyed efficiently. All of these working together can propel a company into the future by giving the employees a sense of pride that they contributed to the organization, and that contribution was appreciated. This is perspective that enables a company to look forward for new ideas and solutions to problems not yet encountered. Chapter Seven Linking Balanced Scorecard Measures to Your Strategy The four perspective of the Balanced Scorecard must be held together, dependently working toward the overall corporate strategy. Without this, the four perspectives may work against each other creating more problems. Linking the scorecard to a companys strategy involves three principles: 1. Cause-and-effect relationships. 2. Performance drivers. 3. Linkage to financials.

These three, although separate, must be considered together when formulating a Balanced Scorecard. It has been proven before that improving one, such as a performance driver, that does not improve the financials, does little for the company. Another thing to consider when linking the Balanced Scorecard to the strategy is the number of measures for the four perspectives. Although as many as four to seven measures can be made for each perspective, it is crucial to view these as instrumentation for a single strategy. The number of measurements is irrelevant to the achievement of the one strategy. It is important to view all together with equal weight. Chapter Eight Structure and Strategy The structure and strategy of an organization must be reflected in the Balanced Scorecard. It is possible that an organization consists of strategic business units that have their own scorecard, and these individual scorecards cannot be combined into one larger scorecard. In that instance, overall performance of the organization usually provides the measurement of how well the individual scorecards are doing. It is best to try and find a common theme or strategy that can traverse all units of business. When this occurs, the role of the larger scorecard would be to police the individual scorecards and measure how effective they are in achieving the common strategy. The Balanced Scorecard is designed to bring together a company to focus on the structure of the company and to achieve the overall goal. This chapter includes a section on government and not-for-profit enterprises. See Martin's summary for an illustration of the Federal Procurement system scorecard.

Chapter Nine Achieving Strategic Alignment: From Top to Bottom Implementing a companys strategy, or mission, begins with educating the people that must execute it. The Balanced Scorecard empowers all employees; so all employees must be educated on what the strategy is and the method in which to achieve it. Sharing of the strategy should also include key outside constituents. This educates all parties involved with the process and enables a smoother flow to the business. All of this can be achieved through communication and education programs, goal setting programs, and a reward system. These programs help clarify the strategy, set goals for achievement, and reward motivated employees. The goal of all of these is to align all parties involved with the companys strategy. This is the first and most crucial step in implementing the Balanced Scorecard. Chapter Ten Targets, Resource Allocation, Initiatives, and Budgets Organizing the organization toward a common goal is critical, but it must be accompanied with tangible goals of the business. The business must also align its physical and financial resources with the strategy. There are four steps in which to achieve a long-range strategic plan and operational budget process. The first is to set stretch targets. Ambitious targets must be set for measures that all employees can accept. The second step is to identify and rationalize strategic initiatives. The idea here is to align initiatives to the scorecard objectives. The third is to identify critical cross-business objectives. This is designed to bring into alignment initiatives that involve other business units or the corporate parent to the scorecard objectives. Finally, the fourth step involves linking the three to five year plan to budgetary performance in order to compare the performance to the strategic plan.

These steps are critical in translating strategic objectives into actual plans. They allow the vision of the Balanced Scorecard to become a reality. Chapter Eleven Feedback and The Strategic Learning Process This chapter focuses on the idea of continuous improvement. Although the authors identify the strategy as double-loop learning, the idea is basically the same. Double-loop learning involves the ability of the employee, other than top management, to implement or suggest change. This allows feedback from every step of the process to filter into the development of new ideas. With this in place, the Balanced Scorecard becomes more of a strategic management system, instead of a measurement system. This is all made possible through a shared understanding of the one strategy, and the autonomy of employees to offer change. The whole organization ends up working together, which is the goal of the Balanced Scorecard.
Chapter Twelve Implementing a Balanced Scorecard Management Program

There are many reasons why a company searches to implement a Balanced Scorecard, but the most important concept to understand is that the Balanced Scorecard is a management not measurement tool.* Implementing a Balanced Scorecard as a measurement tool may work marginally, but it will not achieve the harmony for the business in the long run. The major focus of the Balanced Scorecard is to organize the business toward a common goal. The process of developing a good Balanced Scorecard gives an organization, usually for the first time, a clear picture of the future and a path for getting there. Every step of the way provides insight on how to improve the business process of achieving the one strategy.

____________________________________________ * According to Kaplan and Norton, "This distinction between a measurement and a management system is subtle but crucial. The measurement system should be only a means to achieve an even more important goal - a strategic management system that helps executives implement and gain feedback about their strategy."

The Balanced Scorecard concept involves creating a set of measurements for four strategic perspectives. These perspectives include: 1) financial, 2) customer, 3)

internal business process and 4) learning and growth. The idea is to develop between four and seven measurements for each perspective. Two graphic illustrations appear below to help convey the idea.

The measurements should be focused on a single strategy and be linked, consistent and mutually reinforcing. Some generic measurements are presented in the table below. Perspective
Financial

Generic Measurements
Return of Capital Employed, Economic value added, Sales growth, Cash flow

Customer

Customer satisfaction, retention, acquisition, profitability, market share

Internal business process

Includes measurements along the internal value chain for: Innovation - measures of how well the company identifies the customers future needs. Operations - measures of quality, cycle time, and costs. Post sales service - measures for warranty, repair and treatment of defects and returns.

Learning and growth

Includes measurements for: People - employee retention, training, skills, morale. Systems - measure of availability of critical real time information needed for front line employees.

2. What is a Strategy? A strategy, according to Kaplan and his coauthors, is a set of hypotheses about cause and effect relationships. Defining an organization's strategy involves: 1. Defining the market the organization plans to serve - local, national, global.

2. Defining the customer. Broad or narrow, age group, income level etc.

3. Identifying the critical internal processes needed to capture and satisfy those customers.

4. Determining the individual and organizational capabilities required in the other perspectives. For more on strategy see MAAW's Strategy section.

3. An Example related to Cause and Effect The chain of cause and effect relationships may start with improvements in the area of learning and growth. These improvements tend to cause improvements in business processes, which in turn cause improvements in customer satisfaction and subsequently cause improvements in sales and the financial measurements of profitability. The direction of the cause and effect relationships is emphasized below.

Learning and growth Internal business process Customer Financial

For a more specific example showing cause an effect, see the Sears EmployeeCustomer-Profit Chain illustration below.

4. What do you try to Balance? An important part of the balanced scorecard concept is the emphasis on establishing a balance between four types of measurements. These types of measurements include:

1) Short term and Long term,

2) External (for shareholders and customers) and Internal (for critical business

processes, innovation, and learning and growth),

3) Leading indicators (outcomes desired and performance drivers) and Lagging indicators (outcomes),

4) Objective measures (e.g., financial) and Subjective measures (e.g., many non-financial). See the Exhibit below (item 7) for the idea.

5. How Should the BSC Be Used? Kaplan and Norton also emphasize that "the balanced scorecard should be used as a communication, informing, and learning system, not as a controlling system."

6. Diagnostic Versus Strategic Measurements Kaplan and Norton make a distinction between diagnostic measurements and strategic measurements. Diagnostic measurements monitor whether something is in control. A statistical process control chart with upper and lower limits is a good example of a diagnostic type system that can be used for controlling a process. Strategic measurements define a strategy for competitive excellence and future success. The balanced scorecard is a strategic measurement system. 7. Sample Generic Measurements

BALANCED SCORECARD PERSPECTIVES & SAMPLE MEASUREMENTS*

Short Term Generic Perspective Financial Measurement ROCE, EVA, Sales growth Customer Profitability, Market Share, Retention, Loyalty, Satisfaction Business Process Cost, Productivity, Cycle time, Quality Organizational Learning Employee retention, Technology, Climate for action or Culture. Non-financial Long term Leading Internal Non-financial Non-financial Long term Long term Lead & Lagging Leading Internal Internal Financial vs. Non-financial Financial Financial Financial Financial Non-financial Non-financial Non-financial Non-financial Financial Non-financial Non-financial Non-financial vs. Long Term Short term Short term Long term Short term Long term Short term Short term Short term Short term Short term Short term Short term Leading vs. Lagging Lagging Lagging Lead & Lagging Lead & Lagging Lead & Lagging Lead & Lagging Lead & Lagging Lead & Lagging Lead & Lagging Lead & Lagging Lead & Lagging Lead & Lagging Internal vs. External External External External External** External External External External Internal Internal Internal Internal

*The objective is to balance the measurements associated with each perspective, all focused on a single strategy. These measurements should reinforce each other. Most of the measurements are both leading (drivers) and lagging (outcomes). The direction of the cause and effect relationships is from the bottom of the exhibit to the top.

** Many customers are internal (e.g., the next operation downstream), but the focus here is on the external customer.

8. Sample Generic Scorecard

Perspectives Customer Goals Objectives Measurements Average lead time.* Percentage of deliveries on time. Number of customer complaints.

Continuously improve Decrease lead time.* customer satisfaction. Increase on time delivery. Reduce customer complaints.

Internal Business

Continuously improve Decrease cycle time** Average cycle time.** business processes. Increase quality. Number of defects and number of items reworked. Increase productivity. Average output per employee.

Innovation & Learning

Continuously develop and deliver new innovative products & services.

Increase sales of new products and services

Percentage of sales obtained from new products & services.

Reduce development time.

Average time from initial design to production.

Financial

Continuously improve Decrease costs. financial performance. Increase sales growth Increase market share

Average unit costs. Growth rate in sales. Company's market share.

Increase return on

Return on investment.

investment. *Lead time is the time from order receipt to delivery. ** Cycle time is the time from the start of a process to completion.

9. Sears Causal Model Another example based on a causal model developed at Sears.

This graphic illustration was adapted from an illustration in Rucci, Kirn and Quinn (1998).

10. Federal Procurement Scorecard An example adapted from an illustration on page 182 of Kaplan & Norton's 1996 book (The Balanced Scorecard) is provided below. (Summary).

11. ECI's Balanced Scorecard An example based on an electronics company appears below based on an illustration in Kaplan & Norton 1992.

ECI 's Balanced Scorecard Perspectives Questions Goals New products. How do Customer customers see us? Preferred supplier. Customer partnership. Measurements Percent of sales from new products. On-time delivery as defined by the customer. Share of key account's purchases. Number of cooperative engineering efforts. Manufacturing geometry versus the competition. Cycle time, Unit cost and Yield. Silicon efficiency and Engineering efficiency. Actual introduction schedule versus planned introduction. Time to develop the next generation. Process time to maturity. Percent of products that equal 80% of sales. New product introduction versus the competition. Cash flow. Quarterly sales growth and operating income by division. Increased market share and

Responsive supply.

Technology capability. Manufacturing excellence. Internal business What must we excel at? Design productivity.

New product introduction.

Technology leadership. Can we continue Manufacturing learning. to improve & create value? Product focus.

Innovation & learning

Time to market. Survive. Financial How do we look to shareholders? Succeed. Prosper.

Return on Equity.

12. United Methodist Publishing House Balanced Scorecard An example of a scorecard developed for a non-profit organization is illustrated below based on a description provided in an article by Forsythe, Bunch & Burton 1999.
United Methodist Publishing House Balanced Scorecard Perspective Goals Measurements Increase in sales growth in relation to target. Produce revenues sufficient to cover Achieve corporate earnings Financial expenses and provide reserves for the future. percentage in relation to target. Achieve ROI by each market business unit (profit center) in relation to target. Maintain ability to attract and retain Customer satisfaction based on customers. Customer On time product development and delivery. Maintain an effective and efficient distribution system. Internal Process Produce high quality, cost effective products. Maintain internal process effectiveness. Organization Maintain infrastructure needed for Measures not specifically defined. survey questionnaire.

Measure of error rates on shipments.

Measures not specifically defined.

Measures not specifically defined. Measures related to success in

Innovation and Learning

long-term growth and improvement. producing new products, projects and services. Maintain staff competence. Goals related to learning - not specifically stated. Measures not specifically defined. Measures of learning not specifically defined.

13. Framework for an IS Scorecard The following graphic provides a framework for developing a scorecard for the information systems function. For an explanation see the summary of Martinsons, Davison & Tse.

14. Criticisms of the Balanced Scorecard framework and how it is used Ittner and Larcker argue that most companies have apparently adopted boilerplate versions of nonfinancial measurement frameworks such as Kaplan and Norton's Balanced Scorecard, but seldom establish the cause and effect linkages between the measurements and desired outcomes. This allows self-serving managers to chose and manipulate measurements solely to enhance their own earnings and bonuses. They discuss four mistakes that companies make when trying to measure nonfinancial performance and provide six steps to follow to do it right (Ittner & Larcker 2003 summary).

However, the BSC is more controversial than indicated by Ittner & Larcker. Some researchers have been very critical of the balanced scorecard. For example, Norreklit builds a case against the balanced scorecard by showing that it is not based on sound or logical arguments. Instead, according to Norreklit, the BSC text (i.e., the 1996 book) appeals mainly to emotion and the authority of Kaplan & Harvard and is a conceptually unclear model that relies on attractive adjectives and extensive use of analogies and unrestrained metaphors. It is impressionistic and closely resembles propaganda with heavily loaded words, metaphors, irony, exaggerations, incoherence and a climax. (Norreklit summary). Another criticism relates to a concept developed by Reilly and Reilly referred to as "a measure network". From their viewpoint the balanced scorecard is incomplete, and the linkages among measurements and between perspectives is not explicit. The use of a measure network is suggested as a better approach. (Reilly & Reilly summary). 15. Strategy Graphics: Maps, Canvases & Value Curves Strategy Maps Kaplan and Norton extend the concepts related to the Balanced Scorecard in The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. (Summary). Strategy Maps are combined with Balanced Scorecards to provide a new framework for describing and implementing strategy. According to Kaplan and Norton, a strategy map is "a logical comprehensive architecture for describing strategy. It provides the foundation for designing a Balanced Scorecard that is the cornerstone of a strategic management system" (p. 10). Strategy Maps reveal the cause-and-effect linkages needed to transform intangible assets into tangible financial outcomes. Strategy Maps, if designed correctly, may provide the solution to the problems discussed by Ittner & Larcker mentioned in the

section above. An adaptation of the Balanced Scorecard Generic Strategy Map appears is illustrated below.

Strategy Canvases and Value Curves

The strategy canvases illustrated in several articles by Kim & Mauborgne (1997, 1999 & 2002) might provide a better way to begin analyzing a company's strategy. A strategy canvas shows graphically how an organization's strategy (represented by the company's value curve) is different from it's competitors. The Southwest Airlines strategy canvas below conveys the idea. According Kim & Mauborgne, a value

innovator also needs a strong tag line, e.g., for Southwest, "The speed of the plane at the price of the car - whenever you need it".

Perhaps, starting the strategy analysis and development process with strategy canvases and value curves would provide the basis for more effective strategy maps and balanced scorecards. Other Related Concepts and Articles Relationship Between Strategy, PLC and BSC

Hayes and Wheelwright discuss the connection between a companies process life cycle and product life cycle and how that relationship relates to strategy. The insights provided by these authors has some important implications for strategy development and the design of a balanced scorecard. See the two Hayes & Wheelwright summaries in the reference section below for more information.

The Business Ecosystem The business ecosystem described by Iansiti and Levien provides another interesting concept related to developing strategy. Briefly the main idea is that a company needs to define the business environment or ecosystem in which it operates, and recognize the company's position within the system, to help determine which strategy to follow.