The Balanced Scorecard

1. The Balanced Scorecard translates strategy into action

The Balanced Scorecard translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system.

Strategy execution tool. The Balanced Scorecard (BSC) is not just a measurement system, but a management system that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes to continuously improve strategic performance and results.

Four perspectives. The BSC suggests viewing the organization from four perspectives:

• Financial
• Customer
• Internal Business Processes
• Learning and Growth

These perspectives provide a balanced view of both financial and operational measures, giving managers a comprehensive view of the business. By forcing senior managers to consider all important operational measures together, the BSC lets them see whether improvement in one area may have been achieved at the expense of another.

2. Financial measures alone are insufficient for modern businesses

The financial-reporting process remains anchored to an accounting model developed centuries ago for an environment of arm's-length transactions between independent entities.

Limitations of financial metrics. Traditional financial accounting measures like return-on-investment and earnings-per-share can give misleading signals for continuous improvement and innovation in today's competitive environment. These metrics worked well for the industrial era, but are out of step with the skills and competencies companies are trying to master today.

Intangible assets. Financial measures are inadequate for guiding and evaluating organizations' trajectories through competitive environments. They are lagging indicators that fail to capture much of the value that has been created or destroyed by managers' actions in the most recent accounting period. The BSC introduces a more balanced approach by also measuring intangible assets such as:

• Customer relationships
• Innovative products and services
• High-quality and responsive operating processes
• Employee skills and motivation
• Information technology and databases

3. Customer perspective aligns business with target markets

Companies should want more than satisfied and happy customers; they should want profitable customers.

Customer-centric strategy. The customer perspective enables companies to align their core customer outcome measures—satisfaction, loyalty, retention, acquisition, and profitability—to targeted customers and market segments. It also allows them to identify and measure the value propositions they will deliver to these segments.

Key measures. Some typical customer perspective measures include:

• Market share
• Customer acquisition rates
• Customer retention
• Customer satisfaction
• Customer profitability

Organizations must identify the customer and market segments in which they choose to compete. They then define measures that capture the value propositions the company will deliver to these target segments. The value proposition is the key concept for understanding the drivers of the core measurements of satisfaction, acquisition, retention, and market share.

4. Internal processes must support customer and financial goals

The BSC highlights those processes that are most critical for achieving breakthrough performance for customers and shareholders.

Process improvement focus. The internal business process perspective identifies the critical internal processes in which the organization must excel to implement its strategy. These processes enable the business unit to deliver the value propositions that will attract and retain customers in targeted market segments and satisfy shareholder expectations of excellent financial returns.

Value chain approach. The BSC approach incorporates both short-wave (operational) and long-wave (innovative) processes into the internal-business-process perspective. A complete internal-process value chain might include:

1. Innovation process (creating products/services)
2. Operations process (producing and delivering)
3. Postsale service process (servicing the customer)

This approach enables companies to identify entirely new internal processes for meeting customer and financial objectives, rather than just focusing on incremental improvements to existing activities.

5. Learning and growth drive long-term success

The Balanced Scorecard stresses the importance of investing for the future, and not just in traditional areas for investment, such as new equipment and new product research and development.

Future-focused perspective. The learning and growth perspective identifies the infrastructure that the organization must build to create long-term growth and improvement. This perspective is particularly important because it addresses the human, informational, and organizational capital required to support the critical internal processes.

Key components. The three principal categories for the learning and growth perspective are:

1. Employee capabilities
2. Information systems capabilities
3. Motivation, empowerment, and alignment

Organizations must invest in reskilling employees, enhancing information systems, and aligning organizational procedures and routines. Measures might include employee satisfaction, retention, training, and skills, along with the capacity of information systems and the degree of individual and organizational alignment with strategic goals.

6. Strategy maps visualize cause-and-effect relationships

Every measure selected for a Balanced Scorecard should be an element in a chain of cause-and-effect relationships that communicates the meaning of the business unit's strategy to the organization.

Visual strategy representation. Strategy maps provide a visual representation of an organization's critical objectives and the crucial relationships among them that drive organizational performance. They show the cause-and-effect links by which specific improvements create desired outcomes.

Linking perspectives. A strategy map illustrates how intangible assets are transformed into tangible customer and financial outcomes. It provides executives with a framework for describing and managing strategy in a knowledge economy. A typical map might show:

• How employee learning leads to improved internal processes
• How better processes result in higher customer satisfaction
• How satisfied customers drive increased financial returns

By explicating these cause-and-effect relationships, strategy maps allow organizations to identify the key internal processes that drive strategic success with customers and shareholders.

7. Scorecards cascade throughout the organization

The real power of the Balanced Scorecard occurs when it is transformed from a measurement system to a management system.

Organizational alignment. To be effective, the BSC must be cascaded to all organizational levels. This process of developing scorecards at group, team, and individual levels creates alignment and helps everyone understand how their day-to-day activities contribute to the company's strategic goals.

Communication tool. Cascading the scorecard:

• Communicates strategy to all employees
• Helps departments and individuals align their goals with the strategy
• Links rewards to performance measures
• Provides a basis for compensation and career development

The process of cascading scorecards throughout the organization helps create a shared understanding of the company's vision and strategy, aligning everyone's efforts towards common goals.

8. Link scorecard to planning and budgeting processes

Managers should use their Balanced Scorecard to implement an integrated strategy and budgeting process.

Strategic resource allocation. The BSC should be integrated with the organization's planning and budgeting processes to align resource allocation with strategic priorities. This linkage ensures that budgets support strategy and that companies fund strategic initiatives.

Key steps in this process include:

1. Setting stretch targets for scorecard measures
2. Identifying and rationalizing strategic initiatives
3. Identifying cross-business initiatives
4. Linking to annual resource allocation and budgets

By tying the scorecard to resource allocation, organizations can focus their investments, initiatives, and actions on accomplishing strategic goals. This process helps break down functional silos and promotes collaboration towards shared objectives.

9. Use the scorecard for strategic learning and adaptation

The Balanced Scorecard enables managers to monitor and adjust the implementation of their strategy, and, if necessary, to make fundamental changes in the strategy itself.

Double-loop learning. The BSC facilitates organizational learning at the executive level by enabling managers to monitor and adjust strategy implementation. It provides feedback about whether the planned strategy remains viable in light of current conditions.

Components of strategic learning:

• Shared strategic framework (the scorecard itself)
• Strategic feedback process
• Team problem-solving process

Regular strategy review meetings using the scorecard allow executives to assess whether their strategy is working as expected and to make course corrections as needed. This process of hypothesis testing and adaptation is fundamental to implementing business strategy in fast-changing competitive environments.

10. Implementing a scorecard requires cultural change

The goal of a scorecard project is not to develop a new set of measures. Measurement—how we describe results and targets—is indeed a powerful motivational and evaluation tool. But the measurement framework in the Balanced Scorecard should be deployed to develop a new management system.

Transformational tool. Implementing a BSC is not just about introducing new measures—it's about fundamentally changing how the organization is managed. It requires shifting from a financial-centric, command-and-control culture to one focused on strategy and vision.

Key cultural changes:

• Moving from short-term to long-term thinking
• Balancing financial and non-financial indicators
• Focusing on leading as well as lagging measures
• Encouraging cross-functional collaboration
• Promoting open communication about strategy

Successful implementation requires strong leadership, clear communication, and a phased approach that allows the organization to adapt over time. The BSC should be seen as a cornerstone of a new strategic management system, not just an improved measurement system.

Last updated: October 19, 2024