Kaplan, R. S. and D. P. Norton. 1996. The Balanced Scorecard: Translating Strategy into Action Boston: Harvard Business School Press.
Summary by Chris Hourigan
Master of Accountancy Program
University of South Florida, Fall 2002
Balanced Scorecard Main Page | Performance Measures Main Page | Strategy Main Page
“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 doesn’t 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? That’s where the Balanced Scorecard comes into play. The Balanced Scorecard measures a company’s 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 don’t work today. The Balanced Scorecard is designed to take a balanced look at all of the
company’s 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).
(See a graphic illustration of the Balanced Scorecard framework adapted from Chapter 1).
Chapter Two – Why Does Business Need a Balanced Scorecard
In today’s 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 company’s 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 doesn’t
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.
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:
and service attributes: functionality, quality, and price.
relationships: quality of purchasing experience and personal relationships
across these three classes will provide value for a company’s customers and
help stabilize the lagging measures. A
company must also be aware that in today’s 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 customer’s
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.
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 company’s 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
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 company’s 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
company’s 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
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." (p. 272).