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Kaplan, R. S. and D. P. Norton. 1997. Why does business need a balanced scorecard? Journal of Cost Management (May/June): 5-10.

Summary by Roberto Sola
Master of Accountancy Program
University of South Florida, Fall 2000

Balanced Scorecard Main Page | Performance Measures Main Page | Strategy Main Page

The purpose of this article is to examine the need for a balanced scorecard to help companies convert strategy into tangible objectives and measurements. Kaplan and Norton answer the following questions?

1. What should multiple measurements on a scorecard consist of and what should be the relationship between the measurements?

A strategy according to Kaplan and Norton is "a set of hypotheses about cause and effect." The measurements on a balanced scorecard should consist of a linked set of objectives and measurements that are consistent and mutually reinforcing. The metaphor should be a flight simulator rather than a collection of indicators on a dashboard. It should make explicit the relationships among objectives and measures. The chain of cause and effect should incorporate four perspectives as follows:

Learning and growth → Internal business process → Customer → Financial.

Kaplan and Norton provide an example where improvements in employee skills causes improvement in process quality and process cycle time, that in turn improves on-time delivery, customer loyalty and subsequently return on investment.

The balanced scorecard must contain the appropriate mixture of outcome measures (lagging indicators) and performance drivers (leading indicators).

Performance drivers - provide early indications about whether the strategy is being implemented successfully.

Outcomes measures - help to reveal whether operational improvements have been translated into enhanced financial performance.

2. Should financial measurements be scrapped?

Critics argue that managers should focus on improving customer satisfaction, quality, cycle times, employee skills, and motivation. The financial numbers will take care of themselves.

Kaplan and Norton contend that not all companies can translate such improvements into financial benefits. Fundamental improvements only benefit a company when they can be translated into improved sales, reduced operating expenses, or higher asset utilization. Therefore, the scorecard should contain a strong emphasis on financial outcomes.

The balanced scorecard links fundamental improvements without the distortions that come from an exclusive focus on improving short term financial results.

3. Are four perspectives sufficient?

The four perspectives provide a template, not a strait jacket. Companies should include perspectives on the scorecard as needed by their unique circumstances. The scorecard should include measurements that are vital to the success of the unit's strategy. The measures that appear on the scorecard should be fully integrated into the chain of cause-and-effect relationships that describe the trajectory of the strategy.

4. Should companies use a corporate scorecard or use business unit scorecards?

When a company is diversified, it is more efficient to develop scorecards at the strategic business unit level if these units have their own products, customers, marketing and distribution channels, production facilities and strategy. These can be tied to the corporate scorecard.

5. What does a company or organizational strategy consist of?

Following Porter's concept, an organization's strategy includes:

a. Choosing the market and customers the company or business unit expects to serve.

b. Identifying the critical internal processes that the company or business unit must excel at to capture and satisfy those customers.

c. Determining the individual and organizational capabilities required to achieve the objectives in the other perspectives, i.e., internal, customer and financial.

6. Is the purpose of a balanced scorecard to formulate strategy or implement strategy?

The balanced scorecard is mainly a technique for implementing strategy. It is a mechanism for translating strategy into specific objectives, measures, and targets and for monitoring how the strategy is implemented in the future.

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Related Summaries:

Kaplan, R. S. and D. P. Norton. 1992. The balanced scorecard - Measures that drive performance. Harvard Business Review (January/February): 71-79. (Summary).

Kaplan, R. S. and D. P. Norton. 1993. Putting the balanced scorecard to work. Harvard Business Review (September-October): 134-147. (Summary).

Kaplan, R. S. and D. P. Norton. 1996. The Balanced Scorecard: Translating Strategy into Action Boston: Harvard Business School Press. (Summary).

Kaplan, R. S. and D. P. Norton. 1996. Using the balanced scorecard as a strategic management system. Harvard Business Review (January-February): 75-85. (Summary).

Kaplan, R. S. and D. P. Norton. 2000. Having trouble with your strategy? Then map it. Harvard Business Review (September-October): 167-176. (Summary).

Kaplan, R. S. and D. P. Norton. 2001. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business School Press. (Summary).

Kaplan, R. S. and D. P. Norton. 2001. Transforming the balanced scorecard from performance measurement to strategic management: Part I. Accounting Horizons (March): 87-104. (Summary).

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Lyons, B., A. Gumbus and D. E. Bellhouse. 2003. Aligning capital investment decisions with the balanced scorecard. Journal of Cost Management (March/April): 34-38. (Summary).

Martin, J. R. Not dated. Balanced scorecard concepts. Management And Accounting Web. (Summary).

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Martinsons, M., R. Davison and D. Tse. 1999. The balanced scorecard: A foundation for the strategic management of information systems. Decision Support Systems (25): 71-88. (Summary).

Norreklit, H. 2003. The balanced scorecard: What is the score? A rhetorical analysis of the balanced scorecard. Accounting, Organizations and Society 28(6): 591-619. (Summary).

Paladino, B. 2007. 5 key principles of corporate performance management: How do Balanced Scorecard Hall of Fame, Malcolm Baldrige, Sterling, Fortune 100, APQC, and Forbes award winners drive value? Strategic Finance (June): 39-45. (Note).

Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press. (Summary).

Porter, M. E. 1996. What is a strategy? Harvard Business Review (November-December): 61-78. (Summary).

Ridgway, V. F. 1956. Dysfunctional consequences of performance measurements. Administrative Science Quarterly (September): 240-247. (Summary).

Schonberger, R. J. 2008. Lean performance management (Metrics don't add up). Cost Management (January/February): 5-10. (Note: Schonberger criticizes the KPI or scorecard approach from the lean enterprise perspective. Summary).