Management And Accounting Web

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 management system.

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 an industrial based environment to one that is information based. 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 segments 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. The graphic illustration below conveys the idea.

Balanced Scorecard Framework

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, a change in the financial perspective will result in changes in the other areas because of the cause-and-effect relationships. 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 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 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. More autonomy 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 the 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 perspectives 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 goal.

This chapter includes a section on government and not-for-profit enterprises. The Federal Procurement scorecard is provided as an example.

Federal Procurement 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 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." (p. 272). See the Note about Simons' Levers of Control for more on this issue.

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