Summary by Jason Henderson
Master of Accountancy Program
University of South Florida, Summer 2001
Balanced Scorecard Main Page |
Performance Measures Main Page | Strategy Main Page
Managers rarely think of measurements as part of their strategy even though they recognize their importance for evaluating performance. New strategies and processes are being introduced to improve performance without examining whether old measures of performance are relevant or whether new ones are necessary.
The balanced scorecard combines an effective measurement system that helps solidify a company’s strategic objectives with a management system that can help drive change in key areas such as product, process, customer, and market development. The scorecard gives managers four different perspectives to choose measures from (financial, customers, internal processes, and innovation and improvement activities). The measures of the balanced scorecard helps to focus a company’s strategic vision, encourages thinking about current and future success, and helps provide a balance between external and internal measures. This broad view helps managers see what trade offs they are making among their key success factors. Looking at the scorecard measures of a company, which should be different for every company, it should be clear what that company’s competitive strategy is.
Several companies that have used the balanced scorecard are given as examples in this article. Rockwater, a global engineering and construction company, used the balanced scorecard to respond to their changing industry. The CEO and senior management of Rockwater developed a vision and strategy then transformed them into the balanced scorecard’s four perspectives.
The measures used by Rockwater included:
1. Financial Perspective
Return-on-Capital Employed,
Cash Flow
Project Profitability,
Profit Forecast Reliability,
Sales Backlog.
2. Customer Perspective
Pricing Index,
Customer Ranking Survey,
Customer Satisfaction Index,
Market Share.
3. Internal Processes
Hours with Customers on New Work,
Tender Success Rate,
Rework,
Safety Incident Index,
Project Performance Index,
Project
Closeout Cycle.
4. Innovation and Learning Perspective
Percentage of Revenue from
New Services,
Rate of Improvement Index,
Staff Attitude Survey,
Number of Employee
Suggestions,
Revenue per Employee.
The balanced scorecard helped Rockwater’s management implement changes to make it a leader in its industry.
A few examples of other companies are given to show how each uses the balanced scorecard differently. Apple Computer uses the balanced scorecard as a planning tool rather than a control tool. Advanced Micro Devices (AMD) made an easy transition to the use of the balanced scorecard because it already had a clearly defined mission and performance measures. The balanced scorecard helped AMD bring everything together in a more coherent fashion but did not cause any major changes. The examples are used to illustrate that the balanced scorecard is most successful when used to drive change.
Building a Balanced Scorecard
In a separate section an outline is provided for building a balanced scorecard. A typical process has the following steps:
1. Preparation: Define the business unit that a top- level scorecard is appropriate.
2. Interviews: First Round-facilitator interviews executives too get input on strategic objectives and possible scorecard measures.
3. Executive Workshop: First Round-group debates proposed mission and strategy statements until a consensus is reached.
4.Interviews: Second Round-facilitator compiles information and interviews executives about the tentative balanced scorecard.
5. Executive Workshop: Second Round-more debate vision, strategy, and tentative scorecard. Start to develop implementation plan and objectives.
6. Executive Workshop: Third Round-come to final agreement on vision, objectives, and measurements developed in the first two workshops. Agree on implementation plan.
7. Implementation: Team develops implementation plan for the scorecard.
8. Periodic Reviews: Used on a monthly or quarterly basis and reviewed annually.
At the end of the article Kaplan interviews Larry D. Brady, executive vice-president of FMC Corporation, who discusses his company’s implementation of the balanced scorecard. The balanced scorecard helped managers focus on the company’s strategy. The types of measures included in the scorecard, implementation, benchmarking, problems encountered, and the involvement of management are all discussed in the interview.
______________________________________________
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. 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. 1997. Why does business need a
balanced scorecard? Journal of Cost Management (May/June): 5-10. (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).
Kaplan, R. S. and D. P. Norton. 2001. Transforming the balanced scorecard from performance measurement to strategic
management: Part II. Accounting Horizons (June): 147-160. (Summary).
Kaplan, R. S. and D. P. Norton. 2004. Measuring the strategic readiness of intangible assets. Harvard Business Review (February): 52-63. (Summary).
Kurtzman, J. 1997. Is your company off course? Now you can find out why. Fortune (February 17): 128-130. (Summary).
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. BalScoreSum.htm
Martin, J. R. Not dated. Simon's levers or control in relation to the balanced scorecard. Management And Accounting Web. Simon'sLeversofControl.htm
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. 1996. What is a strategy? Harvard Business Review (November-December): 61-78. (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).