Using The Balanced Scorecard As A Strategic Management System Accounting Essay

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Using the Balanced Scorecard as a Strategic Management System The Idea in Brief The Idea in Practice Why do budgets often bear little direct rela-

The balanced scorecard relies on four pro-

stones for gauging the progress they make

tion to a company's long-term strategic ob-

cesses to bind short-term activities to long-

with these drivers.

jectives? Because they don't take enough

term objectives:

4. Feedback and learning.

By supplying a

into consideration. A balanced scorecard

1. Translating the vision.

By relying on

mechanism for strategic feedback and

augments traditional financial measures

measurement, the scorecard forces manag-

review, the balanced scorecard helps an or-

with benchmarks for performance in three

ers to come to agreement on the metrics

ganization foster a kind of learning often

key nonfinancial areas:

they will use to operationalize their lofty vi-

missing in companies: the ability to reflect


a company's relationship with its cus-


on inferences and adjust theories about


cause-and-effect relationships.



its key internal processes

A bank had articulated its strategy as pro-

Feedback about products and services. New

viding "superior service to targeted cus-

learning about key internal processes. Tech-


its learning and growth.

tomers." But the process of choosing opera-

nological discoveries. All this information can

When performance measures for these

tional measures for the four areas of the

be fed into the scorecard, enabling strategic

areas are added to the financial metrics, the

scorecard made executives realize that they

refinements to be made continually. Thus, at

result is not only a broader perspective on

first needed to reconcile divergent views of

any point in the implementation, managers

the company's health and activities, it's also

who the targeted customers were and

can know whether the strategy is working-

a powerful organizing framework. A sophis-

what constituted superior service.

and if not, why.

ticated instrument panel for coordinating

2. Communicating and linking.

When a

and fine-tuning a company's operations

scorecard is disseminated up and down the

and businesses so that all activities are

organizational chart, strategy becomes a

aligned with its strategy.

tool available to everyone. As the high-level

scorecard cascades down to individual busi-

ness units, overarching strategic objectives

and measures are translated into objectives

and measures appropriate to each particular

group. Tying these targets to individual per-

formance and compensation systems yields

"personal scorecards." Thus, individual em-

ployees understand how their own produc-

tivity supports the overall strategy.

3. Business planning.

Most companies

have separate procedures (and sometimes

units) for strategic planning and budgeting.

Little wonder, then, that typical long-term

planning is, in the words of one executive,

where "the rubber meets the sky." The disci-

pline of creating a balanced scorecard

forces companies to integrate the two

functions, thereby ensuring that financial

budgets do indeed support strategic goals.

After agreeing on performance measures

for the four scorecard perspectives, compa-

nies identify the most influential "drivers" of

the desired outcomes and then set mile-

page 2

Building a scorecard can help managers link today's actions with

tomorrow's goals.

Using the Balanced

Scorecard as a Strategic

Management System

by Robert S. Kaplan and David P. Norton

As companies around the world transform

new strategic management system. Used this

themselves for competition that is based on

way, the scorecard addresses a serious defi-

information, their ability to exploit intangible

ciency in traditional management systems:

assets has become far more decisive than their

their inability to link a company's long-term

ability to invest in and manage physical assets.

strategy with its short-term actions.

Several years ago, in recognition of this

Most companies' operational and manage-

change, we introduced a concept we called the

ment control systems are built around finan-

balanced scorecard. The balanced scorecard

cial measures and targets, which bear little re-

supplemented traditional financial measures

lation to the company's progress in achieving

with criteria that measured performance from

long-term strategic objectives. Thus the em-

three additional perspectives-those of cus-

phasis most companies place on short-term fi-

tomers, internal business processes, and learn-

nancial measures leaves a gap between the

ing and growth. (See the chart "Translating

development of a strategy and its implemen-

Vision and Strategy: Four Perspectives.") It


therefore enabled companies to track finan-

Managers using the balanced scorecard do

cial results while simultaneously monitoring

not have to rely on short-term financial mea-

progress in building the capabilities and ac-

sures as the sole indicators of the company's

quiring the intangible assets they would need

performance. The scorecard lets them intro-

for future growth. The scorecard wasn't a re-

duce four new management processes that,

placement for financial measures; it was their

separately and in combination, contribute to


linking long-term strategic objectives with

Recently, we have seen some companies

short-term actions. (See the chart "Managing

move beyond our early vision for the scorecard

Strategy: Four Processes.")

to discover its value as the cornerstone of a

The first new process-

translating the vision


harvard business review • january-february 1996

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Using the Balanced Scorecard as a Strategic Management System

helps managers build a consensus around the

formance. The scorecard thus enables compa-

organization's vision and strategy. Despite the

nies to modify strategies to reflect real-time

best intentions of those at the top, lofty state-


ments about becoming "best in class," "the

None of the more than 100 organizations

number one supplier," or an "empowered or-

that we have studied or with which we have

ganization" don't translate easily into opera-

worked implemented their first balanced

tional terms that provide useful guides to ac-

scorecard with the intention of developing a

tion at the local level. For people to act on the

new strategic management system. But in

words in vision and strategy statements, those

each one, the senior executives discovered that

statements must be expressed as an integrated

the scorecard supplied a framework and thus a

set of objectives and measures, agreed upon by

focus for many critical management processes:

all senior executives, that describe the long-

departmental and individual goal setting, busi-

term drivers of success.

ness planning, capital allocations, strategic ini-

The second process-

communicating and

tiatives, and feedback and learning. Previ-


-lets managers communicate their

ously, those processes were uncoordinated and

strategy up and down the organization and

often directed at short-term operational goals.

link it to departmental and individual objec-

By building the scorecard, the senior execu-

tives. Traditionally, departments are evaluated

tives started a process of change that has gone

by their financial performance, and individual

well beyond the original idea of simply broad-

incentives are tied to short-term financial

ening the company's performance measures.

goals. The scorecard gives managers a way of

For example, one insurance company-let's

ensuring that all levels of the organization un-

call it National Insurance-developed its first

derstand the long-term strategy and that both

balanced scorecard to create a new vision for

departmental and individual objectives are

itself as an underwriting specialist. But once

aligned with it.

National started to use it, the scorecard al-

The third process-

business planning


lowed the CEO and the senior management

ables companies to integrate their business

team not only to introduce a new strategy for

and financial plans. Almost all organizations

the organization but also to overhaul the com-

today are implementing a variety of change

pany's management system. The CEO subse-

programs, each with its own champions, gurus,

quently told employees in a letter addressed to

and consultants, and each competing for se-

the whole organization that National would

nior executives' time, energy, and resources.

thenceforth use the balanced scorecard and

Managers find it difficult to integrate those di-

the philosophy that it represented to manage

verse initiatives to achieve their strategic

the business.

goals-a situation that leads to frequent disap-

National built its new strategic manage-

pointments with the programs' results. But

ment system step-by-step over 30 months, with

when managers use the ambitious goals set for

each step representing an incremental im-

balanced scorecard measures as the basis for

provement. (See the chart "How One Com-

Robert S. Kaplan

is the Arthur Lowes

allocating resources and setting priorities, they

pany Built a Strategic Management System.")

Dickinson Professor of Accounting at

can undertake and coordinate only those initi-

The iterative sequence of actions enabled the

the Harvard Business School in Boston,

atives that move them toward their long-term

company to reconsider each of the four new


David P. Norton


strategic objectives.

management processes two or three times be-

the founder and president of Renais-

The fourth process-

feedback and learn-

fore the system stabilized and became an es-

sance Solutions, a consulting firm in


-gives companies the capacity for what we

tablished part of National's overall manage-

Lincoln, Massachusetts. They are the

call strategic learning. Existing feedback and

ment system. Thus the CEO was able to

authors of "The Balanced Scorecard-

review processes focus on whether the com-

transform the company so that everyone could

Measures That Drive Performance"

pany, its departments, or its individual em-

focus on achieving long-term strategic objec-

(HBR January-February 1992) and

ployees have met their budgeted financial

tives-something that no purely financial

"Putting the Balanced Scorecard to

goals. With the balanced scorecard at the cen-

framework could do.

Work" (HBR September-October

ter of its management systems, a company can

1993). Kaplan and Norton have also

Translating the Vision

monitor short-term results from the three

written a book on the balanced score-

additional perspectives-customers, internal

The CEO of an engineering construction com-

card to be published in September

business processes, and learning and growth-

pany, after working with his senior manage-

1996 by the Harvard Business School

and evaluate strategy in the light of recent per-

ment team for several months to develop a


harvard business review • january-february 1996

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Using the Balanced Scorecard as a Strategic Management System

mission statement, got a phone call from a

had reached agreement on the new organiza-

project manager in the field. "I want you to

tion's overall strategy: "to provide superior ser-

know," the distraught manager said, "that I

vice to targeted customers." Research had re-

believe in the mission statement. I want to act

vealed five basic market segments among

in accordance with the mission statement. I'm

existing and potential customers, each with

here with my customer. What am I supposed

different needs. While formulating the mea-

to do?"

sures for the customer-perspective portion of

The mission statement, like those of many

their balanced scorecard, however, it became

other organizations, had declared an intention

apparent that although the 25 senior execu-

to "use high-quality employees to provide ser-

tives agreed on the words of the strategy, each

vices that surpass customers' needs." But the

one had a different definition of

superior ser-

project manager in the field with his employ-


and a different image of the

targeted cus-

ees and his customer did not know how to



translate those words into the appropriate ac-

The exercise of developing operational

tions. The phone call convinced the CEO that a

measures for the four perspectives on the

large gap existed between the mission state-

bank's scorecard forced the 25 executives to

ment and employees' knowledge of how their

clarify the meaning of the strategy statement.

day-to-day actions could contribute to realiz-

Ultimately, they agreed to stimulate revenue

ing the company's vision.

growth through new products and services and

Metro Bank (not its real name), the result of

also agreed on the three most desirable cus-

a merger of two competitors, encountered a

tomer segments. They developed scorecard

similar gap while building its balanced score-

measures for the specific products and services

card. The senior executive group thought it

that should be delivered to customers in the

harvard business review • january-february 1996

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Using the Balanced Scorecard as a Strategic Management System

targeted segments as well as for the relation-

achievement of the financial and customer

ship the bank should build with customers in

goals. For example, knowing the importance

each segment. The scorecard also highlighted

of satisfying customers' expectations of on-

gaps in employees' skills and in information

time delivery, the broader group identified sev-

systems that the bank would have to close in

eral internal business processes-such as order

order to deliver the selected value propositions

processing, scheduling, and fulfillment-in

to the targeted customers. Thus, creating a bal-

which the company had to excel. To do so, the

anced scorecard forced the bank's senior man-

company would have to retrain frontline em-

agers to arrive at a consensus and then to

ployees and improve the information systems

translate their vision into terms that had

available to them. The group developed per-

meaning to the people who would realize the

formance measures for those critical processes


and for staff and systems capabilities.

Broad participation in creating a scorecard

Communicating and Linking

takes longer, but it offers several advantages:

"The top ten people in the business now un-

Information from a larger number of manag-

derstand the strategy better than ever before.

ers is incorporated into the internal objectives;

It's too bad," a senior executive of a major oil

the managers gain a better understanding of

company complained, "that we can't put this

the company's long-term strategic goals; and

in a bottle so that everyone could share it."

such broad participation builds a stronger

With the balanced scorecard, he can.

commitment to achieving those goals. But get-

One company we have worked with deliber-

ting managers to buy into the scorecard is only

ately involved three layers of management in

a first step in linking individual actions to cor-

the creation of its balanced scorecard. The se-

porate goals.

nior executive group formulated the financial

The balanced scorecard signals to everyone

and customer objectives. It then mobilized the

what the organization is trying to achieve for

talent and information in the next two levels

shareholders and customers alike. But to align

of managers by having them formulate the

employees' individual performances with the

internal-business-process and learning-and-

overall strategy, scorecard users generally en-

growth objectives that would drive the

gage in three activities: communicating and

educating, setting goals, and linking rewards to

performance measures.

Communicating and Educating.


ing a strategy begins with educating those who

have to execute it. Whereas some organizations

opt to hold their strategy close to the vest, most

believe that they should disseminate it from

top to bottom. A broad-based communication

program shares with all employees the strategy

and the critical objectives they have to meet if

the strategy is to succeed. Onetime events such

as the distribution of brochures or newsletters

and the holding of "town meetings" might kick

off the program. Some organizations post bul-

letin boards that illustrate and explain the bal-

anced scorecard measures, then update them

with monthly results. Others use groupware

and electronic bulletin boards to distribute the

scorecard to the desktops of all employees and

to encourage dialogue about the measures. The

same media allow employees to make sugges-

tions for achieving or exceeding the targets.

The balanced scorecard, as the embodiment

of business unit strategy, should also be com-

municated upward in the organization-to

harvard business review • january-february 1996

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Using the Balanced Scorecard as a Strategic Management System

corporate headquarters and to the corporate

consistent with the organization's. It created a

board of directors. With the scorecard, busi-

small, fold-up personal scorecard that people

ness units can quantify and communicate their

could carry in their shirt pockets or wallets. (See

long-term strategies to senior executives using

the exhibit "The Personal Scorecard.") The

a comprehensive set of linked financial and

scorecard contains three levels of information.

nonfinancial measures. Such communication

The first describes corporate objectives, mea-

informs the executives and the board in spe-

sures, and targets. The second leaves room for

cific terms that long-term strategies designed

translating corporate targets into targets for

for competitive success are in place. The mea-

each business unit. For the third level, the com-

sures also provide the basis for feedback and

pany asks both individuals and teams to articu-

accountability. Meeting short-term financial

late which of their own objectives would be

targets should not constitute satisfactory per-

consistent with the business unit and corporate

formance when other measures indicate that

objectives, as well as what initiatives they would

the long-term strategy is either not working or

take to achieve their objectives. It also asks

not being implemented well.

them to define up to five performance mea-

Should the balanced scorecard be communi-

sures for their objectives and to set targets for

cated beyond the boardroom to external share-

each measure. The personal scorecard helps to

holders? We believe that as senior executives

communicate corporate and business unit ob-

gain confidence in the ability of the scorecard

jectives to the people and teams performing the

measures to monitor strategic performance and

work, enabling them to translate the objectives

predict future financial performance, they will

into meaningful tasks and targets for them-

find ways to inform outside investors about

selves. It also lets them keep that information

those measures without disclosing competi-

close at hand-in their pockets.

The personal scorecard

tively sensitive information.

Linking Rewards to Performance Mea-

Skandia, an insurance and financial services


Should compensation systems be linked

helps to communicate

company based in Sweden, issues a supple-

to balanced scorecard measures? Some com-

corporate and unit

ment to its annual report called "The Business

panies, believing that tying financial compen-

Navigator"-"an instrument to help us navi-

sation to performance is a powerful lever,

objectives to the people

gate into the future and thereby stimulate re-

have moved quickly to establish such a link-

newal and development." The supplement de-

age. For example, an oil company that we'll

and teams performing

scribes Skandia's strategy and the strategic

call Pioneer Petroleum uses its scorecard as

the work.

measures the company uses to communicate

the sole basis for computing incentive com-

and evaluate the strategy. It also provides a re-

pensation. The company ties 60% of its execu-

port on the company's performance along

tives' bonuses to their achievement of ambi-

those measures during the year. The measures

tious targets for a weighted average of four

are customized for each operating unit and in-

financial indicators: return on capital, profit-

clude, for example, market share, customer

ability, cash flow, and operating cost. It bases

satisfaction and retention, employee compe-

the remaining 40% on indicators of customer

tence, employee empowerment, and technol-

satisfaction, dealer satisfaction, employee sat-

ogy deployment.

isfaction, and environmental responsibility

Communicating the balanced scorecard

(such as a percentage change in the level of

promotes commitment and accountability to

emissions to water and air). Pioneer's CEO

the business's long-term strategy. As one exec-

says that linking compensation to the score-

utive at Metro Bank declared, "The balanced

card has helped to align the company with its

scorecard is both motivating and obligating."

strategy. "I know of no competitor," he says,

Setting Goals.

Mere awareness of corporate

"who has this degree of alignment. It is pro-

goals, however, is not enough to change many

ducing results for us."

people's behavior. Somehow, the organization's

As attractive and as powerful as such link-

high-level strategic objectives and measures

age is, it nonetheless carries risks. For instance,

must be translated into objectives and measures

does the company have the right measures on

for operating units and individuals.

the scorecard? Does it have valid and reliable

The exploration group of a large oil company

data for the selected measures? Could unin-

developed a technique to enable and encourage

tended or unexpected consequences arise from

individuals to set goals for themselves that were

the way the targets for the measures are

harvard business review • january-february 1996

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Using the Balanced Scorecard as a Strategic Management System

achieved? Those are questions that companies

the explanation of actual versus targeted re-

should ask.

sults-provides a better opportunity to ob-

Furthermore, companies traditionally han-

serve managers' performance and abilities. In-

dle multiple objectives in a compensation for-

creased knowledge of their managers' abilities

mula by assigning weights to each objective

makes it easier for executives to set incentive

and calculating incentive compensation by the

rewards subjectively and to defend those sub-

extent to which each weighted objective was

jective evaluations-a process that is less sus-

achieved. This practice permits substantial in-

ceptible to the game playing and distortions

centive compensation to be paid if the busi-

associated with explicit, formula-based rules.

ness unit overachieves on a few objectives

One company we have studied takes an in-

even if it falls far short on others. A better ap-

termediate position. It bases bonuses for busi-

proach would be to establish minimum thresh-

ness unit managers on two equally weighted

old levels for a critical subset of the strategic

criteria: their achievement of a financial objec-

measures. Individuals would earn no incentive

tive-economic value added-over a three-

compensation if performance in a given period

year period and a subjective assessment of

fell short of any threshold. This requirement

their performance on measures drawn from

should motivate people to achieve a more bal-

the customer, internal-business-process, and

anced performance across short- and long-

learning-and-growth perspectives of the bal-

term objectives.

anced scorecard.

Some organizations, however, have re-

That the balanced scorecard has a role to

duced their emphasis on short-term, formula-

play in the determination of incentive com-

based incentive systems as a result of introduc-

pensation is not in doubt. Precisely what that

ing the balanced scorecard. They have discov-

role should be will become clearer as more

ered that dialogue among executives and

companies experiment with linking rewards to

managers about the scorecard-both the for-

scorecard measures.

mulation of the measures and objectives and

harvard business review • january-february 1996

page 8

Using the Balanced Scorecard as a Strategic Management System

Business Planning

of financial numbers that generally bear little

"Where the rubber meets the sky": That's how

relation to the targets in the strategic plan.

one senior executive describes his company's

Which document do corporate managers dis-

long-range-planning process. He might have

cuss in their monthly and quarterly meetings

said the same of many other companies because

during the following year? Usually only the

their financially based management systems fail

budget, because the periodic reviews focus on a

to link change programs and resource allocation

comparison of actual and budgeted results for

to long-term strategic priorities.

every line item. When is the strategic plan next

The problem is that most organizations have

discussed? Probably during the next annual off-

separate procedures and organizational units

site meeting, when the senior managers draw

for strategic planning and for resource alloca-

up a new set of three-, five-, and ten-year plans.

tion and budgeting. To formulate their strategic

The very exercise of creating a balanced

plans, senior executives go off-site annually and

scorecard forces companies to integrate their

engage for several days in active discussions fa-

strategic planning and budgeting processes and

cilitated by senior planning and development

therefore helps to ensure that their budgets sup-

managers or external consultants. The outcome

port their strategies. Scorecard users select mea-

of this exercise is a strategic plan articulating

sures of progress from all four scorecard per-

where the company expects (or hopes or prays)

spectives and set targets for each of them. Then

to be in three, five, and ten years. Typically,

they determine which actions will drive them

such plans then sit on executives' bookshelves

toward their targets, identify the measures they

for the next 12 months.

will apply to those drivers from the four per-

Meanwhile, a separate resource-allocation

spectives, and establish the short-term mile-

and budgeting process run by the finance staff

stones that will mark their progress along the

sets financial targets for revenues, expenses,

strategic paths they have selected. Building a

profits, and investments for the next fiscal year.

scorecard thus enables a company to link its fi-

The budget it produces consists almost entirely

nancial budgets with its strategic goals.

harvard business review • january-february 1996

page 9

Using the Balanced Scorecard as a Strategic Management System

For example, one division of the Style Com-

scarce resources, including the scarcest resource

pany (not its real name) committed to achiev-

of all: senior managers' time and attention.

ing a seemingly impossible goal articulated by

Shortly after the merger that created it,

the CEO: to double revenues in five years. The

Metro Bank, for example, launched more than

forecasts built into the organization's existing

70 different initiatives. The initiatives were in-

strategic plan fell $1 billion short of this objec-

tended to produce a more competitive and suc-

tive. The division's managers, after considering

cessful institution, but they were inadequately

various scenarios, agreed to specific increases in

integrated into the overall strategy. After build-

five different performance drivers: the number

ing their balanced scorecard, Metro Bank's

of new stores opened, the number of new cus-

managers dropped many of those programs-

tomers attracted into new and existing stores,

such as a marketing effort directed at individu-

the percentage of shoppers in each store con-

als with very high net worth-and consolidated

verted into actual purchasers, the portion of ex-

others into initiatives that were better aligned

isting customers retained, and average sales per

with the company's strategic objectives. For ex-


ample, the managers replaced a program aimed

By helping to define the key drivers of reve-

at enhancing existing low-level selling skills

nue growth and by committing to targets for

with a major initiative aimed at retraining sales-

each of them, the division's managers eventu-

persons to become trusted financial advisers, ca-

ally grew comfortable with the CEO's ambitious

pable of selling a broad range of newly intro-


duced products to the three selected customer

The process of building a balanced score-

segments. The bank made both changes be-

card-clarifying the strategic objectives and

cause the scorecard enabled it to gain a better

then identifying the few critical drivers-also

understanding of the programs required to

creates a framework for managing an organiza-

achieve its strategic objectives.

tion's various change programs. These initia-

Once the strategy is defined and the drivers

tives-reengineering, employee empowerment,

are identified, the scorecard influences manag-

time-based management, and total quality man-

ers to concentrate on improving or reengineer-

agement, among others-promise to deliver re-

ing those processes most critical to the organiza-

sults but also compete with one another for

tion's strategic success. That is how the

scorecard most clearly links and aligns action

with strategy.

The final step in linking strategy to actions is

to establish specific short-term targets, or mile-

stones, for the balanced scorecard measures.

Milestones are tangible expressions of manag-

ers' beliefs about when and to what degree their

current programs will affect those measures.

In establishing milestones, managers are ex-

panding the traditional budgeting process to in-

corporate strategic as well as financial goals. De-

tailed financial planning remains important,

but financial goals taken by themselves ignore

the three other balanced scorecard perspec-

tives. In an integrated planning and budgeting

process, executives continue to budget for

short-term financial performance, but they also

introduce short-term targets for measures in the

customer, internal-business-process, and learn-

ing-and-growth perspectives. With those mile-

stones established, managers can continually

test both the theory underlying the strategy and

the strategy's implementation.

At the end of the business planning process,

managers should have set targets for the long-

harvard business review • january-february 1996

page 10

Using the Balanced Scorecard as a Strategic Management System

term objectives they would like to achieve in all

remedied. This single-loop process does not re-

four scorecard perspectives; they should have

quire or even facilitate reexamination of either

identified the strategic initiatives required and

the strategy or the techniques used to imple-

allocated the necessary resources to those initia-

ment it in light of current conditions.

tives; and they should have established mile-

Most companies today operate in a turbu-

stones for the measures that mark progress to-

lent environment with complex strategies that,

ward achieving their strategic goals.

though valid when they were launched, may

lose their validity as business conditions

Feedback and Learning

change. In this kind of environment, where

"With the balanced scorecard," a CEO of an

new threats and opportunities arise constantly,

engineering company told us, "I can continu-

companies must become capable of what Chris

ally test my strategy. It's like performing real-

Argyris calls

double-loop learning


time research." That is exactly the capability

that produces a change in people's assump-

that the scorecard should give senior manag-

tions and theories about cause-and-effect rela-

ers: the ability to know at any point in its im-

tionships. (See "Teaching Smart People How

plementation whether the strategy they have

to Learn," HBR May-June 1991.)

formulated is, in fact, working, and if not,

Budget reviews and other financially based


management tools cannot engage senior exec-

The first three management processes-

utives in double-loop learning-first, because

translating the vision, communicating and

these tools address performance from only one

linking, and business planning-are vital for

perspective, and second, because they don't in-

implementing strategy, but they are not suffi-

volve strategic learning. Strategic learning con-

cient in an unpredictable world. Together they

sists of gathering feedback, testing the hypoth-

form an important single-loop-learning pro-

eses on which strategy was based, and making

cess-single-loop in the sense that the objec-

the necessary adjustments.

tive remains constant, and any departure from

The balanced scorecard supplies three ele-

the planned trajectory is seen as a defect to be

ments that are essential to strategic learning.

harvard business review • january-february 1996

page 11

Using the Balanced Scorecard as a Strategic Management System

First, it articulates the company's shared vi-

planning process, executives are forecasting

sion, defining in clear and operational terms

the relationship between changes in perfor-

the results that the company, as a team, is try-

mance drivers and the associated changes in

ing to achieve. The scorecard communicates a

one or more specified goals. For example, exec-

holistic model that links individual efforts and

utives at Metro Bank estimated the amount of

accomplishments to business unit objectives.

time it would take for improvements in train-

Second, the scorecard supplies the essential

ing and in the availability of information sys-

strategic feedback system. A business strategy

tems before employees could sell multiple fi-

can be viewed as a set of hypotheses about

nancial products effectively to existing and

cause-and-effect relationships. A strategic feed-

new customers. They also estimated how great

back system should be able to test, validate,

the effect of that selling capability would be.

and modify the hypotheses embedded in a

Another organization attempted to validate

business unit's strategy. By establishing short-

its hypothesized cause-and-effect relationships

term goals, or milestones, within the business

in the balanced scorecard by measuring the

strength of the linkages among measures in

the different perspectives. (See the chart "How

One Company Linked Measures from the Four

Perspectives.") The company found significant

correlations between employees' morale, a

measure in the learning-and-growth perspec-

tive, and customer satisfaction, an important

customer perspective measure. Customer satis-

faction, in turn, was correlated with faster pay-

ment of invoices-a relationship that led to a

substantial reduction in accounts receivable

and hence a higher return on capital em-

ployed. The company also found correlations

between employees' morale and the number

of suggestions made by employees (two

learning-and-growth measures) as well as be-

tween an increased number of suggestions and

lower rework (an internal-business-process

measure). Evidence of such strong correlations

help to confirm the organization's business

strategy. If, however, the expected correlations

are not found over time, it should be an indica-

tion to executives that the theory underlying

the unit's strategy may not be working as they

had anticipated.

Especially in large organizations, accumulat-

ing sufficient data to document significant cor-

relations and causation among balanced score-

card measures can take a long time-months or

years. Over the short term, managers' assess-

ment of strategic impact may have to rest on

subjective and qualitative judgments. Eventu-

ally, however, as more evidence accumulates,

organizations may be able to provide more ob-

jectively grounded estimates of cause-and-effect

relationships. But just getting managers to

think systematically about the assumptions un-

derlying their strategy is an improvement over

the current practice of making decisions based

on short-term operational results.

harvard business review • january-february 1996

page 12

Using the Balanced Scorecard as a Strategic Management System

Third, the scorecard facilitates the strategy

concepts provided clarification, consensus,

review that is essential to strategic learning. Tra-

and focus on the desired improvements in per-

ditionally, companies use the monthly or quar-

formance. More recently, we have seen com-

terly meetings between corporate and division

panies expand their use of the balanced score-

executives to analyze the most recent period's

card, employing it as the foundation of an

financial results. Discussions focus on past per-

integrated and iterative strategic manage-

formance and on explanations of why financial

ment system. Companies are using the score-

objectives were not achieved. The balanced

card to

scorecard, with its specification of the causal re-

• clarify and update strategy,

lationships between performance drivers and

• communicate strategy throughout the

objectives, allows corporate and business unit


executives to use their periodic review sessions

• align unit and individual goals with the

to evaluate the validity of the unit's strategy


and the quality of its execution. If the unit's em-

• link strategic objectives to long-term tar-

ployees and managers have delivered on the

gets and annual budgets,

performance drivers (retraining of employees,

• identify and align strategic initiatives, and

availability of information systems, and new fi-

• conduct periodic performance reviews to

nancial products and services, for instance),

learn about and improve strategy.

then their failure to achieve the expected out-

The balanced scorecard enables a company

comes (higher sales to targeted customers, for

to align its management processes and focuses

example) signals that the theory underlying the

the entire organization on implementing long-

strategy may not be valid. The disappointing

term strategy. At National Insurance, the

sales figures are an early warning.

scorecard provided the CEO and his managers

Managers should take such disconfirming ev-

with a central framework around which they

idence seriously and reconsider their shared

could redesign each piece of the company's

conclusions about market conditions, customer

management system. And because of the

value propositions, competitors' behavior, and

cause-and-effect linkages inherent in the score-

internal capabilities. The result of such a review

card framework, changes in one component of

may be a decision to reaffirm their belief in the

the system reinforced earlier changes made

current strategy but to adjust the quantitative

elsewhere. Therefore, every change made over

relationship among the strategic measures on

the 30-month period added to the momentum

the balanced scorecard. But they also might

that kept the organization moving forward in

conclude that the unit needs a different strategy

the agreed-upon direction.

(an example of double-loop learning) in light of

Without a balanced scorecard, most organi-

new knowledge about market conditions and

zations are unable to achieve a similar consis-

internal capabilities. In any case, the scorecard

tency of vision and action as they attempt to

will have stimulated key executives to learn

change direction and introduce new strategies

about the viability of their strategy. This capac-

and processes. The balanced scorecard pro-

ity for enabling organizational learning at the

vides a framework for managing the imple-

executive level-strategic learning-is what dis-

mentation of strategy while also allowing the

tinguishes the balanced scorecard, making it in-

strategy itself to evolve in response to changes

valuable for those who wish to create a strategic

in the company's competitive, market, and

management system.

technological environments.




Harvard Business Review

Toward a New Strategic



Management System

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Many companies adopted early balanced-

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scorecard concepts to improve their perfor-

or go to

mance measurement systems. They achieved

tangible but narrow results. Adopting those

harvard business review • january-february 1996

page 13

Using the Balanced Scorecard as a Strategic

Management System

Further Reading


Putting the Balanced Scorecard to Work

Profit Priorities from Activity-Based

by Robert S. Kaplan and David P. Norton


Harvard Business Review

by Robin Cooper and Robert S. Kaplan

September-October 1993

Harvard Business Review

Product no. 4118

May-June 1991

Product no. 3588

In this article, the authors argue that the bal-

anced scorecard is more than a measurement

When used as the financial metric of a bal-

system. Four characteristics make it distinctive:

anced scorecard, activity-based costing (ABC)

It is a top-down reflection of the company's

can help managers find the places in their or-

mission and strategy; it is forward-looking; it

ganizations where improvement is likely to

integrates external and internal measures; and

have the greatest payoff. Any way you slice

it helps a company focus. Together, these

it-by product, customer, distribution chan-

characteristics enable a scorecard to serve as a

nel, or reading-ABC helps you see how an ac-

means for motivating and implementing

tivity generates revenue and consumes re-

breakthrough performance.

sources. Once you understand these

relationships, you're better positioned to take

the actions that will increase your selling mar-

gins and reduce operating expenses.

To Order

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