Using The Balanced Scorecard As A Strategic Management System Accounting Essay

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

The balanced scorecard relies on four pro-

rocks for estimating the advancement they make

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tion to a company ‘s long-run strategic ob-

Ces to adhere short-run activities to long-

with these drivers.

jectives? Because they do n’t take adequate

term aims:

4. Feedback and acquisition.

By providing a

into consideration. A balanced scorecard

1. Translating the vision.

By trusting on

mechanism for strategic feedback and

augments traditional fiscal steps

measuring, the scorecard forces manag-

reappraisal, the balanced scorecard helps an or-

with benchmarks for public presentation in three

Ers to come to understanding on the prosodies

ganization foster a sort of acquisition frequently

cardinal nonfinancial countries:

they will utilize to operationalize their exalted vi-

losing in companies: the ability to reflect


a company ‘s relationship with its cus-


on illations and adjust theories about


cause-and-effect relationships.



its cardinal internal procedures

A bank had articulated its scheme as pro-

Feedback about merchandises and services. New

viding “ superior service to targeted cus-

larning about cardinal internal procedures. Tech-


its acquisition and growing.

tomers. ” But the procedure of taking opera-

nological finds. All this information can

When public presentation steps for these

tional steps for the four countries of the

be fed into the scorecard, enabling strategic

countries are added to the fiscal prosodies, the

scorecard made executives realize that they

polishs to be made continually. Therefore, at

consequence is non merely a broader position on

foremost needed to accommodate divergent positions of

any point in the execution, directors

the company ‘s wellness and activities, it ‘s besides

who the targeted clients were and

can cognize whether the scheme is working-

a powerful organizing model. A sophis-

what constituted superior service.

and if non, why.

ticated instrument panel for organizing

2. Communication and linking.

When a

and polishing a company ‘s operations

scorecard is disseminated up and down the

and concerns so that all activities are

organisational chart, scheme becomes a

aligned with its scheme.

tool available to everyone. As the high-level

scorecard cascades down to single busi-

ness units, overarching strategic aims

and steps are translated into aims

and steps appropriate to each peculiar

group. Tiing these marks to single per-

formance and compensation systems outputs

“ personal scorecards. ” Therefore, single em-

ployees understand how their ain produc-

tivity supports the overall scheme.

3. Business planning.

Most companies

hold separate processs ( and sometimes

units ) for strategic planning and budgeting.

Small admiration, so, that typical long-run

planning is, in the words of one executive,

where “ the gum elastic meets the sky. ” The disci-

pline of making a balanced scorecard

forces companies to incorporate the two

maps, thereby guaranting that fiscal

budgets do so back up strategic ends.

After holding on public presentation steps

for the four scorecard positions, compa-

New Yorks identify the most influential “ drivers ” of

the desired results and so put mile-

page 2

Constructing a scorecard can assist directors link today ‘s actions with

tomorrow ‘s ends.

Using the Balanced

Scorecard as a Strategic

Management System

by Robert S. Kaplan and David P. Norton

As companies around the universe transform

new strategic direction system. Used this

themselves for competition that is based on

manner, the scorecard addresses a serious defi-

information, their ability to work intangible

ciency in traditional direction systems:

assets has become far more decisive than their

their inability to associate a company ‘s long-run

ability to put in and pull off physical assets.

scheme with its short-run actions.

Several old ages ago, in acknowledgment of this

Most companies ‘ operational and manage-

alteration, we introduced a construct we called the

ment control systems are built around finan-

balanced scorecard. The balanced scorecard

cial steps and marks, which bear small re-

supplemented traditional fiscal steps

lation to the company ‘s advancement in accomplishing

with standards that measured public presentation from

long-run strategic aims. Thus the em-

three extra perspectives-those of cus-

phasis most companies place on short-run fi-

tomers, internal concern procedures, and learn-

nancial steps leaves a spread between the

ing and growing. ( See the chart “ Translating

development of a scheme and its implemen-

Vision and Strategy: Four Positions. ” ) It


hence enabled companies to track finan-

Directors utilizing the balanced scorecard do

cial consequences while at the same time supervising

non hold to trust on short-run fiscal mea-

advancement in constructing the capablenesss and ac-

sures as the exclusive indexs of the company ‘s

quiring the intangible assets they would necessitate

public presentation. The scorecard lets them intro-

for future growing. The scorecard was n’t a re-

duce four new direction processes that,

arrangement for fiscal steps ; it was their

individually and in combination, contribute to


associating long-run strategic aims with

Recently, we have seen some companies

short-run actions. ( See the chart “ Pull offing

move beyond our early vision for the scorecard

Scheme: Four Procedures. ” )

to detect its value as the basis of a

The first new process-

interpreting the vision

Harvard University concern reappraisal aˆ? january-february 1996

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Using the Balanced Scorecard as a Strategic Management System

aid directors build a consensus around the

formance. The scorecard therefore enables compa-

organisation ‘s vision and scheme. Despite the

New Yorks to modify schemes to reflect real-time

best purposes of those at the top, exalted state-


ments about going “ best in category, ” “ the

None of the more than 100 organisations

figure one provider, ” or an “ empowered or-

that we have studied or with which we have

ganization ” do n’t interpret easy into opera-

worked implemented their first balanced

tional footings that provide utile ushers to ac-

scorecard with the purpose of developing a

tion at the local degree. For people to move on the

new strategic direction system. But in

words in vision and scheme statements, those

each one, the senior executives discovered that

statements must be expressed as an incorporate

the scorecard supplied a model and therefore a

set of aims and steps, agreed upon by

focal point for many critical direction procedures:

all senior executives, that describe the long-

departmental and single end scene, busi-

term drivers of success.

ness planning, capital allotments, strategic ini-

The 2nd process-

communication and

tiatives, and feedback and acquisition. Previ-


-lets directors communicate their

ously, those procedures were uncoordinated and

scheme up and down the organisation and

frequently directed at short-run operational ends.

nexus it to departmental and single objec-

By constructing the scorecard, the senior execu-

tives. Traditionally, sections are evaluated

tives started a procedure of alteration that has gone

by their fiscal public presentation, and single

good beyond the original thought of merely broad-

inducements are tied to short-run fiscal

ening the company ‘s public presentation steps.

ends. The scorecard gives directors a manner of

For illustration, one insurance company-let ‘s

guaranting that all degrees of the organisation un-

name it National Insurance-developed its first

derstand the long-run scheme and that both

balanced scorecard to make a new vision for

departmental and single aims are

itself as an underwriting specializer. But one time

aligned with it.

National started to utilize it, the scorecard al-

The 3rd process-

concern planning


lowed the CEO and the senior direction

ables companies to incorporate their concern

squad non merely to present a new scheme for

and fiscal programs. Almost all organisations

the organisation but besides to pass the com-

today are implementing a assortment of alteration

pany ‘s direction system. The CEO subse-

plans, each with its ain title-holders, gurus,

quently told employees in a missive addressed to

and advisers, and each viing for se-

the whole organisation that National would

nior executives ‘ clip, energy, and resources.

thenceforth use the balanced scorecard and

Directors find it hard to incorporate those di-

the doctrine that it represented to pull off

verse enterprises to accomplish their strategic

the concern.

goals-a state of affairs that leads to patronize disap-

National built its new strategic manage-

pointments with the plans ‘ consequences. But

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

when directors use the ambitious ends set for

each measure stand foring an incremental im-

balanced scorecard steps as the footing for

provement. ( See the chart “ How One Com-

Robert S. Kaplan

is the Arthur Lowes

apportioning resources and puting precedences, they

pany Built a Strategic Management System. ” )

Dickinson Professor of Accounting at

can set about and organize merely those initi-

The iterative sequence of actions enabled the

the Harvard Business School in Boston,

atives that move them toward their long-run

company to reconsider each of the four new


David P. Norton


strategic aims.

direction processes two or three times be-

the laminitis and president of Renais-

The 4th process-

feedback and learn-

forward the system stabilized and became an es-

sance Solutions, a confer withing house in


-gives companies the capacity for what we

tablished portion of National ‘s overall manage-

Lincoln, Massachusetts. They are the

name strategic acquisition. Existing feedback and

ment system. Thus the CEO was able to

writers of “ The Balanced Scorecard-

reappraisal processes concentrate on whether the com-

transform the company so that everyone could

Measures That Drive Performance ”

pany, its sections, or its single em-

focal point on accomplishing long-run strategic objec-

( HBR January-February 1992 ) and

ployees have met their budgeted fiscal

tives-something that no strictly fiscal

“ Puting the Balanced Scorecard to

ends. With the balanced scorecard at the cen-

model could make.

Work ” ( HBR September-October

ter of its direction systems, a company can

1993 ) . Kaplan and Norton have besides

Translating the Vision

proctor short-run consequences from the three

written a book on the balanced score-

extra perspectives-customers, internal

The CEO of an technology building com-

card to be published in September

concern procedures, and larning and growth-

pany, after working with his senior manage-

1996 by the Harvard Business School

and measure scheme in the visible radiation of recent per-

ment squad for several months to develop a


Harvard University concern reappraisal aˆ? 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 understanding on the new organiza-

undertaking director in the field. “ I want you to

tion ‘s overall scheme: “ to supply superior ser-

know, ” the distraught director said, “ that I

frailty to targeted clients. ” Research had re-

believe in the mission statement. I want to move

vealed five basic market sections among

in conformity with the mission statement. I ‘m

bing and possible clients, each with

here with my client. What am I supposed

different demands. While explicating the mea-

to make? ”

sures for the customer-perspective part of

The mission statement, like those of many

their balanced scorecard, nevertheless, it became

other organisations, had declared an purpose

apparent that although the 25 senior execu-

to “ utilize high-quality employees to supply ser-

tives agreed on the words of the scheme, each

frailties that surpass clients ‘ demands. ” But the

one had a different definition of

superior ser-

undertaking director in the field with his employ-


and a different image of the

targeted cus-

EEs and his client did non cognize how to



translate those words into the appropriate ac-

The exercising of developing operational

tions. The phone call convinced the CEO that a

steps for the four positions on the

big spread existed between the mission state-

bank ‘s scorecard forced the 25 executives to

ment and employees ‘ cognition of how their

clear up the significance of the scheme statement.

daily actions could lend to realiz-

Ultimately, they agreed to excite gross

ing the company ‘s vision.

growing through new merchandises and services and

Metro Bank ( non its existent name ) , the consequence of

besides agreed on the three most desirable cus-

a amalgamation of two rivals, encountered a

tomer sections. They developed scorecard

similar spread while constructing its balanced score-

steps for the specific merchandises and services

card. The senior executive group thought it

that should be delivered to clients in the

Harvard University concern reappraisal aˆ? january-february 1996

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Using the Balanced Scorecard as a Strategic Management System

targeted sections every bit good as for the relation-

accomplishment of the fiscal and client

transport the bank should construct with clients in

ends. For illustration, cognizing the importance

each section. The scorecard besides highlighted

of fulfilling clients ‘ outlooks of on-

spreads in employees ‘ accomplishments and in information

clip bringing, the broader group identified sev-

systems that the bank would hold to shut in

eral internal concern processes-such as order

order to present the selected value propositions

processing, programming, and fulfillment-in

to the targeted clients. Therefore, making a bal-

which the company had to stand out. To make so, the

anced scorecard forced the bank ‘s senior man-

company would hold to retrain frontline em-

agers to get at a consensus and so to

ployees and better the information systems

interpret their vision into footings that had

available to them. The group developed per-

intending to the people who would recognize the

formance steps for those critical procedures


and for staff and systems capablenesss.

Broad engagement in making a scorecard

Communicating and Associating

takes longer, but it offers several advantages:

“ The top 10 people in the concern now un-

Information from a larger figure of manag-

derstand the scheme better than of all time before.

Ers is incorporated into the internal aims ;

It ‘s excessively bad, ” a senior executive of a major oil

the directors gain a better apprehension of

company complained, “ that we ca n’t set this

the company ‘s long-run strategic ends ; and

in a bottle so that everyone could portion it. ”

such wide engagement builds a stronger

With the balanced scorecard, he can.

committedness to accomplishing those ends. But get-

One company we have worked with deliber-

ting directors to purchase into the scorecard is merely

ately involved three beds of direction in

a first measure in associating single actions to cor-

the creative activity of its balanced scorecard. The se-

porate ends.

nior executive group formulated the fiscal

The balanced scorecard signals to everyone

and client aims. It so mobilized the

what the organisation is seeking to accomplish for

endowment and information in the following two degrees

stockholders and clients likewise. But to aline

of directors by holding them formulate the

employees ‘ single public presentations with the

internal-business-process and learning-and-

overall scheme, scorecard users by and large en-

growing aims that would drive the

pot in three activities: communication and

educating, puting ends, and associating wagess to

public presentation steps.

Communicating and Educating.


ing a scheme begins with educating those who

hold to put to death it. Whereas some organisations

opt to keep their scheme near to the waistcoat, most

believe that they should circulate it from

top to bottom. A broad-based communicating

plan portions with all employees the scheme

and the critical aims they have to run into if

the scheme is to win. Erstwhile events such

as the distribution of booklets or newssheets

and the retention of “ town meetings ” might kick

off the plan. Some organisations post bul-

letin boards that illustrate and explain the bal-

anced scorecard steps, so update them

with monthly consequences. Others use groupware

and electronic bulletin boards to administer the

scorecard to the desktops of all employees and

to promote duologue about the steps. The

same media allow employees to do sugges-

tions for accomplishing or transcending the marks.

The balanced scorecard, as the incarnation

of concern unit scheme, should besides be com-

municated upward in the organization-to

Harvard University concern reappraisal aˆ? january-february 1996

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Using the Balanced Scorecard as a Strategic Management System

corporate central offices and to the corporate

consistent with the organisation ‘s. It created a

board of managers. With the scorecard, busi-

little, fold-up personal scorecard that people

ness units can quantify and pass on their

could transport in their shirt pockets or billfolds. ( See

long-run schemes to senior executives utilizing

the exhibit “ The Personal Scorecard. ” ) The

a comprehensive set of linked fiscal and

scorecard contains three degrees of information.

nonfinancial steps. Such communicating

The first describes corporate aims, mea-

informs the executives and the board in spe-

sures, and marks. The 2nd leaves room for

cific footings that long-run schemes designed

interpreting corporate marks into marks for

for competitory success are in topographic point. The mea-

each concern unit. For the 3rd degree, the com-

sures besides provide the footing for feedback and

pany asks both persons and squads to articu-

answerability. Meeting short-run fiscal

late which of their ain aims would be

marks should non represent satisfactory per-

consistent with the concern unit and corporate

formance when other steps indicate that

aims, every bit good as what initiatives they would

the long-run scheme is either non working or

take to accomplish their aims. It besides asks

non being implemented good.

them to specify up to five public presentation mea-

Should the balanced scorecard be communi-

sures for their aims and to put marks for

cated beyond the council chamber to external share-

each step. The personal scorecard helps to

holders? We believe that as senior executives

communicate corporate and concern unit ob-

addition assurance in the ability of the scorecard

jectives to the people and squads executing the

steps to supervise strategic public presentation and

work, enabling them to interpret the aims

predict future fiscal public presentation, they will

into meaningful undertakings and marks for them-

happen ways to inform outside investors about

egos. It besides lets them maintain that information

those steps without unwraping competi-

near at hand-in their pockets.

The personal scorecard

tively sensitive information.

Associating Wagess to Performance Mea-

Skandia, an insurance and fiscal services


Should compensation systems be linked

helps to pass on

company based in Sweden, issues a supple-

to equilibrate scorecard steps? Some com-

corporate and unit

ment to its one-year study called “ The Business

panies, believing that binding fiscal compen-

Sailing master ” – ” an instrument to assist us navi-

sation to public presentation is a powerful lever,

aims to the people

gate into the hereafter and thereby excite re-

have moved rapidly to set up such a link-

newal and development. ” The addendum de-

age. For illustration, an oil company that we ‘ll

and squads executing

scribes Skandia ‘s scheme and the strategic

name Pioneer Petroleum uses its scorecard as

the work.

steps the company uses to pass on

the exclusive footing for calculating incentive com-

and measure the scheme. It besides provides a re-

pensation. The company ties 60 % of its execu-

port on the company ‘s public presentation along

tives ‘ fillips to their accomplishment of ambi-

those steps during the twelvemonth. The steps

tious marks for a leaden norm of four

are customized for each operating unit and in-

fiscal indexs: return on capital, profit-

clude, for illustration, market portion, client

ability, hard currency flow, and runing cost. It bases

satisfaction and keeping, employee compe-

the staying 40 % on indexs of client

tence, employee authorization, and technol-

satisfaction, trader satisfaction, employee sat-

ogy deployment.

isfaction, and environmental duty

Communicating the balanced scorecard

( such as a per centum alteration in the degree of

promotes committedness and answerability to

emanations to H2O and air ) . Pioneer ‘s Chief executive officer

the concern ‘s long-run scheme. As one exec-

says that associating compensation to the score-

utive at Metro Bank declared, “ The balanced

card has helped to aline the company with its

scorecard is both actuating and compeling. ”

scheme. “ I know of no rival, ” he says,

Puting Goals.

Mere consciousness of corporate

“ who has this grade of alliance. It is pro-

ends, nevertheless, is non adequate to alter many

ducing consequences for us. ”

people ‘s behaviour. Somehow, the organisation ‘s

As attractive and every bit powerful as such link-

high-ranking strategic aims and steps

age is, it however carries hazards. For case,

must be translated into aims and steps

does the company have the right steps on

for runing units and persons.

the scorecard? Does it hold valid and dependable

The geographic expedition group of a big oil company

informations for the selected steps? Could unin-

developed a technique to enable and promote

tended or unexpected effects arise from

persons to put ends for themselves that were

the manner the marks for the steps are

Harvard University concern reappraisal aˆ? january-february 1996

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Using the Balanced Scorecard as a Strategic Management System

achieved? Those are inquiries that companies

the account of existent versus targeted re-

should inquire.

sults-provides a better chance to ob-

Furthermore, companies traditionally han-

service directors ‘ public presentation and abilities. In-

dle multiple aims in a compensation for-

creased cognition of their directors ‘ abilities

mula by delegating weights to each aim

makes it easier for executives to put inducement

and ciphering incentive compensation by the

wagess subjectively and to support those sub-

extent to which each weighted aim was

jective evaluations-a procedure that is less sus-

achieved. This pattern permits significant in-

ceptible to the game playing and deformations

centive compensation to be paid if the busi-

associated with explicit, formula-based regulations.

ness unit overachieves on a few aims

One company we have studied takes an in-

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

termediate place. It bases fillips for busi-

proach would be to set up minimal thresh-

ness unit directors on two every bit weighted

old degrees for a critical subset of the strategic

standards: their accomplishment of a fiscal objec-

steps. Persons would gain no inducement

tive-economic value added-over a three-

compensation if public presentation in a given period

twelvemonth period and a subjective appraisal of

fell abruptly of any threshold. This demand

their public presentation on steps drawn from

should actuate people to accomplish a more bal-

the client, internal-business-process, and

anced public presentation across short- and long-

learning-and-growth positions of the bal-

term aims.

anced scorecard.

Some organisations, nevertheless, have re-

That the balanced scorecard has a function to

duced their accent on short-run, formula-

drama in the finding of incentive com-

based incentive systems as a consequence of introduc-

pensation is non in uncertainty. Precisely what that

ing the balanced scorecard. They have discov-

function should be will go clearer as more

ered that duologue among executives and

companies experiment with associating wagess to

directors about the scorecard-both the for-

scorecard steps.

mulation of the steps and aims and

Harvard University concern reappraisal aˆ? january-february 1996

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Using the Balanced Scorecard as a Strategic Management System

Business Planing

of fiscal Numberss that by and large bear small

“ Where the gum elastic meets the sky ” : That ‘s how

relation to the marks in the strategic program.

one senior executive describes his company ‘s

Which papers do corporate directors dis-

long-range-planning procedure. He might hold

pest in their monthly and quarterly meetings

said the same of many other companies because

during the undermentioned twelvemonth? Usually merely the

their financially based direction systems fail

budget, because the periodic reappraisals focus on a

to associate alteration plans and resource allotment

comparing of existent and budgeted consequences for

to long-run strategic precedences.

every line point. When is the strategic program next

The job is that most organisations have

discussed? Probably during the following one-year off-

separate processs and organisational units

site meeting, when the senior directors draw

for strategic planning and for resource alloca-

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

tion and budgeting. To explicate their strategic

The really exercising of making a balanced

programs, senior executives go off-site yearly and

scorecard forces companies to incorporate their

engage for several yearss in active treatments fa-

strategic planning and budgeting procedures and

cilitated by senior planning and development

hence helps to guarantee that their budgets sup-

directors or external advisers. The result

port their schemes. Scorecard users select mea-

of this exercising is a strategic program jointing

sures of advancement from all four scorecard per-

where the company expects ( or hopes or prays )

spectives and set marks for each of them. Then

to be in three, five, and ten old ages. Typically,

they determine which actions will drive them

such programs so sit on executives ‘ bookshelves

toward their marks, place the steps they

for the following 12 months.

will use to those drivers from the four per-

Meanwhile, a separate resource-allocation

spectives, and set up the short-run mile-

and budgeting procedure run by the finance staff

rocks that will tag their advancement along the

sets fiscal marks for grosss, disbursals,

strategic waies they have selected. Constructing a

net incomes, and investings for the following financial twelvemonth.

scorecard therefore enables a company to associate its fi-

The budget it produces consists about wholly

nancial budgets with its strategic ends.

Harvard University concern reappraisal aˆ? january-february 1996

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Using the Balanced Scorecard as a Strategic Management System

For illustration, one division of the Style Com-

scarce resources, including the scarcest resource

pany ( non its existent name ) committed to achiev-

of all: senior directors ‘ clip and attending.

ing a apparently impossible end articulated by

Shortly after the amalgamation that created it,

the Chief executive officer: to duplicate grosss in five old ages. The

Metro Bank, for illustration, launched more than

prognosiss built into the organisation ‘s bing

70 different enterprises. The enterprises were in-

strategic program fell $ 1 billion short of this objec-

tended to bring forth a more competitory and suc-

tive. The division ‘s directors, after sing

cessful establishment, but they were inadequately

assorted scenarios, agreed to specific additions in

integrated into the overall scheme. After build-

five different public presentation drivers: the figure

ing their balanced scorecard, Metro Bank ‘s

of new shops opened, the figure of new cus-

directors dropped many of those programs-

tomers attracted into new and bing shops,

such as a selling attempt directed at individu-

the per centum of shoppers in each shop con-

ALSs with really high net worth-and consolidated

verted into existent buyers, the part of ex-

others into enterprises that were better aligned

isting clients retained, and mean gross revenues per

with the company ‘s strategic aims. For ex-


ample, the directors replaced a plan aimed

By assisting to specify the cardinal drivers of reve-

at heightening bing low-level merchandising accomplishments

nue growing and by perpetrating to marks for

with a major enterprise aimed at retraining sales-

each of them, the division ‘s directors eventu-

individuals to go sure fiscal advisors, ca-

ally grew comfy with the CEO ‘s ambitious

pable of selling a wide scope of freshly intro-


duced merchandises to the three selected client

The procedure of constructing a balanced score-

sections. The bank made both alterations be-

card-clarifying the strategic aims and

do the scorecard enabled it to derive a better

so placing the few critical drivers-also

apprehension of the plans required to

creates a model for pull offing an organiza-

accomplish its strategic aims.

tion ‘s assorted alteration plans. These initia-

Once the scheme is defined and the drivers

tives-reengineering, employee authorization,

are identified, the scorecard influences manag-

time-based direction, and entire quality man-

Ers to concentrate on bettering or reengineer-

agement, among others-promise to present re-

ing those procedures most critical to the organiza-

sults but besides compete with one another for

tion ‘s strategic success. That is how the

scorecard most clearly links and aligns action

with scheme.

The concluding measure in associating scheme to actions is

to set up specific short-run marks, or mile-

rocks, for the balanced scorecard steps.

Milestones are touchable looks of manag-

Ers ‘ beliefs about when and to what degree their

current plans will impact those steps.

In set uping mileposts, directors are ex-

panding the traditional budgeting procedure to in-

corporate strategic every bit good as fiscal ends. De-

tailed fiscal planning remains of import,

but fiscal ends taken by themselves ignore

the three other balanced scorecard perspec-

tives. In an incorporate planning and budgeting

procedure, executives continue to budget for

short-run fiscal public presentation, but they besides

present short-run marks for steps in the

client, internal-business-process, and learn-

ing-and-growth positions. With those mile-

rocks established, directors can continually

trial both the theory underlying the scheme and

the scheme ‘s execution.

At the terminal of the concern planning procedure,

directors should hold set marks for the long-

Harvard University concern reappraisal aˆ? january-february 1996

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Using the Balanced Scorecard as a Strategic Management System

term aims they would wish to accomplish in all

remedied. This single-loop procedure does non re-

four scorecard positions ; they should hold

quire or even facilitate redirect examination of either

identified the strategic enterprises required and

the scheme or the techniques used to imple-

allocated the necessary resources to those initia-

ment it in visible radiation of current conditions.

tives ; and they should hold established mile-

Most companies today operate in a turbu-

rocks for the steps that mark advancement to-

lent environment with complex schemes that,

ward accomplishing their strategic ends.

though valid when they were launched, may

lose their cogency as concern conditions

Feedback and Learning

alteration. In this sort of environment, where

“ With the balanced scorecard, ” a CEO of an

new menaces and chances arise invariably,

technology company told us, “ I can continu-

companies must go capable of what Chris

ally prove my scheme. It ‘s like executing real-

Argyris calls

double-loop acquisition


clip research. ” That is precisely the capableness

that produces a alteration in people ‘s assump-

that the scorecard should give senior manag-

tions and theories about cause-and-effect rela-

Ers: the ability to cognize at any point in its im-

tionships. ( See “ Teaching Smart People How

plementation whether the scheme they have

to Learn, ” HBR May-June 1991. )

formulated is, in fact, working, and if non,

Budget reappraisals and other financially based


direction tools can non prosecute senior exec-

The first three direction processes-

utives in double-loop learning-first, because

interpreting the vision, communication and

these tools address public presentation from merely one

linking, and concern planning-are vital for

position, and 2nd, because they do n’t in-

implementing scheme, but they are non suffi-

volve strategic acquisition. Strategic larning con-

cient in an unpredictable universe. Together they

sists of garnering feedback, proving the hypoth-

signifier an of import single-loop-learning pro-

east southeasts on which scheme was based, and doing

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

the necessary accommodations.

tive remains changeless, and any going from

The balanced scorecard supplies three ele-

the planned flight is seen as a defect to be

ments that are indispensable to strategic acquisition.

Harvard University concern reappraisal aˆ? january-february 1996

page 11

Using the Balanced Scorecard as a Strategic Management System

First, it articulates the company ‘s shared vi-

be aftering procedure, executives are calculating

Zion, specifying in clear and operational footings

the relationship between alterations in perfor-

the consequences that the company, as a squad, is try-

mance drivers and the associated alterations in

ing to accomplish. The scorecard communicates a

one or more specified ends. For illustration, exec-

holistic theoretical account that links single attempts and

utives at Metro Bank estimated the sum of

achievements to concern unit aims.

clip it would take for betterments in train-

Second, the scorecard supplies the indispensable

ing and in the handiness of information sys-

strategic feedback system. A concern scheme

tems before employees could sell multiple fi-

can be viewed as a set of hypotheses about

nancial merchandises efficaciously to bing and

cause-and-effect relationships. A strategic feed-

new clients. They besides estimated how great

back system should be able to prove, validate,

the consequence of that merchandising capableness would be.

and modify the hypotheses embedded in a

Another organisation attempted to formalize

concern unit ‘s scheme. By set uping short-

its hypothesized cause-and-effect relationships

term ends, or mileposts, within the concern

in the balanced scorecard by mensurating the

strength of the linkages among steps in

the different positions. ( See the chart “ How

One Company Linked Measures from the Four

Positions. ” ) The company found important

correlativities between employees ‘ morale, a

step in the learning-and-growth perspec-

tive, and client satisfaction, an of import

client position step. Customer satis-

cabal, in bend, was correlated with faster pay-

ment of invoices-a relationship that led to a

significant decrease in histories receivable

and hence a higher return on capital em-

ployed. The company besides found correlativities

between employees ‘ morale and the figure

of suggestions made by employees ( two

learning-and-growth steps ) every bit good as be-

tween an increased figure of suggestions and

lower rework ( an internal-business-process

step ) . Evidence of such strong correlativities

aid to corroborate the organisation ‘s concern

scheme. If, nevertheless, the expected correlativities

are non found over clip, it should be an indica-

tion to executives that the theory underlying

the unit ‘s scheme may non be working as they

had anticipated.

Particularly in big organisations, accumulat-

ing sufficient informations to document important cor-

dealingss and causing among balanced score-

card steps can take a long time-months or

old ages. Over the short term, directors ‘ assess-

ment of strategic impact may hold to rest on

subjective and qualitative judgements. Eventu-

ally, nevertheless, as more grounds accumulates,

organisations may be able to supply more ob-

jectively grounded estimations of cause-and-effect

relationships. But merely acquiring directors to

believe consistently about the premises un-

derlying their scheme is an betterment over

the current pattern of doing determinations based

on short-run operational consequences.

Harvard University concern reappraisal aˆ? january-february 1996

page 12

Using the Balanced Scorecard as a Strategic Management System

Third, the scorecard facilitates the scheme

constructs provided elucidation, consensus,

reappraisal that is indispensable to strategic acquisition. Tra-

and concentrate on the coveted betterments in per-

ditionally, companies use the monthly or quar-

formance. More late, we have seen com-

terly meetings between corporate and division

panies expand their usage of the balanced score-

executives to analyse the most recent period ‘s

card, using it as the foundation of an

fiscal consequences. Discussions focal point on past per-

integrated and iterative strategic manage-

formance and on accounts of why fiscal

ment system. Companies are utilizing the score-

aims were non achieved. The balanced

card to

scorecard, with its specification of the causal re-

aˆ? clarify and update scheme,

lationships between public presentation drivers and

aˆ? communicate scheme throughout the

aims, allows corporate and concern unit


executives to utilize their periodic reappraisal Sessionss

aˆ? align unit and single ends with the

to measure the cogency of the unit ‘s scheme


and the quality of its executing. If the unit ‘s em-

aˆ? nexus strategic aims to long-run tar-

ployees and directors have delivered on the

gets and one-year budgets,

public presentation drivers ( retraining of employees,

aˆ? identify and align strategic enterprises, and

handiness of information systems, and new fi-

aˆ? behavior periodic public presentation reappraisals to

nancial merchandises and services, for case ) ,

learn about and better scheme.

so their failure to accomplish the expected out-

The balanced scorecard enables a company

comes ( higher gross revenues to targeted clients, for

to aline its direction procedures and focal points

illustration ) signals that the theory underlying the

the full organisation on implementing long-

scheme may non be valid. The dissatisfactory

term scheme. At National Insurance, the

gross revenues figures are an early warning.

scorecard provided the CEO and his directors

Directors should take such disconfirming ev-

with a cardinal model around which they

idence earnestly and reconsider their shared

could redesign each piece of the company ‘s

decisions about market conditions, client

direction system. And because of the

value propositions, rivals ‘ behaviour, and

cause-and-effect linkages inherent in the score-

internal capablenesss. The consequence of such a reappraisal

card model, alterations in one constituent of

may be a determination to reaffirm their belief in the

the system reinforced earlier alterations made

current scheme but to set the quantitative

elsewhere. Therefore, every alteration made over

relationship among the strategic steps on

the 30-month period added to the impulse

the balanced scorecard. But they besides might

that kept the organisation traveling frontward in

conclude that the unit needs a different scheme

the agreed-upon way.

( an illustration of double-loop acquisition ) in visible radiation of

Without a balanced scorecard, most organi-

new cognition about market conditions and

zations are unable to accomplish a similar consis-

internal capablenesss. In any instance, the scorecard

tency of vision and action as they attempt to

will hold stimulated cardinal executives to larn

alteration way and present new schemes

about the viability of their scheme. This capac-

and procedures. The balanced scorecard pro-

ity for enabling organisational acquisition at the

vides a model for pull offing the imple-

executive level-strategic learning-is what dis-

thinking of scheme while besides leting the

tinguishes the balanced scorecard, doing it in-

scheme itself to germinate in response to alterations

valuable for those who wish to make a strategic

in the company ‘s competitory, market, and

direction system.

technological environments.




Harvard Business Review

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Many companies adopted early balanced-

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mance measuring systems. They achieved

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Harvard University concern reappraisal aˆ? january-february 1996

page 13

Using the Balanced Scorecard as a Strategic

Management System

Further Reading


Puting the Balanced Scorecard to Work

Net income Precedences 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

Merchandise no. 4118

May-June 1991

Merchandise no. 3588

In this article, the writers argue that the bal-

anced scorecard is more than a measuring

When used as the fiscal metric of a bal-

system. Four features make it typical:

anced scorecard, activity-based costing ( ABC )

It is a top-down contemplation of the company ‘s

can assist directors happen the topographic points in their or-

mission and scheme ; it is advanced ; it

ganizations where betterment is likely to

integrates external and internal steps ; and

hold the greatest final payment. Any manner you slice

it helps a company focal point. Together, these

it-by merchandise, client, distribution chan-

features enable a scorecard to function as a

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

agencies for actuating and implementing

tivity generates gross and consumes re-

discovery public presentation.

beginnings. Once you understand these

relationships, you ‘re better positioned to take

the actions that will increase your selling mar-

gins and cut down operating disbursals.

To Order

For reissues,

Harvard Business Review

OnPoint orders, and subscriptions


Harvard Business Review:

Name 800-988-0886 or 617-783-7500.

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For customized and quantity orders

of reissues and

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OnPoint merchandises:

Name Rich Gravelin at


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