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-
sions.
on inferences and adjust theories about
tomers
cause-and-effect relationships.
Example:
•
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
tation.
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
complement.
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
page 3
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-
learning.
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-
linking
-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
-en-
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
Massachusetts.
David P. Norton
is
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
ing
-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
Press.
harvard business review • january-february 1996
page 4
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-
vice
and a different image of the
targeted cus-
ees and his customer did not know how to
tomers
.
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
page 5
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
vision.
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.
Implement-
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
page 6
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
sures.
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
page 7
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-
customer.
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-
goal.
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
-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
why.
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
company,
executives to use their periodic review sessions
• align unit and individual goals with the
to evaluate the validity of the unit's strategy
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.
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Many companies adopted early balanced-
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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
ARTICLES
Putting the Balanced Scorecard to Work
Profit Priorities from Activity-Based
by Robert S. Kaplan and David P. Norton
Costing
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
For reprints,
Harvard Business Review
OnPoint orders, and subscriptions
to
Harvard Business Review:
Call 800-988-0886 or 617-783-7500.
Go to
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Harvard Business
Review
OnPoint products:
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