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Authors: Robert S. Kaplan,David P. Norton

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The Balanced Scorecard: Translating Strategy Into Action

BOOK: The Balanced Scorecard: Translating Strategy Into Action
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Copyright

Copyright © 1996 by the President and Fellows of Harvard College

All rights reserved

First eBook Edition: August 1996

ISBN: 978-0-87584-651-4

The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.49-1984.

Preface

T
HE ORIGINS OF THIS BOOK
can be traced back to 1990 when the Nolan Norton Institute, the research arm of KPMG, sponsored a one-year multicompany study, “Measuring Performance in the Organization of the Future.” The study was motivated by a belief that existing performance-measurement approaches, primarily relying on financial accounting measures, were becoming obsolete. The study participants believed that reliance on summary financial-performance measures were hindering organizations’ abilities to create future economic value. David Norton, CEO of Nolan Norton, served as the study leader and Robert Kaplan as an academic consultant. Representatives from a dozen companies
1
—manufacturing and service, heavy industry and high-tech—met bi-monthly throughout 1990 to develop a new performance-measurement model.

Early in the project, we examined recent case studies of innovative performance-measurement systems. One, the Analog Devices case,
2
described an approach for measuring rates of progress in continuous improvement activities. The case also showed how Analog was using a newly created “Corporate Scorecard” that contained, in addition to several traditional financial measures, performance measures relating to customer delivery times, quality and cycle times of manufacturing processes, and effectiveness of new product developments. Art Schneiderman, then vice president of quality improvement and productivity at Analog Devices, came to one meeting to share his company’s experiences with the scorecard. A variety of other ideas were presented during the first half of the study, including shareholder value, productivity and quality measurements, and new compensation
plans, but the participants soon focused on the multidimensional scorecard as offering the most promise for their needs.

The group discussions led to an expansion of the scorecard to what we labeled a “Balanced Scorecard,” organized around four distinct perspectives—financial, customer, internal, and innovation and learning. The name reflected the balance provided between short-and long-term objectives, between financial and nonfinancial measures, between lagging and leading indicators, and between external and internal performance perspectives. Several participants experimented with building prototype Balanced Scorecards at pilot sites in their companies. They reported back to the study group on the acceptance, the barriers, and the opportunities of the Balanced Scorecard. The conclusion of the study, in December 1990, documented the feasibility and the benefits from such a balanced measurement system.

We summarized the findings of the study group in an article, “The Balanced Scorecard—Measures That Drive Performance,”
Harvard Business Review
(January–February 1992). At that time, we were contacted by several senior executives to help them implement the Balanced Scorecard in their organizations. These efforts led to the next round of development. Two executives, Norman Chambers, then chief executive officer of Rockwater, and Larry Brady, then executive vice president (subsequently promoted to president) of the FMC Corporation stand out as particularly effective in extending the application of the scorecard. Chambers and Brady saw the scorecard as more than a measurement system. They both wanted to use the new measurement system to communicate and align their organizations to new strategies: away from the historic, short-term focus on cost reduction and low-price competition, and toward generating growth opportunities by offering customized, value-added products and services to customers. Our work with Chambers and Brady, and with the managers in their organizations, highlighted the importance of tying the measures in the Balanced Scorecard to an organization’s strategy. While seemingly an obvious insight, in fact most organizations, even those implementing new performance-measurement systems, were not aligning measurements to strategy. Most companies were trying to improve the performance of existing processes—through lower cost, improved quality, and shortened response times—but were not identifying the processes that were truly strategic: those that must be performed exceptionally well for an organization’s strategy to succeed. We described the importance of choosing measures
based on strategic success in a second HBR article, “Putting the Balanced Scorecard to Work,” published in September–October 1993.

By mid-1993, Norton was CEO of a new organization, Renaissance Solutions, Inc. (RSI), one of whose primary services was strategic consulting, using the Balanced Scorecard as a vehicle to help companies translate and implement strategy. An alliance between Renaissance and Gemini Consulting opened up opportunities for integrating the scorecard into major transformation programs. These experiences further refined the strategic linkages of the scorecard, demonstrating how even 20 to 25 measures across the four perspectives, could communicate and help implement a single strategy. So rather than view the multiple measures as requiring complex trade-offs, the strategic linkages enabled the scorecard measures to be tied together in a series of cause-and-effect relationships. Collectively, these relationships described the strategic trajectory—how investments in employee reskilling, information technology, and innovative products and services would dramatically improve future financial performance.

The experiences revealed that innovating CEOs used the Balanced Scorecard not only to clarify and communicate strategy, but also to manage strategy. In effect, the Balanced Scorecard had evolved from an improved
measurement system
to a core
management system
. In addition to our initial group of companies, including Brown & Root Energy Services (the parent division of Rockwater) and FMC, we observed the evolving Balanced Scorecard process in several companies mentioned throughout this book: Metro Bank, National Insurance, Kenyon Stores, and Pioneer Petroleum (names have been disguised to preserve confidentiality). The senior executives in these companies were now using the Balanced Scorecard as the central organizing framework for important managerial processes: individual and team goal setting, compensation, resource allocation, budgeting and planning, and strategic feedback and learning. We summarized these developments in a third article, “Using the Balanced Scorecard as a Strategic Management System,”
Harvard Business Review
(January–February 1996).

The rapid evolution of the Balanced Scorecard into a strategic management system led us to realize that we had learned far more than we were able to communicate in a series of articles. Also, we were receiving numerous requests for additional information about how to build and implement Balanced Scorecards. The combination of an ample supply of rich, detailed implementation experiences and a perceived demand for additional information led us to write this book.

The book, while as comprehensive and complete as we could make it, is still a progress report. During the past three years, we have seen new developments and applications as the scorecard concept takes hold in more and more organizations. Our hope is that the observations reported in this book will help more executives to launch and implement Balanced Scorecard programs in their organizations. And we are confident that many of them will be innovating companies, like the ones we have been fortunate to learn from during the past five years, that will expand the structure and use of the scorecard even further. So perhaps in a few years readers can look forward to
Balanced Scorecard: The Sequel.

We are clearly indebted to many people and organizations who have assisted us in our intellectual journey. They include executives and project leaders at FMC (Larry Brady and Ron Mambu), Rockwater (Norm Chambers and Sian Lloyd Rees), and Analog Devices (Ray Stata, Jerry Fishman, and Art Schneiderman). We wish we could acknowledge the executives at Metro Bank, National, Kenyon Stores, Pioneer Petroleum, and several other companies by name, but for reasons of confidentiality, we cannot. Through their leadership and actions, all these executives have showed how the Balanced Scorecard can become the cornerstone of an organization’s management systems.

We have also benefited immeasurably from efforts of many professionals at RSI who have worked with their clients to widen the envelope of Balanced Scorecard applications. In particular, Michael Contrada and Rebecca Steinfort synthesized the experiences of a diverse set of clients into a living body of knowledge within RSI. Laura Downing and Marissa Hendrickson showed us how to apply the Balanced Scorecard in a not-for-profit setting, the Massachusetts Special Olympics, to which they devote much of their personal time. RSI co-founders, Harry Lasker and David Lubin, helped us extend implementation into technology-based solutions, including the strategic feedback and learning system described in
Chapter 11
. This extension enabled us to embed the scorecard concept into the meetings, information systems, and everyday life of organizations. Our relationship with Gemini Consulting, particularly the support of Francis Gouillart, created further opportunities to expand the scorecard concept into complex transformational processes. From all these professional partnerships, we found the true meaning of learning organizations.

Several people played important roles in the preparation of the book. Carol Franco, director of the Harvard Business School Press, gave enthusiastic
endorsement and editorial assistance throughout the project. Hollis Heimbouch, our editor, gave invaluable and insightful comments on initial and subsequent drafts that significantly improved the book’s organization and contents. Thoughtful comments from Ted Francavilla, Tom Valerio, and Professors William Bruns, Robert Simons, and Robin Cooper enabled us to make important improvements in the final manuscript.

Natalie Greenberg applied her usual painstaking and thorough copy-editing skills that, among many other benefits, eliminated our tendency toward repetition. Barbara Roth kept us on schedule by managing effectively the production process and gave excellent advice in art production and editing. Rose Fitzpatrick of Renaissance Solutions supported us by translating crude hand-written notes and roughly scrawled figures and tables into a polished final manuscript. Her patience through many iterations and refinements was a source of strength. To all these people we say thank you.

Robert S. Kaplan and David P. Norton

Boston and Lincoln, Mass., February 1996

BOOK: The Balanced Scorecard: Translating Strategy Into Action
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