Read The Balanced Scorecard: Translating Strategy Into Action Online
Authors: Robert S. Kaplan,David P. Norton
Tags: #Non-Fiction, #Business
The Balanced Scorecard: Translating Strategy Into Action (5 page)
The Balanced Scorecard provides executives with a comprehensive framework that translates a company’s vision and strategy into a coherent set of performance measures. Many companies have adopted mission statements to communicate fundamental values and beliefs to all employees. The mission statement addresses core beliefs and identifies target markets and core products. For example,
To be the most successful company in the airline business.
To be the best broad-based financial institution in our chosen markets.
Mission statements should be inspirational. They should supply energy and motivation to the organization.
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But inspirational mission statements and slogans are not sufficient. As Peter Senge observed: “Many leaders have personal visions that never get translated into shared visions that galvanize an organization. What has been lacking is a discipline for translating individual vision into shared vision.”
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As a specific example, Norman Chambers, the chief executive officer of Rockwater, an undersea construction company, led a two-month effort among senior executives and project managers to develop a detailed mission statement. Shortly after distributing this mission statement, Chambers received a phone call from a project manager on a drilling platform in the middle of the North Sea. “Norm, I want you to know that I believe in the mission statement. I want to act in accordance with the mission statement. I’m here with my customer. What am I supposed to do? How should I be
behaving each day, over the life of this project, to deliver on our mission statement?” Chambers realized that there was a large void between the mission statement and employees’ day-to-day actions.
The Balanced Scorecard translates mission and strategy into objectives and measures, organized into four different perspectives: financial, customer, internal business process, and learning and growth. The scorecard provides a framework, a language, to communicate mission and strategy; it uses measurement to inform employees about the drivers of current and future success. By articulating the outcomes the organization desires and the drivers of those outcomes, senior executives hope to channel the energies, the abilities, and the specific knowledge of people throughout the organization toward achieving the long-term goals.
Many people think of measurement as a tool to control behavior and to evaluate past performance. As we discussed in
Chapter 1
, the measures on a Balanced Scorecard should be used in a different way—to articulate the strategy of the business, to communicate the strategy of the business, and to help align individual, organizational, and cross-departmental initiatives to achieve a common goal. Used in this way, the scorecard does not strive to keep individuals and organizational units in compliance with a pre-established plan, the traditional control system objective. The Balanced Scorecard should be used as a communication, informing, and learning system,
not
a controlling system.
The four perspectives of the scorecard permit a balance between short-and long-term objectives, between outcomes desired and the performance drivers of those outcomes, and between hard objectives measures and softer, more subjective measures. While the multiplicity of measures on a Balanced Scorecard may seem confusing, properly constructed scorecards, as we will see, contain a unity of purpose since all the measures are directed toward achieving an integrated strategy.
The BSC retains the financial perspective since financial measures are valuable in summarizing the readily measurable economic consequences of actions already taken. Financial performance measures indicate whether a company’s strategy, implementation, and execution are contributing to bottom-line improvement. Financial objectives typically relate to profitability—measured, for example, by operating income, return-on-capital
employed, or, more recently, economic value-added. Alternative financial objectives can be rapid sales growth or generation of cash flow. We will discuss, in
Chapter 3
, the linkages between a business’s strategy and its objectives and measures for the financial perspective.
In the customer perspective of the Balanced Scorecard, managers identify the customer and market segments in which the business unit will compete and the measures of the business unit’s performance in these targeted segments. This perspective typically includes several core or generic measures of the successful outcomes from a well-formulated and -implemented strategy. The core outcome measures include customer satisfaction, customer retention, new customer acquisition, customer profitability, and market and account share in targeted segments. But the customer perspective should also include specific measures of the value propositions that the company will deliver to customers in targeted market segments. The segment-specific drivers of core customer outcomes represent those factors that are critical for customers to switch to or remain loyal to their suppliers. For example, customers could value short lead times and on-time delivery. Or a constant stream of innovative products and services. Or a supplier able to anticipate their emerging needs and capable of developing new products and approaches to satisfy those needs. The customer perspective enables business unit managers to articulate the customer and market-based strategy that will deliver superior future financial returns.
Chapter 4
presents an extensive discussion of the development of objectives and measures for the customer perspective.
In the internal-business-process perspective, executives identify the critical internal processes in which the organization must excel. These processes enable the business unit to:
- deliver the value propositions that will attract and retain customers in targeted market segments, and
- satisfy shareholder expectations of excellent financial returns.
The internal-business-process perspective reveals two fundamental differences between the traditional and the BSC approaches to performance measurement. Traditional approaches attempt to monitor and improve existing business processes. They may go beyond financial measures of performance by incorporating quality and time-based metrics. But they still focus on improvement of existing processes. The scorecard approach, however, will usually identify entirely new processes at which an organization must excel to meet customer and financial objectives. For example, a company may realize that it must develop a process to anticipate customer needs or one to deliver new services that target customers value. The BSC internal-business-process objectives highlight the processes, several of which it may not be currently be performing at all, that are most critical for an organization’s strategy to succeed.
The second departure of the BSC approach is to incorporate innovation processes into the internal-business-process perspective (see Figure 2-1). Traditional performance measurement systems focus on the processes of delivering today’s products and services to today’s customers. They attempt to control and improve existing operations that represent the
short wave
of value creation. This short wave of value creation begins with the receipt of an order from an existing customer for an existing product (or service) and ends with the delivery of the product to the customer. The organization creates value from producing, delivering, and servicing this product and the customer at a cost below the price it receives.
Figure 2-1
The Internal-Business-Process Value-Chain Perspective
Managers, however, do not have to choose between these two vital internal processes. The internal-business-process perspective of the Balanced Scorecard incorporates objectives and measures for both the longwave innovation cycle as well as the short-wave operations cycle.
Chapter 5
contains many examples of how companies are formulating objectives and measures for the internal-business-process perspective.
The fourth perspective of the Balanced Scorecard, learning and growth, identifies the infrastructure that the organization must build to create long-term growth and improvement. The customer and internal-business-process perspectives identify the factors most critical for current and future success. Businesses are unlikely to be able to meet their long-term targets for customers and internal processes using today’s technologies and capabilities. Also, intense global competition requires that companies continually improve their capabilities for delivering value to customers and shareholders.
Organizational learning and growth come from three principal sources: people, systems, and organizational procedures. The financial, customer, and internal-business-process objectives on the Balanced Scorecard typically will reveal large gaps between the existing capabilities of people, systems, and procedures and what will be required to achieve breakthrough performance. To close these gaps, businesses will have to invest in reskilling employees, enhancing information technology and systems,
and aligning organizational procedures and routines. These objectives are articulated in the learning and growth perspective of the Balanced Scorecard. As in the customer perspective, employee-based measures include a mixture of generic outcome measures—employee satisfaction, retention, training, and skills—along with specific drivers of these generic measures, such as detailed, business-specific indexes of the particular skills required for the new competitive environment. Information systems capabilities can be measured by realtime availability of accurate, critical customer and internal process information to employees on the front lines of decision making and actions. Organizational procedures can examine alignment of employee incentives with overall organizational success factors, and measured rates of improvement in critical customer-based and internal processes. These issues are explored in further detail in
Chapter 6
.
Altogether, the Balanced Scorecard translates vision and strategy into objectives and measures across a balanced set of perspectives. The scorecard includes measures of desired outcomes as well as processes that will drive the desired outcomes for the future.
Many companies may already be using a mixture of financial and nonfinancial measures, even in senior management reviews and to communicate with boards of directors. Especially in recent years, the renewed focus on customers and process quality has caused many organizations to track and communicate measures on customer satisfaction and complaints, product and process defect levels, and missed delivery dates. In France, companies have developed and used, for more than two decades, the
Tableau de Bord
, a dashboard of key indicators of organizational success. The
Tableau de Bord
is designed to help employees “pilot” the organization by identifying key success factors, especially those that can be measured as physical variables.
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Does a dashboard of financial and nonfinancial indicators supply a “Balanced Scorecard?”
Our experience is that the best Balanced Scorecards are more than collections of critical indicators or key success factors. The multiple measures on a properly constructed Balanced Scorecard should consist of a linked series of objectives and measures that are both consistent and mutually
reinforcing. The metaphor should be a flight simulator, not a dashboard of instrument dials. Like a flight simulator, the scorecard should incorporate the complex set of cause-and-effect relationships among the critical variables, including leads, lags, and feedback loops, that describe the trajectory, the flight plan, of the strategy. The linkages should incorporate both cause-and-effect relationships, and mixtures of outcome measures and performance drivers.
A strategy is a set of hypotheses about cause and effect. The measurement system should make the relationships (hypotheses) among objectives (and measures) in the various perspectives explicit so that they can be managed and validated. The chain of cause and effect should pervade all four perspectives of a Balanced Scorecard. For example, return-on-capital-employed may be a scorecard measure in the financial perspective. The driver of this measure could be repeat and expanded sales from existing customers, the result of a high degree of loyalty among those customers. So, customer loyalty is included on the scorecard (in the customer perspective) because it is expected to have a strong influence on ROCE. But how will the organization achieve customer loyalty? Analysis of customer preferences may reveal that on-time delivery of orders is highly valued by customers. Thus, improved OTD is expected to lead to higher customer loyalty, which, in turn, is expected to lead to higher financial performance. So both customer loyalty and OTD are incorporated into the customer perspective of the scorecard.
In a similar vein, recent work in the service profit chain has emphasized the causal relationships among employee satisfaction, customer satisfaction, customer loyalty, market share, and, eventually, financial performance.
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Thus, a properly constructed Balanced Scorecard should tell the story of the business unit’s strategy. It should identify and make explicit the sequence of hypotheses about the cause-and-effect relationships between outcome measures and the performance drivers of those outcomes. Every measure selected for a Balanced Scorecard should be an element in a chain of cause-and-effect relationships that communicates the meaning of the business unit’s strategy to the organization.