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Authors: Robert S. Kaplan,David P. Norton

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STRATEGIC POSITIONING OR CORE COMPETENCIES/CAPABILITIES-DRIVEN?

In this book we will approach strategy as choosing the market and customer segments the business unit intends to serve, identifying the critical internal business processes that the unit must excel at to deliver the value propositions to customers in the targeted market segments, and selecting the individual and organizational capabilities required for the internal, customer, and financial objectives. This approach is consistent with the industry and competitive analysis articulated in several of Michael Porter’s widely followed corporate strategy books.
12
We have seen this approach work well with dozens of organizations, as we will illustrate in subsequent chapters.

Alternatively, some companies compete by exploiting unique capabilities, resources, and core competencies.
13
For example, Honda leverages its capabilities for designing and building superb engines into market segments—motorcycles, automobiles, lawn mowers, utilities—where this capability gives it competitive advantage. Canon leverages its world-class capabilities in optics and miniaturization, developed initially for cameras, into other products, such as copying and facsimile machines and computer printers. Companies deploying a strategy based on core competencies or unique capabilities may wish to start their strategic planning process by identifying these critical competencies and capabilities for their internal-business-process perspective, and then, for the customer perspective, selecting customer and market segments where these competencies and capabilities are most critical for delivering customer value.

The Balanced Scorecard is primarily a mechanism for strategy implementation, not for strategy formulation.
14
It can accommodate either approach for formulating business unit strategy—starting from the customer perspective, or starting from excellent internal-business-process capabilities. For whatever approach that SBU senior executives use to formulate their strategy, the Balanced Scorecard will provide an invaluable mechanism for translating that strategy into specific objectives, measures, and targets, and monitoring the implementation of that strategy during subsequent periods.

APPENDIX: LIMITATIONS OF FINANCIAL MEASUREMENTS OF BUSINESS PERFORMANCE

Several reports have expressed concern with an overemphasis on financial measures of corporate performance. The Harvard Business School Council on Competitiveness project identified the following systematic differences between investments made by U.S. corporations versus those made in Japan and Germany:

Additional evidence comes from external investors expressing dissatisfaction with seeing only financial reports of past performance. They want information that will help them forecast the future performance of companies in which they have invested their capital (or in which they are contemplating investing). For example, Peter C. Lincoln, vice president of the U.S. Steel and Carnegie Pension Fund stated: “Nonfinancial performance measurement—such as measuring customer satisfaction or the speed at which new products move from the development stage—would be very helpful to investors and analysts. Companies should report this type of information to provide a complete picture of their operations.”
16

The concern with the overemphasis on financial performance measures has even permeated the leading U.S. professional association of public accountants. A high-level special committee on financial reporting of the American Institute of Certified Public Accountants reinforced our concerns with exclusive reliance on financial reporting for measuring business performance: “Users focus on the future while today’s business reporting focuses on the past. Although information about the past is a useful indicator of future performance, users also need forward-looking information.” The committee acknowledged the importance of reporting on how well companies are creating value for the future. The committee recommended linking business performance reporting to management’s strategic vision: “Many users want to see a company through the eyes of management to help them understand management’s perspective and predict where management will lead the company.” It went on to say that nonfinancial measurement must play a key role: “Management should disclose the financial and nonfinancial measurements it uses in managing the business that quantify the effects of key activities and events.”
17

The committee concluded by recommending that companies adopt a more “balanced” and forward-looking approach:

To meet users’ changing needs, business reporting must:

We discuss the opportunities for using the Balanced Scorecard for external reporting in
Chapter 9
.

NOTES

1
. A. D. Chandler,
The Visible Hand: The Managerial Revolution in American Business
(Cambridge, Mass.: Harvard University Press, 1977), and H. T. Johnson and R. S. Kaplan, “Nineteenth-Century Cost Management Systems,” Chap. 2 in
Relevance Lost: The Rise and Fall of Management Accounting
(Boston: Harvard Business School Press, 1987).

2
. Johnson and Kaplan, “Controlling the Vertically Integrated Firm: The Du Pont Powder Company to 1914,” Chap. 4, and “Controlling the Multidivisional Organization: General Motors in the 1920s,” Chap. 5 in
Relevance Lost.

3
. Some of these criticisms appear in the
appendix
to this chapter.

4
. “Implementing the Balanced Scorecard at FMC Corporation: An Interview with Larry D. Brady,”
Harvard Business Review
(September–October 1993): 143–147.

5
. This account is adapted from Joseph M. Juran, “Made in U.S.A.: A Renaissance in Quality,”
Harvard Business Review
(July–August 1993): 45.

6
. R. Simons,
Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal
(Boston: Harvard Business School Press, 1995), 134.

7
. P. Senge,
The Fifth Discipline: The Art and Practice of the Learning Organization
(New York: Currency Doubleday, 1990).

8
. M. Lebas, “Managerial Accounting in France: Overview of Past Tradition and Current Practice,”
European Accounting Review
3, no. 3 (1994): 471–487.

9
. J. Heskett, T. Jones, G. Loveman, E. Sasser, and L. Schlesinger, “Putting the Service Profit Chain to Work,”
Harvard Business Review
(March–April 1994): 164–174.

10
. Simons,
Levers of Control.

11
. M. Goold, A. Campbell, and M. Alexander,
Corporate-Level Strategy: Creating Value in the Multibusiness Company
(New York: John Wiley & Sons, 1994).

12
. M. E. Porter,
Competitive Strategy: Techniques for Analyzing Industries and Competitors
(New York: Free Press, 1980) and
Competitive Advantage: Creating and Sustaining Superior Performance
(New York: Free Press, 1985).

13
. C. K. Prahalad and G. Hamel, “The Core Competence of the Corporation,”
Harvard Business Review
(May–June 1990): 79–91; R. Hayes, “Strategic Planning—Forward in Reverse,”
Harvard Business Review
(November–December 1985): 111–119; and D. J. Collis and C. A. Montgomery, “Competing on Resources: Strategy in the 1990s,”
Harvard Business Review
(July–August 1995): 118–128.

14
. As many organizations start to develop Balanced Scorecards, however, they soon realize that they lack consensus about their business unit’s strategy. In such cases, the development of Balanced Scorecard objectives and measures becomes the catalyst for a more precise strategy formulation process among the senior executives.

15
. Michael E. Porter, “Capital Disadvantage: America’s Failing Capital Investment System,”
Harvard Business Review
(September–October 1992): 73.

16
. The AICPA Special Committee on Financial Reporting,
Improving Business Reporting—A Customer Focus: Meeting the Information Needs of Investors and Creditors
(New York: American Institute of Certified Public Accountants, 1994), 9.

17
. Ibid., 10.

18
. Ibid., 30.

P A R T O N E

M
EASURING
B
USINESS
S
TRATEGY

C
OMPANIES USING THE
B
ALANCED
S
CORECARD
as the cornerstone of a new strategic management system have two tasks: first, they must build the scorecard, and, second, they must use the scorecard. We have organized the book into these two tasks.
Part One
,
Chapters 3
through
8
, describes the construction of a Balanced Scorecard.
Part Two
,
Chapters 9
through
12
, explains how companies are using the Balanced Scorecard as an integrated strategic-management system.

Of course, the two tasks are not independent. As managers start to use their scorecard for key management processes, they will gain further insights about the scorecard itself—which measures are not working, which measures should be modified, and which new measures of strategic success have emerged that should be incorporated into the scorecard.

Chapters 3
through
6
cover the fundamentals for building objectives and measures in each of the four scorecard perspectives: financial, customer, internal business process, and learning and growth. In each chapter, we identify generic measures that show up in most organization’s scorecards, such as the following:

Perspective
Generic Measures
Financial
Return on investment and economic value-added
Customer
Satisfaction, retention, market, and account share
Internal
Quality, response time, cost, and new product introductions
Learning and Growth
Employee satisfaction and information system availability

We stress, however, the importance of incorporating measures that are specifically derived from an organization’s strategy. We show, with specific examples, how objectives and measures in each of the four perspectives have been derived to communicate and help implement the strategy.

Chapter 7
provides the integration of this strategic theme by illustrating the importance of linking the objectives and measures in the four perspectives into broad, interrelated strategic themes. The linkage of measures across the four perspectives clearly shows that the scorecard is not an ad hoc collection of two dozen or so measures that managers must juggle and trade-off against one another. Rather, in a good Balanced Scorecard, the measures should be linked to communicate a small number of broad strategic themes, such as grow the business, reduce risk, or increase productivity. In
Chapter 7
the strategic measures developed in
Chapters 3
through
6
are brought together to articulate what constitutes a good Balanced Scorecard.

Chapters 3
through
7
describe Balanced Scorecards for a single organizational unit—the strategic business unit (SBU).
Chapter 8
extends the concept to developing a Balanced Scorecard for a corporation or sector that comprises several business units within the same organization. We apply the notion of corporate-level strategy to identify the broad themes that enable the whole (the corporation) to be more valuable than the sum of its parts (the operating divisions). We trace the implications of the corporate-level strategy to the Balanced Scorecards that will be developed for related but decentralized operating units and corporate-level functional departments.
Chapter 8
also shows how Balanced Scorecards have been developed for organizational units in the government and not-for-profit sectors.

BOOK: The Balanced Scorecard: Translating Strategy Into Action
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