The Balanced Scorecard: Translating Strategy Into Action (7 page)

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.

The U.S. system is less supportive of long-term corporate investment because of the emphasis on improving short-term returns to influence current share prices.

The U.S. system favors those forms of investment for which returns are most readily measurable; this leads to underinvestment in intangible assets—product and process innovation, employee skills, customer satisfaction—whose short-term returns are more difficult to measure.

The U.S. system leads to overinvestment in assets that can be easily valued (such as through mergers and acquisitions) and to underinvestment in internal development projects whose returns are more difficult to value.

The U.S. system allows companies with very strong asset bases (such as in natural resources, consumer goods companies with strong brand names, and film and broadcast companies) to operate inefficiently, without fully exploiting their undervalued assets, as long as short-term earnings are satisfactory. Realizing the value from these company’s assets required expensive financial innovations involving
hostile tender offers, leveraged buyouts, and issuance of junk bonds.
¹⁵

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

Provide more information about plans, opportunities, risks and uncertainties


Focus more on the factors that create longer-term value, including nonfinancial measures indicating how key business processes are performing


Better align information reported externally with the information reported internally to senior management to manage the business
.
¹⁸

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

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.