Summary by James R. Martin
Balanced Scorecard Main Page | Performance Measures Main Page | Strategy Main Page
I believe this was the first article on the "balanced scorecard". The purpose of the article is to describe the balanced scorecard concept that the authors developed based on a research project involving 12 companies. Kaplan and Norton begin by saying that "what you measure is what you get." The organization's measurement system affects the behavior of managers and employees. Traditional financial measurements (e.g., return on investment and earnings per share) can provide misleading signals. Some alternative measurements have been recommended based on non-financial performance indicators such as cycle time and defect rates. But many senior managers recognize that no single measurement can provide enough information about the critical areas of the business. Therefore, a balanced set of measurements is needed.
The balanced scorecard is defined as a set of measurements that give top managers a fast, but comprehensive view of the business including operational measures on customer satisfaction and the organization's innovation and improvement activities, as well as financial measurements. Kaplan and Norton point out that the operational measures drive financial performance.
The authors use navigating and flying an airplane to illustrate the concept. Pilots need information related to factors such as fuel levels, airspeed, altitude, bearing and destination. Concentrating on a single measurement could be fatal. Today's managers are in a similar situation. They need to view performance in several areas simultaneously. The balanced scorecard does this by providing information from four perspectives: customer, internal business, innovation and learning, and financial. The concept is illustrated in the table below.
|Customer||How do customers see us?|
|Internal business||What must we excel at?|
|Innovation & learning||Can we continue to improve & create value?|
|Financial||How do we look to shareholders?|
The number of measurements should be limited to a short list of critical indicators of current and future performance.
The advantages of the balanced scorecard approach
1) Integrating seemingly disparate elements such as becoming customer oriented, achieving short response times, improving quality, emphasizing teamwork, reducing product launch times, and managing for the long term.
2) Guarding against sub-optimization by showing whether improvements in one area, or perspective, are achieved at the expense of another area.
The customer perspective includes 4 categories: lead time (i.e., time from order receipt to delivery), quality (e.g., defect levels and on time delivery), performance, and service.
The internal business perspective includes the business processes that have the greatest impact on customer satisfaction, such as those that affect cycle time, quality, employee skills and productivity. These measurements should be decomposed to the local levels to provide linkages to upper level measurements on the scorecard to insure that lower level employees have clear targets for actions and decisions that contribute to the company's overall mission.
The innovation and learning perspective involves goals and measurements related to continuous improvement in the company's ability to innovate, improve and learn. These areas determine the company's ability to launch new products, improve operating efficiency and create more value for customers. Examples of measurements suggested for this perspective include percent of sales from new products and measures of improvement in on-time delivery, cycle time, defect rates and yield.
The financial perspective relates to how the company's implementation and execution of the organization's strategy affects the bottom line. Some measurements include those related to cash flow, sales growth and market share, as well as measures of operating income and return on equity.
The financial perspective is still important, regardless of what some critics have said, because there is no other way to determine if improved performance in the other perspectives leads to improved financial results. If improvements in the other perspectives do not lead to improvements in financial measurements, then company executives need to reexamine the basic assumptions underlying the organization's strategy and mission. "Not all long term strategies are profitable strategies." They provide some examples of companies that improved non-financial measurements that did not translate into improvements in financial performance. They argue that to improve the financial results, the newly created capacity resulting from improvements in the other perspectives must be translated into improved sales and market share, reduced operating expenses, or higher asset turnover.
The balanced scorecard does not have the control bias that traditional measurement systems have. It emphasizes strategy and vision, not control. The balanced scorecard approach is consistent with the concepts of cross-functional integration, customer supplier partnerships, global scale, continuous improvement and team accountability.
An example scorecard is provided for a company they refer to as Electronic Circuits Incorporated (ECI). The illustration below is based on the ECI scorecard that appears on page 76. Their illustration did not include the questions that are from a previous illustration on page 72.
ECI 's Balanced Scorecard
|How do customers see us?||New products.||Percent of sales from new products.|
|Responsive supply.||On-time delivery as defined by the customer.|
|Preferred supplier.||Share of key account's purchases.|
|Customer partnership.||Number of cooperative engineering efforts.|
|What must we excel at?||Technology capability.||Manufacturing geometry versus the competition.|
|Manufacturing excellence.||Cycle time, Unit cost and Yield.|
|Design productivity.||Silicon efficiency and Engineering efficiency.|
|New product introduction.||Actual introduction schedule versus planned introduction.|
Innovation & learning
|Can we continue to improve & create value?||Technology leadership.||Time to develop the next generation.|
|Manufacturing learning.||Process time to maturity.|
|Product focus.||Percent of products that equal 80% of sales.|
|Time to market.||New product introduction versus the competition.|
|How do we look to shareholders?||Survive.||Cash flow.|
|Succeed.||Quarterly sales growth and operating income by division.|
|Prosper.||Increased market share and Return on Equity.|
Kaplan and Norton sum up by saying that "The balanced scorecard keeps companies looking - and moving - forward instead of backward" (p. 79).