Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
Citation: Martin, J. R. Not dated. Balanced scorecard concepts. Management And Accounting Web. http://maaw.info/BalScoreSum.htm
1. Four Strategic Perspectives
The Balanced Scorecard concept involves creating a set of measurements for four strategic perspectives. These perspectives include: 1) financial, 2) customer, 3) internal business process and 4) learning and growth. The idea is to develop between four and seven measurements for each perspective. Two graphic illustrations appear below to help convey the idea.
The measurements should be focused on a single strategy and be linked, consistent and mutually reinforcing. Some generic measurements are presented in the table below.
|Financial||Return of Capital Employed, Economic value added, Sales growth, Cash flow|
|Customer||Customer satisfaction, retention, acquisition, profitability, market share|
|Internal business process||Includes measurements along the
internal value chain for:
Innovation - measures of how well the company identifies the customers’ future needs.
Operations - measures of quality, cycle time, and costs.
Post sales service - measures for warranty, repair and treatment of defects and returns.
|Learning and growth||Includes measurements for:
People - employee retention, training, skills, morale.
Systems - measure of availability of critical real time information needed for front line employees.
2. What is a Strategy?
A strategy, according to Kaplan and his coauthors, is a set of hypotheses about cause and effect relationships. Defining an organization's strategy involves:
1) Defining the market
the organization plans to serve - local, national, global.
2) Defining the customer. Broad or narrow, age group, income level etc.
3) Identifying the critical internal processes needed to capture and satisfy those customers.
4) Determining the individual and organizational capabilities required in the other perspectives.
Porter defines Strategy as performing different activities from rivals’ or performing similar activities in different ways.
3. An Example related to Cause and Effect
The chain of cause and effect relationships may start with improvements in the area of learning and growth. These improvements tend to cause improvements in business processes, which in turn cause improvements in customer satisfaction and subsequently cause improvements in sales and the financial measurements of profitability. The direction of the cause and effect relationships is emphasized below.
Learning and growth > Internal business process > Customer > Financial
For a more specific example showing cause an effect, see the Sears Employee-Customer-Profit Chain illustration below.
4. What do you try to Balance?
An important part of the balanced scorecard concept is the emphasis on establishing a balance between four types of measurements. These types of measurements include:
1) Short term and Long term,
2) External (for shareholders and customers) and Internal (for critical business processes, innovation, and learning and growth),
3) Leading indicators (outcomes desired and performance drivers) and Lagging indicators (outcomes),
4) Objective measures (e.g., financial) and Subjective measures (e.g., many non-financial). See the Exhibit below (item 7) for the idea.
5. How Should the BSC Be Used?
Kaplan and Norton also emphasize that "the balanced scorecard should be used as a communication, informing, and learning system, not as a controlling system."
6. Diagnostic Versus Strategic Measurements
Kaplan and Norton make a distinction between diagnostic measurements and strategic measurements.
Diagnostic measurements monitor whether something is in control. A statistical process control chart with upper and lower limits is a good example of a diagnostic type system that can be used for controlling a process.
Strategic measurements define a strategy for competitive excellence and future success. The balanced scorecard is a strategic measurement system.
7. Sample Generic Measurements
|Balanced Scorecard Perspective and Sample Measurments|
|Perspective||Generic Measurement||Financial vs. Non-financial||Short Term vs. Long Term||Leading vs. Lagging||Internal vs. External|
|Sales growth||Financial||Short term||Lead & Lagging||External|
|Customer||Profitability||Financial||Short term||Lead & Lagging||External**|
|Market Share||Non-financial||Long term||Lead & Lagging||External|
|Retention||Non-financial||Short term||Lead & Lagging||External|
|Loyalty||Non-financial||Short term||Lead & Lagging||External|
|Satisfaction||Non-financial||Short term||Lead & Lagging||External|
|Cost||Financial||Short term||Lead & Lagging||Internal|
|Productivity||Non-financial||Short term||Lead & Lagging||Internal|
|Cycle time||Non-financial||Short term||Lead & Lagging||Internal|
|Quality||Non-financial||Short term||Lead & Lagging||Internal|
|Organizational Learning||Employee retention||Non-financial||Long term||Lead & Lagging||Internal|
|Climate for action or Culture||Non-financial||Long term||Leading||Internal|
*The objective is to balance the measurements associated with each perspective, all focused on a single strategy. These measurements should reinforce each other. Most of the measurements are both leading (drivers) and lagging (outcomes). The direction of the cause and effect relationships is from the bottom of the exhibit to the top.
** Many customers are internal (e.g., the next operation downstream), but the focus here is on the external customer.
8. Sample Generic Scorecard
|Customer||Continuously improve customer satisfaction.||Decrease lead time.*||Average lead time.*|
|Increase on time delivery.||Percentage of deliveries on time.|
|Reduce customer complaints.||Number of customer complaints.|
|Internal Business||Continuously improve business processes.||Decrease cycle time**||Average cycle time.**|
|Increase quality.||Number of defects and number of items reworked.|
|Increase productivity.||Average output per employee.|
|Innovation & Learning||Continuously develop and deliver new innovative products & services.||Increase sales of new products and services||Percentage of sales obtained from new products & services.|
|Reduce development time.||Average time from initial design to production.|
|Financial||Continuously improve financial performance.||Decrease costs.||Average unit costs.|
|Increase sales growth||Growth rate in sales.|
|Increase market share||Company's market share.|
|Increase return on investment.||Return on investment.|
*Lead time is the time from order receipt to delivery.
** Cycle time is the time from the start of a process to completion.
9. Sears Causal Model- Another example based on a causal model developed at Sears.
This graphic illustration was adapted from an illustration in Rucci, Kirn and Quinn (1998).
10. Federal Procurement Scorecard
An example adapted from an illustration on page 182 of Kaplan and Norton's 1996 book (The Balanced Scorecard) is provided below. (Summary).
11. ECI's Balanced Scorecard
An example based on an electronics company appears below based on an illustration in Kaplan and Norton 1992.
|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.|
12. United Methodist Publishing House Balanced Scorecard
An example of a scorecard developed for a non-profit organization is illustrated below based on a description provided in an article by Forsythe, Bunch and Burton 1999.
United Methodist Publishing House Balanced Scorecard
|Produce revenues sufficient to cover expenses and provide reserves for the future.||Increase in sales growth in relation to target.|
|Achieve corporate earnings percentage in relation to target.|
|Achieve ROI by each market business unit (profit center) in relation to target.|
|Maintain ability to attract and retain customers.||Customer satisfaction based on survey questionnaire.|
|On time product development and delivery.||Measures not specifically defined.|
|Maintain an effective and efficient distribution system.||Measure of error rates on shipments.|
|Produce high quality, cost effective products.||Measures not specifically defined.|
|Maintain internal process effectiveness.||Measures not specifically defined.|
|Maintain infrastructure needed for long-term growth and improvement.||Measures related to success in producing new products, projects and services.|
|Maintain staff competence.||Measures not specifically defined.|
|Goals related to learning - not specifically stated.||Measures of learning not specifically defined.|
13. Framework for an IS Scorecard
The following graphic provides a framework for developing a scorecard for the information systems function. For an explanation see the summary of Martinsons, Davison and Tse.
14. Criticisms of the Balanced Scorecard Framework and How it is Used
Ittner and Larcker argue that most companies have apparently adopted boilerplate versions of nonfinancial measurement frameworks such as Kaplan and Norton's Balanced Scorecard, but seldom establish the cause and effect linkages between the measurements and desired outcomes. This allows self-serving managers to chose and manipulate measurements solely to enhance their own earnings and bonuses. They discuss four mistakes that companies make when trying to measure nonfinancial performance and provide six steps to follow to do it right (Ittner and Larcker 2003 summary).
However, the BSC is more controversial than indicated by Ittner and Larcker. Some researchers have been very critical of the balanced scorecard. For example, Norreklit builds a case against the balanced scorecard by showing that it is not based on sound or logical arguments. Instead, according to Norreklit, the BSC text (i.e., the 1996 book) appeals mainly to emotion and the authority of Kaplan and Harvard and is a conceptually unclear model that relies on attractive adjectives and extensive use of analogies and unrestrained metaphors. It is impressionistic and closely resembles propaganda with heavily loaded words, metaphors, irony, exaggerations, incoherence and a climax. (Norreklit summary).
Another criticism relates to a concept developed by Reilly and Reilly referred to as "a measure network". From their viewpoint the balanced scorecard is incomplete, and the linkages among measurements and between perspectives is not explicit. The use of a measure network is suggested as a better approach. (Reilly and Reilly summary).
Kaplan and Norton extend the concepts related to the Balanced Scorecard in The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. (Summary). Strategy Maps are combined with Balanced Scorecards to provide a new framework for describing and implementing strategy. According to Kaplan and Norton, a strategy map is "a logical comprehensive architecture for describing strategy. It provides the foundation for designing a Balanced Scorecard that is the cornerstone of a strategic management system" (p. 10). Strategy Maps reveal the cause-and-effect linkages needed to transform intangible assets into tangible financial outcomes. Strategy Maps, if designed correctly, may provide the solution to the problems discussed by Ittner and Larcker mentioned in the section above. An adaptation of the Balanced Scorecard Generic Strategy Map appears is illustrated below.
Strategy Canvases and Value Curves
The strategy canvases illustrated in several articles by Kim and Mauborgne (1997, 1999 and 2002) might provide a better way to begin analyzing a company's strategy. A strategy canvas shows graphically how an organization's strategy (represented by the company's value curve) is different from it's competitors. The Southwest Airlines strategy canvas below conveys the idea. According Kim and Mauborgne, a value innovator also needs a strong tag line, e.g., for Southwest, "The speed of the plane at the price of the car - whenever you need it".
Perhaps, starting the strategy analysis and development process with strategy canvases and value curves would provide the basis for more effective strategy maps and balanced scorecards.
16. Other Related Concepts and Articles
Relationship Between Strategy, PLC and BSC
Hayes and Wheelwright discuss the connection between a companies process life cycle and product life cycle and how that relationship relates to strategy. The insights provided by these authors has some important implications for strategy development and the design of a balanced scorecard. See the two Hayes and Wheelwright summaries in the reference section below for more information.
The Business Ecosystem
The business ecosystem described by Iansiti and Levien provides another interesting concept related to developing strategy. Briefly the main idea is that a company needs to define the business environment or ecosystem in which it operates, and recognize the company's position within the system, to help determine which strategy to follow.
17. References and related summaries
Epstein, M. J. and J. Manzoni. 1997. The balanced scorecard and tableau de bord: Translating strategy into action. Management Accounting (August): 28-36. (Summary).
Fonvielle, W. and L. P. Carr. 2001. Gaining strategic alignment: Making scorecards work. Management Accounting Quarterly (Fall): 4-14. (Summary).
Forsythe, R., J. A. Bunch and E. J. Burton. 1999. Implementing ABC and the balanced scorecard at a publishing company. Management Accounting Quarterly (Fall): 10-18. (Summary).
Hayes, R. H. and S. C. Wheelwright. 1979. Link manufacturing process and product life cycles. Harvard Business Review (January-February): 133-140. (Summary).
Hayes, R. H. and S. C. Wheelwright. 1979. The dynamics of process-product life cycles. Harvard Business Review (March-April): 127-136. (Summary).
Ittner, C. D. and D. F. Larcker. 2003. Coming up short on nonfinancial performance measurement. Harvard Business Review (November): 88-95. (Summary).
Kaplan, R. and D. Norton. 1992.The balanced scorecard - Measures that drive performance. Harvard Business Review (Jan-Feb): 71-79. (Summary).
Kaplan, R. S. and D. P. Norton. 1993. Putting the balanced scorecard to work. Harvard Business Review (September-October): 134-147. Includes a scorecard for Rockwater, a global engineering and construction company. (Summary).
Kaplan, R. and D. Norton. 1996. Using the balanced scorecard as a strategic management system. Harvard Business Review (Jan-Feb). (Summary).
Kaplan, R. S. and D. P. Norton. 1996. The Balanced Scorecard: Translating Strategy into Action. Boston: Harvard Business School Press. (Summary).
Kaplan, R. and D. Norton. 1997. Why does business need a balanced scorecard? Journal of Cost Management (May/June): 5-10. (Summary).
Kaplan, R. and A. Atkinson. 1998. The balanced scorecard: Measuring total business unit performance. Advanced Management Accounting 3rd edition, Chapter 8. Prentice Hall.
Kaplan, R. S. and D. P. Norton. 2001. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Boston, MA: Harvard Business School Press. (Summary).
Kaplan, R. S. and D. P. Norton. 2001. Transforming the balanced scorecard from performance measurement to strategic management: Part I. Accounting Horizons (March): 87-104. (Summary).
Kaplan, R. S. and D. P. Norton. 2001. Transforming the balanced scorecard from performance measurement to strategic management: Part II. Accounting Horizons (June): 147-160. (Summary).
Kim, W. C. and R. Mauborgne. 1997. Value innovation: The strategic logic of high growth. Harvard Business Review (January-February): 103-112. (Summary).
Kim, W. C. and R. Mauborgne. 1999. Creating new market space: A systematic approach to value innovation can help companies break free from the competitive pack. Harvard Business Review (January-February): 83-93. (Summary).
Kim, W. C. and R. Mauborgne. 2002. Charting your company's future. Harvard Business Review (June): 77-83. (Summary).
Lyons, B., A. Gumbus and D. E. Bellhouse. 2003. Aligning capital investment decisions with the balanced scorecard. Journal of Cost Management (March/April): 34-38. (Summary).
Martinsons, M., R. Davison and D. Tse. 1999. The balanced scorecard: A foundation for the strategic management of information systems. Decision Support Systems (25): 71-88. (Summary).
Norreklit, H. 2003. The balanced scorecard: What is the score? A rhetorical analysis of the balanced scorecard. Accounting, Organizations and Society 28(6): 591-619. (Summary).
Porter, M. E. 1996. What is a strategy? Harvard Business Review (November-December): 61-78. (Summary).
Reilly, G. P. and R. R. Reilly. 2000. Using a measure network to understand and deliver value. Journal of Cost Management (November/December): 5-14. (Summary).
Rucci, A. J., S. P. Kirn and R. T. Quinn. 1998. The employee-customer-profit chain at Sears. Harvard Business Review (January-February): 82-97. (Summary).
Schonberger, R. J. 2008. Lean performance management (Metrics don't add up). Cost Management (January/February): 5-10. (Note: Schonberger criticizes the KPI or scorecard approach from the lean enterprise perspective. Summary).
Tatikonda, L. U. and R. J. Tatikonda. 1998. We need dynamic performance measures. Management Accounting (September): 49-53. (Summary).