Using the Balanced Scorecard as a Strategic Management System (Companies…
Using the Balanced Scorecard
as a Strategic Management System
by Robert S. Kaplan and David P. Norton
The balanced scorecard supplemented traditional fi nancial measures with criteria that measured performance from three additional perspectives – those of customers, internal business processes, and learning and growth.
It therefore enabled companies to track fi nancial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth
The scorecard wasn’t a replacement for financial measures; it was their complement.
Managers using the balanced scorecard do not have to rely on short-term financial measures as the sole indicators of the company’s performance.
The scorecard lets them introduce four new management processes that, separately and in combination, contribute to linking long-term strategic objectives with short-term actions.
The first new process – translating the vision – helps managers build a consensus around the organization’s vision and strategy.
For people to act on the words in vision and strategy statements, those statements must be expressed as an integrated set of objectives and measures, agreed upon by all senior executives, that describe the long-term drivers of success.
The second process – communicating and linking – lets managers communicate their strategy up and down the organization and link it to departmental and individual objectives.
The scorecard gives managers a way of ensuring that all levels of the organization understand the long-term strategy and that both departmental and individual objectives are aligned with it.
The third process – business planning – enables companies to integrate their business and financial plans.
when managers use the ambitious goals set for balanced scorecard measures as the basis for allocating resources and setting priorities, they can undertake and coordinate only those initiatives that move them toward their long-term strategic objectives.
The scorecard thus enables companies to modify strategies to reflect real-time learning
The fourth process – feedback and learning – gives companies the capacity for what we call strategic learning.
Existing feedback and review processes focus on whether the company, its departments, or its individual employees have met their budgeted financial goals.
Communicating and Linking
Broad participation in creating a scorecard takes longer, but it offers several advantages: Information from a larger number of managers is incorporated into the internal objectives;
getting managers to buy into the scorecard is only a first step in linking individual actions to corporate goal
The balanced scorecard signals to everyone what the organization is trying to achieve for shareholders and customers alike
Communicating and educating. Implementing a strategy begins with educating those who have to execute it.
Communicating the balanced scorecard promotes commitment and accountability to the business’s long-term strategy
Managing Strategy: Four Processes
Translating the vision
-Clarifying the vision
Communicating and Linking
-Communicating and educating
-Linking rewards to performance measures
-Aligning strategic initiatives
Feedback and Learning
-Articulating the shared vision
-Supplying strategic feedback
-Facilitating strategy review and learnig
The problem is that most organizations have separate procedures and organizational units for strategic planning and for resource allocation and budgeting
To formulate their strategic plans, senior executives go off-site annually and engage for several days in active discussions facilitated by senior planning and development managers or external consultants
Which document do corporate managers discuss in their monthly and quarterly meetings during the following year? Usually only the budget, because the periodic reviews focus on a comparison of actual and budgeted results for every line item
When is the strategic plan next discussed? Probably during the next annual off-site meeting, when the senior managers draw up a new set of three-, five-, and ten-year plans
The very exercise of creating a balanced scorecard forces companies to integrate their strategic planning and budgeting processes and therefore helps to ensure that their budgets support their strategies
In establishing milestones, managers are expanding the traditional budgeting process to incorporate strategic as well as financial goals
At the end of the business-planning process, managers should have set targets for the long-term objectives they would like to achieve in all four scorecard perspectives; they should have identified the strategic initiatives required and allocated the necessary resources to those initiatives; and they should have established milestones for the measures that mark progress toward achieving their strategic goals
Feedback and Learning
The balanced scorecard supplies three elements that are essential to strategic learning
First, it articulates the company’s shared vision, defi ning in clear and operational terms the results that the company, as a team, is trying to achieve
Second, the scorecard supplies the essential strategic feedback system. A business strategy can be viewed as a set of hypotheses about cause-and-effect relationships
Third, the scorecard facilitates the strategy review that is essential to strategic learning
Companies are using the scorecard to
clarify and update strategy
clarify and update strategy;
communicate strategy throughout the company;
align unit and individual goals with the strategy;
link strategic objectives to long-term targets and annual budgets;
identify and align strategic initiatives;
and conduct periodic performance reviews to learn about and improve strategy