The Balanced Scorecard: Translating Strategy into Action, Robert Kaplan and David Norton, (Brighton: Harvard Business Press, 1996).
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The Balanced Scorecard Synopsis
In The Balanced Scorecard: Translating Strategy into Action, authors Robert Kaplan and David Norton address the issues which modern businesses face with traditional performance measures. Historically, businesses measured performance with financial metrics. They did this in a retroactive fashion, looking at past transactions to understand how well the business performed. As a result, past data was the pillar to inform strategy for future decisions and operations. This was relevant during the industrial age when performance was primarily measured by the output of goods produced.
Modern companies, however, present new challenges in measuring performance. These companies hold assets that are typically intangible, thus making traditional industrial-based accounting methods less effective. The balanced scorecard provides a comprehensive view of the factors that contribute to a company’s performance. It does this by introducing new perspectives to supplement traditional performance measurement. In addition to financial, these new perspectives include customer, internal business processes, and learning and growth perspective. By including all four perspectives, leaders can truly understand the performance of a business. Moreover, they are able to create better strategies for future growth.
The financial perspective is the most important one as it is the basis for all others. It should link to the corporate strategy with a cause-and-effect relationship and represent the long-term objectives of the business. The corporate strategy threads through all perspectives of the balanced scorecard. Thus, a change in the financial perspective will likely change the other perspectives.
With the customer perspective, companies need to understand how well they are meeting the demands of their target customers and its market segments. To understand this, there are five performance measures that businesses can look at: customer satisfaction, loyalty, retention, acquisition, and profitability. Measuring these areas for performance and incorporating this perspective into the organization’s strategy can help inform whether the organization is excelling in their markets.
Leaders can manage three classes of attributes to impact these metrics. They include:
- Product and service attributes, such as functionality, quality, and price.
- Customer relationships; specifically the quality of the buying experience and the personal relationships
- Brand through image and reputation
Organizations need to also recognize that the customer perspective is only relevant if you are providing a quality product. Without a quality product, you will not have demand. Without demand, you will not have customers. Therefore, the first and most important factor in driving customer perspective is still a quality product.
Internal-business process perspective
Internal-business processes are the company components that deliver the goals of the customers and other stakeholders. Organizations should approach this perspective by starting from scratch rather than improving on existing solutions. Instead of the traditional approach involving monitoring costs and quality and efficiency of existing processes, revamp the whole approach. Start with the basics. From there, layer on your changes. By starting from scratch, this will provide an opportunity to innovate and find creative solutions.
The three steps to the internal-business process perspective are:
- Innovation – validate the market and create the product
- Operation – create the product and deliver to customers
- Post-Sale Service – service the customer
Learning and growth perspective
The learning and growth perspective ties together all the other perspectives by focusing on growing the organization’s capabilities. This focuses on developing three areas of the organization: employee capabilities, information system capabilities, and motivation, empowerment, and alignment.
Employees are the number one resource for driving a company forward. They are the sources of innovation and are at the heart of an organization’s progress. As a result, companies need to invest in your employees through education to ensure that they continue to hone and leverage their skills. Pair this with motivation and alignment with the corporate strategy in order to draw on the employees’ strengths to create new organizational capabilities. Finally, information systems capabilities can enable the cohesive sharing of information throughout the company. This means the knowledge and learnings from one group can be shared and leveraged efficiently by another group. The result: the organization can take a forward-looking view.
Implementing a Balanced Scorecard with strategy
To reap the benefits of the balanced scorecard, all four perspectives must work together to drive towards the corporate strategy. There are three things that leaders need to take into consideration to ensure alignment between the perspective and the scorecard. They are: cause-and-effect relationships, performance drivers, and linkage to financials. Within each perspective, there may be as many as seven performance measures. However, it is important that each measure be weighed equally and given similar attention as they should all simultaneously be imperative for the overall objective.
When putting the balanced scorecard into practice, involve all stakeholders as well as those who are responsible for executing the strategy. By communicating this to all relevant individuals, you can increase alignment and understanding of what is important to the organization. After aligning people, leaders need to also align the organization’s physical and financial assets with the strategy. To do this, translate the strategy into an actionable plan. Break apart financial goals from long-term into short and mid-term. Rationalize all strategic initiatives that need to take place in this timeline. Determine those which require cross-functional participation and ensure both parties cooperate.
- The balanced scorecard is used by modern organizations to identify areas that will help align the organization’s activities towards the objectives.
- In addition to financial perspectives, the balanced scorecard brings in customer, internal business processes, and learning and growth as a perspective for measuring performance.
- When implementing the balanced scorecard, ensure that all relevant team members who will be executing the strategy are involved.
The Balanced Score Card Authors
Robert Kaplan is an Emeritus Professor of Leadership Development at the Harvard School of Business. He was an accounting academic and is best known for co-creating the Balanced Scorecard. His contributions to the accounting field are significant, landing him a spot in the Accounting Hall of Fame. Kaplan continues to share his insights with the world by being one of the most prolific case writers in the world.
David Norton is an American business executive who co-founded the Balanced Scorecard. After pursuing his Ph.D. in Business Administration at Harvard University, he co-founded a management consulting firm, which was later acquired by KPMG Peat Marwick. He served as a firm partner until 1992 when he left and founded Renaissance Solutions Inc.