Kaplan Norton Article Part II

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2001 American Accounting Association

Accoun ting Horizons

Vol. 15 No. 2

Ju ne 2001

pp. 147160

COMMENTARY

Transforming the Balanced Scorecardfrom Performance Measurement to

Strategic Management: Part II

Robert S. Kaplan and David P. Norton

Robert S . Kaplan is a Professor at H arvard University and David P.

Norton is found er and president of the Bala nced S corecard Collabo-

rative in Lincoln, Massachusetts.

In a previous p aper (Kaplan an d Norton 2001b), we described th e role for st ra tegy

ma ps a nd Balan ced Scorecards to develop perform an ce objectives an d m easu res linked

to str at egy. With th is paper, we show how organ izat ions u se th eir scorecards to align

key man agemen t pr ocesses and system s to the str at egy. We also discuss t he relat ion-

ship of th e Balan ced Scorecard (BSC) to oth er finan cial an d cost m easu rem ent initia-

tives, such as shareholder value metrics and activity-based costing, and quality pro-

gram s. We conclude with suggestions about opportu nities for addit iona l resear ch onmeasurement an d man agement systems.

THE FIVE P RINCIP LES OF A STRATEGY-FOCUS ED ORGANIZATION

When a sked t o describe how the Balan ced Scorecard h elped them achieve break -

th rough perform an ce, execut ives of adopting organ izat ions cont inua lly referred to two

words: alignmentand focus (Kaplan an d Norton 2001a, Chap ter 1). Although ea ch or-

ganizat ion achieved str at egic alignmen t an d focus in different ways, at different paces

an d in differen t sequ ences, each eventua lly used a comm on set of five principles, which

we refer t o as t he P rinciples of a St ra tegy-Focused Or ganizat ion, port ra yed in F igur e 1.

Principle #1: Translate the Strategy to Operational Terms

Organizat ions tra nslate their stra tegy int o the logical ar chitectur e of a stra tegy

ma p a nd Ba lanced Scorecard to specify in deta il the critical element s for t heir growth

strategies (Kaplan and Norton 2001b). These create a common and understandable

point of reference for all organizational u nits an d emp loyees.

Principle #2: Align the Organization to the Strategy

Organizations consist of numerous sectors, business units, and specialized depart-

ment s, each with its own operat ions a nd often its own st ra tegy. Fun ctiona l departm ents,

such as finance, manufacturing, marketing, sales, engineering, and purchasing, have


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148 Accoun ting Horizons/ J un e 2001

FIGURE1

ThePrinciplesofaStr

ategy-FocusedOrganizatio

n

Sourc

e:Kaplan

andNorton

(2001a)


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Tran sforming the Balan ced S corecard from Perform ance Measu rement to Strategic Man agem ent: Part II 149

th eir own bodies of knowledge, lan guage, an d cultur e. Fun ctional silos a rise a nd be-

come a m ajor bar rier t o str at egy implement at ion since most organ izat ions h ave great

difficulty commu nicat ing an d coord ina tin g across th ese specialt y functions. For orga ni-

zational perform an ce to be more th an th e sum of its par ts, individual str at egies must be

link ed an d int egrat ed. The corporat e role defines th e link ages expected t o crea te syn-ergy and ensu res th at th e linka ges actua lly occur.

Figure 2 shows the linka ges at th e Mobil North Amer ican Mar keting an d Refining

division (NAM&R). The high-level st ra tegic them es in #1 guide the development of th e

Balan ced Scorecards in th e business u nits in #2, which a re eith er geograp hic regions or

product lines, such as lubricants. Each unit formulates a strategy appropriate for its

ta rget ma rk et in light of the specific circumst an ces it facescompet itors, mar ket op-

portunities, and critical processesbut that is consistent with the themes and priori-

ties of NAM&R. The m easu res a t t he individual busin ess-un it levels do not h ave to add

to a divisiona l measu re, unlike finan cial measu res th at aggregate easily from sub-units

to depart men ts t o higher organ izat iona l levels. The business-un it ma na gers choose lo-

cal measures tha t influence but ar e not n ecessar ily identical t o the divisiona l scorecard

measures.

Beyond aligning t he bu siness un its, str at egy-focused organizat ions mu st align th eir

sta ff fun ctions an d sha red service unit s, such a s hu ma n r esour ces, inform at ion t echn ol-

ogy, pur cha sing, environment al, and finan ce as in #3 of Figur e 2. Often th is alignm ent

is accomplished with service agreement s between each fun ctional depar tm ent a nd t he

business u nits. Man agemen t a nd cost a ccoun ting textbooks describe how to assign th e

costs of support depart ment s t o production depart ment s an d selling units. The scorecard

appr oach is m uch m ore compr ehensive. In a ddition t o cont ra cting on pr ice or cost, t he

sta ff fun ctions an d th e line bus iness un its a gree to the m enu of services to be provided,

including t heir fun ctionality, quality level, response t ime, an d cost. Th is service a gree-men t becomes t he ba sis of the Ba lanced Scorecard const ru cted by t he functiona l de-

par tm ent. The departm ents cust omers a re th e int ern al business units, the value propo-

sition is defined by th e negotiat ed service agr eement , an d t he finan cial objectives ar e

derived from th e negotiated bu dget for the departm ent. Next, the depart ment identi-

fies the inter na l process an d learn ing and growth objectives tha t dr ive its cust omer a nd

fina ncial objectives.

When t his pr ocess is complete, all the organ izat iona l un itsline bu siness un its a nd

sta ff fun ctionshave well-defined str at egies th at ar e ar ticulat ed an d mea sur ed by Bal-

an ced Scorecards a nd st ra tegy maps. Becau se the local str at egies are int egrat ed, th ey

reinforce each other . This alignment allows corpora te-level synergies to emer ge in which

th e whole exceeds th e sum of th e individua l par ts.

Linkages can also be established across corpora te bounda ries, as in #4 of Exhibit 2.

Several compa nies const ru cted Ba lanced Scorecards to define th eir relat ionsh ips with

key suppliers, cust omer s, out sour cing vendors, an d joint ventu res. Compa nies us e such

scorecards with extern al pa rt ies to be explicit a bout (1) the objectives of the relat ion-

ship, and (2) how to measure the contribution and performance of each party to the

relat ionsh ip in ways oth er t ha n just price or cost. Sometimes, par ticularly in govern-

men ta l sett ings, scorecards ar e defined for high-level th emes, such a s sa lmon recovery

in Washin gton Sta te a nd economic developmen t in t he City of Cha rlott e, tha t en com-

pass m ultiple depart ment s a nd governm ent agencies. No one depar tmen t or agency

ha s complete jur isdiction or ability to influen ce th e desired out comes . The scorecar d forthe high-level th eme provides t he m echan ism th at engages m ana gers from mu ltiple


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FIGURE2

AligningtheOrga

nizationtoItsStrategy

Sourc

e:Kaplan

andNorton

(2001a)


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depar tm ent s an d agencies to discuss h ow th ey can cont ribut e to achieving high-level

st ra tegic objectives.

Prin ciple #3: Make Strategy Eve ryone s Everyd ay Jo b

The CEOs an d senior leadersh ip team s of adopting organ izat ions u nder stood th atth ey could not implement th e new str at egy by themselves. They want ed cont ribut ions

actions an d ideasfrom everyone in th e organization. The th ird pr inciple of stra tegy-

focused organizat ions r equires th at all employees un derst an d th e stra tegy and condu ct

th eir day-to-day business in ways t ha t cont ribut e to th e success of th at str at egy. This is

not top-down direction . This is t op-down communication . Senior man agers understa nd

th at individua ls far from corporat e and r egiona l headqua rt ers can creat e considera ble

value by findin g new an d impr oved ways of doing bus iness.

Execut ives sta rt th is process by using the Ba lanced Scorecard t o communicate and

educate the organization about the new strategy. Some observers are skeptical about

communicating strategy to the entire organization, feeling that valuable information

would be leaked t o competit ors . Mobils Br ian Bak ers r esponse wa s:

Knowing our st rat egy will do them litt le good u nless th ey can execut e it. On t he other

ha nd , we ha ve no cha nce of execut ing our st ra tegy un less our people know it. Its a

chan ce well have t o tak e.

Companies can educate the employees about surprisingly sophisticated business

concepts. To un derst an d th e scorecard, employees lear n a bout cust omer segment at ion,

variable contr ibution m argin, and dat abase ma rketing. Instea d of assum ing that the

work force is incapable of under sta nding t hese ideas, ma na gers ma ke concerted effort s

to educate em ployees at all levels of the organ ization about key str at egic component s.Pet er Dru cker (1954) int roduced ma na gemen t-by-objectives (MBO) nea rly 50 year s

ago. But Dru ckers excellent concept wa s implem ent ed poorly in pr actice, leadin g to

MBO in m ost organ izat ions focusing on a myria d of local m easu res a nd in itiat ives not

linked t o high-level organ izat iona l objectives or coord ina ted with ea ch oth er. The Bal-

an ced Scorecard ena bles per sona l objective settin g to be integra ted across t he organ iza-

tion and linked t o high-level st ra tegic objectives.

Companies communicate their strategy and scorecard holistically. Instead of cas-

cadin g objectives th rough t he cha in of comm an d, as is n orm ally done, th ey comm un i-

cat e the complete st ra tegy down to individual employees. Individuals an d depar tm ent s

at lower levels are challenged to develop their own objectives in light of the broader

priorities; in some cases, personal scorecards ar e us ed to set personal objectives. Man ypleasan t su rpr ises result from th is process as individuals find n ew ways to do th eir jobs

an d identify ar eas outside th eir norma l responsibilities to which t hey can cont ribut e.

Fina lly, most organizat ions linkincent ive com pensation to th e Balan ced Scorecard,

typically after m an aging with th e scorecard for a year. The execut ives m ust be confi-

dent t ha t t hey ar e using sensible mea sur es, ha ve valid and r eliable data collection pr o-

cesses to support th e measur es, and ha ve measures n ot easily manipulated. Once they

become confident about t heir m easu res an d dat a, th ey tu rn th e powerful compen sat ion

lever on. Brian Baker at Mobil declared:

People got t ha t scorecard out a nd did t he calculat ions t o see how much money th eywere going to get. We could not have gotten the same focus on the scorecard if we

didnt h ave th e link to pay.


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Gerry Isom, CEO of Cigna Pr opert y and Cas ua lty agreed:

It would be h ar d to get people to accept a tota lly differen t wa y of mea sur emen t if you

dont rein force th at cha nge th rough incent ive compensa tion.

A study of 214 compa nies r eport s t ha t 88 percent of responding compa nies consid-

ered t he u se of Balan ced Scorecard mea sur es linked to rewar d system s to be effective

(Mercer & Co. 1999).

Incentive systems based on t he Ba lanced Scorecard vary widely. Some compa nies,

such a s Mobil, deploy a t eam -based in cent ive system , using bus iness-un it a nd division

scorecards as t he ba sis for r eward s. Other s use a combina tion of business-un it, com-

pany, and individual performance rewards. Compensation can be based on up to 25

str at egic measu res. Inst ead of promoting confusion, as ma ny fear, th e scorecard com-

pensa tion systems h eight en t he employees inter est in a ll component s of th e str at egy

and further their demand for knowledge and information about scorecard measures.

Str at egy becomes everyones everyday job becau se employees now un derst an d th e str at -egy an d ar e motivat ed to make it su cceed.

Principle #4: Make Strategy A Continual P rocess

Most organizations build t heir m ana gement processes a round t he budget and oper-

at ing plan . The month ly ma na gement m eeting reviews perform an ce vs. plan, discusses

varian ces from past perform an ce, an d request s action plan s for dea ling with sh ort -ter m

varian ces. There is nothin g wrong with t his,per se. Tactical ma na gement is n ecessar y.

But in m ost organizat ions t ha ts all there is. Besides th e ann ua l stra tegic-plann ing

meeting, no meeting occurs where managers discuss strategy. We surveyed partici-

pant s at conferences an d lear ned th at 85 percent of their ma na gement team s spendless th an one h our per month discussing stra tegy.

The adopting BSC companies introduce a new double-loop process to manage

stra tegy. The process integrat es the man agement of ta ctics with t he m ana gement of

str at egy, using th ree import an t pr ocesses, as depicted in Figur e 3.

First, organizations link strategy to the bud geting process. They use t he Bala nced

Scorecard as a screen to evaluate potential investments and initiatives. At Chemical

Bank, where more than 70 different requests for funding were submitted, executives

foun d th at over 50 percent of th e proposed initiat ives h ad n o impact on a ny scorecard

mea sur e. These were discar ded as nonst ra tegic. They also foun d th at despite ha ving

more tha n t hr ee times as m an y proposed initiatives as scorecar d measu res, about 20

percent of th e meas ur es on t he scorecard h ad n o initiat ives associated with improving

th em. A new process for m an aging str at egic initiat ives emerged th at included a ut horiz-

ing fun ds for st ra tegic initiat ives within t he an nu al budget process.

Companies usually have an operational bud get that authorizes spending for pro-

ducing and delivering existing pr oducts a nd ser vices, and ma rk eting an d selling them

to existing cust omer s. They now intr oduce a strategy bud getth at ena bles them t o de-

velop entirely new capabilities, reach new customers and markets, and make radical

improvemen ts in existing pr ocesses an d capa bilities. This distinction is essent ial. J ust

as the Balanced Scorecard attempts to protect long-term objectives from short-term

suboptimization, th e budgeting process mu st pr otect th e long-ter m initia tives from th e

pressu res t o deliver short-ter m fina ncial perform an ce.


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FIGURE3

MakingStrateg

yaContinualProcess

Sourc

e:Kaplan

andNorton

(2001a)


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The second st ep to mak e str at egy a cont inua l process intr oduces a sim ple m anage-

m ent m eeting to review stra tegy. As obvious as th is step soun ds, such meet ings did not

exist in th e past. Now, man agement m eetings ar e scheduled on a monthly or quar terly

basis to discuss t he Bala nced Scorecard so th at a br oad spectr um of ma na gers comes

togeth er t o discuss th e str at egy. A new kind of ener gy is creat ed. People use ter ms likefun and exciting to describe the meetings. One senior executive reported that the

meetings became so popular, there was standing room only and he could have sold

tickets t o them.

Informa tion feedback systems change to support the new ma na gement meetings.

Initia lly, th ese systems a re designed for t he n eeds of th e execut ive tea m. But organ iza-

tions can go fur th er by crea ting open reporting in which performa nce results ar e ma de

available to everyone in t he organizat ion. Building upon t he pr inciple tha t str at egy is

everyones job, th ey empower everyone by giving t hem th e kn owledge needed t o do

their jobs. At Cigna Property & Casualty, a first-line underwriter sees performance

reports before a direct-line execut ive if she h appen s t o be monitoring th e feedback sys-

tem. This creates a set of cultural issues that revolutionize traditional, hierarchical

appr oaches to inform at ion a nd power.

Finally, a process for learning and adapting the strategy evolves. The initial Bal-

an ced Scorecard r epresent s hypotheses about t he st ra tegy; at time of form ulat ion it is

the best estimate of the actions expected to create long-term financial success. The

scorecard d esign pr ocess ma kes t he caus e-an d-effect linka ges in th e str at egic hypoth -

eses explicit. As t he scorecard is put into action an d feedback systems begin t heir re-

port ing on a ctu al resu lts, an organizat ion can t est t he hypotheses of its str at egy. Some,

like Brown & Root and Sears, did the testing formally, using statistical correlations

between mea sur es on t he scorecard t o deter mine wh eth er, for exam ple, employee em-

powerment programs were increasing customer satisfaction and improved processes.Others, like Chemical Ban k, tested t he h ypoth eses more qualitatively at meetings where

ma na gers validat ed and r efined the pr ogram s being used to drive service quality and

customer retention.

Still oth ers us e the meet ings to sear ch for n ew stra tegic opport un ities tha t were not

cur ren tly on th eir scorecar d (see Mint zberg [1987] an d Ha mel [2000] for discuss ions of

emergent str at egy). Ideas a nd lear ning emerge cont inua lly from within t he organiza-

tion. Rat her th an waiting for n ext years budget cycle, th e priorities and th e scorecards

ar e upda ted imm ediately. Much like a na vigat or guiding a vessel on a long-term jour -

ney, consta ntly sensing the shifting winds a nd curr ents a nd consta nt ly adapt ing the

cour se, the execut ives of th e successful compa nies u se th e ideas a nd learn ing genera ted

by their organization to fine-tune their strategies. Instead of being an annual event,

str at egy form ulat ion, test ing, and r evision became a cont inua l process.

Using the Balanced Scorecard in this manner matches what Bob Simons (1995,

Cha pter 5; 2000, Cha pter 10) describes as a n int era ctive cont rol system , cha ra cter ized

by four defining characteristics:

Informat ion in the control system provides an importan t a nd r ecurr ing agenda

for senior man agement.

The system demands frequent an d regular att ention from operating mana gers

at all levels of the organ izat ion.

Data generat ed by th e system ar e interpr eted and discussed in face-to-face meet-ings of super iors, subordina tes, an d peers.


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The system is a cata lyst for th e cont inual challenge and debate of underlying

data , assumpt ions, and action plan s.

Simons resear ch r eveals how ma na gers choose one system , such a s th e budget system ,

the r evenue reporting system, or t he project m an agement system, and mak e it th eirintera ctive system. After th at resear ch was condu cted, th e Balan ced Scorecard em erged

to provide a genera l templat e for a n organizat ions inter active system. Rat her th an

ha ving t o choose one from th e ma ny existing systems, execut ives can design th eir own

inter active system t o focus int ensely on st ra tegy and its imp lementa tion. And t he pr o-

cess of const ru cting t heir cust omized inter active system pr ovides t he a dditiona l benefit

of team building and gaining coherence and commitment within the senior manage-

men t t eam for t he st ra tegy. This leads na tu ra lly to the discussion of th e fifth prin ciple

to crea te a str at egy-focused organ izat ion.

Prin ciple #5: Mobilize Leade rship for Change

The first four principles focus on th e Bala nced Scorecard tool, fra mework, an d t heprocesses t o support it. To become tr uly st ra tegy-focused, h owever, r equires m ore t ha n

processes and tools. Ownership and active involvement of the executive team is the

single most importa nt condition for s uccess. Str at egy requires chan ge from virtu ally

every pa rt of the organization. Str at egy requires t eam work to coordina te t hese chan ges.

Str at egy implement at ion a lso requir es cont inua l focus on t he chan ge initia tives and on

th e perform an ce against ta rgeted outcomes. If th ose at t he top are n ot ener getic leaders

of the pr ocess, cha nge does not occur , stra tegy is not implement ed, and t he opport un ity

for br eakt hr ough perform an ce is lost.

A Balan ced Scorecard pr ogram sta rt s with t he r ecognition th at it is not a metr ics

pr oject; its a chan ge pr oject. In itia lly th e focus is on mobilization and creating m o-men tu m, t o get t he p rocess lau nched. Once m obilized, th e focus shifts t o governance

to insta ll the new perform an ce model. Finally, an d gradu ally over time, a n ew man -

agement system evolves, a strategic management system that institutionalizes the

new cultur al values a nd pr ocesses into a new system for m an aging. Convergence to

the new ma nagement system can ta ke two to three years.

In the mobilization phase, the leaders must make the organization understand why

cha nge is needed; the organization m ust be un frozen. Kott er (1996) describes how tran sfor-

ma tional change begins at th e top and with thr ee discrete actions by the leader s: (1) esta b-

lish a sense of urgency; (2) create the guiding coalition; and (3) develop a vision and a

str at egy. The leaders of successful Balan ced Scorecard organizat ions clearly followed this

mode. Several of the adopting companies were experiencing difficult times. The obviousth rea t of failure and loss of jobs was a motivator tha t creat ed receptivity for change. But the

role for t he Balanced Scorecard t o drive cha nge an d breakthr ough perform ance is not lim-

ited t o distr essed or failing compa nies. Often , execut ives a t compa nies curr ent ly doing well

creat e str etch ta rgets t o ensu re t ha t the organization does not become complacent . They

use the Balanced Scorecard t o commun icat e a vision for dram at ically bett er per form an ce

th an th e present . Execut ive leadersh ip makes the need for chan ge obvious to all.

Once the cha nge pr ocess is lau nched, execut ives est ablish a governance process t o

guide the transition. This process defines, demonstrates, and reinforces the new cul-

tural values to the organization. Breaking with traditional power-based structures is

importa nt . The crea tion of str at egy tea ms, town hall meetings, and open comm un ica-tions are all component s of th e new man agemen t a pproach.


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Embedding the new stra tegy an d cultur e into a new man agement system, however,

creat es a r isk tha t t he organizat ion fails to adapt to futu re shifts in opportu nities and

th rea ts. Good execut ives r ecognize tha t str at egies m ust cont inua lly evolve t o reflect

cha nges in t he compet itive lands cape. The ar t of th e leader is to delicat ely balan ce th e

ten sion between sta bility and cha nge.This concludes t he su mm ar y of th e five principles to become str at egy-focus ed. We

now tu rn to the relat ionsh ip of th e BSC to oth er impr ovement in itiatives and t o prom-

ising ar eas of fut ur e resear ch.

RELATIONSHIP OF B SC TO OTHER ORGANIZATIONAL

IMPROVEMENT INITIATIVES

The BSC emer ged in th e 1990s just as two oth er a pproachesactivity-based cost-

ing and shar eholder value man agementwere being advocat ed as measu rement sys-

tem s to help ma na gers improve organ izat iona l perform an ce. The th ree appr oaches do

not compet e with ea ch oth er; in fact t hey ar e highly compa tible and wh ile each can be

implemented independently of the others, organizations will get the greatest benefit

from integrat ing all thr ee.

Shareho lder Value Manage men t

Shareholder value metrics, such as residual income, economic value-added, and

sha reh older value-added (Myers 1996, 1997), addr ess t wo defects in t ra ditiona l finan -

cial perform an ce measu rem ent : th e overinvestmen t pr oblem when only net income or

earn ings is used as th e aggregate perform an ce measur e, an d the un derinvestmen t prob-

lem when a ra tiosuch as r etu rn -on-investm ent or r etu rn -on-equityis used. We en-

cour age man agers who operate under a shar eholder value discipline to use th at metr ic

as t heir overa rching measu re in t he fina ncial perspective. Within t he fina ncial perspec-tive of the BSC, the shareholder value metric is decomposed into the subobjectives of

cost r eduction, improved asset productivity, and revenue growth (see stra tegy map t em-

plate, Kapla n a nd Norton 2001b, Figur e 2). Customer objectives define t he st ra tegy for

revenue growth.

Mana gers operat ing only with shar eholder value metrics, and without th e more

comprehensive BSC measurement framework, often take a low-risk and short-term

pat hreduce costs an d dispose of under ut ilized a ssetsto achieve their finan cial im-

provemen ts. Growing revenues typically ta kes longer, involves m ore r isk, an d r equires

more nea r-term spending to develop new pr oducts, services, and m ar kets, enh an ce cus-

tomer relat ionsh ips, improve ser vice, an d increa se employee capabilities. Nothing in

sha reh older value ma na gement is incompa tible with revenu e growth. But th e finan cial

metrics in a shareholder value approach cannot serve as a vehicle for articulating a

revenue gr owth str at egy an d th e complemen ta ry pr ocesses for a chieving it. The BSC

complement s sha reholder value man agement by defining the dr ivers of revenue growth

explicit objectives an d mea sur es for t ar geted cust omer s, th e different iatin g cust omer

value proposition, the internal business processes for innovation and enhanced cus-

tomer relat ionsh ips, an d the needed infra str uctur e investm ents in people, systems, and

organ izat iona l alignm ent. It also helps execut ives ma na ge the tr ade-offs between sh ort -

ter m productivity improvemen ts an d long-ter m sust aina ble revenu e growth.

Activity-Base d Costin gActivity-based cost ing (ABC) was developed to corr ect anoth er defect in fina ncial


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systemsth e ina bility of tr aditional costing syst ems t o ident ify th e drivers of indirect

an d su pport costs (Kaplan an d Cooper 1998). ABC opera tes by r elating organizat iona l

spending to activities and processes that support the design, production, marketing,

an d delivery of products a nd services t o cust omer s.

O p e r a t io n a l L in k a g e

The first link age between ABC and t he BSC occur s in th e opera tiona l measu res of

th e BSCs int ern al pr ocess perspective. Three par am eters cost, qua lity, an d tim e

usually define the operating performance of any process. Quality and time are rela-

tively easy to mea sur e since th ey are based on physical mea sur ement s. Cost, however,

is an a na lytic concept th at can not be measu red by a stopwatch or a laser-gauging in-

str um ent . Only with an ABC model can organ izat iona l expenses be accur at ely tr aced to

processes of product developmen t, ma rk eting an d sales, man ufactur ing, distr ibution,

an d service delivery.

Customer Profi ta b i l i t y L inkage

A second linkage occur s when an ABC model is u sed t o measu re t he p rofitability of

individua l cust omer s (Kaplan an d Cooper 1998, Chapt er 10). The BSC customer per -

spective typically includes cust omer out come mea sur es su ch as acquisition, sa tisfac-

tion, retent ion, accoun t shar e, and m ar ket sh ar e. But compan ies a lso need to measu re

whether their loyal, satisfied customers are profitable. Balancing measures such as

cust omer profitability or per cent age of unpr ofitable cust omer s help ma na gers ensu re

th ey are not impr oving their customer m easu res a t t he expense of high-level finan cial

profitability measur es.

Budge t ing Linka geA third link age ar ises when t he ABC model is used for a ctivity-based bu dgeting:

combining in form at ion on th e forecasted volume an d m ix of products an d ser vices with

anticipated activity and process efficiencies to construct a bottom-up budget for forth-

coming periods (Kaplan and Cooper 1998, Chapter 15). With the BSC providing the

management process for defining the strategic budget, and activity-based budgeting

used to develop t he operat iona l budget (see discussion of th ese two budgets in Pr inciple

#4 above, Makin g Str at egy a Cont inua l Pr ocess), ma na gers h ave powerful an alytic

tools for t heir bu dgetin g processes.

ABC can also be combined with sha reh older value m an agemen t by applying ABC

principles to assign a ssets to activities an d th en t o cost objects. This en ables capita l

costs an d residua l income t o be calculated a t t he individual pr oduct a nd cust omer level.

Getting Started

Thus, shareholder value metrics, ABC, and the BSC play complementary roles.

People often ask , My organ izat ion ha s limited capa city for th ese ma jor cha nge initia-

tives. I can t do all thr ee at th e sam e tim e. Which should I do first?

1. If th e biggest pr oblems facing an organ izat ion a re lar ge, growing indirect a nd

support expenses, and inefficient processes, th en implement ABC first. It gives

ma nagers a deep understa nding of their cost st ructur e, helps th em t o identify

th e most costly an d n onvalue-added processes, and reveals how much of the growth


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in sup port resources can be reversed by takin g appr opria te a ctions with ineffi-

cient processes, complex products, or demanding customers.

2. If th e organization h as a low retur n on investment , a weak finan cial structure, a

low sales-to-asset ra tio, and h igh levels of work ing capita l, th en st ar t with sha re-

holder value m an agement . The sha reh older value appr oach highlight s th e ineffi-cient use of capita l an d pr ovides explicit incentives for ma na gers t o divest u nder -

perform ing assets an d increa se the ut ilization of th e rema ining assets.

3. If the organization wishes to implement a m ajor chan ge in its stra tegy, or h as

just been r estr uctur ed from a centr alized, fun ctional organ ization t o a decentr al-

ized, customer-focused one, then start with the BSC. No other tool facilitates

ma jor cha nges in str ategy bett er or faster .

Organizations ultimately benefit from all three measurement approaches: the fi-

nancial and investment discipline that comes from adopting a shareholder value ap-

proach; the deep understanding of cost structure and cost drivers that activity-based

costing pr ovides; an d th e integra ted fram ework for m an aging str at egy, including value

an d revenue drivers, tha t t he Balan ced Scorecard delivers.

Total Quality Manageme nt

Many companies also engage in quality initiatives. The causal linkages in a BSC

stra tegy map enha nce qua lity progra ms by art iculating th e two ways th at process im-

provements can link to strategic outcomes. First, quality improvements in the internal

perspective should impr ove one or more outcome m easu res in th e cust omer perspective;

second, quality improvements can lead to cost reduction, an outcome in the financial

perspective. The BSC enables ma na gers to describe how th ey expect t o tr an slat e quality

improvement s into higher revenu es, fewer as sets, less people, an d lower spen ding.The BSC process also guides organizations to redeploy their scarce resources of

people and funds a way from nonst ra tegic process improvemen ts a nd t owar d th ose pro-

cesses an d initiat ives most critical for implementing t he st ra tegy to achieve breakth rough

cust omer an d fina ncial per form an ce. In a ddition, building a Balan ced Scorecard often

reveals entir ely new processes at wh ich t he organizat ion m ust excel. Rat her t ha n just

improving existing processes, the scorecard process focuses quality initiatives on im-

proving th e perform an ce of th ese newly identified processes.

RES EARCH AGEND A ON ORGANIZATIONAL

PERFORMANCE MANAGEMENT

Dur ing the pa st t en year s, the Balan ced Scorecard evolved from a per form an ce mea-

surement system to an organizing framework for successful strategy implementation.

Changing wha t is mea sur ed profoun dly affects t he beha vior of ma na gers an d employees,

an d h elps organ izations deliver dr am at ically improved per form an ce. This is good n ews

for a ccount ing researchers. Accoun ta nts are in th e measu rement business and th e expe-

rience of adopting compa nies r eaffirms th at m easurem ent m atters. Moreover, th e experi-

ence affirms t ha t m anagement control system s m atter. Its not just whatis measured but

how th e measur ements are u sed tha t deter mines organizational su ccess. The impact of

the scorecard is reinforced when it is used in a multiplicity of management processes:

compen sat ion (th e most s tu died process by accoun ting r esearcher s); alignmen t of diverse

organ izationa l units t o a comm on st ra tegy; comm un icat ion a nd edu cat ion; setting indi-vidual objectives; linking st ra tegy, plan ning, resour ce allocat ion, a nd budgetin g; sett ing


13/14


ta rgets; exploiting inform at ion technology for new reporting present at ions; condu cting

man agement meetings interactively to promote testing, learn ing, and adapt at ion; and

senior lead ersh ips u se of mea sur ement to drive organ izat iona l cha nge. All these pr o-

cesses can be st ud ied to as sess t heir in dividua l and collective effectiveness.

Some good empirical work test s th e cau sal linkages th at un derlie the const ru ctionof str at egy ma ps (Itt ner a nd La rcker 1998; Ban ker et a l. 2000). Interest ing experimen -

tal work assesses how individuals respond to reports containing financial and nonfi-

na ncial data (Lipe and Sa lterio 2000; Swain et al. 1999). But t hese a re only the begin-

ning of promising research initiat ives on performa nce measur ement and man agement.

Ana lytic research can expand beyond cont ra cting issues t o address h ow synergies

nonlinear r etur nsar e creat ed when diverse individuals do th eir t asks in ways tha t

ar e in pha se with a nd r einforce each oth er. The successful BSC implement ers did n ot

hire n ew, more sk illed employees. They did n ot work th eir employees ha rder or longer.

They achieved the benefits by having their existing employees focus and align their

effort s aroun d a comm on str at egy. Un derst an ding how measu rem ent yields nonlinea r

per form an ce ret ur ns by coord ina tin g an d focusing employees effort could be fert ile

ground for analytic modeling.

Em pirical an d experimen ta l resear ch can explore several import an t issues. How can

ta rgets with compa ra ble degrees of difficulty be est ablished a cross diverse business an d

sha red s ervice un its? Mobil adopted a p rocess t hey called leveling to put all un its on a

level playin g field for rewa rd s. It called for active involvemen t of sen ior s ta ff specialists

an d ma na gerial peers to review, cha llenge, and eventu ally rat ify the t ar gets proposed by

decentr alized un its. Th e form of the r ewar d is a lso of int erest . Mobils pr evious policy re-

warded ma na gers who achieved their t ar gets, but gave zero rewar ds when perform an ce

fell short of tar gets. The new policy was a cont inuous r eward fun ction th at increa sed with

th e degree of difficulty of the t ar gets. As the CE O sta ted, I pr efer t o give a bett er r at ing fora ma na ger who str etches for a ta rget a nd falls a little short, th an to someone who beat s an

easy ta rget. J ust how to implement such a process in pr actice, of cour se, is a n ont rivial

ta sk for which additional r esearch could certa inly be beneficial. Ana lytic schemes alrea dy

exist for r ewarding t he a chievement of str etch ta rgets (Kaplan a nd Atkinson 1998, 773

780), but our experience with implementin g th ese schemes in pr actice is quite limited.

The visibility of a ma na gers a bility an d effort is heighten ed when th e BSC is used

as an interactive control system. A Mobil senior executive claimed, The process en-

ables me to see how ma na gers th ink, plan, an d execut e. I can see th e gaps. Such in-

crea sed observability of ma na gers per form an ce allows companies t o use subjective re-

war ds ba sed on ability an d effort , not t he second-best a pproach of rewar ding only on

resu lts. Again, empirical a nd experimen ta l resear ch can investigate t he effectiveness of

subjective rewar ds ba sed on su ch increa sed observability. How well ar e people ma king

subjective evaluat ions an d judgment s? Wha t kind of subjective judgment s can we con-

fidently allow individuals t o ma ke an d in wha t circums ta nces?

Many organizations obtain substantial commitment and contributions from their

employees with out intr oducing incent ive compen sat ion based on BSC m easu res. Indi-

viduals want to be part of and contribute to a successful organization. Without the

guida nce of a BSC, however, employees ar e often jus t given a job to do, not a n opportu-

nity t o find n ew an d bett er wa ys to help th e organ ization achieve its st ra tegic objec-

tives. Thu s, resear ch on t he m ix between int rinsic and extr insic motivation can be ef-

fectively conducted with the comm un icat ion and per sona l goal-set tin g processes of th eBSC man agement system.


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The m ultiplicity of man agement processes requir ed to crea te st ra tegic focus in an

orga niza tion can be st ud ied. Are a ll crit ical? Is success a m ult iplicat ive model in which

th e perform an ce breakt hr oughs come from all processes being implemen ted effectively?

Or can some processes be effective an d deliver significan t resu lts with out being rein-

forced by others? This research will likely require intense field research, probably bystu dying an implementa tion in a m ulti-un it organ izat ion, where different un its adopted

different aspects of th e BSC ma na gement syst em. For exam ple, some un its might h ave

implement ed all five principles of a st ra tegy-focused orga nizat ion, while oth ers d id only

one or t wo. How did t his a ffect th e resu lting perform an ce of all these u nits?

During the past ten years, many organizations of all types and in all geographic

area s adopted perform ance man agement systems t ha t u se a m ixtu re of financial an d

nonfina ncial met rics. In these two paper s, we present a fra mework th at describes the

meas ur ement an d ma na gement system s of successful organ izat ions we observe in pr ac-

tice. With t he widespread a vailability of organ izat iona l implemen ta tions a nd a fra me-

work to describe how the implemen ta tions were perform ed, accoun ting r esear cher s can

now begin a systema tic research pr ogram , using mu ltiple research m eth ods, to explore

the key factors in implementing more effective measurement and management sys-

tem s. Such a system at ic explora tion provides a valua ble complemen t t o th e individua l

case st udies to be produced in th e year s ah ead.

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Kaplan Norton Article Part II