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Using the Balanced Scorecard as a Strategic Management System

by Robert S. Kaplan and David P. Norton

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Using the Balanced Scorecard as a Strategic

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The Idea in Brief The Idea in Practice

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Why do budgets often bear little direct relation to a company’s long-term strategic objectives? Because they don’t take enough into consideration. A balanced scorecard augments traditional financial measures with benchmarks for perfor-mance in three key nonfinancial areas:

• a company’s relationship with its customers

• its key internal processes

• its learning and growth.

When performance measures for these areas are added to the financial metrics, the result is not only a broader perspective on the company’s health and activities, it’s also a powerful organizing framework. A sophis-ticated instrument panel for coordinating and fine-tuning a company’s operations and businesses so that all activities are aligned with its strategy.

The balanced scorecard relies on four processes to bind short-term activities to long-term objectives:

1. TRANSLATING THE VISION.

By relying on measurement, the scorecard forces managers to come to agreement on the metrics they will use to operationalize their lofty visions.

Example:

A bank had articulated its strategy as pro-viding “superior service to targeted custom-ers.” But the process of choosing operational measures for the four areas of the scorecard made executives realize that they first needed to reconcile divergent views of who the targeted customers were and what constituted superior service.

2. COMMUNICATING AND LINKING.

When a scorecard is disseminated up and down the organizational chart, strategy be-comes a tool available to everyone. As the high-level scorecard cascades down to indi-vidual business units, overarching strategic objectives and measures are translated into objectives and measures appropriate to each particular group. Tying these targets to individual performance and compensation systems yields “personal scorecards.” Thus, individual employees understand how their own productivity supports the overall strategy.

3. BUSINESS PLANNING.

Most companies have separate procedures (and sometimes units) for strategic planning and budgeting. Little wonder, then, that typi-cal long-term planning is, in the words of one executive, where “the rubber meets the sky.” The discipline of creating a balanced score-card forces companies to integrate the two functions, thereby ensuring that financial budgets do indeed support strategic goals. After agreeing on performance measures for the four scorecard perspectives, companies

identify the most influential “drivers” of the desired outcomes and then set milestones for gauging the progress they make with these drivers.

4. FEEDBACK AND LEARNING.

By supplying a mechanism for strategic feed-back and review, the balanced scorecard helps an organization foster a kind of learning often missing in companies: the ability to re-flect on inferences and adjust theories about cause-and-effect relationships.

Feedback about products and services. New learning about key internal processes. Tech-nological discoveries. All this information can be fed into the scorecard, enabling strategic refinements to be made continually. Thus, at any point in the implementation, managers can know whether the strategy is working—and if not, why.


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Editor’s Note:

In 1992, Robert S. Kaplan and David P. Norton’s concept of the balanced score-card revolutionized conventional thinking about performance metrics. By going beyond tradi-tional measures of financial performance, the concept has given a generation of managers a better understanding of how their companies are really doing.

These nonfinancial metrics are so valuable mainly because they predict future financial performance rather than simply report what’s already happened. This article, first published in 1996, describes how the balanced scorecard can help senior managers systematically link current actions with tomorrow’s goals, focusing on that place where, in the words of the authors, “the rubber meets the sky.”

As companies around the world transformthemselves for competition that is based oninformation, their ability to exploit intangi-ble assets has become far more decisivethan their ability to invest in and managephysical assets. Several years ago, in recogni-

tion of this change, we introduced a conceptwe called the balanced scorecard. The bal-anced scorecard supplemented traditionalfinancial measures with criteria that mea-sured performance from three additionalperspectives—those of customers, internalbusiness processes, and learning and growth.(See the exhibit “Translating Vision andStrategy: Four Perspectives.”) It therefore en-abled companies to track financial resultswhile simultaneously monitoring progressin building the capabilities and acquiringthe intangible assets they would need forfuture growth. The scorecard wasn’t a re-placement for financial measures; it wastheir complement.

Recently, we have seen some companiesmove beyond our early vision for the score-card to discover its value as the cornerstoneof a new strategic management system. Usedthis way, the scorecard addresses a seriousdeficiency in traditional management systems:their inability to link a company’s long-termstrategy with its short-term actions.



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Most companies’ operational and man-agement control systems are built around fi-nancial measures and targets, which bearlittle relation to the company’s progress inachieving long-term strategic objectives.Thus the emphasis most companies placeon short-term financial measures leaves agap between the development of a strategyand its implementation.

Managers using the balanced scorecard donot have to rely on short-term financial mea-sures as the sole indicators of the company’sperformance. The scorecard lets them intro-duce four new management processes that,separately and in combination, contribute tolinking long-term strategic objectives withshort-term actions. (See the exhibit “Manag-ing Strategy: Four Processes.”)

The first new process—translating the vision—helps managers build a consensus aroundthe organization’s vision and strategy. De-spite the best intentions of those at the top,lofty statements about becoming “best inclass,” “the number one supplier,” or an “em-powered organization” don’t translate easilyinto operational terms that provide usefulguides to action at the local level. For peopleto act on the words in vision and strategystatements, those statements must be expressedas an integrated set of objectives and mea-sures, agreed upon by all senior executives,that describe the long-term drivers of success.

The second process—communicating andlinking—lets managers communicate theirstrategy up and down the organization andlink it to departmental and individual objec-tives. Traditionally, departments are evaluatedby their financial performance, and individualincentives are tied to short-term financialgoals. The scorecard gives managers a way ofensuring that all levels of the organization un-derstand the long-term strategy and that bothdepartmental and individual objectives arealigned with it.

The third process—business planning—enables companies to integrate their businessand financial plans. Almost all organizationstoday are implementing a variety of changeprograms, each with its own champions,gurus, and consultants, and each competing forsenior executives’ time, energy, and resources.Managers find it difficult to integrate thosediverse initiatives to achieve their strategicgoals—a situation that leads to frequent disap-

pointments with the programs’ results. Butwhen managers use the ambitious goals setfor balanced scorecard measures as the basisfor allocating resources and setting priorities,they can undertake and coordinate only thoseinitiatives that move them toward their long-term strategic objectives.

The fourth process—feedback and learning—gives companies the capacity for what wecall strategic learning. Existing feedback andreview processes focus on whether the com-pany, its departments, or its individual em-ployees have met their budgeted financialgoals. With the balanced scorecard at thecenter of its management systems, a companycan monitor short-term results from the threeadditional perspectives—customers, internalbusiness processes, and learning and growth—and evaluate strategy in the light of recentperformance. The scorecard thus enablescompanies to modify strategies to reflectreal-time learning.

None of the more than 100 organizationsthat we have studied or with which we haveworked implemented their first balancedscorecard with the intention of developing anew strategic management system. But ineach one, the senior executives discoveredthat the scorecard supplied a framework andthus a focus for many critical managementprocesses: departmental and individual goalsetting, business planning, capital allocations,strategic initiatives, and feedback and learn-ing. Previously, those processes were uncoor-dinated and often directed at short-termoperational goals. By building the scorecard,the senior executives started a process ofchange that has gone well beyond the origi-nal idea of simply broadening the company’sperformance measures.

For example, one insurance company—let’scall it National Insurance—developed its firstbalanced scorecard to create a new vision for it-self as an underwriting specialist. But once Na-tional started to use it, the scorecard allowedthe CEO and the senior management team notonly to introduce a new strategy for the organi-zation but also to overhaul the company’smanagement system. The CEO subsequentlytold employees in a letter addressed to thewhole organization that National wouldthenceforth use the balanced scorecard andthe philosophy that it represented to managethe business.

Robert S. Kaplan

is the Marvin Bower Professor of Leadership Development at Harvard Business School, in Boston, and the chairman and a cofounder of Balanced Scorecard Collaborative, in Lincoln, Massachusetts. David P. Norton is the CEO and a cofounder of Balanced Scorecard Collaborative. They are the coauthors of four books about the balanced scorecard, the most re-cent of which is Alignment: Using the Balanced Scorecard to Create Corporate Synergies (Harvard Business School Publishing, 2006).



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Translating Vision and Strategy: Four Perspectives

Managing Strategy: Four Processes



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National built its new strategic managementsystem step-by-step over 30 months, with eachstep representing an incremental improve-ment. (See the exhibit “How One CompanyBuilt a Strategic Management System…”) Theiterative sequence of actions enabled thecompany to reconsider each of the four newmanagement processes two or three timesbefore the system stabilized and becamean established part of National’s overall man-agement system. Thus the CEO was able totransform the company so that everyonecould focus on achieving long-term strategicobjectives—something that no purely financialframework could do.

Translating the Vision

The CEO of an engineering constructioncompany, after working with his senior man-agement team for several months to developa mission statement, got a phone call from aproject manager in the field. “I want you toknow,” the distraught manager said, “that Ibelieve in the mission statement. I want toact in accordance with the mission state-

ment. I’m here with my customer. What amI supposed to do?”

The mission statement, like those of manyother organizations, had declared an intentionto “use high-quality employees to provideservices that surpass customers’ needs.” Butthe project manager in the field with his em-ployees and his customer did not know howto translate those words into the appropriateactions. The phone call convinced the CEOthat a large gap existed between the missionstatement and employees’ knowledge of howtheir day-to-day actions could contribute to re-alizing the company’s vision.

Metro Bank (not its real name), the result ofa merger of two competitors, encountered asimilar gap while building its balanced score-card. The senior executive group thought ithad reached agreement on the new organiza-tion’s overall strategy: “to provide superiorservice to targeted customers.” Research hadrevealed five basic market segments amongexisting and potential customers, each withdifferent needs. While formulating the mea-sures for the customer-perspective portion

How One Company Built a Strategic Management System...



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of their balanced scorecard, however, it be-came apparent that although the 25 seniorexecutives agreed on the words of the strat-egy, each one had a different definition ofsuperior service and a different image ofthe targeted customers.

The exercise of developing operationalmeasures for the four perspectives on thebank’s scorecard forced the 25 executives toclarify the meaning of the strategy state-ment. Ultimately, they agreed to stimulaterevenue growth through new products andservices and also agreed on the three mostdesirable customer segments. They devel-oped scorecard measures for the specificproducts and services that should be deliv-ered to customers in the targeted segmentsas well as for the relationship the bankshould build with customers in each seg-ment. The scorecard also highlighted gapsin employees’ skills and in information sys-tems that the bank would have to close inorder to deliver the selected value proposi-tions to the targeted customers. Thus, creat-ing a balanced scorecard forced the bank’s

senior managers to arrive at a consensus andthen to translate their vision into terms thathad meaning to the people who would real-ize the vision.

Communicating and Linking

“The top ten people in the business now un-derstand the strategy better than ever before.It’s too bad,” a senior executive of a major oilcompany complained, “that we can’t put thisin a bottle so that everyone could share it.”With the balanced scorecard, he can.

One company we have worked with de-liberately involved three layers of managementin the creation of its balanced scorecard.The senior executive group formulated thefinancial and customer objectives. It thenmobilized the talent and information in thenext two levels of managers by having themformulate the internal-business-processand learning-and-growth objectives thatwould drive the achievement of the financialand customer goals. For example, knowingthe importance of satisfying customers’ ex-pectations of on-time delivery, the broader



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group identified several internal businessprocesses—such as order processing, sched-uling, and fulfillment—in which the com-pany had to excel. To do so, the companywould have to retrain frontline employeesand improve the information systems avail-able to them. The group developed perfor-mance measures for those critical processesand for staff and systems capabilities.

Broad participation in creating a scorecardtakes longer, but it offers several advantages:Information from a larger number of manag-ers is incorporated into the internal objectives;the managers gain a better understanding ofthe company’s long-term strategic goals; andsuch broad participation builds a strongercommitment to achieving those goals. Butgetting managers to buy into the scorecard isonly a first step in linking individual actions tocorporate goals.

The balanced scorecard signals to everyonewhat the organization is trying to achieve forshareholders and customers alike. But toalign employees’ individual performanceswith the overall strategy, scorecard users gen-erally engage in three activities: communicat-

ing and educating, setting goals, and linkingrewards to performance measures.

Communicating and educating. Implement-ing a strategy begins with educating thosewho have to execute it. Whereas some organi-zations opt to hold their strategy close tothe vest, most believe that they should dis-seminate it from top to bottom. A broad-basedcommunication program shares with allemployees the strategy and the critical objec-tives they have to meet if the strategy is tosucceed. Onetime events such as the distribu-tion of brochures or newsletters and theholding of “town meetings” might kick off theprogram. Some organizations post bulletinboards that illustrate and explain the balancedscorecard measures, then update them withmonthly results. Others use groupware andelectronic bulletin boards to distribute thescorecard to the desktops of all employeesand to encourage dialogue about the mea-sures. The same media allow employees tomake suggestions for achieving or exceedingthe targets.

The balanced scorecard, as the embodimentof business unit strategy, should also be com-

...Around the Balanced Scorecard



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municated upward in the organization—tocorporate headquarters and to the corporateboard of directors. With the scorecard, businessunits can quantify and communicate theirlong-term strategies to senior executives usinga comprehensive set of linked financial andnonfinancial measures. Such communicationinforms the executives and the board in spe-cific terms that long-term strategies designedfor competitive success are in place. The mea-sures also provide the basis for feedback andaccountability. Meeting short-term financialtargets should not constitute satisfactory per-formance when other measures indicate thatthe long-term strategy is either not working ornot being implemented well.

Should the balanced scorecard be communi-cated beyond the boardroom to external share-holders? We believe that as senior executivesgain confidence in the ability of the scorecardmeasures to monitor strategic performanceand predict future financial performance, theywill find ways to inform outside investorsabout those measures without disclosing com-petitively sensitive information.

Skandia, an insurance and financial servicescompany based in Sweden, issues a supple-ment to its annual report called “The Busi-ness Navigator”—“an instrument to helpus navigate into the future and therebystimulate renewal and development.” Thesupplement describes Skandia’s strategy andthe strategic measures the company uses tocommunicate and evaluate the strategy. Italso provides a report on the company’s per-formance along those measures during theyear. The measures are customized for eachoperating unit and include, for example,market share, customer satisfaction and re-tention, employee competence, employeeempowerment, and technology deployment.

Communicating the balanced scorecardpromotes commitment and accountability tothe business’s long-term strategy. As one exec-utive at Metro Bank declared, “The balancedscorecard is both motivating and obligating.”

Setting goals. Mere awareness of corporategoals, however, is not enough to change manypeople’s behavior. Somehow, the organiza-tion’s high-level strategic objectives and mea-sures must be translated into objectives andmeasures for operating units and individuals.

The exploration group of a large oil com-pany developed a technique to enable and

encourage individuals to set goals for them-selves that were consistent with the organiza-tion’s. It created a small, fold-up, personalscorecard that people could carry in theirshirt pockets or wallets. (See the exhibit “ThePersonal Scorecard.”) The scorecard containsthree levels of information. The first de-scribes corporate objectives, measures, andtargets. The second leaves room for translatingcorporate targets into targets for each busi-ness unit. For the third level, the companyasks both individuals and teams to articulatewhich of their own objectives would be con-sistent with the business unit and corporateobjectives, as well as what initiatives theywould take to achieve their objectives. It alsoasks them to define up to five performancemeasures for their objectives and to set targetsfor each measure. The personal scorecardhelps to communicate corporate and busi-ness unit objectives to the people and teamsperforming the work, enabling them totranslate the objectives into meaningful tasksand targets for themselves. It also lets themkeep that information close at hand—intheir pockets.

Linking rewards to performance measures.Should compensation systems be linked tobalanced scorecard measures? Some compa-nies, believing that tying financial compensa-tion to performance is a powerful lever, havemoved quickly to establish such a linkage.For example, an oil company that we’ll callPioneer Petroleum uses its scorecard as thesole basis for computing incentive compensa-tion. The company ties 60% of its executives’bonuses to their achievement of ambitioustargets for a weighted average of four financialindicators: return on capital, profitability,cash flow, and operating cost. It bases theremaining 40% on indicators of customersatisfaction, dealer satisfaction, employee sat-isfaction, and environmental responsibility(such as a percentage change in the level ofemissions to water and air). Pioneer’s CEOsays that linking compensation to the score-card has helped to align the company withits strategy. “I know of no competitor,” hesays, “who has this degree of alignment. It isproducing results for us.”

As attractive and as powerful as such linkageis, it nonetheless carries risks. For instance,does the company have the right measures onthe scorecard? Does it have valid and reliable



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data for the selected measures? Could unin-tended or unexpected consequences arise fromthe way the targets for the measures areachieved? Those are questions that companiesshould ask.

Furthermore, companies traditionally han-dle multiple objectives in a compensationformula by assigning weights to each objec-tive and calculating incentive compensationby the extent to which each weighted objec-tive was achieved. This practice permits sub-stantial incentive compensation to be paid ifthe business unit overachieves on a few objec-tives even if it falls far short on others. A bet-ter approach would be to establish minimumthreshold levels for a critical subset of thestrategic measures. Individuals would earnno incentive compensation if performance ina given period fell short of any threshold.This requirement should motivate people toachieve a more balanced performance acrossshort- and long-term objectives.

Some organizations, however, have reducedtheir emphasis on short-term, formula-basedincentive systems as a result of introducing the

balanced scorecard. They have discovered thatdialogue among executives and managersabout the scorecard—both the formulation ofthe measures and objectives and the explana-tion of actual versus targeted results—providesa better opportunity to observe managers’performance and abilities. Increased knowl-edge of their managers’ abilities makes iteasier for executives to set incentive rewardssubjectively and to defend those subjectiveevaluations—a process that is less susceptibleto the game playing and distortions associatedwith explicit, formula-based rules.

One company we have studied takes anintermediate position. It bases bonuses forbusiness unit managers on two equallyweighted criteria: their achievement of afinancial objective—economic value added—over a three-year period and a subjectiveassessment of their performance on measuresdrawn from the customer, internal-business-process, and learning-and-growth perspectivesof the balanced scorecard.

That the balanced scorecard has a role toplay in the determination of incentive com-

The Personal Scorecard



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pensation is not in doubt. Precisely what thatrole should be will become clearer as morecompanies experiment with linking rewards toscorecard measures.

Business Planning

“Where the rubber meets the sky”: That’show one senior executive describes hiscompany’s long-range-planning process. Hemight have said the same of many othercompanies because their financially basedmanagement systems fail to link change pro-grams and resource allocation to long-termstrategic priorities.

The problem is that most organizationshave separate procedures and organizationalunits for strategic planning and for resourceallocation and budgeting. To formulate theirstrategic plans, senior executives go off-siteannually and engage for several days inactive discussions facilitated by senior plan-ning and development managers or externalconsultants. The outcome of this exercise is astrategic plan articulating where the com-pany expects (or hopes or prays) to be inthree, five, and ten years. Typically, suchplans then sit on executives’ bookshelves forthe next 12 months.

Meanwhile, a separate resource-allocationand budgeting process run by the financestaff sets financial targets for revenues, ex-penses, profits, and investments for the nextfiscal year. The budget it produces consistsalmost entirely of financial numbers thatgenerally bear little relation to the targets inthe strategic plan.

Which document do corporate managersdiscuss in their monthly and quarterly meet-ings during the following year? Usually onlythe budget, because the periodic reviewsfocus on a comparison of actual and budgetedresults for every line item. When is the strate-gic plan next discussed? Probably during thenext annual off-site meeting, when the seniormanagers draw up a new set of three-, five-,and ten-year plans.

The very exercise of creating a balancedscorecard forces companies to integrate theirstrategic planning and budgeting processesand therefore helps to ensure that their bud-gets support their strategies. Scorecard usersselect measures of progress from all fourscorecard perspectives and set targets for eachof them. Then they determine which actions

will drive them toward their targets, identifythe measures they will apply to those driversfrom the four perspectives, and establish theshort-term milestones that will mark theirprogress along the strategic paths they haveselected. Building a scorecard thus enables acompany to link its financial budgets with itsstrategic goals.

For example, one division of the Style Com-pany (not its real name) committed to achiev-ing a seemingly impossible goal articulatedby the CEO: to double revenues in five years.The forecasts built into the organization’sexisting strategic plan fell $1 billion short ofthis objective. The division’s managers, afterconsidering various scenarios, agreed tospecific increases in five different performancedrivers: the number of new stores opened,the number of new customers attracted intonew and existing stores, the percentage ofshoppers in each store converted into actualpurchasers, the portion of existing customersretained, and average sales per customer.

By helping to define the key drivers of rev-enue growth and by committing to targetsfor each of them, the division’s managerseventually grew comfortable with the CEO’sambitious goal.

The process of building a balanced scorecard—clarifying the strategic objectives and thenidentifying the few critical drivers—alsocreates a framework for managing an organi-zation’s various change programs. Theseinitiatives—reengineering, employee empow-erment, time-based management, and totalquality management, among others—promiseto deliver results but also compete with oneanother for scarce resources, including thescarcest resource of all: senior managers’ timeand attention.

Shortly after the merger that created it,Metro Bank, for example, launched morethan 70 different initiatives. The initiativeswere intended to produce a more competitiveand successful institution, but they were inad-equately integrated into the overall strategy.After building their balanced scorecard,Metro Bank’s managers dropped many ofthose programs—such as a marketing effortdirected at individuals with very high networth—and consolidated others into initia-tives that were better aligned with the com-pany’s strategic objectives. For example, themanagers replaced a program aimed at en-



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hancing existing low-level selling skills witha major initiative aimed at retraining sales-persons to become trusted financial advisers,capable of selling a broad range of newlyintroduced products to the three selectedcustomer segments. The bank made bothchanges because the scorecard enabled it togain a better understanding of the programsrequired to achieve its strategic objectives.

Once the strategy is defined and the driversare identified, the scorecard influences man-agers to concentrate on improving or reengi-neering those processes most critical to theorganization’s strategic success. That is howthe scorecard most clearly links and alignsaction with strategy.

The final step in linking strategy to actionsis to establish specific short-term targets, ormilestones, for the balanced scorecard mea-sures. Milestones are tangible expressions ofmanagers’ beliefs about when and to whatdegree their current programs will affectthose measures.

In establishing milestones, managers areexpanding the traditional budgeting processto incorporate strategic as well as financialgoals. Detailed financial planning remainsimportant, but financial goals taken bythemselves ignore the three other balancedscorecard perspectives. In an integratedplanning and budgeting process, executivescontinue to budget for short-term financialperformance, but they also introduce short-term targets for measures in the customer,internal-business-process, and learning-and-growth perspectives. With those milestonesestablished, managers can continually testboth the theory underlying the strategy andthe strategy’s implementation.

At the end of the business-planning pro-cess, managers should have set targets for thelong-term objectives they would like toachieve in all four scorecard perspectives;they should have identified the strategic initi-atives required and allocated the necessaryresources to those initiatives; and they shouldhave established milestones for the measuresthat mark progress toward achieving theirstrategic goals.

Feedback and Learning

“With the balanced scorecard,” a CEO of an en-gineering company told us, “I can continuallytest my strategy. It’s like performing real-time

research.” That is exactly the capability thatthe scorecard should give senior managers: theability to know at any point in its implementa-tion whether the strategy they have formu-lated is, in fact, working, and if not, why.

The first three management processes—translating the vision, communicating andlinking, and business planning—are vital forimplementing strategy, but they are not suffi-cient in an unpredictable world. Togetherthey form an important single-loop-learningprocess—single-loop in the sense that the ob-jective remains constant, and any departurefrom the planned trajectory is seen as a defectto be remedied. This single-loop process doesnot require or even facilitate reexaminationof either the strategy or the techniques usedto implement it in light of current conditions.

Most companies today operate in a turbu-lent environment with complex strategies that,though valid when they were launched, maylose their validity as business conditionschange. In this kind of environment, wherenew threats and opportunities arise constantly,companies must become capable of what ChrisArgyris calls double-loop learning—learningthat produces a change in people’s assump-tions and theories about cause-and-effect rela-tionships. (See “Teaching Smart People How toLearn,” HBR May–June 1991.)

Budget reviews and other financiallybased management tools cannot engagesenior executives in double-loop learning—first, because these tools address perfor-mance from only one perspective, and sec-ond, because they don’t involve strategiclearning. Strategic learning consists of gath-ering feedback, testing the hypotheses onwhich strategy was based, and making thenecessary adjustments.

The balanced scorecard supplies three ele-ments that are essential to strategic learning.First, it articulates the company’s sharedvision, defining in clear and operational termsthe results that the company, as a team, istrying to achieve. The scorecard communi-cates a holistic model that links individualefforts and accomplishments to businessunit objectives.

Second, the scorecard supplies the essentialstrategic feedback system. A business strategycan be viewed as a set of hypotheses aboutcause-and-effect relationships. A strategicfeedback system should be able to test, vali-



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date, and modify the hypotheses embeddedin a business unit’s strategy. By establishingshort-term goals, or milestones, within thebusiness-planning process, executives areforecasting the relationship between changesin performance drivers and the associatedchanges in one or more specified goals. Forexample, executives at Metro Bank estimatedthe amount of time it would take for improve-ments in training and in the availability ofinformation systems before employees couldsell multiple financial products effectivelyto existing and new customers. They also esti-mated how great the effect of that selling

capability would be.Another organization attempted to validate

its hypothesized cause-and-effect relation-ships in the balanced scorecard by measuringthe strength of the linkages among measuresin the different perspectives. (See the exhibit“How One Company Linked Measures fromthe Four Perspectives.”) The company foundsignificant correlations between employees’morale, a measure in the learning-and-growthperspective, and customer satisfaction, animportant customer perspective measure.Customer satisfaction, in turn, was correlatedwith faster payment of invoices—a relation-ship that led to a substantial reduction inaccounts receivable and hence a higher returnon capital employed. The company also foundcorrelations between employees’ morale andthe number of suggestions made by employ-ees (two learning-and-growth measures) aswell as between an increased number ofsuggestions and lower rework (an internal-business-process measure). Evidence of suchstrong correlations help to confirm the orga-nization’s business strategy. If, however, theexpected correlations are not found overtime, it should be an indication to executivesthat the theory underlying the unit’s strategymay not be working as they had anticipated.

Especially in large organizations, accumu-lating sufficient data to document significantcorrelations and causation among balancedscorecard measures can take a long time—months or years. Over the short term, manag-ers’ assessment of strategic impact may haveto rest on subjective and qualitative judg-ments. Eventually, however, as more evidenceaccumulates, organizations may be able toprovide more objectively grounded estimatesof cause-and-effect relationships. But just get-ting managers to think systematically aboutthe assumptions underlying their strategyis an improvement over the current practiceof making decisions based on short-termoperational results.

Third, the scorecard facilitates the strategyreview that is essential to strategic learning.Traditionally, companies use the monthly orquarterly meetings between corporate anddivision executives to analyze the most recentperiod’s financial results. Discussions focus onpast performance and on explanations of whyfinancial objectives were not achieved. Thebalanced scorecard, with its specification of

How One Company Linked Measures from the Four Perspectives



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the causal relationships between performancedrivers and objectives, allows corporate andbusiness unit executives to use their periodicreview sessions to evaluate the validity of theunit’s strategy and the quality of its execution.If the unit’s employees and managers havedelivered on the performance drivers (retrain-ing of employees, availability of informationsystems, and new financial products and ser-vices, for instance), then their failure toachieve the expected outcomes (higher salesto targeted customers, for example) signalsthat the theory underlying the strategy maynot be valid. The disappointing sales figuresare an early warning.

Managers should take such disconfirmingevidence seriously and reconsider theirshared conclusions about market conditions,customer value propositions, competitors’behavior, and internal capabilities. The resultof such a review may be a decision to reaffirmtheir belief in the current strategy but to ad-just the quantitative relationship among thestrategic measures on the balanced scorecard.But they also might conclude that the unitneeds a different strategy (an example ofdouble-loop learning) in light of new knowl-edge about market conditions and internalcapabilities. In any case, the scorecard willhave stimulated key executives to learn aboutthe viability of their strategy. This capacityfor enabling organizational learning at theexecutive level—strategic learning—is whatdistinguishes the balanced scorecard, makingit invaluable for those who wish to create astrategic management system.

Toward a New Strategic Management System

Many companies adopted early balancedscorecard concepts to improve their perfor-mance measurement systems. They achievedtangible but narrow results. Adopting thoseconcepts provided clarification, consensus,and focus on the desired improvements inperformance. More recently, we have seen

companies expand their use of the balancedscorecard, employing it as the foundation of anintegrated and iterative strategic managementsystem. Companies are using the scorecard to

• clarify and update strategy;• communicate strategy throughout the

company;• align unit and individual goals with the

strategy;• link strategic objectives to long-term tar-

gets and annual budgets;• identify and align strategic initiatives;

and• conduct periodic performance reviews to

learn about and improve strategy.The balanced scorecard enables a com-

pany to align its management processes andfocuses the entire organization on imple-menting long-term strategy. At National In-surance, the scorecard provided the CEO andhis managers with a central frameworkaround which they could redesign each pieceof the company’s management system. Andbecause of the cause-and-effect linkages in-herent in the scorecard framework, changesin one component of the system reinforcedearlier changes made elsewhere. Therefore,every change made over the 30-month pe-riod added to the momentum that kept theorganization moving forward in the agreed-upon direction.

Without a balanced scorecard, most organi-zations are unable to achieve a similar consis-tency of vision and action as they attempt tochange direction and introduce new strategiesand processes. The balanced scorecard pro-vides a framework for managing the imple-mentation of strategy while also allowing thestrategy itself to evolve in response tochanges in the company’s competitive, mar-ket, and technological environments.

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Further Reading

A R T I C L E S

Putting the Balanced Scorecard to Work



September–October 1993Product no. 4118

In this article, the authors argue that the bal-anced scorecard is more than a measurement system. Four characteristics make it distinctive: It is a top-down reflection of the company’s mission and strategy; it is forward-looking; it integrates external and internal measures; and it helps a company focus. Together, these char-acteristics enable a scorecard to serve as a means for motivating and implementing breakthrough performance.

Profit Priorities from Activity-Based Costing

by Robin Cooper and Robert S. Kaplan


May–June 1991Product no. 3588

When used as the financial metric of a bal-anced scorecard, activity-based costing (ABC) can help managers find the places in their or-ganizations where improvement is likely to have the greatest payoff. Any way you slice it—by product, customer, distribution channel, or reading—ABC helps you see how an activity generates revenue and consumes resources. Once you understand these relationships, you’re better positioned to take the actions that will increase your selling margins and reduce operating expenses.


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