balanced scorecard

balanced scorecard
Name	Balanced Scorecard
Field	Strategic management, Performance management
Originators	Robert S. Kaplan, David P. Norton
Year	1992
Related concepts	Key performance indicator, Strategy map, Total quality management

balanced scorecard is a strategic planning and management system used extensively in business, industry, and government worldwide to align business activities to the vision and strategy of the organization. Developed in the early 1990s, it provides a framework that translates an organization's strategic objectives into a coherent set of performance measures. The system goes beyond traditional financial metrics to include operational measures, offering a more 'balanced' view of organizational performance and facilitating improved strategic feedback and learning.

Overview

The balanced scorecard framework enables organizations to clarify their vision and strategy and translate them into actionable objectives. It is built on the premise that measuring performance through financial metrics alone is insufficient for the modern economic landscape. Instead, it advocates for a multi-faceted approach to performance management. This methodology has been widely adopted by corporations like Mobil Oil, Cigna, and British Telecommunications to drive major strategic transformations. The system encourages a focus on both short-term operational control and long-term strategic goals, creating a more holistic management process that integrates with initiatives like Six Sigma and Lean manufacturing.

Development and history

The concept was first introduced in a 1992 Harvard Business Review article titled "The Balanced Scorecard—Measures That Drive Performance," authored by accounting professor Robert S. Kaplan and management consultant David P. Norton. Their research, initially involving companies such as Analog Devices, sought to create a new performance management model. The foundational ideas were later expanded in their seminal 1996 book, *The Balanced Scorecard: Translating Strategy into Action*. This work built upon earlier management concepts, including the *Tableau de Bord* used in France and ideas from pioneers like Peter Drucker regarding management by objectives. The framework's evolution continued with subsequent publications like *The Strategy-Focused Organization* and its integration with tools like Strategy maps.

Four perspectives

The classic balanced scorecard suggests that an organization be viewed from four interrelated perspectives, each with distinct objectives and measures. The **Financial perspective** focuses on traditional measures of economic success, such as return on investment and economic value added, important to stakeholders like shareholders. The **Customer perspective** examines how the organization is perceived by its clients, tracking metrics like customer satisfaction and market share in segments served by firms like Walmart or Samsung. The **Internal Business Processes perspective** looks at the operational efficiency of key processes critical to achieving customer and financial objectives, akin to those optimized in Toyota Production System. Finally, the **Learning and Growth perspective** focuses on the intangible drivers of future success, such as employee capabilities, information system quality, and organizational culture, areas championed by firms like Google and Microsoft.

Implementation and use

Successful implementation typically begins with executive leadership from the Chief Executive Officer and involves creating a Strategy map to visually articulate cause-and-effect relationships between strategic objectives. Organizations like the United States Army and the City of Charlotte have adapted the framework for public sector use. The process involves selecting key performance indicators for each perspective, setting targets, and aligning strategic initiatives, often supported by specialized software from vendors like SAP SE or Oracle Corporation. Regular strategic review meetings, similar to those in the General Electric management system, are essential for reviewing metrics, analyzing performance, and fostering organizational learning and strategy adjustment.

Criticisms and limitations

Critics argue that the balanced scorecard can become an overly complex bureaucratic exercise if not carefully managed. Scholars like Michael Porter have emphasized that it is a tool for implementing strategy, not for formulating it. Some studies, including those published in the MIT Sloan Management Review, suggest that selecting the wrong metrics can lead to misguided incentives and sub-optimal performance, a problem analogous to Goodhart's law. Others note that the original model may not adequately address external factors like environmental, social, and corporate governance concerns or the dynamics of network-based organizations in the era of Amazon and Facebook. Implementation can also be resource-intensive, requiring significant commitment from the board of directors and senior management.

Variations and extensions

The original framework has inspired numerous adaptations. The **Strategy Map**, developed by Kaplan and Norton, provides a visual representation of strategy. The **Public Sector Scorecard** modifies the perspectives for government and non-profit entities, as seen in adaptations by the World Bank and various municipal governments. Integrated frameworks combine the scorecard with other systems, such as the European Foundation for Quality Management model. The **Sustainability Balanced Scorecard** incorporates a fifth perspective focused on environmental and social performance, responding to pressures from entities like the United Nations Global Compact. Other derivatives include the **Performance Prism** and adaptations for specific industries like healthcare and education.

Category:Management Category:Strategic management Category:Performance management