Today’s post is about a classic of business literature. The Balanced Scorecard from Robert Kaplan and David Norton is an approach to business strategy. It is hard to argue with the basic idea that businesses should regularly monitor a variety of success factors and report how they are succeeding on each.
A balanced scorecard contains a range of measures in each of four perspectives: 1) Financial, 2) Customer, 3) Internal-Business, and 4) Learning and Growth. The precise measures used depend upon the strategy. For example, the measures might include customer satisfaction for the customer perspective and return on capital employed for the financial perspective. Each firm therefore has to design its own balanced scorecard that fits with whatever the firm is trying to achieve. “..a balanced scorecard should not be created by emulating the best measures used by the best companies” (Kaplan and Norton 1996, page 286).
As each scorecard is unique clearly there is a lot of effort involved in implementing a balanced scorecard. That said I buy the argument that the act of constructing the scorecard is useful in itself. It helps you think deeply about strategy. The measurement system also helps keep you focused after implementation.
Having a regular report on progress may seem obvious but the book is nearly twenty years old so it may have been more radical when initially published. Furthermore, there remain many organizations who don’t seem to have meaningful systems to measure performance against strategy. Lets hope in another twenty years that can’t be said.
One of the most interesting themes in the book is the idea that: “A strategy is a set of hypotheses about cause and effect” (Kaplan and Norton 1996, page 30). This helps to make sense of the scorecard. Many of the measures are not valuable to achieve in themselves but early indicators that the strategy is working. Theoretically this means that a company could hit nearly all of it targets and fail miserably if the indicators were wrongly chosen. It is thus clearly important to pick the measures well. That said any firm that is able to adopt a balanced scorecard is probably better run than most and, hopefully, likely to pick better measures.
Read: Robert S. Kaplan and David P. Norton, 1996, The Balanced Scorecard: Translating Strategy Into Action, Harvard Business Review Press