"Balanced Scorecard": 
A NEW APPROACH TO MANAGING ⁽¹⁾

The Balanced Scorecard has evolved since we first developed and introduced the concept as a new framework for measuring organization performance. It was originally proposed to overcome the limitations of managing only with financial measures. Financial measures reported on outcomes, lagging indicators, but did not communicate the drivers of future performance, the indicators of how to create new value through investments in customers, suppliers, employees, technology, and innovation. The Balanced Scorecard provided a framework to look at the strategy used for value creation from four different perspectives:

1. Financial. The strategy for growth, profitability, and risk viewed from the perspective of the shareholder
   
2. Customer. The strategy for creating value and differentiation from the perspective of the customer.
   
3. Internal business processes. The strategic priorities for various business processes, which create customer and shareholder satisfaction.
   
4. Learning and growth. The priorities to create a climate that supports organizational change, innovation, and growth.

With the Balanced Scorecard, corporate executives could now measure how their business units created value for current and future customers. While retaining an interest in financial performance, the Balanced Scorecard clearly revealed the drivers of superior, long-term value and competitive performance.

We quickly learned that measurement has consequences beyond just reporting on the past. Measurement creates focus for the future because the measures chosen by managers communicate to the organization what is important. To take full advantage of this power, measurement should be integrated into a management system. Thus we refined the Balanced Scorecard concept and showed how it could move beyond a performance measurement system to become the organizing framework for a strategic management system. A strategy scorecard replaced the budget as the center for management processes. In effect, the Balanced Scorecard became the operating system for a new strategic management process.

As organizations managed with the scorecard, they made further discoveries. The speed and magnitude of the results achieved by the early adopters revealed the power of the Balanced Scorecard management system to focus the entire organization on strategy. To achieve such intense strategic focus the organizations had instituted comprehensive, transformational change. They redefined their relationships with the customer, reengineered fundamental business processes, taught their workforces new skills, and deployed a new technology infrastructure. Also, a new culture emerged, centered not on traditional functional silos but on the team effort required to support the strategy. The management system provided the mechanism to mobilize and guide the process of change. But this new culture involved even more than a management system. Companies created a new kind of organization based on the requirements of their strategy-hence the term Strategy-Focused Organization. For the companies we studied, creating a Strategy-Focused Organization was not a homogeneous approach similar to, for example, qualifying for ISO 9000 or submitting an application for the Baldrige Award, processes by which a standard set of requirements can be applied. Strategies differed so that the organizational changes differed from company to company. The common feature, however, was that every Strategy-Focused Organization put strategy at the center of its change and management processes. By clearly defining the strategy, communicating it consistently, and linking it to the drivers of change, a performance-based culture emerged that linked everyone and every unit to the unique features of the strategy.

Companies are moving away from performance management systems linked exclusively to financial frameworks. In the early decades of the twentieth century, Dupont Corporation and General Motors Corporation developed the return-on-investment metric as an integrating device for the multidivisional firm. By the mid-twentieth century, multidivisional firms were using the budget as the centerpiece of their management systems. In the 1990s, companies had extended the financial framework to embrace financial metrics that correlated better with shareholder value, leading to economic value added (EVA) and value-based management metrics. But even today's best financial frameworks do not capture all the dynamics of performance in today's knowledge-based competition.

Recognizing the limitations of managing only with financial numbers, many companies adopted quality as their central rallying cry and organizing framework during the 1980s and 1990s. Companies strove to win national quality awards-Malcolm Baldrige in the United States, the Deming Prize in Japan, and EFQM in Europe-and to emulate Motorola, Inc., and General Electric by adopting six sigma programs. But quality alone was insufficient, as were the pure financial measures the quality programs hoped to replace. Several companies that won national quality awards soon found themselves in financial distress.

Beyond financial and quality measures, some companies have emphasized customer focus, implementing programs to build market-focused organization and establishing customer relationship management systems. Others have opted for core competencies or reengineering of fundamental business processes. Still others have emphasized strategic human resources management, showing how motivated, skilled employees can create economic value, or have deployed information technology for competitive advantage. Each of these perspectives-financial, quality, customers, capabilities, processes, people, and systems-is important and can play a role in creating value in organizations. But each represents only one component in the network of management activities and processes that must be performed to generate superior, sustainable performance. To focus on and manage only one of these perspectives encourages sub optimization at the expense of broader organizational goals. Companies have to replace any narrow or specific focus with a comprehensive view in which strategy is at the heart of the management systems.

Strategy-Focused Organizations use the Balanced Scorecard to place strategy at the center of their management processes. The Balanced Scorecard makes a unique contribution by describing strategy in a consistent and insightful way. Before the development of strategy scorecards, managers had no generally accepted framework for describing strategy: They could not implement something that they couldn't describe well. So the simple act of describing strategy via strategy maps and scorecards is an enormous breakthrough. Having the scorecard, however, may be necessary but not sufficient to beat the odds against successful strategy implementation. From working with the world-class executives on whom this book is based, we have learned that they succeeded by using the Balanced Scorecard as the central framework for a new performance management process. This process produced significant performance improvements rapidly, reliably, and in a sustainable manner. The approach, while building on solid historical foundations, was tailored to the needs of the new economy. This book provides a roadmap for those who wish to create their own Strategy-Focused Organization.

(1) The Strategy Focused Organization - Robert S. Kaplan and David P. Norton - page 22-26