The Balanced Scorecard

ROBERT S. KAPLAN AND DAVID P. NORTON

Reviewed by Todd

For more than a thousand years, the scientific method has served as the basis for technological advancement. Experience informs conjecture, educated guessing leads to hypothesis, and testing confirms or denies the prophecy. In business, strategy plays the part of hypothesis, as business leaders place their bets on what will work in the marketplace. Most executives fail to connect strategy and action, and when they do, they lack the measurements needed to prove success or failure. Authors Robert Kaplan and David Norton propose a more methodical metrics-based approach to link the two in their book The Balanced Scorecard.

The scorecard serves as a dashboard for how the company is operating, creating feedback mechanisms that align business strategy and the actions of management. First is a financial set of metrics that are common and are based on the life-cycle stage the business is in. So, growth companies focus on sales and market share while maturing firms watch unit costs and operating expenses. Customer metrics like satisfaction, retention, and share-of-wallet measure a company’s value proposition. Next, a whole host of internal metrics brings focus to innovation, operations, and services—processes that provide customer and shareholder value. Finally, companies cannot deliver value without investing in the growth and development of its workers, so measurements like employee satisfaction gauge success.

“If you can’t measure it, you can’t manage it.”

The authors report that most senior leadership teams settle on fifteen to twenty-five metrics but quickly find that 20 percent of metrics on new scorecards fail to have supporting data. “If data do not exist to support a measure, the management process for a key strategic objective is likely inadequate or nonexistent.” The development process helps uncover gaps and oversights in aspects of the business that need attention.

The Balanced Scorecard is definitely the advanced class on scorekeeping. The process the authors propose must start at the top, with senior management defining an actionable strategy and vision for the company. The strategic measurements must be transferable down through the corporate hierarchy so that team goals and individual goals match the overall strategic goals. And feedback from the scorecard should provide a clear confirmation or denial of senior management’s strategic hypotheses.

Poring over sales results, return-on-capital calculations, and cash flow projections is the preoccupation of almost every business leader. The appeal of The Balanced Scorecard is in the direct link that is created between top-level strategy and decision making at all levels of the organization. Rather than searching for unknown causes of unexpected results, executives can finally see the relationship between internal indicators, both leading and lagging, and the always-scrutinized financial results. TS

The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press, Hardcover 1996, ISBN 9780875846514

WHERE TO NEXT? Here for the basics on financials Here for fourteen key management principles Here for using data-driven marketing | EVEN MORE: The Strategy-Focused Organization by Robert S. Kaplan and David P. Norton