Bruce Gurd Bruce Gurd

Balanced Scorecard

Balanced Scorecard

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Balanced Scorecard

The balanced scorecard (BSC) was developed by Robert S. Kaplan, professor at Harvard Business School,
and David Norton in the early 1990s. In its early versions, it was a strategic performance measurement
system that balanced financial and nonfinancial measures and short run against long run. The system was
designed to create visibility of the drivers of value creation in a business rather than just focus on financial
outcomes. This was in a context where resources such as people and intellectual assets were becoming more
valuable than physical assets in many organizations. There were four dimensions to the original
scorecard—Financial, Customer, Internal Business Processes, and Learning and Growth. From its early
beginnings in 1992, it has evolved into a tool for strategy execution process. The balanced scorecard
intersects with a range of fields in business—innovation, information systems, leadership, marketing and
customer value creation, strategy, and learning. The strategy map has become central to the scorecard. This is
a schematic of the value creation process integrating the key processes and capital of the organization,
especially intellectual capital, in a cause-and-effect relationship. The following section, Fundamentals,
explains the development of the balanced scorecard since its inception and the major features of a
contemporary balanced scorecard. The Importance section explains the advantages and issues in the use of
the scorecard.

Fundamentals
The balanced scorecard is predicated on the notion that performance measures are a powerful influence on
members of an organization, particularly if there is a connection with rewards, whether intrinsic or extrinsic.
The first mention of the balanced scorecard is in a footnote to a 1989 Harvard case, Analog Devices, written
about a company that had developed a “Blue Book” with a range of financial and nonfinancial measures.
Early scorecards were a collection of measures that balanced financial against nonfinancial and leading
indicators that led future performance against lagging indicators. It was a reaction to the relentless pressure
by financial markets for ever-increasing returns and the focus on the factors that would affect ongoing
profitability, such as customer satisfaction and improved internal processes. There was a recognized
connection between the four dimensions of the scorecard, which are as follows:
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Financial —The outcome for all profit-making organizations is a financial result for stockholders
measured by a range of metrics such as return on capital or net profit margin or growth in revenues.
Customer —In most cases, it is a positive response from the customer that creates value for the
organization by profitable sales. The metrics may include sales penetration as well as the level of
customer satisfaction and loyalty.
Internal Business Processes —To increase the quality of the customer relationship, operating processes
will be continually improved to enhance the quality flexibility while reducing cost of these processes.
Measurements may include cycle time, asset utilization, and quality metrics.
Learning and Growth —The driving force of value creation is through the intellectual capital, the
ideas, and innovation that bring about new products and services as well as processes, sometimes with
rapid discontinuous innovation. It can be measured by the development of human capability, new

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 products to market, and growth of strategic alliances.

For each dimension, the organization identified the key strategic objectives, then the measures that would
determine whether the objective had been achieved. For each measure, targets were set and initiatives
planned to reach the objectives. The organization needed to clarify its vision and make this the center of the
balanced scorecard. The most difficult part of the scorecard was the learning and growth dimension.
Implementers of the BSC found great difficulty in this dimension of the scorecard because the areas of
intellectual capital and innovation are at the heart of future competitive advantage, yet the drivers are the
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most difficult to identify.

While some organizations found that the four dimensions worked well for them, others introduced different
dimensions. Various fifth dimensions developed, including a social and environmental dimension.

As the BSC spread into the nonprofit sector and government, the financial perspective was no longer the
primary goal of the organization and the mission needed to be put as the final outcome. This can be seen in
cases developed by Robert Kaplan and David Norton such as Boston Lyric Opera. Nevertheless, there are
particular issues in implementing in the nonprofit and public sector because of the significant political
context and institutional pressures. Implementing a BSC from the center of a large public sector organization
may create significant tensions at the local level where local needs may conflict with the metrics in the BSC.

The BSC has evolved over time, with a series of books whose titles include phrases such as “The
Strategy-Focused Organization,” “Alignment,” and “Strategy Execution Premium.” One of the important
developments was the explanation of strategy maps, the maps that reflect cause-effect relationships. While
these relationships might change over time, it is considered useful for managers to understand the link
between drivers of performance. The strategy map becomes a “working hypothesis” of how the organization
creates value for its critical stakeholders. Usually the map is driven upward from learning and growth that
drove improved business processes, which increased customer satisfaction and led to improved financial
results.

Another development of the BSC led to the idea of cascading down the organization. This was the process of
linking all departments, and perhaps all employees, to the corporate scorecard so that all sections of the
organization would be focusing on strategy and contributing toward it. Individual employee could have their
own personal scorecard that reflected their contribution toward the ultimate organizational strategy. This was
the key principle in Robert Kaplan and David Norton’s 2001 book The Strategy-Focused Organization.

Following on from this was the idea of alignment. It was argued that through the use of the score-card, all
parts of the organizations could be aligned around strategic goals. The BSC would be an organizing form that
would enable the development of a cohesive strategy that would be communicated to all sections of the
organization and achievement of the goals fed back throughout the organization. Although the BSC seems to
be built on the planning school of strategy, there is a degree of “emergent” strategy allowed for, as employees
would be looking for new opportunities to expand the strategy.
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Robert Kaplan and David Norton have now expanded their model to include the BSC as a central part of the
strategy execution process—hence, their 2008 book The Execution Premium.

Importance
The BSC has become pervasive; it has had an enormous impact on practice and research. After 1992, the idea
diffused into larger organizations and was perceived as an important part of corporate governance processes.
Now even small nonprofits have a balanced scorecard, at least at a whole of organization level. Although the
idea originated in the United States, there are now case studies and surveys of BSC applications into Europe
and across Asia. In Europe, there are surveys showing use in Germany and diffusion into Scandinavia. The
French have historically used the tableau de bord, which has been discussed as both similar in its concept of

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 a balanced structure of measurement and yet distinguished from the BSC. There is increasing evidence of
applications of the BSC into Asia, including Taiwan and Singapore, and by 2010 there were over 100 cases
of implementations in Chinese hospitals, as just one sector in the Chinese economy.

While the early writings were mainly about the for-profit sector, the BSC is now found in most types of
organizations. There are now many books outlining how the BSC might be used in government and
nonprofits; Kaplan and Norton have demonstrated how the application may vary with financial outcomes
being replaced by mission as the final outcome.
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The BSC has generated significant research interest from academics and a thriving debate among
practitioners. Since there are alternatives to the BSC, Robert Chenhall came up with the label “strategic
performance measurement systems” to encompass all the systems designed to translate strategy into metrics
and link operations to the corporate vision.

The research evidence has provided mixed evidence about the effectiveness of the use of BSC. As with most
management systems, poor results are often blamed on poor implementations. Rather than focusing on
implementation problems, its detractors would argue that it is difficult to implement and does not produce the
anticipated benefits, that it is more constraining than enabling and will reduce rather than enhance creativity
and innovation.

While the drivers of financial performance are of significant concern to all organizations, the financial
outcomes usually dominate the corporate agenda. Even in the presence of the BSC there appears to remain
considerable concern at a board level of the short-run financial performance. Indeed, some researchers
suggest that the BSC is a shabby substitute for financial performance.

Andre de Waal is one writer who has criticized the BSC as being oversold with a lack of empirical research
to demonstrate that it will produce increased performance. Ken Merchant, a well-known writer in
management control systems, expressed his belief that statements that the BSC is suitable and beneficial in
every organization are unhelpful, nor is there sufficient research to support such claims. Even in cases where
there is a correlation between BSC use and high performance, it may indeed be that high-performing
organizations use the BSC as a means of drawing together key performance issues rather than the BSC being
the driver of that performance.

Others have argued that the BSC, with its four perspectives, has been used as a measurement “straitjacket,”
which might indeed harm firms by constraining the level of innovation and creativity. Kaplan and Norton
have always argued that the scorecard should be seen as a basic structure with plenty of flexibility and that
metrics in the innovation area should promote rather than constrain.

There has been specific criticism of the central principle, the cause-and-effect relationship. This is seen as a
difficult process. Studies in Austria, Germany, Malaysia, and the United States have shown that more than
three fourths of implementers failed to develop these relationships. Claiming causal relationships between
perspectives has been seen as quite problematic. These links may be tentative hypotheses, which rapidly
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change. The time lag is also uncertain; a link between customers and financial outcomes is not unexpected,
but the time lags over which this occurs are not really known. The links have been seen as logical rather than
causal.

The BSC is designed to encourage external engagement and focus on opportunities as they arise. Kaplan and
Norton’s description of how Mobil workers might see potential distribution sites is an example. For all this,
researchers have suggested that in practice there may be insufficient resources to keep the scorecard dynamic,
in which case the scorecard becomes too internally focused, static, and not sufficiently focused on the
external environment. Rather than supporting strategy implementation, some researchers have found that in
practice, managers struggle to find mechanisms to assist staff to think through responses to the external
environment.

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 Researchers have noted the substantial growth of the intellectual capital literature and compared this with the
learning-and-growth perspective of the BSC—often perceived as its weakest aspect. There is a growing
literature on intellectual capital and intangible assets, and the nature and formation of these assets is far more
complex than the BSC literature might suggest.

The BSC is a management methodology that appears to be here to stay. Many organizations find it a helpful
approach to coordinate the development of strategy, its execution, and monitoring of progress and are using it
at a board level or a whole-of-organization level. Detailed scorecards cascading down the organization to the
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departmental and individual levels are less common. Whether organizations will see the BSC as a central tool
in strategy execution is not yet clear.

Bruce Gurd

See also Goal-Setting Theory; Learning Organization; Management Control Systems; Modes of Strategy:
Planned and Emergent; Strategic Decision Making

Further Readings
Chenhall, R. (2005). Integrative strategic performance measurement systems, strategic alignment of
manufacturing, learning and strategic outcomes: An exploratory study. Accounting, Organizations and
Society, 30(5), 395–422.

Kaplan, R. S., & Norton, D. P. (1992). The balanced scorecard: Measures that drive performance. Harvard
Business Review, 70(1), 71–79.

Kaplan, R. S., & Norton, D. P. (2001). The strategyfocused organization: How balanced scorecard companies
thrive in the new business environment. Boston, MA: Harvard Business Press.

Kaplan, R. S., & Norton, D. P. (2004). Strategy maps: Converting intangible assets into tangible outcomes.
Boston, MA: Harvard Business Press.

Kaplan, R. S., & Norton, D. P. (2006). Alignment: Using the balanced scorecard to create corporate synergies
. Boston, MA: Harvard Business Press.

Kaplan, R. S., & Norton, D. P. (2008). The execution premium: Linking strategy to operations for
competitive advantage. Boston, MA: Harvard Business Press.
Copyright @ 2013. SAGE Publications, Inc.

Neely, A., Adams, C., & Kennerley, M. (2002). Performance prism: The scorecard for measuring and
managing business success. Upper Saddle River, NJ: Financial Times/Prentice Hall.

Norreklit, H. (2000). The balance on the balanced scorecard: A critical analysis of some of its assumptions.
Management Accounting Research, 11, 65–88.

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