Balance Scorecard

Four Strategic Perspectives
The Balanced Scorecard concept involves creating a set of measurements for four strategic
perspectives. These perspectives include: 1) financial, 2) customer, 3) internal business process and 4)
learning and growth. The idea is to develop between four and seven measurements for each
perspective. Two graphic illustrations appear below to help convey the idea.
The measurements should be focused on a single strategy and be linked, consistent and mutually
reinforcing. Some generic measurements are presented in the table below.
Perspective
Generic Measurements
Financial
Return of Capital Employed, Economic value added, Sales

growth, Cash flow
Customer
Customer satisfaction, retention, acquisition, profitability,

market share
Internal business
process
Includes measurements along the internal value chain for:

Innovation - measures of how well the company identifies the
customers future needs.
Operations - measures of quality, cycle time, and costs.
Post sales service - measures for warranty, repair and
treatment of defects and returns.

Learning and growth
Includes measurements for:

People - employee retention, training, skills, morale.
Systems - measure of availability of critical real time
information needed for front line employees.
What is A Strategy?
A strategy, according to Kaplan and his coauthors, is a set of hypotheses about cause and effect
relationships. Defining an organization's strategy involves:
1. Defining the market the organization plans to serve - local, national, and global.
2. Defining the customer. Broad or narrow, age group, income level etc.
3. Identifying the critical internal processes needed to capture and satisfy those
customers.
4. Determining the individual and organizational capabilities required in the
other perspectives.
An Example related to Cause and Effect
The chain of cause and effect relationships may start with improvements in the area of learning and
growth. These improvements tend to cause improvements in business processes, which in turn cause
improvements in customer satisfaction and subsequently cause improvements in sales and the financial
measurements of profitability. The direction of the cause and effect relationships is emphasized below.
Learning and growth Internal business process Customer Financial
What do you try to balance
An important part of the balanced scorecard concept is the emphasis on establishing a balance between
four types of measurements. These types of measurements include:
1) Short term and Long term,
2) External (for shareholders and customers) and Internal (for critical business
processes, innovation, and learning and growth),
3) Leading indicators (outcomes desired and performance drivers) and

Lagging indicators (outcomes),
4) Objective measures (e.g., financial) and Subjective measures (e.g., many
non-financial). See the Exhibit below (item 7) for the idea.
How BSC should be used
Kaplan and Norton also emphasize that "the balanced scorecard should be used as a communication,
informing, and learning system, not as a controlling system."
Diagnostic versus Strategic Measures
Kaplan and Norton make a distinction between diagnostic measurements and strategic measurements.
Diagnostic measurements monitor whether something is in control. A statistical process control
chart with upper and lower limits is a good example of a diagnostic type system that can be used for
controlling a process.
Strategic measurements define a strategy for competitive excellence and future success. The
balanced scorecard is a strategic measurement system.
Sample Generic Measurements
BALANCED SCORECARD PERSPECTIVES & SAMPLE MEASUREMENTS*
Generic
Measurement
Financial vs.
Nonfinancial
Short
Term vs.
Long
Term
Financial
ROCE,
EVA,
Sales growth
Financial
Financial
Financial
Customer
Profitability,
Market Share,
Retention,
Loyalty,
Satisfaction
Financial
Non-financial
Non-financial
Non-financial
Non-financial
Perspective
Leading vs.
Lagging
Internal vs.
External
Short term
Short term
Long term
Lagging
Lagging
Lead &
Lagging
External
External
External
Short term
Long term
Short term
Short term
Short term
Lead &
Lagging
Lead &
Lagging
Lead &
Lagging
Lead &
Lagging
Lead &
External**
External
External
External
External
Lagging
Business Process
Cost,
Productivity,
Cycle time,
Quality
Organizational
Learning
Employee
retention,
Technology,
Climate for
action or
Culture.
Financial
Non-financial
Non-financial
Non-financial
Short term
Short term
Short term
Short term
Lead &
Lagging
Lead &
Lagging
Lead &
Lagging
Lead &
Lagging
Internal
Internal
Internal
Internal
Non-financial Long term

Lead &
Lagging
Leading
Internal
Internal
Internal
Leading
*The objective is to balance the measurements associated with each perspective, all focused on a
single
strategy. These measurements should reinforce each other. Most of the measurements are both
leading
(drivers) and lagging (outcomes). The direction of the cause and effect relationships is from the
bottom of
the exhibit to the top.
** Many customers are internal (e.g., the next operation downstream), but the focus here is on the
external
customer.
8. Sample Generic Scorecard
Perspectives
Customer
Internal Business
Goals
Continuously improve
customer satisfaction.
business processes.
Objectives
Measurements
Decrease lead time.*
Average lead time.*
Increase on time
delivery.
Percentage of deliveries
on time.
Reduce customer
complaints.
Number of customer
complaints.
Decrease cycle time**
Average cycle time.**
Increase quality.
Number of defects and

number of items
reworked.
Increase productivity.
Average output per

employee.
Innovation & Learning Continuously develop

and deliver new
innovative products &
services.
Increase sales of new

products and services
Percentage of sales
obtained from new
products & services.
Reduce development
time.
Average time from initial

design to production.
Financial
Decrease costs.
Average unit costs.
Increase sales growth
Growth rate in sales.
Increase market share
Company's market share.
Increase return on
investment.
Return on investment.
financial performance.
*Lead time is the time from order receipt to delivery.

** Cycle time is the time from the start of a process to completion.
9. Sears Causal Model

Another example based on a causal model developed at Sears.
This graphic illustration was adapted from an illustration in Rucci, Kirn and Quinn (1998).
10. Federal Procurement Scorecard

An example adapted from an illustration on page 182 of Kaplan & Norton's 1996 book (The Balanced
Scorecard) is provided below. (Summary).
11. ECI's Balanced Scorecard

An example based on an electronics company appears below based on an illustration in Kaplan &
Norton 1992.
ECI 's Balanced Scorecard
Perspectives
Customer
Internal
Questions
Goals
New products.
Percent of sales from new products.
Responsive supply.
On-time delivery as defined by the

customer.
How do
customers see us? Preferred supplier.
What must we
Measurements
Share of key account's purchases.
Customer partnership.
Number of cooperative engineering

efforts.
Technology capability.
Manufacturing geometry versus the
competition.
business
excel at?
Manufacturing excellence.
Cycle time, Unit cost and Yield.
Design productivity.
Silicon efficiency and Engineering

efficiency.
New product introduction.
Actual introduction schedule versus

planned introduction.
Technology leadership.
Time to develop the next generation.
Manufacturing learning.
Can we continue
Innovation &
to improve &
Product focus.
learning
create value?
Financial
Process time to maturity.

Percent of products that equal 80%
of sales.
Time to market.
New product introduction versus the

competition.
Survive.
Cash flow.
How do we look Succeed.

to shareholders?
Prosper.
Quarterly sales growth and operating

income by division.
Increased market share and Return
on Equity.
12. United Methodist Publishing House Balanced Scorecard

An example of a scorecard developed for a non-profit organization is illustrated below based on a
description provided in an article by Forsythe, Bunch & Burton 1999.
United Methodist Publishing House Balanced Scorecard
Perspective
Financial
Customer
Internal Process
Goals
Produce revenues sufficient to cover

expenses and provide reserves for the
future.
Measurements
Increase in sales growth in relation to
target.
Achieve corporate earnings percentage in
relation to target.
Achieve ROI by each market business
unit (profit center) in relation to target.
Maintain ability to attract and retain

customers.
Customer satisfaction based on survey

questionnaire.
On time product development and

delivery.
Measures not specifically defined.
Maintain an effective and efficient

distribution system.
Measure of error rates on shipments.
Produce high quality, cost effective

products.
Maintain internal process effectiveness. Measures not specifically defined.

Organization
Innovation
and Learning
Maintain infrastructure needed for

long-term growth and improvement.
Measures related to success in producing

new products, projects and services.
Maintain staff competence.
Goals related to learning - not

specifically stated.
Measures of learning not specifically

defined.
13. Framework for an IS Scorecard

The following graphic provides a framework for developing a scorecard for the information systems
function. For an explanation see the summary of Martinsons, Davison & Tse.
14. Criticisms of the Balanced Scorecard framework and how it is used

Ittner and Larcker argue that most companies have apparently adopted boilerplate versions of
nonfinancial measurement frameworks such as Kaplan and Norton's Balanced Scorecard, but seldom
establish the cause and effect linkages between the measurements and desired outcomes. This allows
self-serving managers to chose and manipulates measurements solely to enhance their own earnings
and bonuses. They discuss four mistakes that companies make when trying to measure nonfinancial
performance and provide six steps to follow to do it right (Ittner & Larcker 2003 summary).
However, the BSC is more controversial than indicated by Ittner & Larcker. Some researchers have
been very critical of the balanced scorecard. For example, Norreklit builds a case against the balanced
scorecard by showing that it is not based on sound or logical arguments. Instead, according to
Norreklit, the BSC text (i.e., the 1996 book) appeals mainly to emotion and the authority of Kaplan &
Harvard and is a conceptually unclear model that relies on attractive adjectives and extensive use of
analogies and unrestrained metaphors. It is impressionistic and closely resembles propaganda with
heavily loaded words, metaphors, irony, exaggerations, incoherence and a climax. (Norreklit
summary).
15. Strategy Graphics: Maps, Canvases & Value Curves
Strategy Maps
Kaplan and Norton extend the concepts related to the Balanced Scorecard in The Strategy-Focused
Organization: How Balanced Scorecard Companies Thrive in the New Business Environment.
(Summary). Strategy Maps are combined with Balanced Scorecards to provide a new framework for
describing and implementing strategy. According to Kaplan and Norton, a strategy map is "a logical
comprehensive architecture for describing strategy. It provides the foundation for designing a
Balanced Scorecard that is the cornerstone of a strategic management system" (p. 10). Strategy Maps
reveal the cause-and-effect linkages needed to transform intangible assets into tangible financial
outcomes. Strategy Maps, if designed correctly, may provide the solution to the problems discussed by
Ittner & Larcker mentioned in the section above. An adaptation of the Balanced Scorecard Generic
Strategy Map appears is illustrated below.
Strategy Canvases and Value Curves

The strategy canvases illustrated in several articles by Kim & Mauborgne (1997, 1999 & 2002) might
provide a better way to begin analyzing a company's strategy. A strategy canvas shows graphically
how an organization's strategy (represented by the company's value curve) is different from it's
competitors. The Southwest Airlines strategy canvas below conveys the idea. According Kim &
Mauborgne, a value innovator also needs a strong tag line, e.g., for Southwest, "The speed of the plane
at the price of the car - whenever you need it".
Perhaps, starting the strategy analysis and development process with strategy canvases and value
curves would provide the basis for more effective strategy maps and balanced scorecards.

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What are the four strategic perspectives discussed in the balanced scorecard concept?

What are the four strategic perspectives discussed in the balanced scorecard concept?

What are some generic measurements for each perspective according to the text?

What are some generic measurements for each perspective according to the text?

Four Strategic Perspectives

Return of Capital Employed, Economic value added, Sales

Customer satisfaction, retention, acquisition, profitability,

Includes measurements along the internal value chain for:

treatment of defects and returns.

Includes measurements for:

3) Leading indicators (outcomes desired and performance drivers) and

Non-financial Long term

Non-financial Long term

Decrease lead time.*

Average lead time.*

Decrease cycle time**

Average cycle time.**

Number of defects and

Average output per

Innovation & Learning Continuously develop

Increase sales of new

Average time from initial

Average unit costs.

Increase sales growth

Growth rate in sales.

Increase market share

Company's market share.

*Lead time is the time from order receipt to delivery.

9. Sears Causal Model

10. Federal Procurement Scorecard

11. ECI's Balanced Scorecard

Percent of sales from new products.

On-time delivery as defined by the

Share of key account's purchases.

Number of cooperative engineering

Manufacturing geometry versus the

Cycle time, Unit cost and Yield.

Silicon efficiency and Engineering

New product introduction.

Actual introduction schedule versus

Time to develop the next generation.

Process time to maturity.

New product introduction versus the

How do we look Succeed.

Quarterly sales growth and operating

12. United Methodist Publishing House Balanced Scorecard

Produce revenues sufficient to cover

Maintain ability to attract and retain

Customer satisfaction based on survey

On time product development and

Measures not specifically defined.

Maintain an effective and efficient

Measure of error rates on shipments.

Produce high quality, cost effective

Measures not specifically defined.

Maintain internal process effectiveness. Measures not specifically defined.

Maintain infrastructure needed for

Measures related to success in producing

Maintain staff competence.