Do you find it hard to crystallize your business strategy into actionable plans and align everyone behind them? The Balanced Scorecard (BSC) is a renowned business management system created by Robert Kaplan and David Norton. It connects long-term strategic goals with day-to-day operational activities to turn strategy into action. It is especially useful for business leaders seeking to improve strategic alignment and performance management in their organizations. In this book, The Balanced Scorecard, they get down to the nitty-gritty of how to use BSC.
In The Balanced Scorecard summary, we explain how to use the system to measure organizational performance from four perspectives: Financials, Customers, Internal Business Processes, and Learning & Growth. We also explore how to use the balanced scorecard tool for long-term strategic management.
What is The Balanced Scorecard (BSC)?
Robert Kaplan and David Norton first introduced the balanced scorecard concept in 1992 in a Harvard Business Review article. It provides a comprehensive framework to clarify, communicate, measure, and manage organizational strategy, and has become one of the most influential business concepts of the 21st century.
Just as pilots rely on a dashboard to track multiple flight factors, managers can use the BSC for operational measures to navigate complex business environments—to track and manage overall performance and build new capabilities for financial success and strategic success.
The BSC translates an organization’s mission into goals and performance measures across 4 core perspectives: financials, customers, internal processes, and learning and growth.
These cover the various ways that a company can create value.
In this summary, we’ll explain The Balanced Scorecard model in 2 parts:
(i) How to build the scorecard; and
(ii) How to implement or use the scorecard
Building a Balanced Scorecard (BSC)
Strategy involves a set of hypotheses about how specific actions might lead to desired outcomes. The Balanced Scorecard helps clarify and translate strategies into four perspectives, each with 4-7 key measurements. This can be visualized on a strategy map.
Each perspective should include key performance indicators (KPI)s with both (i) lag measures that reflect outcomes from past activities (e.g. profitability, revenue growth) and (ii) lead measures that predict future performance (e.g. customer acquisition rates, innovation metrics). They also jointly address mix of external and internal perspectives.
The Financial Perspective
This perspective answers the question: “What financial performance do our shareholders expect?”
Strategic Objectives and Measures
• The objectives and metrics should (i) define expected financial outcomes, and (ii) indicate if the company’s strategy execution is improving the bottom line.
• Common financial measures include: improving profitability by (i) increasing revenues, productivity, and asset utilization, and (ii) reducing costs and risks. The long-term financial goal of any business is to provide superior returns on the invested capital.
A company’s financial needs will change with its maturity:
• Growth stage: Early in their life cycle, companies usually need high investment to build new products and markets, leading to low returns on invested capital and negative cashflow. Typical financial metrics are: % revenue growth or sales growth.
• Sustain stage: Companies in this phase are expected to maintain market share, and earn solid returns on invested capital. The focus is typically on profitability (e.g. operating income, gross margin).
• Harvest stage: At this phase, companies seek to maximize cash flow with minimal new investment. Typical financial goals are: operating cash flow or reduced working capital.
An effective financial strategy must match the stage your company is at. Typically, it will be along 3 main themes:
• Revenue growth: Expand offerings, reach new customers or markets, enhance product value, and adjust pricing.
• Cost optimization: Lower both direct and indirect costs, improve productivity, and/or share resources across business units.
• Asset optimization: Optimize asset investment, working capital, and asset utilization.
The BSC clarifies these financial objectives, linking short-term actions to long-term goals with a blend of lead and lag measures to ensure comprehensive financial management and a balanced approach.
The Customer Perspective
This perspective answers the question: “To fulfill our strategic vision, what do our customers need to see from us?” To do this, managers must:
• Identify the target customer/market segments, so as to customize the company’s offerings and strategies more effectively; and
• For each segment, set specific goals and measures to deliver superior value.
These should get translated into both lag and lead measurements, such as: market share, customer acquisition, customer retention, product and service attributes, customer relationship, customer satisfaction, reputation, etc.
In our complete summary of The Balanced Scorecard (including text, infographic and audio formats), you can learn more about each of these measures and lag indicators that managers should focus on.
The Internal Business Process Perspective
This perspective answers the question: “To satisfy customers and shareholders, what processes must we excel at?” Managers must identify the key internal processes (including new processes) to:
• Deliver value propositions that attract and retain target customers; and
• Satisfy shareholders’ expected financial returns.
In our detailed 17-page summary, we explore the role of 3 main internal processes – innovations, operations, and post-sale service processes – in a business’s value chain, understanding each, how they interrelate, and their implications for business functions and time to market.
The Learning and Growth Perspective
This perspective addresses the question: “To achieve our vision, how will we improve our capacity to change and grow?”
Check out our full version of The Balanced Scorecard summary for more details on how to close the gap between your current current business capabilities and what you need to achieve breakthrough successes for the other 3 aspects of strategy (financial, customer, and internal processes).
Implementing/Using the Balanced Scorecard
Once a company has developed a Balanced Scorecard (BSC), it can be used as a powerful tool to manage strategy over the long term, and engage in continuous improvement across the entire organization. Successful implementation of the BSC involves 4 steps, which we explain in detail in our 17-page summary of The Balance Scorecard, along with comprehensive tips on their implementation. For now, here’s a quick glimpse at the four steps of the strategic planning process.
Step 1. Clarify and Translate the Vision & Strategy
Senior management clarifies the vision and strategy, translating them into strategic objectives in 4 areas: financial, customer, internal processes, and learning and growth.
Step 2. Communicate and Link Objectives & Measures
Communicate the strategic objectives and link them to team and individual performance measures, to ensure everyone is pursuing the same performance targets.
Step 3: Develop Plans and Set Targets
Based on the agreed strategy and communicated objectives, identify changes and initiatives required to meet those targets, then develop the implementation plans. Make sure resources are budgeted and allocated effectively to achieve these targets.
Step 4: Create a Feedback Loop for Strategic Learning
Feedback loops help the organization to review progress and refine strategies based on performance data.
Getting the Most from The Balanced Scorecard
The Balanced Scorecard is a powerful management system that provides a holistic approach and a balanced view of short-term and long-term objectives, financial and non-financial measures, desired outcomes, and performance drivers–to help you build a truly strategy-focused organization and drive long-term success.
If you’re ready to learn more about using the balanced scorecard as a management tool to understand your company’s vision and strategic objective and translate them into a performance metric, check out our full book summary bundle, which includes an infographic, 17-page text summary, and 25-minute audio summary.
In this book, Robert Kaplan, and David Norton include many detailed case studies—including those of
Rockwater, Metro Bank, Pioneer Petroleum, National Insurance, and Kenyon Stores—to show how the Balanced Scorecard can be cascaded at organizational, departmental, and individual levels. They also explore different types of measurements and considerations for each of the 4 perspectives, with practical advice on how to implement the balanced scorecard approach successfully. For more details, please visit the Balanced Scorecard Institute or purchase the book here.
The balanced scorecard framework is great for translating strategy to action, but it does not help you to define strategy. For more resources on business strategy and performance measurement, do check out our free summary of Good to Great by Jim Collins, which explores why some companies make the leap from good to great. You might also enjoy our summary of Playing to Win by A.G. Lafley and Roger L. Martin, to learn how to create and implement winning strategies in business.
About the Authors of The Balanced Scorecard
The Balanced Scorecard: Translating Strategy into Action was written by authors Robert S. Kaplan and David P. Norton.
Robert S. Kaplan is a Senior Fellow and Marvin Bower Professor of Leadership Development, Emeritus, at Harvard Business School. He is known for his pioneering work in activity-based costing (ABC) and the Balanced Scorecard and has authored numerous books and articles on performance management and strategic systems.
David P. Norton is a renowned business theorist and consultant, co-creator of the Balanced Scorecard. He co-founded the consulting firm Palladium Group, Inc., where he advised organizations worldwide on strategy execution. Norton has co-authored multiple books on strategic performance management with Kaplan.
The Balanced Scorecard Quotes
“Implementing a strategy begins by educating and involving the people who must execute it.”
“Companies that try to be everything to everybody usually end up being nothing to anyone.”
“A strategy is a set of hypotheses about cause and effect…a properly constructed Balanced Scorecard should tell the story of the business unit’s strategy.”
“The scorecard provides a framework, a language, to communicate mission and strategy.”
“Communication to employees about an organization’s vision and strategy should be viewed as an internal marketing campaign.”
“Strategic planning must be linked to operational budgeting if action is to be tied to vision.”
Click here to download The Balanced Scorecard infographic & summary
