Foundations of Management, Anderson University DBA

Summer 2001

The Balanced Scorecard: Historical

Development and Context, As Developed
by Robert Kaplan & David Norton
KARL R. KNAPP
Anderson University Anderson IN

ABSTRACT
This paper discusses the general theory of the Balanced Scorecard and
traces its historical origins. The Balanced Scorecard is based on three main
areas: Measurement, Human Relations, and Customer Value Disciplines.
The basis in measurement draws on Management by Objectives. The human
relations school of management and open-book management theories are
influential. The customer value discipline links the scorecard to the strategy
of the firm.

The Balanced Scorecard

The Balanced Scorecard is

a theory and management
approach first proposed in the
Harvard Business Review by
Robert S. Kaplan & David P.
Norton (1995). A subsequent
book, The Balanced Scorecard,
was published following this
article (1996). The most recent
refinement of this theory and
management approach appears
in Kaplan & Nortons book, The
Strategy-Focused Organization
(2001). This paper attempts to
present a high-level overview of
this management theory, along
with a description of its
historical
foundation
and
development.
2001by Karl R. Knapp

As defined by Kaplan and

Norton (1996), The Balanced
Scorecard
translates
an
organizations
mission
and
strategy into a comprehensive
set of performance measures
that provides the framework for
a strategic measurement and
management
system.
This
strategic management system
measures
organizational
performance in four balanced
perspectives:
Financial summarizes the
readily measurable economic
consequences
of
actions
already taken.
Customer

contains
measures that identify the
customer
and
market

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segments
in
which
the
business unit will compete
and the measures of the
business units performance
in these targeted segments.
Internal Business Process
measures the critical
internal processes in which
the organization must excel.
Learning
&
Growth

measures the infrastructure

that the organization must
build to create long-term
growth and improvement.
To create a Balanced
Scorecard
an
organizations
management team translates
the mission, vision, and strategy
of the firm into a scorecard. The
scorecard
measures
should
represent both long-term and
short-term
success
in
the
execution of the strategy. The
measures are arranged in the
four
perspectives.
The
scorecard should contain both
outcome measures that indicate
excellent prior performance,
along with the performancedrivers that create successful
future performance.
This balanced framework
enables a management team to
execute the following four
strategic
management
processes:

Clarify and translate vision

and strategy.

2001by Karl R. Knapp

Communicate
and
link
strategic
objectives
and
measures.
Plan, set targets, and align
strategic initiatives.
Enhance strategic feedback
and learning.
These
four
strategic
management processes are the
keys to the Balanced Scorecard
theory.
Strategy-Focused Organization
The latest refinement of
this concept developed from the
experiences
of
companies
implementing
the
Balanced
Scorecard into their strategic
management processes. Kaplan
and
Norton
found
that
implementation of strategy is as
important as the development of
strategy. They propose that
successful
strategy
implementation
incorporates
the following five strategic
management principles (Kaplan
& Norton, 2001):
Translate the strategy to
operational terms.
Align the organization to the
strategy.
Make strategy everyones
everyday job.
Make strategy a continual
process.
Mobilize
change
through
executive leadership.

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Within the five principles

there are several elements.
These new elements add the
following new sections to the
theory:

Strategy Maps Strategy

aligned
with
the
value
proposition (see figure 1).
Personal
Scorecards

Strategy
aligned
with
personal objectives.
Balanced
Paychecks

Incentive
compensation
aligned
with
team-based
goals (scorecard).
Strategic & Operational
Budgeting

Strategy
funded.
Open
Reporting

All
employees
get
the

2001by Karl R. Knapp

information and management

meetings held to discuss
performance.
Change Management The
Balanced Scorecard is a
change
management
program, enabled by the
scorecard.
One of the most useful
additions
to
the
Balanced
Scorecard
theory
is
the
Balanced Scorecard Strategy
Map (Kaplan & Norton, 2001). A
well-developed strategy map
clearly illustrates the companys
strategy and the measures of
success for the strategy. A
template for a strategy map is
illustrated on the following
page.

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Balanced Scorecard Strategy Map

Improve Shareholder Value
Shareholder Value

Revenue Growth
Strategy

Productivity Strategy

ROCE

Build the Franchise

Increase Customer Value

Improve Cost Structure

Improve Asset Utilization

New Revenue Sources

Customer Profitability

Cost per Unit

Asset Utilization

Customer Acquisition

Customer Retention
Product
Leadership
Customer
Intimacy
Operational
Excellence

Customer Value Proposition

Increase Customer Value
Price

Quality

Time

Relationship
Functio
nanlity

Service

Image
Brand

Relation
ships

Customer Satisfaction

Build the
Franchise
(Innovation
Processes)

Increase Customer
Value
(Customer
Management
Processes)

Achieve
Operational
Excellence
(Operational
Processes)

Be a Good
Corporate Citizen
(Regulatory &
Environmental)

A Motivated and Prepared Workforce

Strategic Competencies

Strategic Technologies

Climate for Action

Figure 1: Balanced Scorecard Strategy Map (Kaplan &

Norton, 2001)

2001by Karl R. Knapp

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Balanced Scorecard Historical 'Family Tree'

Balanced Scorecard
The balanced scorecard
Robert Kaplan & David Norton
1996
Measurement & Goals
Management by Objectives
The practice of management
Peter Drucker
1954
Principles of Management
Administration industrielle
Henri Fayol
1916

Stategy Focused Organization

The strategy focused organization
Robert Kaplan & David Norton
2001

Communication, Motivation & Human Relations

Open Book Management
Open book management
John Case
1995

Eight Stage Change process

Leading change
John Kotter
1996

Customer Value Discipline

Value Discipline
Discipline of market leaders
Micheal Treacy & Fred Wiersema
1995

Theory Y
Open Book Management
The human side of enterprise The great game of business
Douglass McGregor
Jack Stack
1960
1992
Human Relations
Hawthorne Studies
Eldon Mayo
1945
Hierarchy of Needs
Toward a psychology of being
Abraham Maslow
1962

Figure 2 - Balanced Scorecard Historical 'Family Tree'

Historical Analysis
The Balanced Scorecard is
based
on
three
general
management concepts:
Measurement
and
Goal
Setting.
Communication, Motivation
and Human Relations.
Business Strategy.
The remainder of this
paper discusses the historical
evolution of each of these
management concepts.

Measurement & Goal Setting

The Balanced Scorecard
concept
uses
a
strategic
measurement system at the
root of the theory. One of the
most widely used measurement
2001by Karl R. Knapp

and management practices is

Management by Objectives.
In
The
Practice
of
Management, Peter Drucker
(1954) introduced a concept
called
Management
by
Objectives (MBO). As defined by
George
Odiorne
(1965),
Management by Objectives is a
process whereby the superior
and subordinate managers of an
organization jointly identify its
common goals, define each
individuals major areas of
responsibility in terms of the
results expected of him, and use
these measures as guides for
operating the unit and assessing
the contribution of each of its
members. In this definition, the
key
is
that
subordinates
participate in the goal setting

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process. It is the involvement of

subordinates
that
allows
Drucker
the
credit
for
development of Management by
Objectives. This would dismiss
many of the claims made for
previous use of MBO by such
people as McKinsey, Barnard,
Fayol, or by such corporations
as DuPont, General Motors, and
Standard of New Jersey firms
that Odiorne claims used an
early
objective-based
management
style
of
organization
(Greenwood,
1981).
Prior
objective
based
management
research
and
implementation
clearly
influenced the development of
Management by Objectives.
Henri Fayol founded the
earliest thinking about the
functions of management. In his
work,
Administration
industrielle et gnrale, Fayol
founded the fourteen principles
of management (Fayol, 1916):

Division
of
labor
(job
specialization).
Authority & responsibility
(authority
derived
from
expertise, leadership, skill,
and knowledge).
Unity of command (everyone
has one manager and only
one manager).
Line of authority (chain of
command).

2001by Karl R. Knapp

Centralization (preferred less

centralized).
Unity of direction (singleness
of purpose).
Initiative (causes creativity &
innovation).
Equity (fair treatment for
employees).
Order (efficiency & career
opportunity).
Discipline (enforce rules to
achieve goals).
Remuneration of Personnel
(bonuses and profit sharing).
Stability
&
Tenure
of
Employees (encouraged longterm employees).
Subordination of Individual
Interests to the Common
Interest (employees need to
understand
how
their
performance
affects
the
entire organization).
Esprit de Corp.
Management by Objectives
and The Balanced Scorecard are
greatly influenced by Fayols
four functions of management
(Fayol, 1916):

Planning.
Organizing.
Leading.
Controlling.

Communication,
Motivation
&
Human Relations
One
of
the
key
foundational concepts of The
Balanced Scorecard is that

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employees are motivated by a

clear line of sight from their
activities to the strategy of the
organization. Employees want
to understand the linkage
between what they do, and what
the
organizations
mission,
vision, values and strategy are.
These ideas are based mainly on
the Human Relations School of
management theory.
Open-Book Management
A major premise that the
Balanced
Scorecard
is
constructed
upon
is
that
employees need to understand
the business strategy, and have
information available to them
that enables them to execute
and adapt their actions to
successfully
execute
the
strategy. This idea is clearly
influenced by the theory of
Open-Book Management.

Jack Stack introduced the

concept
of
Open-Book
Management The Great Game
of Business (1992). In this book
Stack argues that the best,
most efficient, most profitable
way to operate a business is to
give everybody in the company
a voice in saying how the
company is run and a stake in
the financial outcome, good or
bad (Stack, 1992). John Case
has further developed this basic
concept in several books and
articles.

2001by Karl R. Knapp

Open-book management is
revolutionary
because
conventional business operates
under two assumptions (Case,
1995):
A job must be defined as
narrowly as possible.
Workers need close, direct
supervision.
The key steps to the
development of this archaic
management
paradigm
are
(Case, 1995):
The rise of engineering, and
of the engineering-inspired
movement
known
as
scientific management.
The professionalization of
management the creation,
in effect, of a separate
managerial class.
The rise of the adversarial
union.
Changes
in
the
organizational
and
social
environment have prompted
changes in the approach to
management.
According to Case (1995),
open-book management is a
way of running a company that
gets everyone to focus on
helping the business make
money. Case further argues
that open-book management
takes
those
trendy
new
management
ideas

empowerment, TQM, teams and

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so on and gives them a

business logic. In an open-book
company, employees understand
why theyre being called upon
to solve problems, cut costs,
reduce defects, and give the
customer better service.

3. Empower people to make

decisions based on what they
know.
4. Make
sure
everyone

everyone! shares directly in

the companys success, and
in the risk of failure.

In open-book management
there
are
three
essential
differences to a conventional
business (Case, 1995):

These four steps have

been refined and organized in
the following four management
practices (McCoy, 1996):

Every employee sees and

learns to understand the
companys financials, along
with all the other numbers
that are critical to tracking
the businesss performance.
Employees
learn
that,
whatever else they do, part of
their job is to move those
numbers
in
the
right
direction.
Employees have a direct
stake
in
the
companys
success.

Educate.
Big picture education.
Customer education.
Operating
process
education.
Financial
results
education.
Enable.
Information sharing.
Information
exchange
systems.
Employee
participation
and involvement systems.
Empower.
Convincing
employees
they have the right and
responsibility
to
make
decisions and take action.
Engage (reward systems).

The implementation of the

open-book management concept
is
very
similar
to
the
implementation of a Balanced
Scorecard
strategic
management
system.
Case
posits that there are four steps
to
implementing
open-book
management (Case, 1995):

1. Get the information out

there.
2. Teach the basics of business.

2001by Karl R. Knapp

After reviewing the basic

fundamentals
of
open-book
management, it is easy to see
the linkages to the Balanced
Scorecard.
The
Balanced
Scorecard shares the basic
fundamentals
of
open
communication
and
the

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engagement
of
employees
through incentive-based pay.
The Balanced Scorecard refines
this approach by going beyond
financial measurements using a
balanced
four-perspective
approach,
highlighting
the
cause-and-effect
relationships
between business drivers and
outcome measures (financial). It
also links the business strategy
to the strategic measurement
and management system.
Assumptions About Human Nature
Assumptions about human
nature and motivation underlie
both the Balanced Scorecard
and Open-Book management.
Douglass McGregors influential
work
on
managerial
assumptions
about
human
nature was influential to the
development of these modern
management theories.
The Balanced Scorecard
and Open-Book management
are
based
on
Theory
Y
assumptions
about
human
nature.
According to McGregor
(1960),
the
Theory
Y
assumptions are:

1. Expending
physical
and
mental effort at work is as
natural as play and rest. The
average human being does
not inherently dislike work.
2. External control and the
threat of punishment are not
2001by Karl R. Knapp

the only means to direct

effort toward organizational
objectives.
People
will
exercise self-direction and
self-control in the service of
objectives to which they feel
committed.
3. Commitment to objectives is
a function of the rewards
associated
with
their
achievement.
The
most
significant rewards the
satisfaction of ego and selfactualization needs can be
direct products of effort
directed
toward
organizational objectives.
4. Avoidance of responsibility,
lack
of
ambition,
and
emphasis on security are not
inherent
human
characteristics. Under proper
conditions,
the
average
human being learns not only
to accept but to seek
responsibility.
5. Imagination,
ingenuity,
creativity, and the ability to
use these qualities to solve
organizational problems are
widely distributed among
people.
In accordance with the
approach
to
the
Balanced
Scorecard
and
Open-Book
management,
Theory
Y
assumptions would view the
task of management as follows
(McGregor, 1960):
1. Managers are responsible for
organizing the elements of

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productive
enterprise

money, materials, equipment,

people in the interest of
economic ends.
2. Because
people
are
motivated to perform, have
potential for development,
can assume responsibility,
and are willing to work
toward organizational goals,
managers are responsible for
enabling people to recognize
and develop these basic
capabilities.
3. The
essential
task
of
management is to arrange
organizational conditions and
methods of operation so that
working
toward
organizational objectives is
also the best way for people
to achieve their own personal
goals.

theories of human motivation.

Mayo was heavily influenced by
the work of Abraham Maslow.
Maslow (1998) believed
that people sought meaning in
their work, wanted to commit to
causes larger than themselves,
and were capable of roaring off
the face of the earth when
engaged with a task, role, or
responsibility that was worth
doing.
Maslow introduced the
hierarchy of needs or selfactualization theory. This theory
was based on the assumption
that people are inherently
seeking self-actualization, as
they move up the hierarchy of
needs.
Self
Actualization

Proponents
of
the
Balanced Scorecard and Open
Book
management
would
certainly argue that point 3
above is the essential task of
management.
Theory
Y
assumptions
about
people
was
heavily
influenced
by
the
human
relations
perspective
of
management
thought.
The
development of this perspective
was influenced by Eldon Mayo
and Abraham Maslow.

Eldon Mayos research in

the famous Hawthorne studies
provided empirical evidence on
2001by Karl R. Knapp

EsteemNeeds
LoveNeeds
SafetyNeeds
PhysiologicalNeeds

Maslows (1962) Hierarchy of

Needs

To move up the hierarchy

of needs, the needs below must
be generally satisfied.
The Balanced Scorecard is
an extension of the concept of
open-book management, based
on Theory Y assumptions about

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people,
who
seek
selfactualization.
The
Balanced
Scorecard is also a tool for
organizational change. Kaplan
and Norton borrow heavily from
the work of
John Kotter on
change management.

1. Establishing
a
sense
of
urgency.
Create a crisis.
Eliminate
obvious
examples of excess.
Set targets so high that
they cant be reached by
conducting business as
usual.
Stop measuring subunit
performance based only on
functional goals. Insist on
broader
measures
of
performance.
Send more data to more
employees.

2. Creating
the
guiding
coalition.
Position
power:
Are
enough key players on
board, especially the main
line managers, so that
those left out cannot easily
block progress?
Expertise: Are the various
points of view relevant to
the
task
at
hand
adequately represented so
that informed, intelligent
decisions will be made?
Credibility:
Does
the
group have enough people

Leading Change
If successfully used, the
Balanced Scorecard will identify
areas where the firms strategy
is successful and where it needs
improvement. These areas of
improvement will undoubtedly
require change. John Kotter
developed a highly regarded
approach to the implementation
of change recommended by
Kaplan and Norton (2001).
Kotter
argues
that
the
successful implementation of
change should follow an eightstep process (Kotter, 1996):

Insist that people talk

regularly to unsatisfied
customers.
Use consultants and other
means to force more
relevant data and honest
discussion
into
management meetings.
Put
more
honest
discussions of the firms
problems
in
company
newspapers and senior
management
speeches.
Stop senior management
happy talk.
Bombard
people
with
information
on
future
opportunities,
on
the
wonderful
rewards
for
capitalizing
on
those
opportunities, and on the
organizations
current
inability to pursue those
opportunities.

2001by Karl R. Knapp

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with good reputations in

the firm so that its
pronouncements will be
taken seriously by other
employees?
Leadership:
Does
the
group
include
enough
proven leaders to be able
to
drive
the
change
process?
3. Developing a vision and
strategy.
Vision: a sensible and
appealing picture of the
future.
Strategies: a logic for
how the vision can be
achieved.
Plans: specific steps and
timetables to implement
the strategies.
Budgets: plans converted
into financial projections
and goals.

4. Communicating the change

vision.
5. Empowering employees for
broad-based action.
6. Generating short-term wins.
7. Consolidating
gains
and
producing more change.
8. Anchoring new approaches in
the culture.

2001by Karl R. Knapp

Kotters eight-step process

can be applied both to the
implementation
of
change
identified as a result of the
Balanced Scorecard, and to the
implementation of the Balanced
Scorecard itself.
Customer Value Discipline
The subject of business
strategy is deep and wide. The
Balanced Scorecard, especially
the latest version of the theory
presented in The StrategyFocused Organization (2001), is
heavily based on the concepts
presented by Michael Treacy
and Fred Wiersema (1995) in
Discipline of Market Leaders.
The
formulation
of
strategy
is
not
specially
addressed in either of the works
on the Balanced Scorecard.
What the authors propose is
that the customer perspective of
a companys scorecard and
strategy map, must match the
companys strategy towards its
customers. It must match its
customer value discipline.
Treacy
and
Wiersema
(1996)
propose
that,
to
accomplish
maximum
effectiveness, a company must
pursue one of three customer
value disciplines (Treacy &
Wiersema, 1996).

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The Three Customer Value Disciplines

Operational
excellence:
providing customers with
reliable products or services
at
competitive
prices,
delivered
with
minimal
difficulty or inconvenience.
Product
leadership:
providing
products
that
continually redefine the state
of the art.
Customer intimacy: selling
the customer a total solution,
not just a product or service.
One of the keys to
formulating
a
successful
Balanced Scorecard is the
linkage between the measures
in the customer perspective and
the companys value discipline.
The measures in the customer
perspective should indicate the
success or failure of the
companys value discipline.

The
customer
value
discipline also has a great effect
on the other measures in the
companys scorecard. Measures
in
the
business
process
perspective for instance, should
directly support the companys
customer value discipline. For
example,
a
company
that
pursues a product leadership
value discipline should have a
focus on innovation. This focus
on
innovation
should
be
reflected as measures in the
business process perspective of
their scorecard. The lack of
2001by Karl R. Knapp

these
innovation
measures
identifies a weak link between
the stated value discipline and
the operational processes of the
company that execute the
strategy.
Summary & Next Steps
The Balanced Scorecard
management
approach
developed by Kaplan & Norton
(1995) is based upon several
foundational
management
theories, including:
Management by objectives
(Drucker, 1954).
Principles of management
(Fayol, 1916).
Open-book
management
(Case, 1995).
Leading
change
(Kotter,
1996).
Theory Y (McGregor, 1960).
Hierarchy of needs (Maslow,
1962).
Value disciplines (Treacy &
Wiersema, 1995).
The Balanced Scorecard is
a strategic management tool
that is gaining in popularity.
Initial results from companies
using the Balanced Scorecard
have
been
favorable.
The
concept
fits
with
current
management thinking and is
enabled by technological and
social changes in the current
work environment.

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The next step in the

development of the Balanced
Scorecard management theory
should be an analysis of
successful (and unsuccessful)
implementations
of
this
approach. As with the concept
of customer value disciplines
(Treacy & Wiersema, 1995),
common threads for successful
implementations
might
be
identified. Successful companies
may prove to use similar
scorecards, or fall into specific
categories of similarity. Once
identified,
these
common
themes could be used to
develop
best
practice
scorecards matched to specific
types of business strategies.

2001by Karl R. Knapp

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