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The Balanced Scorecard: Historical Development and Context, As Developed by Robert Kaplan & David Norton
KARL R. KNAPP
Anderson University – Anderson IN
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 & Norton’s 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. As defined by Kaplan and
© 2001by Karl R. Knapp
Norton (1996), “The Balanced Scorecard translates an organization’s 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 segments in which the business unit will compete
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and strategy of the firm into a scorecard. along with the performance-drivers that create successful future performance. • Plan. These new elements add the following new sections to the 06/25/2001 © 2001by Karl R. and align strategic initiatives. • Make strategy everyone’s everyday job. The scorecard should contain both outcome measures that indicate excellent prior performance. Knapp Page 2 of 15 . • Enhance strategic feedback and learning. These four strategic management processes are the keys to the Balanced Scorecard theory. • Learning & Growth – measures the “infrastructure that the organization must build to create long-term growth and improvement”. They propose that successful strategy implementation incorporates the following five strategic management principles (Kaplan & Norton. Strategy-Focused Organization The latest refinement of this concept developed from the experiences of companies implementing the Balanced Scorecard into their strategic management processes. The measures are arranged in the four perspectives. vision. • Align the organization to the strategy. Kaplan and Norton found that implementation of strategy is as important as the development of strategy. Anderson University DBA Summer 2001 and the measures of the business unit’s performance in these targeted segments”. To create a Balanced Scorecard an organization’s management team translates the mission. • Internal Business Process – measures the “critical internal processes in which the organization must excel”. The scorecard measures should represent both long-term and short-term success in the execution of the strategy. This ‘balanced’ framework enables a management team to execute the following four strategic management processes: • Clarify and translate vision and strategy. set targets. • Mobilize change through executive leadership. • Make strategy a continual process. 2001): • Translate the strategy to operational terms. Within the five principles there are several elements. • Communicate and link strategic objectives and measures.Foundations of Management.
• Strategic & Operational Budgeting – Strategy funded. • Personal Scorecards – Strategy aligned with personal objectives. 2001). A well-developed strategy map clearly illustrates the company’s strategy and the measures of success for the strategy. Knapp Page 3 of 15 06/25/2001 . One of the most useful additions to the Balanced Scorecard theory is the Balanced Scorecard Strategy Map (Kaplan & Norton. • Change Management – The Balanced Scorecard is a change management program. Anderson University DBA Summer 2001 theory: • Strategy Maps – Strategy aligned with the value proposition (see figure 1). © 2001by Karl R. • Open Reporting – All employees get the information and management meetings held to discuss performance. enabled by the scorecard. • Balanced Paychecks – Incentive compensation aligned with team-based goals (scorecard).Foundations of Management. A template for a strategy map is illustrated on the following page.
Foundations of Management. Knapp Page 4 of 15 06/25/2001 . 2001) © 2001by Karl R. Anderson University DBA Summer 2001 Balanced Scorecard Strategy Map Improve Shareholder Value Revenue Growth Strategy Build the Franchise New Revenue Sources Shareholder Value ROCE Productivity Strategy Improve Asset Utilization Asset Utilization Increase Customer Value Customer Profitability Customer Acquisition Improve Cost Structure Cost per Unit Customer Retention Product Leadership Customer Intimacy Operational Excellence Price Increase Customer Value Quality Time Customer Value Proposition Function anlity Service Relation Relationship ships Image Brand 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.
In The Practice of Management. The remainder of this paper discusses the historical evolution of each of these management concepts. As defined by George Odiorne (1965).Foundations of Management. Management by Objectives is “a process whereby the superior and subordinate managers of an organization jointly identify its common goals. define each individual’s major areas of responsibility in terms of the results expected of him. • Business Strategy. Anderson University DBA Summer 2001 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 Communication. One of the most widely used measurement © 2001by Karl R. Peter Drucker (1954) introduced a concept called Management by Objectives (MBO).Balanced Scorecard Historical 'Family Tree' Historical Analysis The Balanced Scorecard is based on three general management concepts: • Measurement and Goal Setting. • Communication. the key is that subordinates participate in the goal setting 06/25/2001 Page 5 of 15 . Motivation and Human Relations. Knapp and management practices is Management by Objectives. Motivation & Human Relations Open Book Management Open book management John Case 1995 Theory Y The human side of enterprise Douglass McGregor 1960 Human Relations Hawthorne Studies Eldon Mayo 1945 Hierarchy of Needs Toward a psychology of being Abraham Maslow 1962 Eight Stage Change process Leading change John Kotter 1996 Stategy Focused Organization The strategy focused organization Robert Kaplan & David Norton 2001 Customer Value Discipline Value Discipline Discipline of market leaders Micheal Treacy & Fred Wiersema 1995 Open Book Management The great game of business Jack Stack 1992 Figure 2 . and use these measures as guides for operating the unit and assessing the contribution of each of its members”. Measurement & Goal Setting The Balanced Scorecard concept uses a “strategic measurement system” at the root of the theory. In this definition.
Initiative (causes creativity & innovation). “This would dismiss many of the claims made for previous use of MBO by such people as McKinsey. Prior objective based management research and implementation clearly influenced the development of Management by Objectives. Esprit de Corp. In his work. leadership. Management by Objectives and The Balanced Scorecard are greatly influenced by Fayol’s four functions of management (Fayol. Fayol. Order (efficiency & career opportunity). • Line of authority (chain of command). and Standard of New Jersey – firms that Odiorne claims used an early objectivebased management style of organization” (Greenwood. or by such corporations as DuPont. Discipline (enforce rules to achieve goals). 1916): • Division of labor (job specialization).Foundations of Management. 1916): • • • • Planning. Henri Fayol founded the earliest thinking about the functions of management. Anderson University DBA Summer 2001 process. and knowledge). General Motors. Administration industrielle et générale. Motivation & Human Relations One of the key foundational concepts of The Balanced Scorecard is that employees are motivated by a © 2001by Karl R. Controlling. Fayol founded the fourteen principles of management (Fayol. Organizing. Leading. skill. Barnard. Knapp Page 6 of 15 06/25/2001 . Equity (fair treatment for employees). Remuneration of Personnel (bonuses and profit sharing). • Centralization (preferred less • • • • • • • • • centralized). Unity of direction (singleness of purpose). It is the involvement of subordinates that allows Drucker the credit for development of Management by Objectives. 1981). • Authority & responsibility (authority derived from expertise. Communication. Subordination of Individual Interests to the Common Interest (employees need to understand how their performance affects the entire organization). Stability & Tenure of Employees (encouraged longterm employees). • Unity of command (everyone has one manager and only one manager).
This idea is clearly influenced by the theory of Open-Book Management. values and strategy are. • Workers need close. in effect. vision. teams and so on – and gives them a 06/25/2001 © 2001by Karl R. TQM. • The rise of the adversarial union. 1995): • A job must be defined as narrowly as possible. and have information available to them that enables them to execute and adapt their actions to successfully execute the strategy. good or bad” (Stack. According to Case (1995). Jack Stack introduced the concept of Open-Book Management The Great Game of Business (1992). 1995): • The rise of engineering. Anderson University DBA Summer 2001 clear ‘line of sight’ from their activities to the strategy of the organization. Knapp Page 7 of 15 . Open-book management is revolutionary because conventional business operates under two assumptions (Case. Changes in the organizational and social environment have prompted changes in the approach to management. direct supervision. of a separate managerial class. most efficient. The key steps to the development of this archaic management paradigm are (Case. Open-Book Management A major premise that the Balanced Scorecard is constructed upon is that employees need to understand the business strategy. Case further argues that open-book management “takes those trendy new management ideas – empowerment. “open-book management is a way of running a company that gets everyone to focus on helping the business make money”. Employees want to understand the linkage between what they do. John Case has further developed this basic concept in several books and articles. and of the engineering-inspired movement known as scientific management. 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. and what the organization’s mission.Foundations of Management. These ideas are based mainly on the Human Relations School of management theory. In this book Stack argues that “the best. • The professionalization of management – the creation. 1992).
1996): • Educate. • Operating process education. • Information sharing. employees understand why they’re being called upon to solve problems. The Balanced Scorecard shares the basic fundamentals of open communication and the engagement of employees through incentive-based pay. Make sure everyone – everyone! – shares directly in the company’s success. and in the risk of failure. • Employees have a direct stake in the company’s success. • Employees learn that. The Balanced Scorecard refines this approach by going beyond financial measurements using a 06/25/2001 Page 8 of 15 . © 2001by Karl R. reduce defects. • Customer education. cut costs. 3. Get the information out there. In an open-book company. • Financial results education. • Enable. it is easy to see the linkages to the Balanced Scorecard. 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. 2. In open-book management there are three essential differences to a conventional business (Case. Anderson University DBA Summer 2001 business logic. • Information exchange systems.Foundations of Management. • Employee participation and involvement systems. Teach the basics of business. Empower people to make decisions based on what they know. 1995): • Every employee sees – and learns to understand – the company’s financials. along with all the other numbers that are critical to tracking the business’s performance. and give the customer better service”. After reviewing the basic fundamentals of open-book management. Knapp 4. • Engage (reward systems). 1995): 1. • Convincing employees they have the right and responsibility to make decisions and take action. • Big picture education. • Empower. whatever else they do. These four steps have been refined and organized in the following four management practices (McCoy. part of their job is to move those numbers in the right direction.
equipment. lack of ambition. Anderson University DBA Summer 2001 balanced four-perspective approach. Expending physical and mental effort at work is as natural as play and rest. materials. Assumptions About Human Nature Assumptions about human nature and motivation underlie both the Balanced Scorecard and Open-Book management. The Balanced Scorecard and Open-Book management are based on Theory Y assumptions about human nature.Foundations of Management. People will exercise self-direction and self-control in the service of © 2001by Karl R. Theory Y assumptions would view the task of management as follows (McGregor. It also links the business strategy to the strategic measurement and management system. Douglass McGregor’s influential work on managerial assumptions about human nature was influential to the development of these modern management theories. highlighting the cause-and-effect relationships between business drivers and outcome measures (financial). In accordance with the approach to the Balanced Scorecard and Open-Book management. The average human being does not inherently dislike work. 3. According to McGregor (1960). and the ability to use these qualities to solve organizational problems are widely distributed among people. 2. 1960): 1. Because people are 06/25/2001 Page 9 of 15 . Avoidance of responsibility. the average human being learns not only to accept but to seek responsibility. Imagination. Managers are responsible for organizing the elements of productive enterprise – money. 2. creativity. Commitment to objectives is a function of the rewards associated with their achievement. the Theory Y assumptions are: 1. 5. ingenuity. Under proper conditions. people – in the interest of economic ends. 4. Knapp objectives to which they feel committed. and emphasis on security are not inherent human characteristics. External control and the threat of punishment are not the only means to direct effort toward organizational objectives. The most significant rewards – the satisfaction of ego and selfactualization needs – can be direct products of effort directed toward organizational objectives.
The Balanced Scorecard is an extension of the concept of open-book management. role. or responsibility that was worth doing”. Proponents of the Balanced Scorecard and Open Book management would certainly argue that point 3 above is the essential task of management. Kaplan and Norton borrow heavily from the work of John Kotter on 06/25/2001 Page 10 of 15 . The Balanced Scorecard is also a tool for organizational change. can assume responsibility. This theory was based on the assumption that people are inherently seeking ‘self-actualization’. Theory Y assumptions about people was heavily influenced by the human relations perspective of management thought. Self Actualization Esteem Needs Love Needs Safety Needs Physiological Needs Maslow’s (1962) Hierarchy of Needs To move up the hierarchy of needs. based on Theory Y assumptions about people. 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. Knapp their work. the needs below must be generally satisfied. The development of this perspective was influenced by Eldon Mayo and Abraham Maslow. and are willing to work toward organizational goals. Maslow introduced the hierarchy of needs or selfactualization theory. as they move up the hierarchy of needs. Mayo was heavily influenced by the work of Abraham Maslow. and were capable of ‘roaring off the face of the earth’ when engaged with a task. wanted to commit to causes larger than themselves. Anderson University DBA Summer 2001 motivated to perform. who seek selfactualization. have potential for development. managers are responsible for enabling people to recognize and develop these basic capabilities. Maslow (1998) believed that “people sought meaning in © 2001by Karl R. Eldon Mayo’s research in the famous Hawthorne studies provided empirical evidence on theories of human motivation.Foundations of Management.
• Stop measuring subunit performance based only on functional goals. 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. 1996): 1. • Insist that people talk regularly to unsatisfied customers. • Send more data to more employees. • Create a crisis. John Kotter developed a highly regarded approach to the implementation of change recommended by Kaplan and Norton (2001). These areas of improvement will undoubtedly require change. Knapp management meetings. • Set targets so high that they can’t be reached by conducting business as usual. • Position power: Are enough key players on board. intelligent decisions will be made? • Credibility: Does the group have enough people 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 06/25/2001 Page 11 of 15 . • Put more honest discussions of the firm’s problems in company newspapers and senior management speeches. and on the organization’s current inability to pursue those opportunities. Establishing a sense of urgency. Stop senior management ‘happy talk’. Leading Change If successfully used. • Use consultants and other means to force more relevant data and honest discussion into © 2001by Karl R. Insist on broader measures of performance. 2. especially the main line managers. Kotter argues that the successful implementation of change should follow an eightstep process (Kotter. Anderson University DBA Summer 2001 change management. on the wonderful rewards for capitalizing on those opportunities.Foundations of Management. • Eliminate obvious examples of excess. the Balanced Scorecard will identify areas where the firm’s strategy is successful and where it needs improvement. • Bombard people with information on future opportunities. Creating the guiding coalition.
Foundations of Management. 4. not just a product or service. Customer Value Discipline The subject of business strategy is deep and wide. delivered with minimal difficulty or inconvenience. • Customer intimacy: selling the customer a total solution. is © 2001by Karl R. Communicating the change vision. Empowering employees for broad-based action. a company must pursue one of three customer value disciplines (Treacy & Wiersema. especially the latest version of the theory presented in The StrategyFocused Organization (2001). Generating short-term wins. 8. 7. The Balanced Scorecard. The Three Customer Value Disciplines • Operational excellence: providing customers with reliable products or services at competitive prices. What the authors propose is that the customer perspective of a company’s scorecard and strategy map. Kotter’s eight-step process can be applied both to the implementation of change identified as a result of the Balanced Scorecard. • Product leadership: providing products that continually redefine the state of the art. 1996). Anchoring new approaches in the culture. The formulation of strategy is not specially addressed in either of the works on the Balanced Scorecard. • Budgets: plans converted into financial projections and goals. • Plans: specific steps and timetables to implement the strategies. • Vision: a sensible and appealing picture of the future. must match the company’s strategy towards its customers. Treacy and Wiersema (1996) propose that. to accomplish maximum effectiveness. One of formulating the a keys to successful Page 12 of 15 06/25/2001 . Knapp heavily based on the concepts presented by Michael Treacy and Fred Wiersema (1995) in Discipline of Market Leaders. 6. 5. Consolidating gains and producing more change. It must match its customer ‘value discipline’. • Strategies: a logic for how the vision can be achieved. Developing a vision and strategy. and to the implementation of the Balanced Scorecard itself. Anderson University DBA Summer 2001 process? 3.
these common ‘themes’ could be used to develop best practice scorecards © 2001by Karl R. • Theory Y (McGregor. The customer value discipline also has a great effect on the other measures in the company’s scorecard.Foundations of Management. Initial results from companies using the Balanced Scorecard have been favorable. As with the concept of customer value disciplines (Treacy & Wiersema. 1962). Once identified. 1995). The next step in the development of the Balanced Scorecard management theory should be an analysis of successful (and unsuccessful) implementations of this approach. common threads for successful implementations might be identified. Summary & Next Steps The Balanced Scorecard management approach developed by Kaplan & Norton (1995) is based upon several foundational management theories. 1996). • Leading change (Kotter. Measures in the business process perspective for instance. This focus on innovation should be reflected as measures in the business process perspective of their scorecard. 1995). including: • Management by (Drucker. a company that pursues a product leadership value discipline should have a focus on innovation. The lack of these innovation measures identifies a weak link between the stated value discipline and the operational processes of the company that execute the strategy. 1995). For example. Anderson University DBA Summer 2001 Balanced Scorecard is the linkage between the measures in the customer perspective and the company’s value discipline. Successful companies may prove to use similar scorecards. objectives • Principles of management (Fayol. 1960). The concept fits with current management thinking and is enabled by technological and social changes in the current work environment. • Value disciplines (Treacy & Wiersema. should directly support the company’s customer value discipline. 1954). The Balanced Scorecard is a strategic management tool that is gaining in popularity. • Open-book management (Case. or fall into specific categories of similarity. • Hierarchy of needs (Maslow. The measures in the customer perspective should indicate the success or failure of the company’s value discipline. 1916). Knapp Page 13 of 15 06/25/2001 .
© 2001by Karl R. Knapp Page 14 of 15 06/25/2001 .Foundations of Management. Anderson University DBA Summer 2001 matched to specific types of business strategies.
Anderson University DBA Summer 2001 Bibliography Barnard. M. © 2001by Karl R. Harvard Business Press. The Open-Book Revolution. No 2. 3). pp. The great game of business. Cambridge. Assisted by Harold Smiddy. New York: Currency & Doubleday. (1995). G. & Salsbury. New York: AMACOM. Greenwood. Magazine. Ltd. Academy of Management Review. (1954). Pierre S. Odiorne. (1962). A. H. New York: HarperCollins. Creating an “open-book” organization. Harvard Business Press. J. D. New York: Pitman. (1960). Fayol. Harvard University Press. Maslow. D. (1996). (1996). Chandler. McCoy. P. & Wiersema. 225-230. D. 10(5e serie. Management by objectives: a system of management leadership. McGregor. No. (1995). The practice of management. Bulletin de la Société de l’Industrie Minérale. (1995). (1971). R. Van Nostrand Company. C.Foundations of Management. 47-48. 1-162. J. J. A. Treacy. Inc. Maslow. Management by Objectives: As Developed by Peter Drucker. Inc.33-34. Harvard Business Press. F. (1965). New York: McGraw-Hill. The strategy focused organization. The human side of enterprise. & Norton. Addison-Wesley. J. Kaplan. Vol 6. DuPont and the making of the modern corporation. (1996). (2001). June 1995. Knapp Page 15 of 15 06/25/2001 . S. The balanced scorecard. Kaplan. New York: John Wiley & Sons. R. & Norton. A. Stack. The functions of the executive. Toward a psychology of being. 26-43. Discipline of market leaders. T. (1938). (1992). D. Case. Case. (1981). (1998). Kotter. Leading change. (1916). R. New York: Harper & Row. Maslow on management. Open-book management. Administration industrielle et générale. New York: Harper & Row Drucker.
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