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Assignment 2 Analysis of an article by www.missishot.blogspot.

You can't improve what you can't measure

The Kaplan’s and Norton’s article “The Balanced Scorecard– Measures that Drive Performance”
published in 1992 in Harvard Business Review was a new comprehensive approach to assessing
the company performance. They called it the Balanced Scorecards (BSC) - a concept for linking
strategy with a balanced set of relevant measures. In terms of management practice the BSC was
not new as a concept for measuring whether the activities of a company are meeting its objectives
according to vision and strategy but it was a breakthrough for performance measurement as
balanced and relevant within all company key perspectives. The main perspectives for the standard
BSC are financial, customer, internal business process and learning (innovation). The BSC system
helps managers focus on performance metrics while balancing financial objectives with customer,
process and innovation perspectives. In their 2000 book “The Strategy- Focused Organization”
they extended the performance measure system to a strategic management system by introducing
the so called strategy maps and ultimately captured the scorecard as a strategic tool. Basically a
strategy map is a diagram that describes how a particular organization creates value by connecting
strategic objectives in explicit cause-and-effect relationship with each other the four BSC
perspectives. It is supposedly the first step to crating an effective BSC.
This paper is going to analyze the BSC concept offered by the original authors Kaplan and
Norton with enriched features on related managerial practical implications. The brief look at
modern development of new management theories (e.g. Activity Based Management and others) is
shown in the attempt for the better understanding of the BSC advantages in today’s business
The global competition, advances in IT, greater focus on the customer have triggered the new
forms of management of an organization to compete effectively. The following new management
ideologies have been introduced: Total Quality Management, Continuous Improvement, Process
Management, Activity-Based Management, all aiming at greater customer focus. The focus on
customer is the latest trend in successful competition strategy. The adoption of quality principles
requires the effective use of performance measures. And the Process Management has brought
about the findings of an effective way of developing measures through processes. Therefore

“process-based thinking” plays an important role in developing BSC. The processes show what is
actually going on in the organization on high level. They in turn are broken into activities to get a
picture what is going on in the lower (local) levels. If we look at the historic development of
management the BSC has the roots in Activity-Based Management. In fact, Kaplan was one of the
pioneers in articulating Activity-Based Costing and its further use for activity analysis to improve
operational control and management control. ABC differs from traditional volume-based overhead
assigning for a cost objects (product). It assigns resource cost to a cost object based on activities
performed for the cost object (product, customer, market). In case of ABC approach one can assess
the profitability of an individual customer, distribution channel or market. “Activity-Based Costing
system focus on organizational activities as the key element for analyzing cost behavior by linking
organizational spending on resources to the activities and business processes performed by the
resources” (Kaplan).
Activity-Based Costing is a base for Activity-Based Management that, in turn, is used with TQM
and reengineering to:
1. develop the business case
2. establish priorities
3. provide cost justification
4. track the benefits
5. measure performance for ongoing improvement.
As can be noticed at the end of management practice there is always the performance
measurement. The BSC gives the managers the framework for formulating objectives and
measuring them. However the BSC has become more than a tactical or an operational
measurement system. After almost a decade from the original article in HBR and with their
experience in implementing the BSC within American companies, Kaplan and Norton pointed out
in their numerous books that innovative companies are using the scorecard as a strategic
management system. That is, “they are using the measurement focus of the scorecard to
accomplish critical management processes:
1. Clarify and translate vision and strategy
2. Communicate and link strategic objectives and measures
3. Plan, set targets, and align strategic initiatives
4. Enhance strategic feedback and learning” (Kaplan and Norton “The Strategy-Focused

So the current practice of the BSC implementation is a highly important for the company
strategy implementation.
Yet the main aspects of the BSC were reflected in their article of 1992. Therefore I will be
keeping to the original paper in my follow-up overview of the BSC.
The Balanced Scorecard perspectives
Kaplan and Norton highlight the four main BSC perspectives:
Customer perspective – how do customers see us?
Internal business process perspective - what must we excel at?
Financial perspective - how do we look to shareholders?
Innovation and learning perspective – can we continue to improve and create value?
The Balanced Scorecard framework is shown in Figure 1. In my opinion it is the best graphical
representation for today (source: ).
In original paper of 1992 only Goals and Measures parameters are on the BSC. Since then two
additional parameters have been added - Targets and Initiatives, and Goals are called Objectives
just for better specification.

Figure 1 © Paul Arveson based on Kaplan and Norton

The previous management theories have focused mostly on financial measures for company
performance such as a return on investment, return on capital employed, net margin, cash flow etc
with overall focus on production activities and its profitability. The BSC widely include also non-
financial measures such as customer satisfaction rate, delivery performance to customer by date or
quantity, customer retention etc with central focus on customer.
The mission statements of today’s corporation have a great focus on customer. Therefore how a
company performs from its customer perspective has become a priority for top management. The
customers’ concerns are usually represented by following factors: time, quality, performance
(service), and cost. In management literature they also can be referred to as Critical Success
Factors for improving customers’ services. These factors really matter to customers and as a result
to company competitiveness. The Critical Success Factors (CSFs) can be used for any BSC
perspectives to priorities what must be in place to achieve that objective. For example, a product
launch can be a CSF for acquiring new customers and consequently for market share growth. The
percent of sales from new product can be a measure of the customer satisfaction about the new
product. For Innovation perspective, user involvement is a CSF for a successful IT project.
The building of BSC requires the company to articulate goals for time, quality, performance
(service) and cost. The company can improve the lead time for existing product by measuring time
from order receiving to time it actually delivers according to the order. On time delivery, low level
of defect in products and other quality measure have to be defined by a customer. The different
customers perceive the quality differently. One can allow 7 days window in delivery the other only
5 days. So the company delivering in 6 days will be super performing for one and underperforming
for others clients. The companies should view their performance through customers’ eyes
sometimes involving third party for survey or standards in the industry. Another technique is used
for comparing a company performance against their competitors is Benchmarking. Benchmarking
first identifies company’s critical success factors then studies the best practices of other firms for
achieving these CSFs and ultimately implements improvements into the company’s processes to
match or beat the performance of those competitors.
The performance (service) measures shows how the company’s product or services contribute to
creating value for its customers.
The relevant cost measures are considered to be of high importance for organizations.

Activity Based Costing provides more precise information for product costs and process control
than conventional cost accounting. ABC enables to view product (service) costs through all value
chain and identify low-added activities resource consuming that can be optimized or eliminated.
Large opportunities for cost savings can come from supply chain (upstream) operations. By
understanding the cost associated with ordering, receiving, inspecting, moving, storing, and paying
for materials, companies can make better decisions in choosing the lowest total cost supplies, not
just the lowest price supplies. An ABC model of the supplier relationship enables managers to
work with their best vendor to search for ways to lower inventory levels and total supply chain
costs, benefits that will avail both parties.
Internal Business Perspective in BSC measure what the company should do internally to meet its
customers’ expectations. After all, the processes, decisions and actions occurred in the organization
contribute to excellence performance and customer satisfaction. Therefore, Internal Business
perspective focuses on internal operations critical for success in the market. The factors that affect
cycle times, productivity, cost, employee skills etc. decisive in key internal processes. The
company should develop operational measure for all of them. The top management needs to link
these measures for entire processes to the actions taken by individuals on local level. This will
ensure that employees on lower level have clear targets for action, decisions and improvements
activities that will contribute to the firm’s overall mission or strategy. The top managers are to
disaggregate the summary measure - general goal measure for performance to trace it to individual
action of a department.
Innovation and Learning Perspective aims at continuous improvement as targets for success are
changing continuously. In intense global competition the company’s value is determined by its
ability to innovate, improve, and learn. That is, the company ability to create more value for
customers, launch new product, enter new markets and thereby increase sales and margins. In
terms of strategy Innovation scorecard shows company’s opportunities for growing and increasing
shareholder value.
The innovation goals might be stability in the manufacturing of new products rather than
improvements for existing products. The percent of sales from new products guides the product
launch. The managers have to monitor it to grasp the current trends. If it is downward, they are to
explore whether the problems have arisen in new product design or its market introduction.
Technology leadership can be measured by product performance compared to competitors or by
number of new products with patented technology in them. Another critical success factors in

Innovation perspective are Cost leadership, Market leadership and R&D and so on. When a
strategy map is created, this perspective is often a base upon which the firm’s success is built and
includes the human capital evaluations.
Financial Perspective represents financial performance goals and measures. How well the
executed strategy is contributing to shareholder value and wealth. Typical financial goals
encompass profitability, growth, and shareholder value. A company might state its financial goals
simply: to survive, to succeed and to prosper. In Kaplan example survival is measured by cash
flow, success by quarterly sales growth and operating income by division, and prosperity by return
on equity and increased market share by segment.
Nevertheless, in today’s business environment the financial measures are being criticized for
their inaccurate coverage of the current company state, for their backward-looking focus, and
inability to reflect required value-creation actions. In attempt to overcome these shortcomings, a
company can use Shareholder Value Analysis, which “forecasts future cash flows and discounts
them back to a rough estimate of current value” (Kaplan). SVA assesses the performance of the
business (business unit) and provide a picture for measuring and managing cash flows over time.
The company which provides a greater return on capital in a peer group is outperforming its
competitors and, at the same time provides a greater shareholder value. Yet it is not necessarily that
the company provides a greater customer satisfaction or successful strategy in a long run.
On the whole SVA measures the company ability to earn more than its cost of capital.
Identifying activities and processes that drive cash flow is a tall order for top management.
When developing the financial perspective for their BSC managers should encourage the
business units to link their objectives to corporate strategy. The uniform financial metrics help in
comparisons of performance but can distort the business unit strategy.
Each business unit may be asked to achieve a 15% return-on-capital-employed objective.
However, it does not recognize the differences in strategies of those units. Apart from defining
financial performance expected from the strategy, financial measures serve as the ultimate target
for the goals and measures of all the other BSC perspectives.
Some critics argue that financial measures do not reflect customer satisfaction, quality, cycle
time, and employee motivation hence they can be used for improvement actions. These critics put
greater emphasis on the operations as a trigger for financial figures. If improvements are made in
the company’s operations, the financial numbers will take care of themselves. Kaplan and Norton
disagree with that. So do I.

First, the well-designed financial control system enhances a company total quality management
program and adds value to the stakeholders. The contemporary definition for financial
management or management accounting defines them as value adding, continuous improvement
process of various actions.
Second, it is not always the case that enhanced operations lead to the better financial results. As a
matter of fact, the improvements in manufacturing capabilities might not be translated into
increased profitability. For example, incremental investments into new manufacturing machines
instead of investments into equipment easily converted to a customized product that, in turn, gives
flexibility in managerial decisions for greater operational profitability. Obviously the new
machines extended capabilities have improved the operations but did not resulted in financial
numbers probably due to a slow responsive marketing system or more demanding customer needs.
It is a real frustration for the executives to discover that operational improvements have not been
reflected in the bottom line. It usually means that the company’s executives have to reexamine
their assumptions about the strategy, its implementation plan and their views on critical success
The BSC represents the changes in the fundamental assumptions about performance
measurement. Previously the most performance measurement systems have been designed and
implemented by financial experts without involvement of senior managers. Such measurement
systems have been suffering from a control bias. That is, they try to control behavior by implying
the actions to be taken and then measuring to see whether the employees have in fact taken those
actions. It worked in the Industrial Age but it is no longer effective in modern Information Age.
The BSC, the new approach to performance measurement fits with today’s information driven
economy, where the better informed customer is becoming more demanding and sophisticated, the
internal processes more global and, in the same time, more integrated, financial systems more
interactive and innovation capability is growing continuously and fast-paced.

1. Kaplan, S. and Norton, D.P. (1992).The Balanced Scorecard: Measures That Drive
Performance HBR
2. Kaplan s. and Norton D.P. “The Strategy-Focused Organization: How Balanced Scorecard
Companies Thrive in the New Business Environment”