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 As defined by Kaplan and

Norton (1996), “The Balanced
The Balanced Scorecard is
Scorecard translates an
a theory and management
organization’s mission and
approach first proposed in the
strategy into a comprehensive
Harvard Business Review by
set of performance measures
Robert S. Kaplan & David P.
that provides the framework for
Norton (1995). A subsequent
a strategic measurement and
book, The Balanced Scorecard,
management system”. This
was published following this
strategic management system
article (1996). The most recent
measures organizational
refinement of this theory and
performance in four ‘balanced’
management approach appears
perspectives:
in Kaplan & Norton’s book, The
Strategy-Focused Organization  Financial – summarizes “the
(2001). This paper attempts to readily measurable economic
present a high-level overview of consequences of actions
this management theory, along already taken”.
with a description of its  Customer – contains
historical foundation and measures that “identify the
development. customer and market

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Foundations of Management, Anderson University DBA
Summer 2001

segments in which the  Communicate and link

business unit will compete strategic objectives and
and the measures of the measures.
business unit’s performance  Plan, set targets, and align
in these targeted segments”. strategic initiatives.
 Internal Business Process  Enhance strategic feedback
– measures the “critical and learning.
internal processes in which
the organization must excel”. These four strategic
 Learning & Growth – management processes are the
measures the “infrastructure keys to the Balanced Scorecard
that the organization must theory.
build to create long-term
growth and improvement”. Strategy-Focused
Organization
To create a Balanced
The latest refinement of
Scorecard an organization’s
this concept developed from the
management team translates
experiences of companies
the mission, vision, and strategy
implementing the Balanced
of the firm into a scorecard. The
Scorecard into their strategic
scorecard measures should
management processes. Kaplan
represent both long-term and
and Norton found that
short-term success in the
implementation of strategy is as
execution of the strategy. The
important as the development of
measures are arranged in the
strategy. They propose that
four perspectives. The
successful strategy
scorecard should contain both
implementation incorporates
outcome measures that indicate
the following five strategic
excellent prior performance,
management principles (Kaplan
along with the performance-
& Norton, 2001):
drivers that create successful
future performance.  Translate the strategy to
This ‘balanced’ framework operational terms.
enables a management team to  Align the organization to the
execute the following four strategy.
strategic management  Make strategy everyone’s
processes: everyday job.
 Make strategy a continual
 Clarify and translate vision process.
and strategy.  Mobilize change through
executive leadership.

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Foundations of Management, Anderson University DBA
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Within the five principles information and management

there are several elements. meetings held to discuss
These new elements add the performance.
following new sections to the  Change Management – The
theory: Balanced Scorecard is a
change management
 Strategy Maps – Strategy program, enabled by the
aligned with the value scorecard.
proposition (see figure 1).
 Personal Scorecards – One of the most useful
Strategy aligned with additions to the Balanced
personal objectives. Scorecard theory is the
 Balanced Paychecks – Balanced Scorecard Strategy
Incentive compensation Map (Kaplan & Norton, 2001). A
aligned with team-based well-developed strategy map
goals (scorecard). clearly illustrates the company’s
 Strategic & Operational strategy and the measures of
Budgeting – Strategy success for the strategy. A
funded. template for a strategy map is
 Open Reporting – All illustrated on the following
employees get the page.

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 Foundations of Management, Anderson University DBA
Summer 2001

Balanced Scorecard Strategy Map

Improve Shareholder Value

Shareholder Value
Revenue Growth Productivity Strategy
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
Customer Value Proposition Operational
Excellence
Increase Customer Value Relationship Image

Price Quality Time Functio Service Relation Brand

nanlity ships

Customer Satisfaction

“Build the “Increase Customer “Achieve “Be a Good

Franchise” Value” Operational Corporate Citizen”
(Innovation (Customer Excellence” (Regulatory &
Processes) Management (Operational Environmental)
Processes) Processes)

A Motivated and Prepared Workforce

Strategic Competencies Strategic Technologies Climate for Action

Figure 1: Balanced Scorecard Strategy Map (Kaplan &

Norton, 2001)

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Foundations of Management, Anderson University DBA
Summer 2001

Balanced Scorecard Historical 'Family Tree'

Balanced Scorecard Stategy Focused Organization
The balanced scorecard The strategy focused organization
Robert Kaplan & David Norton Robert Kaplan & David Norton
1996 2001

Measurement & Goals Communication, Motivation & Human Relations Customer Value Discipline

Management by Objectives Open Book Management Eight Stage Change process Value Discipline
The practice of management Open book management Leading change Discipline of market leaders
Peter Drucker John Case John Kotter Micheal Treacy & Fred Wiersema
1954 1995 1996 1995

Principles of Management Theory Y Open Book Management

Administration industrielle
The human side of enterprise
The great game of business
Henri Fayol Douglass McGregor Jack Stack
1916 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 and management practices is

Management by Objectives.
The Balanced Scorecard is
based on three general In The Practice of
management concepts: Management, Peter Drucker
(1954) introduced a concept
 Measurement and Goal called Management by
Setting. Objectives (MBO). As defined by
 Communication, Motivation George Odiorne (1965),
and Human Relations. Management by Objectives is “a
 Business Strategy. process whereby the superior
and subordinate managers of an
The remainder of this
organization jointly identify its
paper discusses the historical
common goals, define each
evolution of each of these
individual’s major areas of
management concepts.
responsibility in terms of the
Measurement & Goal Setting results expected of him, and use
these measures as guides for
The Balanced Scorecard operating the unit and assessing
concept uses a “strategic the contribution of each of its
measurement system” at the members”. In this definition, the
root of the theory. One of the key is that subordinates
most widely used measurement participate in the goal setting

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Foundations of Management, Anderson University DBA
Summer 2001

process. It is the involvement of  Centralization (preferred less

subordinates that allows centralized).
Drucker the credit for  Unity of direction (singleness
development of Management by of purpose).
Objectives. “This would dismiss  Initiative (causes creativity &
many of the claims made for innovation).
previous use of MBO by such  Equity (fair treatment for
people as McKinsey, Barnard, employees).
Fayol, or by such corporations  Order (efficiency & career
as DuPont, General Motors, and opportunity).
Standard of New Jersey – firms  Discipline (enforce rules to
that Odiorne claims used an achieve goals).
early objective-based
 Remuneration of Personnel
management style of
(bonuses and profit sharing).
organization” (Greenwood,
 Stability & Tenure of
1981).
Employees (encouraged long-
Prior objective based term employees).
management research and  Subordination of Individual
implementation clearly Interests to the Common
influenced the development of Interest (employees need to
Management by Objectives. understand how their
performance affects the
Henri Fayol founded the entire organization).
earliest thinking about the  Esprit de Corp.
functions of management. In his
work, Administration Management by Objectives
industrielle et générale, Fayol and The Balanced Scorecard are
founded the fourteen principles greatly influenced by Fayol’s
of management (Fayol, 1916): four functions of management
(Fayol, 1916):
 Division of labor (job
specialization).  Planning.
 Authority & responsibility  Organizing.
(authority derived from  Leading.
expertise, leadership, skill,  Controlling.
and knowledge).
Communication, Motivation &
 Unity of command (everyone
has one manager and only Human Relations
one manager). One of the key
 Line of authority (chain of foundational concepts of The
command). Balanced Scorecard is that
employees are motivated by a

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Foundations of Management, Anderson University DBA
Summer 2001
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 organization’s 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.
Open-book management is
revolutionary because
 2001by Karl R. Knapp
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
so on – and gives them a
business logic. In an open-book
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Foundations of Management, Anderson University DBA
Summer 2001

company, employees understand 4. Make sure everyone –

why they’re being called upon everyone! – shares directly in
to solve problems, cut costs, the company’s success, and
reduce defects, and give the in the risk of failure.
customer better service”.
These four steps have
In open-book management been refined and organized in
there are three essential the following four management
differences to a conventional practices (McCoy, 1996):
business (Case, 1995):
 Educate.
 Every employee sees – and  Big picture education.
learns to understand – the  Customer education.
company’s financials, along  Operating process
with all the other numbers education.
that are critical to tracking  Financial results
the business’s performance. education.
 Employees learn that,  Enable.
whatever else they do, part of  Information sharing.
their job is to move those  Information exchange
numbers in the right systems.
direction.
 Employee participation
 Employees have a direct and involvement systems.
stake in the company’s
 Empower.
success.
 Convincing employees
The implementation of the they have the right and
open-book management concept responsibility to make
is very similar to the decisions and take action.
implementation of a Balanced  Engage (reward systems).
Scorecard strategic
management system. Case After reviewing the basic
posits that there are four steps fundamentals of open-book
to implementing open-book management, it is easy to see
management (Case, 1995): the linkages to the Balanced
Scorecard. The Balanced
1. Get the information out Scorecard shares the basic
there. fundamentals of open
2. Teach the basics of business. communication and the
3. Empower people to make engagement of employees
decisions based on what they through incentive-based pay.
know. The Balanced Scorecard refines
this approach by going beyond

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Foundations of Management, Anderson University DBA
Summer 2001

financial measurements using a exercise self-direction and

balanced four-perspective self-control in the service of
approach, highlighting the objectives to which they feel
cause-and-effect relationships committed.
between business drivers and 3. Commitment to objectives is
outcome measures (financial). It a function of the rewards
also links the business strategy associated with their
to the strategic measurement achievement. The most
and management system. significant rewards – the
satisfaction of ego and self-
Assumptions About Human actualization needs – can be
Nature direct products of effort
Assumptions about human directed toward
nature and motivation underlie organizational objectives.
both the Balanced Scorecard 4. Avoidance of responsibility,
and Open-Book management. lack of ambition, and
Douglass McGregor’s influential emphasis on security are not
work on managerial inherent human
assumptions about human characteristics. Under proper
nature was influential to the conditions, the average
development of these modern human being learns not only
management theories. to accept but to seek
responsibility.
The Balanced Scorecard 5. Imagination, ingenuity,
and Open-Book management creativity, and the ability to
are based on Theory Y use these qualities to solve
assumptions about human organizational problems are
nature. widely distributed among
people.
According to McGregor
(1960), the Theory Y In accordance with the
assumptions are: approach to the Balanced
Scorecard and Open-Book
1. Expending physical and management, Theory Y
mental effort at work is as assumptions would view the
natural as play and rest. The task of management as follows
average human being does (McGregor, 1960):
not inherently dislike work.
2. External control and the 1. Managers are responsible for
threat of punishment are not organizing the elements of
the only means to direct productive enterprise –
effort toward organizational money, materials, equipment,
objectives. People will

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Foundations of Management, Anderson University DBA
Summer 2001

people – in the interest of Mayo was heavily influenced by

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.
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 self-
actualization theory. This theory
was based on the assumption
that people are inherently
seeking ‘self-actualization’, as
they move up the hierarchy of
needs.

Self
Proponents of the Actualization
Balanced Scorecard and Open
Esteem Needs
Book management would
certainly argue that point 3 Love Needs
above is the essential task of
management. Safety Needs

Theory Y assumptions Physiological Needs

about people was heavily
influenced by the human Maslow’s (1962) Hierarchy of
relations perspective of Needs
management thought. The
development of this perspective To move up the hierarchy
was influenced by Eldon Mayo of needs, the needs below must
and Abraham Maslow. be generally satisfied.

Eldon Mayo’s research in The Balanced Scorecard is

the famous Hawthorne studies an extension of the concept of
provided empirical evidence on open-book management, based
theories of human motivation. on Theory Y assumptions about
people, who seek self-

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Foundations of Management, Anderson University DBA
Summer 2001

actualization. The Balanced  Insist that people talk

Scorecard is also a tool for regularly to unsatisfied
organizational change. Kaplan customers.
and Norton borrow heavily from  Use consultants and other
the work of John Kotter on means to force more
change management. relevant data and honest
discussion into
Leading Change management meetings.
If successfully used, the  Put more honest
Balanced Scorecard will identify discussions of the firm’s
areas where the firm’s strategy problems in company
is successful and where it needs newspapers and senior
improvement. These areas of management speeches.
improvement will undoubtedly Stop senior management
require change. John Kotter ‘happy talk’.
developed a highly regarded  Bombard people with
approach to the implementation information on future
of change recommended by opportunities, on the
Kaplan and Norton (2001). wonderful rewards for
Kotter argues that the capitalizing on those
successful implementation of opportunities, and on the
change should follow an eight- organization’s current
step process (Kotter, 1996): inability to pursue those
opportunities.
1. Establishing a sense of
urgency. 2. Creating the guiding
 Create a crisis. coalition.
 Eliminate obvious  Position power: Are
examples of excess. enough key players on
 Set targets so high that board, especially the main
they can’t be reached by line managers, so that
conducting business as those left out cannot easily
usual. block progress?
 Stop measuring subunit  Expertise: Are the various
performance based only on points of view relevant to
functional goals. Insist on the task at hand
broader measures of adequately represented so
performance. that informed, intelligent
 Send more data to more decisions will be made?
employees.  Credibility: Does the
group have enough people
with good reputations in

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Foundations of Management, Anderson University DBA
Summer 2001

the firm so that its Customer Value Discipline

pronouncements will be The subject of business
taken seriously by other strategy is deep and wide. The
employees? Balanced Scorecard, especially
 Leadership: Does the the latest version of the theory
group include enough presented in The Strategy-
proven leaders to be able Focused Organization (2001), is
to drive the change heavily based on the concepts
process? presented by Michael Treacy
and Fred Wiersema (1995) in
3. Developing a vision and Discipline of Market Leaders.
strategy.
 Vision: a sensible and The formulation of
appealing picture of the strategy is not specially
future. addressed in either of the works
 Strategies: a logic for on the Balanced Scorecard.
how the vision can be What the authors propose is
achieved. that the customer perspective of
 Plans: specific steps and a company’s scorecard and
timetables to implement strategy map, must match the
the strategies. company’s strategy towards its
 Budgets: plans converted customers. It must match its
into financial projections customer ‘value discipline’.
and goals.
Treacy and Wiersema
4. Communicating the change (1996) propose that, to
vision. accomplish maximum
5. Empowering employees for effectiveness, a company must
broad-based action. pursue one of three customer
6. Generating short-term wins. value disciplines (Treacy &
7. Consolidating gains and Wiersema, 1996).
producing more change. The Three Customer Value
8. Anchoring new approaches in
Disciplines
the culture.
 Operational excellence:
Kotter’s eight-step process providing customers with
can be applied both to the reliable products or services
implementation of change at competitive prices,
identified as a result of the delivered with minimal
Balanced Scorecard, and to the difficulty or inconvenience.
implementation of the Balanced  Product leadership:
Scorecard itself. providing products that

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Foundations of Management, Anderson University DBA
Summer 2001

continually redefine the state Summary & Next Steps

of the art.
The Balanced Scorecard
 Customer intimacy: selling
management approach
the customer a total solution,
developed by Kaplan & Norton
not just a product or service.
(1995) is based upon several
One of the keys to foundational management
formulating a successful theories, including:
Balanced Scorecard is the
 Management by objectives
linkage between the measures
(Drucker, 1954).
in the customer perspective and
the company’s value discipline.  Principles of management
The measures in the customer (Fayol, 1916).
perspective should indicate the  Open-book management
success or failure of the (Case, 1995).
company’s value discipline.  Leading change (Kotter,
1996).
The customer value  Theory Y (McGregor, 1960).
discipline also has a great effect  Hierarchy of needs (Maslow,
on the other measures in the 1962).
company’s scorecard. Measures  Value disciplines (Treacy &
in the business process Wiersema, 1995).
perspective for instance, should
directly support the company’s The Balanced Scorecard is
customer value discipline. For a strategic management tool
example, a company that that is gaining in popularity.
pursues a product leadership Initial results from companies
value discipline should have a using the Balanced Scorecard
focus on innovation. This focus have been favorable. The
on innovation should be concept fits with current
reflected as measures in the management thinking and is
business process perspective of enabled by technological and
their scorecard. The lack of social changes in the current
these innovation measures work environment.
identifies a weak link between
the stated value discipline and The next step in the
the operational processes of the development of the Balanced
company that execute the Scorecard management theory
strategy. should be an analysis of
successful (and unsuccessful)
implementations of this
approach. As with the concept
of customer value disciplines

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Foundations of Management, Anderson University DBA
Summer 2001

(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.

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Foundations of Management, Anderson University DBA
Summer 2001
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