www.hbrreprints.

org

BEST OF HBR

Using the Balanced

Scorecard as a Strategic
Management System
by Robert S. Kaplan and David P. Norton
•

Included with this full-text Harvard Business Review article:

1 Article Summary
The Idea in Brief—the core idea
The Idea in Practice—putting the idea to work

2 Using the Balanced Scorecard as a Strategic Management System

14 Further Reading
A list of related materials, with annotations to guide further
exploration of the article’s ideas and applications

Reprint R0707M
This document is authorized for use only in Prof. Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.
B EST O F HBR
 Using the Balanced Scorecard as a Strategic
Management System

The Idea in Brief The Idea in Practice

O
compensation systems yields
Why do budgets often bear little direct H

C
“personal scorecards.” Thus, individual
relation to a company’s long-term S

employees understand how their own

strategic objectives? Because they
S

S
productivity supports the overall
don’t take
E

N
I
strategy.
enough into consideration. A S

balanced scorecard augments

U

B
3. BUSINESS PLANNING.
traditional financial measures with D

benchmarks for perfor mance in

R

A
Most companies have separate
three key nonfinancial areas:
V

R
procedures (and sometimes units) for
A

H
strategic planning and budgeting. Little
• a company’s relationship with 5 wonder, then, that typi cal long-term
its customers 0

0 planning is, in the words of one

2

executive, where “the rubber meets the

• its key internal processes ©

T sky.” The discipline of creating a

• its learning and growth. H

G
balanced score card forces companies
to integrate the two functions, thereby
I

When performance measures for R

ensuring that financial budgets do

Y

these areas are added to the financial

P

indeed support strategic goals. After

O

metrics, the result is not only a C

The balanced scorecard relies on four agreeing on performance measures for

broader perspective on the company’s
processes to bind short-term activities the four scorecard perspectives,
health and activities, it’s also a
to long-term objectives: companies
powerful organizing framework. A
identify the most influential “drivers” of
sophis ticated instrument panel for
1. TRANSLATING THE VISION. the desired outcomes and then set
coordinating and fine-tuning a
By relying on measurement, the milestones for gauging the progress
company’s operations and businesses
scorecard forces managers to come they make with these drivers.
so that all activities are aligned with its
strategy. to agreement on the metrics they will
use to operationalize their lofty 4. FEEDBACK AND LEARNING.
visions. By supplying a mechanism for strategic
feed back and review, the balanced
. Example:
scorecard helps an organization foster a
A bank had articulated its strategy as
D

kind of learning often missing in

E

pro viding “superior service to targeted

V

companies: the ability to re flect on

R

custom ers.” But the process of

E

inferences and adjust theories about

S

choosing operational measures for

E

cause-and-effect relationships.
R

S
the four areas of the scorecard made
T

H executives realize that they first Feedback about products and services.
needed to reconcile divergent views of
G

R
New learning about key internal
L
who the targeted customers were and processes. Tech nological discoveries.
L

A
what constituted superior service. All this information can be fed into the
scorecard, enabling strategic
.

I
2. COMMUNICATING AND LINKING. refinements to be made continually.
T

A
When a scorecard is disseminated up Thus, at any point in the
R

O
and down the organizational chart, implementation, managers can know
P

R
strategy be comes a tool available to whether the strategy is working— and if
O

C
everyone. As the high-level scorecard not, why.
G
cascades down to indi vidual business
N
I
units, overarching strategic objectives
H

S
and measures are translated into
objectives and measures appropriate to
I

U each particular group. Tying these

targets to individual performance and
P

O
 page 1
This document is authorized for use only in Prof. Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.

BEST OF HBR

Using the Balanced

Scorecard as a
Strategic
Management
System
by Robert S. Kaplan and David P. Norton
 rubber meets the sky.”
S

N
I

As companies around the world transform

B

Editor’s Note: In 1992, Robert S. Kaplan and themselves for competition that is based on
A

David P. Norton’s concept of the balanced score V

card revolutionized conventional thinking about A

.
information, their ability to exploit intangi
performance metrics. By going beyond tradi
H

D 7

E 0

R
ble assets has become far more decisive
0

tional measures of financial performance, the

E
2

©
S

than their ability to invest in and manage

E

concept has given a generation of managers a

T

G
S

T
physical assets. Several years ago, in recogni
I
H

better understanding of how their companies are

R

Y
G
P
I

R O

really doing. tion of this change, we introduced a concept we

L

A
called the balanced scorecard. The bal anced
. scorecard supplemented traditional financial
These nonfinancial metrics are so valuable
N
measures with criteria that mea sured
O

I
performance from three additional
T
perspectives—those of customers, internal
mainly because they predict future financial
A
business processes, and learning and growth. (See
the exhibit “Translating Vision and Strategy: Four
R

performance rather than simply report what’s

P
Perspectives.”) It therefore en abled companies to
R

O
track financial results while simultaneously
C
monitoring progress in building the capabilities
already happened. This article, first published in
and acquiring the intangible assets they would
need for future growth. The scorecard wasn’t a re
G

placement for financial measures; it was their

I

1996, describes how the balanced scorecard can

H

S
complement.
Recently, we have seen some companies move
I

help senior managers systematically link current beyond our early vision for the score card to
B

P
discover its value as the cornerstone of a new
actions with tomorrow’s goals, focusing on that strategic management system. Used this way, the
scorecard addresses a serious deficiency in
L

O
traditional management systems: their inability to
place where, in the words of the authors, “the
H link a company’s long-term strategy with its
short-term actions.
C

harvard business review • managing for the long term • july–august 2007 page 2 This document is authorized for use only in Prof.
Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.
Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR
 bear little relation to the objectives are aligned with it.
company’s progress in achieving The third process—business
long-term strategic objectives. planning— enables companies to
Thus the emphasis most integrate their business and
companies place on short-term financial plans. Almost all
financial measures leaves a gap organizations today are
between the development of a implementing a variety of
strategy and its implementation. change programs, each with its
Managers using the balanced own champions, gurus, and
scorecard do not have to rely on consultants, and each competing
short-term financial mea sures for senior executives’ time,
as the sole indicators of the energy, and resources. Managers
company’s performance. The find it difficult to integrate those
scorecard lets them intro duce diverse initiatives to achieve
four new management processes their strategic goals—a situation
that, separately and in that leads to frequent disap
combination, contribute to pointments with the programs’
linking long-term strategic results. But when managers use
objectives with short-term the ambitious goals set for
actions. (See the exhibit “Manag balanced scorecard measures as
ing Strategy: Four Processes.”) the basis for allocating resources
The first new and setting priorities, they can
process—translating the vision— undertake and coordinate only
helps managers build a those initiatives that move them
consensus around the toward their long term strategic
organization’s vision and objectives.
strategy. De spite the best The fourth process—feedback
intentions of those at the top, and learning— gives companies
lofty statements about becoming the capacity for what we call
“best in class,” “the number one strategic learning. Existing
supplier,” or an “em powered feedback and review processes
organization” don’t translate focus on whether the com pany,
easily into operational terms its departments, or its individual
that provide useful guides to em ployees have met their
action at the local level. For budgeted financial goals. With
people to act on the words in the balanced scorecard at the
vision and strategy statements, center of its management
those statements must be systems, a company can monitor
expressed as an integrated set of short-term results from the three
objectives and mea sures, agreed additional
upon by all senior executives, perspectives—customers,
that describe the long-term internal business processes, and
drivers of success. learning and growth— and
Robert S. Kaplan is the Marvin Bower The second evaluate strategy in the light of
Professor of Leadership Development at process—communicating and recent performance. The
Harvard Business School, in Boston, and linking—lets managers scorecard thus enables
the chairman and a cofounder of Balanced communicate their strategy up companies to modify strategies
Scorecard Collaborative, and down the organization and to reflect real-time learning.
in Lincoln, Massachusetts. David P. Nortonlink it to departmental and None of the more than 100
is the CEO and a cofounder of Balanced individual objec tives. organizations that we have
Scorecard Collaborative. They are the Traditionally, departments are studied or with which we have
coauthors of four books about the balanced evaluated by their financial worked implemented their first
scorecard, the most re cent of which is performance, and individual balanced scorecard with the
Alignment: Using the Balanced Scorecard incentives are tied to short-term intention of developing a new
to Create Corporate Synergies (Harvard financial goals. The scorecard strategic management system.
Business School Publishing, 2006). gives managers a way of But in each one, the senior
Most companies’ operational and ensuring that all levels of the executives discovered that the
man agement control systems organization un derstand the scorecard supplied a framework
are built around fi nancial long-term strategy and that both and thus a focus for many
measures and targets, which departmental and individual critical management processes:
departmental and individual
goal setting, business planning,
capital allocations, strategic
initiatives, and feedback and
learn ing. Previously, those
processes were uncoor dinated
and often directed at short-term
operational goals. By building
the scorecard, the senior
executives started a process of
change that has gone well
beyond the origi nal idea of
simply broadening the only to introduce a new strategy
company’s performance for the organi zation but also to
measures. overhaul the company’s
For example, one insurance management system. The CEO
company—let’s call it National subsequently told employees in a
Insurance—developed its first letter addressed to the whole
balanced scorecard to create a organization that National would
new vision for it self as an thenceforth use the balanced
underwriting specialist. But once scorecard and the philosophy
Na tional started to use it, the that it represented to manage
scorecard allowed the CEO and the business.
the senior management team not

harvard business review • managing for the long term • july–august 2007 page 3 This document is authorized for use only in Prof.
Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.
Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR

Translating Vision and Strategy: Four Perspectives

Managing Strategy: Four Processes

harvard business review • managing for the long term • july–august 2007 page 4 This document is authorized for use only in Prof.
Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.
Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR
got a phone call from a project
manager in the field. “I want you
to know,” the distraught manager
National built its new strategic said, “that I believe in the
management system mission statement. I want to act
step-by-step over 30 months, in accordance with the mission
with each step representing an state
incremental improve ment. (See ment. I’m here with my customer.
the exhibit “How One Company What am I supposed to do?”
Built a Strategic Management The mission statement, like
System…”) The iterative sequence those of many other
of actions enabled the company organizations, had declared an
to reconsider each of the four new intention to “use high-quality
management processes two or employees to provide services
three times before the system that surpass customers’ needs.”
stabilized and became an But the project manager in the
established part of National’s field with his em ployees and his
overall man agement system. customer did not know how to
Thus the CEO was able to translate those words into the
transform the company so that appropriate actions. The phone
everyone could focus on call convinced the CEO that a
achieving long-term strategic large gap existed between the
objectives—something that no mission statement and
purely financial framework could employees’ knowledge of how
do. their day-to-day actions could
contribute to re alizing the
Translating the Vision company’s vision.
The CEO of an engineering Metro Bank (not its real name),
construction company, after the result of a merger of two
working with his senior man competitors, encountered a
agement team for several months similar gap while building its
to develop a mission statement, balanced score card. The senior
 executive group thought it had segments among existing and
reached agreement on the new potential customers, each with
organiza tion’s overall strategy: different needs. While formulating
“to provide superior service to the mea sures for the
targeted customers.” Research customer-perspective portion
had revealed five basic market

How One Company Built a Strategic Management System...

harvard business review • managing for the long term • july–august 2007 page 5 This document is authorized for use only in Prof.
Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.
Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR
senior managers to arrive at a consensus next two levels of managers by having them
and formulate the internal-business-process
then to translate their vision into terms that and learning-and-growth objectives that
had meaning to the people who would real would drive the achievement of the financial
ize the vision. and customer goals. For example, knowing
the importance of satisfying customers’ ex
Communicating and Linking pectations of on-time delivery, the broader
“The top ten people in the business now un
derstand the strategy better than ever
before.
It’s too bad,” a senior executive of a major oil
company complained, “that we can’t put this
in a bottle so that everyone could share it.”
With the balanced scorecard, he can.
One company we have worked with de
liberately involved three layers of
management
in the creation of its balanced scorecard.
The senior executive group formulated the
financial and customer objectives. It then
mobilized the talent and information in the
 targeted customers.
The exercise of developing operational
measures for the four perspectives on the
bank’s scorecard forced the 25 executives to
clarify the meaning of the strategy state
ment. Ultimately, they agreed to stimulate
revenue growth through new products and
services and also agreed on the three most
desirable customer segments. They devel
oped scorecard measures for the specific
products and services that should be deliv
ered to customers in the targeted segments
as well as for the relationship the bank
should build with customers in each seg
ment. The scorecard also highlighted gaps in
employees’ skills and in information sys
tems that the bank would have to close in
of their balanced scorecard, however, it be
order to deliver the selected value proposi
came apparent that although the 25 senior
tions to the targeted customers. Thus, creat
executives agreed on the words of the strat
ing a balanced scorecard forced the bank’s
egy, each one had a different definition of
superior service and a different image of the

harvard business review • managing for the long term • july–august 2007 page 6 This document is authorized for use only in Prof.
Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.
Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR
order processing, sched uling,
and fulfillment—in which the com
pany had to excel. To do so, the
group identified several internal company would have to retrain
business processes—such as frontline employees and improve
the information systems avail Communicating and educating.
able to them. The group Implement ing a strategy begins
developed perfor mance with educating those who have to
measures for those critical execute it. Whereas some organi
processes and for staff and zations opt to hold their strategy
systems capabilities. close to the vest, most believe
Broad participation in creating that they should dis seminate it
a scorecard takes longer, but it from top to bottom. A
offers several advantages: broad-based communication
Information from a larger number program shares with all
of manag ers is incorporated into employees the strategy and the
the internal objectives; the critical objec tives they have to
managers gain a better meet if the strategy is to succeed.
understanding of the company’s Onetime events such as the
long-term strategic goals; and distribu tion of brochures or
such broad participation builds a newsletters and the holding of
stronger commitment to “town meetings” might kick off
achieving those goals. But getting the program. Some organizations
managers to buy into the post bulletin boards that
scorecard is only a first step in illustrate and explain the
linking individual actions to balanced scorecard measures,
corporate goals. then update them with monthly
The balanced scorecard signals results. Others use groupware
to everyone what the and electronic bulletin boards to
organization is trying to achieve distribute the scorecard to the
for shareholders and customers desktops of all employees and to
alike. But to align employees’ encourage dialogue about the
individual performances with the mea sures. The same media allow
overall strategy, scorecard users employees to make suggestions
gen erally engage in three for achieving or exceeding the
activities: communicat targets.
ing and educating, setting goals, The balanced scorecard, as the
and linking rewards to embodiment of business unit
performance measures. strategy, should also be com-

...Around the Balanced Scorecard

harvard business review • managing for the long term • july–august 2007 page 7 This document is authorized for use only in Prof.
Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.
Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR
executives gain confidence in the
ability of the scorecard measures
to monitor strategic performance
municated upward in the and predict future financial
organization—to corporate performance, they will find ways
headquarters and to the to inform outside investors about
corporate board of directors. With those measures without
the scorecard, business units can disclosing com petitively
quantify and communicate their sensitive information.
long-term strategies to senior Skandia, an insurance and
executives using a financial services company based
comprehensive set of linked in Sweden, issues a supple ment
financial and nonfinancial to its annual report called “The
measures. Such communication Busi ness Navigator”—“an
informs the executives and the instrument to help us navigate
board in spe cific terms that into the future and thereby
long-term strategies designed for stimulate renewal and
competitive success are in place. development.” The supplement
The mea sures also provide the describes Skandia’s strategy and
basis for feedback and the strategic measures the
accountability. Meeting company uses to communicate
short-term financial targets and evaluate the strategy. It also
should not constitute satisfactory provides a report on the
per formance when other company’s per formance along
measures indicate that the those measures during the year.
long-term strategy is either not The measures are customized for
working or not being each operating unit and include,
implemented well. for example, market share,
Should the balanced scorecard customer satisfaction and re
be communi cated beyond the tention, employee competence,
boardroom to external share employee empowerment, and
holders? We believe that as senior technology deployment.
 Communicating the balanced objectives to the people and
scorecard promotes commitment teams performing the work,
and accountability to the enabling them to translate the
business’s long-term strategy. As objectives into meaningful tasks
one exec utive at Metro Bank and targets for themselves. It
declared, “The balanced also lets them keep that
scorecard is both motivating and information close at hand—in
obligating.” their pockets.
Setting goals. Mere awareness Linking rewards to performance
of corporate goals, however, is measures. Should compensation
not enough to change many systems be linked to balanced
people’s behavior. Somehow, the scorecard measures? Some
organiza tion’s high-level compa nies, believing that tying
strategic objectives and mea financial compensa tion to
sures must be translated into performance is a powerful lever,
objectives and measures for have moved quickly to establish
operating units and individuals. such a linkage. For example, an
The exploration group of a large oil company that we’ll call
oil com pany developed a Pioneer Petroleum uses its
technique to enable and scorecard as the sole basis for
encourage individuals to set computing incentive compensa
goals for them selves that were tion. The company ties 60% of its
consistent with the organiza executives’ bonuses to their
tion’s. It created a small, fold-up, achievement of ambitious targets
personal scorecard that people for a weighted average of four
could carry in their shirt pockets financial indicators: return on
or wallets. (See the exhibit “The capital, profitability, cash flow,
Personal Scorecard.”) The and operating cost. It bases the
scorecard contains three levels of remaining 40% on indicators of
information. The first de scribes customer satisfaction, dealer
corporate objectives, measures, satisfaction, employee sat
and targets. The second leaves isfaction, and environmental
room for translating corporate responsibility (such as a
targets into targets for each busi percentage change in the level of
ness unit. For the third level, the emissions to water and air).
company asks both individuals Pioneer’s CEO says that linking
and teams to articulate which of compensation to the score card
their own objectives would be con has helped to align the company
sistent with the business unit and with its strategy. “I know of no
corporate objectives, as well as competitor,” he says, “who has
what initiatives they would take this degree of alignment. It is
to achieve their objectives. It also producing results for us.”
asks them to define up to five As attractive and as powerful as
performance measures for their such linkage is, it nonetheless
objectives and to set targets for carries risks. For instance, does
each measure. The personal the company have the right
scorecard helps to communicate measures on the scorecard? Does
corporate and busi ness unit it have valid and reliable

harvard business review • managing for the long term • july–august 2007 page 8 This document is authorized for use only in Prof.
Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.
Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR
companies
should ask.
Furthermore, companies traditionally han
data for the selected measures? Could unin dle multiple objectives in a compensation
tended or unexpected consequences arise formula by assigning weights to each objec
from tive and calculating incentive
the way the targets for the measures are compensation
achieved? Those are questions that by the extent to which each weighted objec
 tive was achieved. This practice permits that dialogue among executives and
sub managers about the scorecard—both the
stantial incentive compensation to be paid formulation of the measures and objectives
if and the explana tion of actual versus
the business unit overachieves on a few targeted results—provides a better
objec opportunity to observe managers’
tives even if it falls far short on others. A performance and abilities. Increased knowl
bet edge of their managers’ abilities makes it
ter approach would be to establish
easier for executives to set incentive
minimum
rewards subjectively and to defend those
threshold levels for a critical subset of the
subjective evaluations—a process that is
strategic measures. Individuals would earn
less susceptible to the game playing and
no incentive compensation if performance
in distortions associated with explicit,
a given period fell short of any threshold. formula-based rules.
This requirement should motivate people to One company we have studied takes an
achieve a more balanced performance intermediate position. It bases bonuses for
across business unit managers on two equally
short- and long-term objectives. weighted criteria: their achievement of a
Some organizations, however, have financial objective—economic value
reduced added— over a three-year period and a
their emphasis on short-term, subjective assessment of their
formula-based performance on measures drawn from the
incentive systems as a result of introducingcustomer, internal-business process, and
the learning-and-growth perspectives of the
balanced scorecard.
That the balanced scorecard has a role to
The Personal Scorecard play in the determination of incentive com
balanced scorecard. They have discovered

harvard business review • managing for the long term • july–august 2007 page 9 This document is authorized for use only in Prof.
Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.
Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR
comparison of actual and
budgeted results for every line
item. When is the strate gic plan
pensation is not in doubt. next discussed? Probably during
Precisely what that role should be the next annual off-site meeting,
will become clearer as more when the senior managers draw
companies experiment with up a new set of three-, five-, and
linking rewards to scorecard ten-year plans.
measures. The very exercise of creating a
balanced scorecard forces
Business Planning companies to integrate their
“Where the rubber meets the strategic planning and budgeting
sky”: That’s how one senior processes and therefore helps to
executive describes his ensure that their bud gets
company’s long-range-planning support their strategies.
process. He might have said the Scorecard users select measures
same of many other companies of progress from all four
because their financially based scorecard perspectives and set
management systems fail to link targets for each of them. Then
change pro grams and resource they determine which actions
allocation to long-term strategic will drive them toward their
priorities. targets, identify the measures
The problem is that most they will apply to those drivers
organizations have separate from the four perspectives, and
procedures and organizational establish the short-term
units for strategic planning and milestones that will mark their
for resource allocation and progress along the strategic
budgeting. To formulate their paths they have selected.
strategic plans, senior executives Building a scorecard thus enables
go off-site annually and engage a company to link its financial
for several days in active budgets with its strategic goals.
discussions facilitated by senior For example, one division of the
plan ning and development Style Com pany (not its real name)
managers or external committed to achiev ing a
consultants. The outcome of this seemingly impossible goal
exercise is a strategic plan articulated by the CEO: to double
articulating where the com pany revenues in five years. The
expects (or hopes or prays) to be forecasts built into the
in three, five, and ten years. organization’s existing strategic
Typically, such plans then sit on plan fell $1 billion short of this
executives’ bookshelves for the objective. The division’s
next 12 months. managers, after considering
Meanwhile, a separate various scenarios, agreed to
resource-allocation and specific increases in five different
budgeting process run by the performance drivers: the number
finance staff sets financial of new stores opened, the number
targets for revenues, ex penses, of new customers attracted into
profits, and investments for the new and existing stores, the
next fiscal year. The budget it percentage of shoppers in each
produces consists almost entirely store converted into actual
of financial numbers that purchasers, the portion of
generally bear little relation to existing customers retained, and
the targets in the strategic plan. average sales per customer.
Which document do corporate By helping to define the key
managers discuss in their drivers of rev enue growth and by
monthly and quarterly meet ings committing to targets for each of
during the following year? them, the division’s managers
Usually only the budget, because eventually grew comfortable with
the periodic reviews focus on a the CEO’s ambitious goal.
 The process of building a example, launched more than 70
balanced scorecard— clarifying different initiatives. The
the strategic objectives and then initiatives were intended to
identifying the few critical produce a more competitive and
drivers—also creates a successful institution, but they
framework for managing an were inad equately integrated
organi zation’s various change into the overall strategy. After
programs. These building their balanced
initiatives—reengineering, scorecard, Metro Bank’s
employee empow erment, managers dropped many of those
time-based management, and programs—such as a marketing
total quality management, effort directed at individuals with
among others—promise to deliver very high net worth—and
results but also compete with one consolidated others into initia
another for scarce resources, tives that were better aligned
including the scarcest resource of with the com pany’s strategic
all: senior managers’ time and objectives. For example, the
attention. managers replaced a program
Shortly after the merger that aimed at en
created it, Metro Bank, for

harvard business review • managing for the long term • july–august 2007 page 10 This document is authorized for use only in Prof.
Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.
Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR
traditional budgeting process to
incorporate strategic as well as
financial goals. Detailed financial
hancing existing low-level selling planning remains important, but
skills with a major initiative financial goals taken by
aimed at retraining sales persons themselves ignore the three other
to become trusted financial balanced scorecard perspectives.
advisers, capable of selling a In an integrated planning and
broad range of newly introduced budgeting process, executives
products to the three selected continue to budget for short-term
customer segments. The bank financial performance, but they
made both changes because the also introduce short term targets
scorecard enabled it to gain a for measures in the customer,
better understanding of the internal-business-process, and
programs required to achieve its learning-and growth
strategic objectives. perspectives. With those
Once the strategy is defined and milestones established,
the drivers are identified, the managers can continually test
scorecard influences man agers both the theory underlying the
to concentrate on improving or strategy and the strategy’s
reengi neering those processes implementation.
most critical to the organization’s At the end of the
strategic success. That is how the business-planning pro cess,
scorecard most clearly links and managers should have set
aligns action with strategy. targets for the long-term
The final step in linking strategy objectives they would like to
to actions is to establish specific achieve in all four scorecard
short-term targets, or milestones, perspectives; they should have
for the balanced scorecard mea identified the strategic initi atives
sures. Milestones are tangible required and allocated the
expressions of managers’ beliefs necessary resources to those
about when and to what degree initiatives; and they should have
their current programs will affect established milestones for the
those measures. measures that mark progress
In establishing milestones, toward achieving their strategic
managers are expanding the goals.
 arise constantly, companies must
Feedback and Learning become capable of what Chris
“With the balanced scorecard,” a Argyris calls double-loop
CEO of an en gineering company learning—learning that produces
told us, “I can continually test my a change in people’s assump
strategy. It’s like performing tions and theories about
real-time cause-and-effect rela tionships.
research.” That is exactly the (See “Teaching Smart People How
capability that the scorecard to Learn,” HBR May–June 1991.)
should give senior managers: the Budget reviews and other
ability to know at any point in its financially based management
implementa tion whether the tools cannot engage senior
strategy they have formu lated is, executives in double-loop
in fact, working, and if not, why. learning— first, because these
The first three management tools address perfor mance from
processes— translating the only one perspective, and sec
vision, communicating and ond, because they don’t involve
linking, and business strategic learning. Strategic
planning—are vital for learning consists of gath ering
implementing strategy, but they feedback, testing the hypotheses
are not suffi cient in an on which strategy was based, and
unpredictable world. Together making the necessary
they form an important adjustments.
single-loop-learning The balanced scorecard
process—single-loop in the sense supplies three ele ments that are
that the ob jective remains essential to strategic learning.
constant, and any departure from First, it articulates the company’s
the planned trajectory is seen as shared vision, defining in clear
a defect to be remedied. This and operational terms the results
single-loop process does not that the company, as a team, is
require or even facilitate trying to achieve. The scorecard
reexamination of either the communi cates a holistic model
strategy or the techniques used to that links individual efforts and
implement it in light of current accomplishments to business
conditions. unit objectives.
Most companies today operate Second, the scorecard supplies
in a turbu lent environment with the essential strategic feedback
complex strategies that, though system. A business strategy can
valid when they were launched, be viewed as a set of hypotheses
may lose their validity as about cause-and-effect
business conditions change. In relationships. A strategic
this kind of environment, where feedback system should be able
new threats and opportunities to test, vali

harvard business review • managing for the long term • july–august 2007 page 11 This document is authorized for use only in Prof.
Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.
Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR
information systems before employees could
sell multiple financial products effectively
to existing and new customers. They also esti
date, and modify the hypotheses embedded mated how great the effect of that selling
in a business unit’s strategy. By establishing
short-term goals, or milestones, within the
business-planning process, executives are
forecasting the relationship between changes
in performance drivers and the associated How One Company Linked Measures from
changes in one or more specified goals. For
the Four Perspectives
example, executives at Metro Bank estimated
the amount of time it would take for improve capability would be.
ments in training and in the availability of Another organization attempted to validate its
 hypothesized cause-and-effect relation ships Especially in large organizations, accumu
in the balanced scorecard by measuring the lating sufficient data to document significant
strength of the linkages among measures in correlations and causation among balanced
the different perspectives. (See the exhibit scorecard measures can take a long time—
“How One Company Linked Measures from the months or years. Over the short term, manag
Four Perspectives.”) The company found ers’ assessment of strategic impact may have
significant correlations between employees’ to rest on subjective and qualitative judg
morale, a measure in the learning-and-growth ments. Eventually, however, as more evidence
perspective, and customer satisfaction, an accumulates, organizations may be able to
important customer perspective measure. provide more objectively grounded estimates
Customer satisfaction, in turn, was correlated of cause-and-effect relationships. But just get
with faster payment of invoices—a relation ting managers to think systematically about
ship that led to a substantial reduction in the assumptions underlying their strategy is
accounts receivable and hence a higher return an improvement over the current practice of
on capital employed. The company also found making decisions based on short-term
correlations between employees’ morale and operational results.
the number of suggestions made by employ Third, the scorecard facilitates the strategy
ees (two learning-and-growth measures) as review that is essential to strategic learning.
well as between an increased number of Traditionally, companies use the monthly or
suggestions and lower rework (an internal quarterly meetings between corporate and
business-process measure). Evidence of such division executives to analyze the most recent
strong correlations help to confirm the orga period’s financial results. Discussions focus
nization’s business strategy. If, however, the on past performance and on explanations of
expected correlations are not found over time, why financial objectives were not achieved.
it should be an indication to executives that The balanced scorecard, with its specification
the theory underlying the unit’s strategy may of
not be working as they had anticipated.

harvard business review • managing for the long term • july–august 2007 page 12 This document is authorized for use only in Prof.
Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.
Using the Balanced Scorecard as a Strategic Management System•••BEST OF HBR
propositions, competitors’
behavior, and internal
capabilities. The result of such a
the causal relationships between review may be a decision to
performance drivers and reaffirm their belief in the current
objectives, allows corporate and strategy but to ad just the
business unit executives to use quantitative relationship among
their periodic review sessions to the strategic measures on the
evaluate the validity of the unit’s balanced scorecard. But they also
strategy and the quality of its might conclude that the unit
execution. If the unit’s employees needs a different strategy (an
and managers have delivered on example of double-loop learning)
the performance drivers (retrain in light of new knowl edge about
ing of employees, availability of market conditions and internal
information systems, and new capabilities. In any case, the
financial products and ser vices, scorecard will have stimulated
for instance), then their failure to key executives to learn about the
achieve the expected outcomes viability of their strategy. This
(higher sales to targeted capacity for enabling
customers, for example) signals organizational learning at the
that the theory underlying the executive level—strategic
strategy may not be valid. The learning—is what distinguishes
disappointing sales figures are the balanced scorecard, making it
an early warning. invaluable for those who wish to
Managers should take such create a strategic management
disconfirming evidence seriously system.
and reconsider their shared
conclusions about market Toward a New Strategic
conditions, customer value Management System
 Many companies adopted early and his managers with a central
balanced scorecard concepts to framework around which they
improve their perfor mance could redesign each piece of the
measurement systems. They company’s management system.
achieved tangible but narrow And because of the
results. Adopting those concepts cause-and-effect linkages in
provided clarification, consensus, herent in the scorecard
and focus on the desired framework, changes in one
improvements in performance. component of the system
More recently, we have seen reinforced earlier changes made
companies expand their use of elsewhere. Therefore, every
the balanced scorecard, change made over the 30-month
employing it as the foundation of pe riod added to the momentum
an integrated and iterative that kept the organization
strategic management system. moving forward in the agreed
Companies are using the upon direction.
scorecard to Without a balanced scorecard,
• clarify and update strategy; most organi zations are unable to
• communicate strategy achieve a similar consis tency of
throughout the company; vision and action as they attempt
• align unit and individual goals to change direction and introduce
with the strategy; new strategies and processes. The
• link strategic objectives to balanced scorecard pro vides a
long-term tar gets and annual framework for managing the
budgets; imple mentation of strategy while
• identify and align strategic also allowing the strategy itself
initiatives; and to evolve in response to changes
• conduct periodic performance in the company’s competitive,
reviews to learn about and mar ket, and technological
improve strategy. environments.
The balanced scorecard enables
Reprint R0707M
a com pany to align its
To order, see the next page
management processes and
or call 800-988-0886 or
focuses the entire organization
617-783-7500 or go to
on imple menting long-term
www.hbrreprints.org
strategy. At National In surance,
the scorecard provided the CEO

harvard business review • managing for the long term • july–august 2007 page 13 This document is authorized for use only in Prof.
Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.
B EST O F HBR

Using the Balanced Scorecard as a

Strategic Management System

Further Reading
ARTICLES
 subscriptions, call 800-988-0886 or the places in their or ganizations where
617-783-7500. Go to improvement is likely to have the
www.hbrreprints.org greatest payoff. Any way you slice it— by
product, customer, distribution channel,
For customized and quantity or reading—ABC helps you see how an
orders of Harvard activity generates revenue and
Business Review consumes resources. Once you
article reprints, call 617-783-7626, understand these relationships, you’re
or e-mai better positioned to take the actions that
customizations@hbsp.harvard.edu will increase your selling margins and
Putting the Balanced reduce operating expenses.
Scorecard to Work by Robert S.
Kaplan and David P. Norton
Harvard Business Review
September–October 1993
Product no. 4118

In this article, the authors argue that the

bal anced scorecard is more than a
measurement system. Four
characteristics make it distinctive: It is a
top-down reflection of the company’s
mission and strategy; it is
forward-looking; it integrates external
and internal measures; and it helps a
company focus. Together, these char
acteristics enable a scorecard to serve
as a means for motivating and
implementing breakthrough
performance.
Profit Priorities from
Activity-Based Costing
by Robin Cooper and Robert
S. Kaplan Harvard Business
Review
May–June 1991
To Order Product no. 3588

When used as the financial metric of a

For Harvard Business bal anced scorecard, activity-based
Review reprints and costing (ABC) can help managers find page 14
This document is authorized for use only in Prof. Arup Majumdar's SM-MBA 2022-Arup Majumdar at BML Munjal University - School of Management from Jul 2023 to Jan 2024.