2 pages

Article Reading Notes (two pages) and Book Review (three pages) Format:

• Single-spaced, business block format, 12 point Times New Roman font

• Address the following using bold subheadings to segment your narrative:

• Thesis – identify the central lesson the author is trying to teach

• Central pillars – define and discuss at least three major learning outcomes

• Discussion – reflection on the book’s impact on the future manager

S COMPANIES AROUND THE WORLD transform themselves

for competition that is based on information, their abil-

ity to exploit intangible assets has become far more

decisive than their ability to invest in and manage

physical assets. Several years ago, in recognition of this change,

we introduced a concept we called the balanced scorecard. The

balanced scorecard supplemented traditional fi nancial measures

with criteria that measured performance from three additional

perspectives – those of customers, internal business processes,

and learning and growth. (See the exhibit “Translating Vision

and Strategy: Four Perspectives.”) It therefore enabled compa-

nies to track fi nancial results while simultaneously monitoring

progress in building the capabilities and acquiring the intangible

assets they would need for future growth. The scorecard wasn’t

Editor’s Note: In 1992, Robert S. Kaplan and
David P. Norton’s concept of the balanced
scorecard revolutionized conventional
thinking about performance metrics. By
going beyond traditional measures of
fi nancial performance, the concept has
given a generation of managers a better
understanding of how their companies are
really doing.

These nonfi nancial metrics are so valu-
able mainly because they predict future
fi nancial performance rather than simply
report what’s already happened. This
article, fi rst published in 1996, describes
how the balanced scorecard can help
senior managers systematically link current
actions with tomorrow’s goals, focusing
on that place where, in the words of the
authors, “the rubber meets the sky.”

Using the Balanced Scorecard
as a Strategic Management System

by Robert S. Kaplan and David P. Norton

A

MANAGING FOR THE LONG TERM | BEST OF HBR | January–February 1996

150 Harvard Business Review | July–August 2007 | hbr.org

R
o

b
e

rt
M

e
g

an
ck

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152 Harvard Business Review | July–August 2007 | hbr.org

a replacement for fi nancial measures;

it was their complement.

Recently, we have seen some compa-

nies move beyond our early vision for

the scorecard to discover its value as the

cornerstone of a new strategic manage-

ment system. Used this way, the score-

card addresses a serious defi ciency in

traditional management systems: their

inability to link a company’s long-term

strategy with its short-term actions.

Most companies’ operational and

management control systems are built

around fi nancial measures and targets,

which bear little relation to the com-

pany’s progress in achieving long-term

strategic objectives. Thus the emphasis

most companies place on short-term fi –

nancial measures leaves a gap between

the development of a strategy and its

implementation.

Managers using the balanced score-

card do not have to rely on short-term

fi nancial measures as the sole indica-

tors of the company’s performance. The

scorecard lets them introduce four new

management processes that, separately

and in combination, contribute to link-

ing long-term strategic objectives with

short-term actions. (See the exhibit

“Managing Strategy: Four Processes.”)

The fi rst new process – translating the

vision – helps managers build a consen-

sus around the organization’s vision and

strategy. Despite the best intentions of

those at the top, lofty statements about

becoming “best in class,” “the number

one supplier,” or an “empowered or-

ganization” don’t translate easily into

operational terms that provide useful

guides to action at the local level. For

people to act on the words in vision and

strategy statements, those statements

must be expressed as an integrated

set of objectives and measures, agreed

upon by all senior executives, that de-

scribe the long-term drivers of success.

The second process – communicating

and linking – lets managers communi-

cate their strategy up and down the or-

ganization and link it to departmental

and individual objectives. Traditionally,

departments are evaluated by their fi –

nancial performance, and individual in-

centives are tied to short-term fi nancial

goals. The scorecard gives managers a

way of ensuring that all levels of the

organization understand the long-term

strategy and that both departmental

and individual objectives are aligned

with it.

The third process – business planning –

enables companies to integrate their

business and fi nancial plans. Almost all

organizations today are implementing

a variety of change programs, each with

its own champions, gurus, and consul-

tants, and each competing for senior

executives’ time, energy, and resources.

Managers fi nd it diffi cult to integrate

those diverse initiatives to achieve their

strategic goals – a situation that leads

to frequent disappointments with the

programs’ results. But when manag-

ers use the ambitious goals set for bal-

anced scorecard measures as the basis

for allocating resources and setting

priorities, they can undertake and coor-

dinate only those initiatives that move

them toward their long-term strategic

objectives.

The fourth process – feedback and

learning – gives companies the capac-

ity for what we call strategic learning.

Existing feedback and review processes

focus on whether the company, its de-

partments, or its individual employ-

ees have met their budgeted fi nancial

goals. With the balanced scorecard at

the center of its management systems,

a company can monitor short-term re-

sults from the three additional perspec-

tives – customers, internal business pro-

cesses, and learning and growth – and

evaluate strategy in the light of recent

performance. The scorecard thus en-

ables companies to modify strategies

to refl ect real-time learning.

None of the more than 100 organi-

zations that we have studied or with

which we have worked implemented

their fi rst balanced scorecard with the

intention of developing a new strate-

gic management system. But in each

one, the senior executives discovered

that the scorecard supplied a frame-

work and thus a focus for many critical

management processes: departmental

and individual goal setting, business

planning, capital allocations, strategic

initiatives, and feedback and learn-

ing. Previously, those processes were

uncoordinated and often directed at

short-term operational goals. By build-

ing the scorecard, the senior executives

started a process of change that has

gone well beyond the original idea of

simply broadening the company’s per-

formance

measures.

For example, one insurance com-

pany – let’s call it National Insurance –

developed its fi rst balanced scorecard

to create a new vision for itself as an

underwriting specialist. But once Na-

tional started to use it, the scorecard al-

lowed the CEO and the senior manage-

ment team not only to introduce a new

strategy for the organization but also

to overhaul the company’s manage-

ment system. The CEO subsequently

told employees in a letter addressed to

the whole organization that National

would thenceforth use the balanced

scorecard and the philosophy that it

represented to manage the business.

National built its new strategic man-

agement system step-by-step over 30

Robert S. Kaplan is the Marvin Bower

Professor of Leadership Development at

Harvard Business School, in Boston, and

the chairman and a cofounder of Balanced

Scorecard Collaborative, in Lincoln, Mas-

sachusetts. David P. Norton is the CEO

and a cofounder of Balanced Scorecard Col-

laborative. They are the coauthors of four

books about the balanced scorecard, the

most recent of which is Alignment: Using

the Balanced Scorecard to Create Corporate

Synergies (Harvard Business School Pub-

lishing, 2006).

Lofty vision and strategy
statements don’t translate
easily into action at the
local level.

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hbr.org | July–August 2007 | Harvard Business Review 153

months, with each step representing

an incremental improvement. (See the

exhibit “How One Company Built a

Strategic Management System…”) The

iterative sequence of actions enabled

the company to reconsider each of the

four new management processes two

or three times before the system stabi-

lized and became an established part of

National’s overall management system.

Thus the CEO was able to transform

the company so that everyone could

focus on achieving long-term strategic

objectives – something that no purely

fi nancial framework could do.

Translating the Vision
The CEO of an engineering construc-

tion company, after working with his

senior management team for several

months to develop a mission statement,

got a phone call from a project man-

ager in the fi eld. “I want you to know,”

the distraught manager said, “that I be-

lieve in the mission statement. I want

to act in accordance with the mission

statement. I’m here with my customer.

What am I supposed to do?”

The mission statement, like those

of many other organizations, had de-

clared an intention to “use high-quality

employees to provide services that sur-

pass customers’ needs.” But the project

manager in the fi eld with his employ-

ees and his customer did not know

how to translate those words into the

appropriate actions. The phone call

convinced the CEO that a large gap

existed between the mission statement

and employees’ knowledge of how their

day-to-day actions could contribute to

realizing the company’s vision.

Metro Bank (not its real name), the

result of a merger of two competitors,

encountered a similar gap while build-

ing its balanced scorecard. The senior

executive group thought it had reached

agreement on the new organization’s

overall strategy: “to provide superior

service to targeted customers.” Re-

search had revealed fi ve basic market

segments among existing and potential

customers, each with different needs.

While formulating the measures for the

customer-perspective portion of their

balanced scorecard, however, it became

apparent that although the 25 senior

executives agreed on the words of the

strategy, each one had a different defi –

nition of superior service and a different

image of the targeted customers.

The exercise of developing opera-

tional measures for the four perspec-

tives on the bank’s scorecard forced the

25 executives to clarify the meaning of

the strategy statement. Ultimately, they

agreed to stimulate revenue growth

through new products and services and

also agreed on the three most desirable

customer segments. They developed

scorecard measures for the specific

products and services that should be

delivered to customers in the targeted

segments as well as for the relationship

the bank should build with customers

Translating Vision and Strategy: Four Perspectives

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154 Harvard Business Review | July–August 2007 | hbr.org

in each segment. The scorecard also

highlighted gaps in employees’ skills

and in information systems that the

bank would have to close in order to

deliver the selected value propositions

to the targeted customers. Thus, cre-

ating a balanced scorecard forced the

bank’s senior managers to arrive at a

consensus and then to translate their vi-

sion into terms that had meaning to the

people who would realize the vision.

Communicating and Linking
“The top ten people in the business now

understand the strategy better than

ever before. It’s too bad,” a senior execu-

tive of a major oil company complained,

“that we can’t put this in a bottle so that

everyone could share it.” With the bal-

anced scorecard, he can.

One company we have worked with

deliberately involved three layers of

management in the creation of its bal-

anced scorecard. The senior executive

group formulated the fi nancial and

customer objectives. It then mobilized

the talent and information in the next

two levels of managers by having them

formulate the internal-business-process

and learning-and-growth objectives

that would drive the achievement of

the fi nancial and customer goals. For

example, knowing the importance of

satisfying customers’ expectations of

on-time delivery, the broader group

identified several internal business

processes – such as order processing,

scheduling, and fulfi llment – in which

the company had to excel. To do so, the

company would have to retrain front-

line employees and improve the infor-

mation systems available to them. The

group developed performance mea-

sures for those critical processes and for

staff and systems capabilities.

Broad participation in creating a

scorecard takes longer, but it offers

several advantages: Information from

a larger number of managers is incor-

porated into the internal objectives;

the managers gain a better understand-

ing of the company’s long-term stra-

tegic goals; and such broad participa-

tion builds a stronger commitment to

achieving those goals. But getting man-

agers to buy into the scorecard is only

a fi rst step in linking individual actions

to corporate goals.

The balanced scorecard signals to

everyone what the organization is try-

ing to achieve for shareholders and cus-

tomers alike. But to align employees’ in-

dividual performances with the overall

strategy, scorecard users generally en-

gage in three activities: communicating

and educating, setting goals, and link-

ing rewards to performance measures.

Communicating and educating.
Implementing a strategy begins with

educating those who have to execute

it. Whereas some organizations opt to

hold their strategy close to the vest,

most believe that they should dissem-

inate it from top to bottom. A broad-

based communication program shares

with all employees the strategy and the

critical objectives they have to meet

if the strategy is to succeed. Onetime

events such as the distribution of bro-

chures or newsletters and the holding

of “town meetings” might kick off the

program. Some organizations post bul-

letin boards that illustrate and explain

the balanced scorecard measures, then

update them with monthly results. Oth-

ers use groupware and electronic bul-

letin boards to distribute the scorecard

to the desktops of all employees and

to encourage dialogue about the mea-

sures. The same media allow employees

to make suggestions for achieving or ex-

ceeding the targets.

The balanced scorecard, as the em-

bodiment of business unit strategy,

should also be communicated upward

in the organization – to corporate head-

quarters and to the corporate board of

directors. With the scorecard, business

units can quantify and communicate

their long-term strategies to senior

executives using a comprehensive set

of linked fi nancial and nonfi nancial

measures. Such communication in-

forms the executives and the board in

specifi c terms that long-term strategies

designed for competitive success are in

place. The measures also provide the

basis for feedback and accountabil-

ity. Meeting short-term fi nancial tar-

gets should not constitute satisfactory

performance when other measures

indicate that the long-term strategy is

either not working or not being imple-

mented well.

Should the balanced scorecard be

communicated beyond the boardroom

to external shareholders? We believe

that as senior executives gain confi –

dence in the ability of the scorecard

measures to monitor strategic perfor-

mance and predict future fi nancial per-

formance, they will fi nd ways to inform

outside investors about those measures

without disclosing competitively sensi-

tive information.

Skandia, an insurance and fi nancial

services company based in Sweden, is-

sues a supplement to its annual report

called “The Business Navigator” – “an

instrument to help us navigate into the

future and thereby stimulate renewal

and development.” The supplement de-

scribes Skandia’s strategy and the strate-

gic measures the company uses to com-

municate and evaluate the strategy. It

also provides a report on the company’s

performance along those measures dur-

ing the year. The measures are custom-

ized for each operating unit and include,

for example, market share, customer

satisfaction and retention, employee

competence, employee empowerment,

and technology deployment.

Communicating the balanced score-

card promotes commitment and ac-

countability to the business’s long-term

strategy. As one executive at Metro

Bank declared, “The balanced scorecard

is both motivating and obligating.”

The personal scorecard
helps to communicate
corporate and unit
objectives to the people and
teams performing the work.

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hbr.org | July–August 2007 | Harvard Business Review 155

Setting goals. Mere awareness of cor-
porate goals, however, is not enough to

change many people’s behavior. Some-

how, the organization’s high-level stra-

tegic objectives and measures must be

translated into objectives and measures

for operating units and individuals.

The exploration group of a large oil

company developed a technique to en-

able and encourage individuals to set

goals for themselves that were consis-

tent with the organization’s. It created

a small, fold-up, personal scorecard that

people could carry in their shirt pock-

ets or wallets. (See the exhibit “The

Personal Scorecard.”) The scorecard

contains three levels of information.

The fi rst describes corporate objectives,

measures, and targets. The second

leaves room for translating corporate

targets into targets for each business

unit. For the third level, the company

asks both individuals and teams to ar-

ticulate which of their own objectives

would be consistent with the business

unit and corporate objectives, as well

as what initiatives they would take to

achieve their objectives. It also asks

them to defi ne up to fi ve performance

measures for their objectives and to set

targets for each measure. The personal

scorecard helps to communicate corpo-

rate and business unit objectives to the

people and teams performing the work,

enabling them to translate the objec-

tives into meaningful tasks and targets

for themselves. It also lets them keep

that information close at hand – in

their pockets.

Linking rewards to performance
measures. Should compensation sys-
tems be linked to balanced scorecard

measures? Some companies, believing

that tying fi nancial compensation to

performance is a powerful lever, have

moved quickly to establish such a link-

age. For example, an oil company that

we’ll call Pioneer Petroleum uses its

scorecard as the sole basis for comput-

ing incentive compensation. The com-

pany ties 60% of its executives’ bonuses

to their achievement of ambitious

targets for a weighted average of four

fi nancial indicators: return on capital,

profi tability, cash fl ow, and operating

cost. It bases the remaining 40% on in-

dicators of customer satisfaction, dealer

satisfaction, employee satisfaction, and

environmental responsibility (such

as a percentage change in the level of

emissions to water and air). Pioneer’s

CEO says that linking compensation to

the scorecard has helped to align the

company with its strategy. “I know of

no competitor,” he says, “who has this

degree of alignment. It is producing re-

sults for us.”

As attractive and as powerful as such

linkage is, it nonetheless carries risks.

For instance, does the company have

the right measures on the scorecard?

Does it have valid and reliable data

for the selected measures? Could un-

intended or unexpected consequences

arise from the way the targets for the

measures are achieved? Those are ques-

tions that companies should ask.

Furthermore, companies tradition-

ally handle multiple objectives in a

compensation formula by assigning

weights to each objective and calculat-

ing incentive compensation by the ex-

tent to which each weighted objective

was achieved. This practice permits sub-

stantial incentive compensation to be

paid if the business unit overachieves

on a few objectives even if it falls far

short on others. A better approach

would be to establish minimum thresh-

old levels for a critical subset of the

strategic measures. Individuals would

earn no incentive compensation if per-

formance in a given period fell short of

any threshold. This requirement should

motivate people to achieve a more bal-

anced performance across short- and

long-term objectives.

Some organizations, however, have

reduced their emphasis on short-term,

formula-based incentive systems as

a result of introducing the balanced

scorecard. They have discovered that

dialogue among executives and man-

agers about the scorecard – both the

formulation of the measures and ob-

jectives and the explanation of actual

versus targeted results – provides a

Managing Strategy: Four Processes

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better opportunity to observe man-

agers’ performance and abilities. In-

creased knowledge of their managers’

abilities makes it easier for executives

to set incentive rewards subjectively

and to defend those subjective evalu-

ations – a process that is less suscepti-

ble to the game playing and distor tions

associated with explicit, formula-based

rules.

One company we have studied takes

an intermediate position. It bases bo-

nuses for business unit managers on two

equally weighted criteria: their achieve-

ment of a financial objective – eco-

nomic value added – over a three-year

period and a subjective assessment of

their performance on measures drawn

from the customer, internal-business-

process, and learning-and-growth per-

spectives of the balanced scorecard.

That the balanced scorecard has a

role to play in the determination of in-

centive compensation is not in doubt.

Precisely what that role should be will

become clearer as more companies ex-

periment with linking rewards to score-

card measures.

Business Planning
“Where the rubber meets the sky”: That’s

how one senior executive describes his

company’s long-range-planning pro-

cess. He might have said the same of

many other companies because their

fi nancially based management systems

fail to link change programs and re-

source allocation to long-term strategic

priorities.

The problem is that most organiza-

tions have separate procedures and

organizational units for strategic plan-

ning and for resource allocation and

budgeting. To formulate their strategic

plans, senior executives go off-site an-

nually and engage for several days in

active discussions facilitated by senior

planning and development managers

or external consultants. The outcome

of this exercise is a strategic plan articu-

lating where the company expects (or

hopes or prays) to be in three, fi ve, and

ten years. Typically, such plans then sit

on executives’ bookshelves for the next

12 months.

Meanwhile, a separate resource-

allocation and budgeting process run

by the fi nance staff sets fi nancial tar-

gets for revenues, expenses, profi ts, and

investments for the next fi scal year. The

budget it produces consists almost en-

tirely of fi nancial numbers that gener-

ally bear little relation to the targets in

the strategic plan.

Which document do corporate man-

agers discuss in their monthly and quar-

terly meetings during the following

year? Usually only the budget, because

the periodic reviews focus on a compar-

ison of actual and budgeted results for

every line item. When is the strategic

plan next discussed? Probably during

the next annual off-site meeting, when

the senior managers draw up a new set

of three-, fi ve-, and ten-year plans.

How One Company Built a Strategic Management System…

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hbr.org | July–August 2007 | Harvard Business Review 157

The very exercise of creating a bal-

anced scorecard forces companies to

integrate their strategic planning and

budgeting processes and therefore

helps to ensure that their budgets sup-

port their strategies. Scorecard users se-

lect measures of progress from all four

scorecard perspectives and set targets

for each of them. Then they determine

which actions will drive them toward

their targets, identify the measures they

will apply to those drivers from the four

perspectives, and establish the short-

term milestones that will mark their

progress along the strategic paths they

have selected. Building a scorecard thus

enables a company to link its fi nancial

budgets with its strategic goals.

For example, one division of the Style

Company (not its real name) commit-

ted to achieving a seemingly impossible

goal articulated by the CEO: to double

revenues in fi ve years. The forecasts

built into the organization’s existing

strategic plan fell $1 billion short of

this objective. The division’s manag-

ers, after considering various scenarios,

agreed to specifi c increases in fi ve dif-

ferent performance drivers: the num-

ber of new stores opened, the number

of new customers attracted into new

and existing stores, the percentage of

shoppers in each store converted into

actual purchasers, the portion of exist-

ing customers retained, and average

sales per customer.

By helping to defi ne the key drivers of

revenue growth and by committing to

targets for each of them, the division’s

managers eventually grew comfortable

with the CEO’s ambitious goal.

The process of building a balanced

scorecard – clarifying the strategic ob-

jectives and then identifying the few

critical drivers – also creates a frame-

work for managing an organization’s

various change programs. These ini-

tiatives – reengineering, employee em-

powerment, time-based management,

and total quality management, among

others – promise to deliver results but

also compete with one another for

scarce resources, including the scarcest

resource of all: senior managers’ time

and attention.

Shortly after the merger that created

it, Metro Bank, for example, launched

more than 70 different initiatives. The

initiatives were intended to produce

a more competitive and successful in-

stitution, but they were inadequately

integrated into the overall strategy. Af-

ter building their balanced scorecard,

Metro Bank’s managers dropped many

of those programs – such as a market-

ing effort directed at individuals with

Building a scorecard enables
a company to link its
fi nancial budgets with its
strategic goals.

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very high net worth – and consolidated

others into initiatives that were better

aligned with the company’s strategic

objectives. For example, the managers

replaced a program aimed at enhanc-

ing existing low-level selling skills with

a major initiative aimed at retraining

salespersons to become trusted fi nan-

cial advisers, capable of selling a broad

range of newly introduced products to

the three selected customer segments.

The bank made both changes because

the scorecard enabled it to gain a better

understanding of the programs required

to achieve its strategic objectives.

Once the strategy is defi ned and the

drivers are identifi ed, the scorecard

inf luences managers to concentrate

on improving or reengineering those

processes most critical to the organiza-

tion’s strategic success. That is how the

scorecard most clearly links and aligns

action with

strategy.

The fi nal step in linking strategy to

actions is to establish specifi c short-

term targets, or milestones, for the bal-

anced scorecard measures. Milestones

are tangible expressions of managers’

beliefs about when and to what degree

their current programs will affect those

measures.

In establishing milestones, managers

are expanding the traditional budget-

ing process to incorporate strategic as

well as fi nancial goals. Detailed fi nan-

cial planning remains important, but

fi nancial goals taken by themselves ig-

nore the three other balanced scorecard

perspectives. In an integrated planning

and budgeting process, executives con-

tinue to budget for short-term fi nancial

performance, but they also introduce

short-term targets for measures in the

customer, internal-business-process,

and learning-and-growth perspectives.

With those milestones established,

managers can continually test both the

theory underlying the strategy and the

strategy’s implementation.

At the end of the business-planning

process, managers should have set

targets for the long-term objectives

they would like to achieve in all four

scorecard perspectives; they should

have identifi ed the strategic initiatives

required and allocated the necessary

resources to those initiatives; and they

should have established milestones for

the measures that mark progress to-

ward achieving their strategic goals.

Feedback and Learning
“With the balanced scorecard,” a CEO

of an engineering company told us, “I

can continually test my strategy. It’s like

performing real-time research.” That is

exactly the capability that the scorecard

should give senior managers: the ability

to know at any point in its implemen-

tation whether the strategy they have

formulated is, in fact, working, and if

not, why.

The first three management pro-

cesses – translating the vision, com-

municating and linking, and business

planning – are vital for implementing

strategy, but they are not suffi cient in

an unpredictable world. Together they

form an important single-loop-learning

process – single-loop in the sense that

the objective remains constant, and any

departure from the planned trajectory

is seen as a defect to be remedied. This

single-loop process does not require

or even facilitate reexamination of

either the strategy or the techniques

used to implement it in light of current

conditions.

Most companies today operate in a

turbulent environment with complex

strategies that, though valid when they

were launched, may lose their valid-

ity as business conditions change. In

this kind of environment, where new

threats and opportunities arise con-

stantly, companies must become capa-

ble of what Chris Argyris calls double-

loop learning – learning that produces

a change in people’s assumptions and

theories about cause-and-effect rela-

tionships. (See “Teaching Smart People

How to Learn,” HBR May–June 1991.)

Budget reviews and other fi nancially

based management tools cannot en-

gage senior executives in double-loop

…Around the Balanced Scorecard

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hbr.org | July–August 2007 | Harvard Business Review 159

learning – first, because these tools

address performance from only one

perspective, and second, because they

don’t involve strategic learning. Strate-

gic learning consists of gathering feed-

back, testing the hypotheses on which

strategy was based, and making the

necessary adjustments.

The balanced scorecard supplies

three elements that are essential to stra-

tegic learning. First, it articulates the

company’s shared vision, defi ning in

clear and operational terms the results

that the company, as a team, is trying to

achieve. The scorecard communicates

a holistic model that links individual

efforts and accomplishments to busi-

ness unit objectives.

Second, the scorecard supplies the

essential strategic feedback system. A

business strategy can be viewed as a set

of hypotheses about cause-and-effect

relationships. A strategic feedback sys-

tem should be able to test, validate, and

modify the hypotheses embedded in a

business unit’s strategy. By establishing

short-term goals, or milestones, within

the business-planning process, execu-

tives are forecasting the relationship

between changes in performance driv-

ers and the associated changes in one or

more specifi ed goals. For example, ex-

ecutives at Metro Bank estimated the

amount of time it would take for im-

provements in training and in the avail-

ability of information systems before

employees could sell multiple fi nancial

products effectively to existing and new

customers. They also estimated how

great the effect of that selling capabil-

ity would be.

Another organization attempted to

validate its hypothesized cause-and-ef-

fect relationships in the balanced score-

card by measuring the strength of the

linkages among measures in the differ-

ent perspectives. (See the exhibit “How

One Company Linked Measures from

the Four Perspectives.”) The company

found signifi cant correlations between

employees’ morale, a measure in the

learning-and-growth perspective, and

customer satisfaction, an important cus-

tomer perspective measure. Customer

satisfaction, in turn, was correlated

with faster payment of invoices – a rela-

tionship that led to a substantial reduc-

tion in accounts receivable and hence a

higher return on capital employed. The

company also found correlations be-

tween employees’ morale and the num-

ber of suggestions made by employees

(two learning-and-growth measures) as

well as between an increased number

of suggestions and lower rework (an

internal-business-process measure).

Evidence of such strong correlations

help to confi rm the organization’s busi-

ness strategy. If, however, the expected

correlations are not found over time, it

should be an indication to executives

that the theory underlying the unit’s

The Personal Scorecard

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MANAGING FOR THE LONG TERM | BEST OF HBR | Using the Balanced Scorecard as a Strategic Management System

160 Harvard Business Review | July–August 2007 | hbr.org

strategy may not be working as they

had anticipated.

Especially in large organizations, ac-

cumulating suffi cient data to document

signifi cant correlations and causation

among balanced scorecard measures

can take a long time – months or years.

Over the short term, managers’ assess-

ment of strategic impact may have to

rest on subjective and qualitative judg-

ments. Eventually, however, as more ev-

idence accumulates, organizations may

be able to provide more objectively

grounded estimates of cause-and-effect

relationships. But just getting manag-

ers to think systematically about the

assumptions underlying their strategy

is an improvement over the current

practice of making decisions based on

short-term operational results.

Third, the scorecard facilitates the

strategy review that is essential to stra-

tegic learning. Traditionally, companies

use the monthly or quarterly meetings

between corporate and division execu-

tives to analyze the most recent peri-

od’s fi nancial results. Discussions focus

on past performance and on explana-

tions of why fi nancial objectives were

not achieved. The balanced scorecard,

with its specifi cation of the causal rela-

tionships between performance drivers

and objectives, allows corporate and

business unit executives to use their pe-

riodic review sessions to evaluate the

validity of the unit’s strategy and the

quality of its execution. If the unit’s em-

ployees and managers have delivered

on the performance drivers (retraining

of employees, availability of informa-

tion systems, and new fi nancial prod-

ucts and services, for instance), then

their failure to achieve the expected

outcomes (higher sales to targeted cus-

tomers, for example) signals that the

theory underlying the strategy may not

be valid. The disappointing sales fi gures

are an early warning.

Managers should take such discon-

fi rming evidence seriously and recon-

sider their shared conclusions about

market conditions, customer value

propositions, competitors’ behavior,

and internal capabilities. The result of

such a review may be a decision to reaf-

fi rm their belief in the current strategy

but to adjust the quantitative relation-

ship among the strategic measures on

the balanced scorecard. But they also

might conclude that the unit needs

a different strategy (an example of

double-loop learning) in light of new

knowledge about market conditions

and internal capabilities. In any case,

the scorecard will have stimulated key

executives to learn about the viability

of their strategy. This capacity for en-

abling organizational learning at the

executive level – strategic learning – is

what distinguishes the balanced score-

card, making it invaluable for those

who wish to create a strategic manage-

ment system.

Toward a New Strategic
Management System
Many companies adopted early bal-

anced scorecard concepts to improve

their performance measurement sys-

tems. They achieved tangible but nar-

row results. Adopting those concepts

How One Company Linked Measures
from the Four Perspectives

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provided clarifi cation, consensus, and

focus on the desired improvements in

performance. More recently, we have

seen companies expand their use of

the balanced scorecard, employing it

as the foundation of an integrated and

iterative strategic management system.

Companies are using the scorecard to

clarify and update strategy;

communicate strategy throughout

the company;

align unit and individual goals with

the strategy;

link strategic objectives to long-term

targets and annual budgets;

identify and align strategic initiatives;

and

conduct periodic performance

reviews to learn about and improve

strategy.

The balanced scorecard enables a

company to align its management

processes and focuses the entire orga-

nization on implementing long-term

strategy. At National Insurance, the

scorecard provided the CEO and his

managers with a central framework

around which they could redesign each

piece of the company’s management

system. And because of the cause-and-

effect linkages inherent in the score-

card framework, changes in one com-

ponent of the system reinforced earlier

changes made elsewhere. Therefore,

every change made over the 30-month

period added to the momentum that

kept the organization moving forward

in the agreed-upon direction.

Without a balanced scorecard, most

organizations are unable to achieve a

similar consistency of vision and ac-

tion as they attempt to change direc-

tion and introduce new strategies and

processes. The balanced scorecard pro-

vides a framework for managing the

implementation of strategy while also

allowing the strategy itself to evolve in

response to changes in the company’s

competitive, market, and technological

environments.

Reprint R0707M

To order, see page 195.

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