Balanced scorecard and strategy map (Kaplan and Norton)

The balanced scorecard translates corporate goals and strategy into a defined set of measurable objectives spanning the organisation’s key functions. It has become one of the most widely used frameworks for management by objectives, while the strategy map makes the intended relationships among those objectives visible.

When to use it

• To implement and monitor a chosen strategy; the scorecard is generally stronger for execution than for developing the strategy itself.
• To align processes and employees, improve customer outcomes and connect execution to financial results.

Origins

Peter Drucker observed that management by objectives works only after the objectives themselves have been thought through—a step he believed organisations usually neglected.

The balanced scorecard drew on metric-based incentive systems, the French tableau de bord tradition of performance dashboards and a corporate scorecard pioneered by Art Schneiderman at Analog Devices. Robert Kaplan and David Norton developed the idea through research and introduced it in a 1992 article, followed by a 1996 book. Their purpose was to make strategy implementable and observable through a coherent set of measurable objectives.

What it is

The framework begins by translating strategy into explicit objectives rather than selecting measures in isolation. It balances financial results with the customer, process and organisational capabilities expected to create them.

A strategy map extends this logic by arranging the objectives into cause-and-effect relationships. It shows how investments in people, information and learning support critical processes, how those processes deliver customer value and how customer outcomes contribute to financial goals.

How to use it

The scorecard was originally designed for strategy implementation, although later versions also contributed to strategy development. Its first generation added three non-financial perspectives to the company’s established financial objectives:

Financial perspective: measures such as revenue, gross and operating margin, return on capital employed and cash flow.

Customer perspective: measures such as market share, satisfaction, quality and delivery performance, and retention.

Internal business processes perspective: productivity and operating measures, including bottlenecks.

Learning and growth perspective: indicators including job satisfaction, training expenditure as a share of operating cost and employee turnover.

Kaplan, Norton and other practitioners progressively refined the method. Their 2000 follow-up emphasised communication as a prerequisite for execution. In their 2003 work, the strategy map became the primary device for clarifying and communicating strategy, transforming a one-dimensional list of objectives into a two-dimensional view of how value is expected to be created.

Strategy map: an example

As a second generation of the scorecard, the strategy map connects objectives with arrows representing the organisation’s cause-and-effect assumptions. The resulting pathway shows how different parts of the company must align to create value and deliver the strategy.

Organisations and advisers frequently adapt the perspectives to their priorities. Kaplan and Norton’s original four may be expanded to five or six, for example by treating information management, environmental impact or innovation as separate perspectives.

A third generation adds a “destination statement” describing what success will look like at a defined future point, with intended end results for each perspective. This results-driven formulation is meant to focus and energise managers as they pursue the scorecard and strategy-map objectives.

Top practical tip

Use the map to make the strategic hypothesis explicit before finalising the scorecard. Every objective and measure should connect to a limited, understandable path from organisational capability to customer and financial outcomes.

Top pitfall

Too many objectives, weak prioritisation and a page crowded with boxes and arrows will obscure rather than clarify strategy. Keep the map selective enough that managers can explain its causal logic without the diagram.

Further reading

Kaplan, R.S. and Norton, D.P. (nineteen ninety-two) “The Balanced Scorecard—Measures That Drive Performance.” Harvard Business Review, January–February.

Kaplan, R.S. and Norton, D.P. (two thousand and four) Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Boston, MA: Harvard Business School Press.