Central Theme
In their article, Kaplan and Norton summarize the concept of the balanced scorecard which they introduced several years ago to address the issues of strategic development of businesses. The central idea of the article is that existing measurements of success used by companies are mostly based on financial performance indicators, which is a framework that overlooks important aspects of business development and fails to determine whether companies pursue their declared goals effectively. Apart from the financial aspect (but without ignoring it), the authors suggest measuring performance from three additional perspectives: customers, internal business processes, and learning and growth.
Including these three perspectives in performance, evaluation allows not only obtaining a more comprehensive understanding of how businesses perform but also improving the management system. This is another point that Kaplan and Norton emphasize: the balanced scorecard is not only for evaluation but also for enhancing strategic planning and implementation. One of the main problems that businesses face in the context of strategic development is connecting vision, philosophy, mission statement, goals, and other aspects of their strategies to certain actions and decisions on lower levels. It is a challenge to ensure that everything a business does serves the purpose of achieving its strategic goals. Therefore, evaluating performance from the financial perspective solely is not enough, and this is where the helpfulness of the balanced scorecard for different aspects of development becomes evident. According to Kaplan and Norton, the scorecard facilitates the adoption of certain practices that help link short-term actions to long-term strategic objectives.
These practices are described through four processes: translating the vision, communicating and linking business planning, and feedback and learning. The first process includes generating a clear business vision and gaining consensus regarding this vision among all the top managers. The second process, communicating and linking, is about bringing this vision down to all other layers of a company so that goals are understood, and the role of everyone in achieving those goals is understood as well. Also, it is important to link certain rewards to good performance and complying with the vision. The third process, business planning, involves defining objectives, i.e. tasks and targets that are less abstract than the vision and need to be accomplished and attained respectively to achieve strategic goals. Also, business planning includes the distribution of resources and their allocation to certain objectives. Milestones need to be established to enable evaluation afterward. Finally, the fourth process, feedback, and learning are collecting feedback on strategic vision and ensuring that it contributes to improving the vision toward adequate compliance with detected needs and trends. Therefore, the fourth process influences the first one, which makes all four processes a cycle of strategic development enabled by the balanced scorecard.
Critical Analysis
At the beginning of the article, Kaplan and Norton go straight to the point, explaining what a balanced scorecard is, what additional measurements it brings to performance evaluation, and what processes they use of it launches within companies. Further, the authors provide more details and support their concepts and recommendations with examples. Although the article is not written as an academic one (e.g. there are no formal references), the authors do present research data, as they have analyzed the application of the balanced scorecard in many companies. Moreover, the article contains excerpts from interviews with managers who share their vision of strategy and their experiences of using the scorecard. All this makes the article look reliable and convincing.
The presence of examples is one of the strengths of the article. The simplicity of delivery is another strength. What can be considered a weakness is that the authors do not reveal their sources: studied companies and interviewed managers remain unidentified. Describing a certain company might be more appealing. From my perspective, I find the ideas of Kaplan and Norton very insightful and helpful. I agree that relying on financial indicators solely in performance evaluation is misleading. What I was particularly impressed by is that including certain perspectives in evaluation can create a new management system that promotes strategic development, and the authors of the article convinced me that it can.
Main Takeaways
Apart from the four processes described above, readers can also learn from the article how to employ in real life the scorecard and the strategic management system supported by it. Kaplan and Norton provide a step-by-step example. First, an executive team develops a balanced scorecard: all the members should agree on it and commit to the strategy. Then, the strategy is communicated to middle managers, and departmental scorecards are developed. After that, all existing investments that do not comply with the strategy should be eliminated, and corporate change programs should be launched.
These processes are expected to take approximately six months; within the next six months, the scorecard is constantly reviewed and updated based on feedback. After a year, the balanced scorecard is communicated to the entire organization, and individual performance objectives are established based on it. All the aspects of planning, including budgeting, are to be updated by incorporating the measurements established by the scorecard. Monthly, quarterly, and annual strategy reviews should be accordingly conducted starting from month 18. Finally, every employee is requested to link his or her performance to the scorecard. This is how the balanced scorecard helps build a new management system that ensures pursuing strategic goals more effectively.