Balanced scorecard

From Wikipedia, the free encyclopedia

The balanced scorecard (BSC) is a strategic performance management tool - a semi-standard

structured report supported by proven design methods and automation tools that can be used by
managers to keep track of the execution of activities by staff within their control and monitor the
consequences arising from these actions. It is perhaps the best known of several such
frameworks (for example, it is the most widely adopted performance management framework
reported in the annual survey of management tools undertaken by Bain & Company, and has
been widely adopted in English speaking western countries and Scandinavia in the early 1990s).
Since 2000, use of Balanced Scorecard, its derivatives (e.g. performance prism), and other
similar tools (e.g. Results Based Management) have become common in the Middle East, Asia
and Spanish-speaking countries also.

Contents
 1 Characteristics
 2 History
 3 Design
o 3.1 Original design method
o 3.2 Improved design methods
o 3.3 Popularity
o 3.4 Variants, alternatives and criticisms
 4 Criticism
 5 The four perspectives
 6 Measures
 7 Software tools
 8 See also
 9 References
 10 Sources

Characteristics
The core characteristic of the Balanced Scorecard and its derivatives is the presentation of a
mixture of financial and non-financial measures each compared to a 'target' value within a single
concise report. The report is not meant to be a replacement for traditional financial or operational
reports but a succinct summary that captures the information most relevant to those reading it. It
is the method by which this 'most relevant' information is determined (i.e. the design processes
used to select the content) that most differentiates the various versions of the tool in circulation.

The first versions of Balanced Scorecard asserted that relevance should derive from the corporate
strategy, and proposed design methods that focused on choosing measures and targets associated
with the main activities required to implement the strategy. As the initial audiences for this were
the readers of the Harvard Business Review, the proposal was translated into a form that made
sense to a typical reader of that journal - one relevant to a mid-sized US business. Accordingly,
initial designs were encouraged to measure three categories of non-financial measure in addition
to financial outputs - those of "Customer," "Internal Business Processes" and "Learning and
Growth." Clearly these categories were not so relevant to non-profits or units within complex
organisations (which might have high degrees of internal specialisation), and much of the early
literature on Balanced Scorecard focused on suggestions of alternative 'perspectives' that might
have more relevance to these groups.

Modern Balanced Scorecard thinking has evolved considerably since the initial ideas proposed in
the late 1980s and early 1990s, and the modern performance management tools including
Balanced Scorecard are significantly improved - being more flexible (to suit a wider range of
organisational types) and more effective (as design methods have evolved to make them easier to
design, and use).

History
The first balanced scorecard was created by Art Schneiderman (an independent consultant on the
management of processes) in 1987 at Analog Devices, a mid-sized semi-conductor company.Art
Schniederman participated in an unrelated research study in 1990 led by Dr. Robert S. Kaplan in
conjunction with US management consultancy Nolan-Norton, and during this study described his
work on Balanced Scorecard. Subsequently, Kaplan and David P. Norton included anonymous
details of this use of balanced scorecard in their 1992 article on Balanced Scorecard. Kaplan and
Norton's article wasn't the only paper on the topic published in early 1992 But the 1992 Kaplan
and Norton paper was a popular success, and was quickly followed by a second in 1993. In 1996,
they published the book The Balanced Scorecard These articles and the first book spread
knowledge of the concept of Balanced Scorecard widely, but perhaps wrongly have led to
Kaplan and Norton being seen as the creators of the Balanced Scorecard concept.

While the "balanced scorecard" concept and terminology was coined by Art Schneiderman, the
roots of performance management as an activity run deep in management literature and practice.
Management historians such as Alfred Chandler suggest the origins of performance management
can be seen in the emergence of the complex organisation - most notably during the 19th Century
in the USA. More recent influences may include the pioneering work of General Electric on
performance measurement reporting in the 1950s and the work of French process engineers (who
created the tableau de bord – literally, a "dashboard" of performance measures) in the early part
of the 20th century. The tool also draws strongly on the ideas of the 'resource based view of the
firm' proposed by Edith Penrose. However it should be noted that none of these influences is
explicitly linked to original descriptions of Balanced Scorecard by Schneiderman, Maisel, or
Kaplan & Norton.

Kaplan and Norton's first book, The Balanced Scorecard, remains their most popular. The book
reflects the earliest incarnations of Balanced Scorecard - effectively restating the concept as
described in the second Harvard Business Review article. Their second book, The Strategy
Focused Organization, echoed work by others (particularly in Scandinavia) on the value of
visually documenting the links between measures by proposing the "Strategic Linkage Model" or
strategy map. Since then Balanced Scorecard books have become more common - in early 2010
Amazon was listing several hundred titles in English which had Balanced Scorecard in the title.

Design
Design of a Balanced Scorecard ultimately is about the identification of a small number of
financial and non-financial measures and attaching targets to them, so that when they are
reviewed it is possible to determine whether current performance 'meets expectations'. The idea
behind this is that by alerting managers to areas where performance deviates from expectations,
they can be encouraged to focus their attention on these areas, and hopefully as a result trigger
improved performance within the part of the organisation they lead.

The original thinking behind Balanced Scorecard was for it to be focused on information relating
to the implementation of a strategy, and perhaps unsurprisingly over time there has been a
blurring of the boundaries between conventional strategic planning and control activities and
those required to design a Balanced Scorecard. This is illustrated well by the four steps required
to design a Balanced Scorecard included in Kaplan & Norton's writing on the subject in the late
1990s, where they assert four steps as being part of the Balanced Scorecard design process:

1. Translating the vision into operational goals;

2. Communicating the vision and link it to individual performance;
3. Business planning; index setting
4. Feedback and learning, and adjusting the strategy accordingly.

These steps go far beyond the simple task of identifying a small number of financial and non-
financial measures, but illustrate the requirement for whatever design process is used to fit within
broader thinking about how the resulting Balanced Scorecard will integrate with the wider
business management process. This is also illustrated by books and articles referring to balanced
scorecards confusing the design process elements and the balanced scorecard itself. In particular,
it is common for people to refer to a “strategic linkage model” or “strategy map” as being a
balanced scorecard.

Although it helps focus managers' attention on strategic issues and the management of the
implementation of strategy, it is important to remember that the balanced scorecard itself has no
role in the formation of strategy. In fact, balanced scorecards can comfortably co-exist with
strategic planning systems and other tools.

Original design method

The earliest Balanced Scorecards comprised simple tables broken into four sections - typically
these "perspectives" were labeled "Financial", "Customer", "Internal Business Processes", and
"Learning and Growth". Designing the Balanced Scorecard required selecting five or six good
measures for each perspective.

Many authors have since suggested alternative headings for these perspectives, and also
suggested using either additional or fewer perspectives. These suggestions were notably
triggered by a recognition that different but equivalent headings would yield alternative sets of
measures. The major design challenge faced with this type of Balanced Scorecard is justifying
the choice of measures made. "Of all the measures you could have chosen, why did you choose
these?" This common question is hard to answer using this type of design process. If users are
not confident that the measures within the Balanced Scorecard are well chosen, they will have
less confidence in the information it provides. Although less common, these early-style Balanced
Scorecards are still designed and used today.

In short, early-style Balanced Scorecards are hard to design in a way that builds confidence that
they are well designed. Because of this, many are abandoned soon after completion.

Improved design methods

In the mid 1990s, an improved design method emerged. In the new method, measures are
selected based on a set of "strategic objectives" plotted on a "strategic linkage model" or
"strategy map". With this modified approach, the strategic objectives are distributed across the
four measurement perspectives, so as to "connect the dots" to form a visual presentation of
strategy and measures.

To develop a strategy map, managers select a few strategic objectives within each of the
perspectives, and then define the cause-effect chain among these objectives by drawing links
between them. A balanced scorecard of strategic performance measures is then derived directly
from the strategic objectives. This type of approach provides greater contextual justification for
the measures chosen, and is generally easier for managers to work through. This style of
Balanced Scorecard has been commonly used since 1996 or so: it is significantly different in
approach to the methods originally proposed, and so can be thought of as representing the "2nd
Generation" of design approach adopted for Balanced Scorecard since its introduction.

Several design issues still remain with this enhanced approach to Balanced Scorecard design, but
it has been much more successful than the design approach it superseded.

In the late 1990s, the design approach had evolved yet again. One problem with the "2nd
generation" design approach described above was that the plotting of causal links amongst
twenty or so medium-term strategic goals was still a relatively abstract activity. In practice it
ignored the fact that opportunities to intervene, to influence strategic goals are, and need to be
anchored in the "now;" in current and real management activity. Secondly, the need to "roll
forward" and test the impact of these goals necessitated the creation of an additional design
instrument; the Vision or Destination Statement. This device was a statement of what "strategic
success," or the "strategic end-state" looked like. It was quickly realized, that if a Destination
Statement was created at the beginning of the design process then it was much easier to select
strategic Activity and Outcome objectives to respond to it. Measures and targets could then be
selected to track the achievement of these objectives. Design methods that incorporate a
"Destination Statement" or equivalent (e.g. the Results Based Management method proposed by
the UN in 2002) represent a tangibly different design approach to those that went before, and
have been proposed as representing a "3rd Generation" design method for Balanced Scorecard.

Design methods for Balanced Scorecard continue to evolve and adapt to reflect the deficiencies
in the currently used methods, and the particular needs of communities of interest (e.g. NGO's
and Government Departments have found the 3rd Generation methods embedded in Results
Based Management more useful than 1st or 2nd Generation design methods).

Popularity

In 1997, Kurtzman found that 64 percent of the companies questioned were measuring
performance from a number of perspectives in a similar way to the Balanced Scorecard.

Balanced Scorecards have been implemented by government agencies, military units, business
units and corporations as a whole, non-profit organisations, and schools.

Many examples of Balanced Scorecards can be found via Web searches. However, adapting one
organisation's Balanced Scorecard to another is generally not advised by theorists, who believe
that much of the benefit of the Balanced Scorecard comes from the design process itself. Indeed,
it could be argued that many failures in the early days of Balanced Scorecard could be attributed
to this problem, in that early Balanced Scorecards were often designed remotely by consultants.
Managers did not trust, and so failed to engage with and use these measure suites created by
people lacking knowledge of the organisation and management responsibility.

Variants, alternatives and criticisms

Since the Balanced Scorecard was popularized in the early 1990s, a large number of alternatives
to the original 'four box' Balanced Scorecard promoted by Kaplan and Norton in their various
articles and books have emerged. Most have very limited application, and are typically proposed
either by academics as vehicles for promoting other agendas (such as green issues), or
consultants as an attempt at differentiation to promote sales of books and / or consultancy.

Many of the variations proposed are broadly similar, and a research paper published in 2002
attempted to identify a pattern in these variations - noting three distinct types of variation. The
variations appeared to be part of an evolution of the Balanced Scorecard concept, and so the
paper refers to these distinct types as "Generations". Broadly, the original 'measures in boxes'
type design (as proposed by Kaplan & Norton) constitutes the 1st Generation Balanced
Scorecard design; Balanced Scorecard designs that include a 'strategy map' or 'strategic linkage
model' (e.g. the Performance Prism, later Kaplan & Norton designs the Performance Driver
model of Olve & Wetter) constitute the 2nd Generation of Balanced Scorecard design; and
designs that augment the strategy map / strategic linkage model with a separate document
describing the long-term outcomes sought from the strategy (the "Destination Statement" idea)
comprise the 3rd Generation Balanced Scorecard design. Examples of the 3rd Generation
Balanced Scorecard design include the Third Generation Balanced Scorecard itself, and the
performance management elements of the UN's Results Based Management model.

Criticism
The Balanced Scorecard has always attracted criticism from a variety of sources. Most has come
from the academic community, who dislike the empirical nature of the framework: Kaplan and
Norton notoriously failed to include any citation of prior art in their initial papers on the topic.
Some of this criticism focuses on technical flaws in the methods and design of the original
Balanced Scorecard proposed by Kaplan and Norton, and has over time driven the evolution of
the device through its various Generations. Other academics have simply focused on the lack of
citation support. But a general weakness of this type of criticism is that it typically uses the 1st
Generation Balanced Scorecard as its object: many of the flaws identified are addressed in other
works published since the original Kaplan & Norton works in the early 1990s.

Another criticism, usually from pundits and consultants, is that the balanced scorecard does not
provide a bottom line score or a unified view with clear recommendations: it is simply a list of
metrics These critics usually include in their criticism suggestions about how the 'unanswered'
question postulated could be answered. Typically however, the unanswered question relates to
things outside the scope of Balanced Scorecard itself (such as developing strategies). There are a
few empirical studies linking the use of Balanced Scorecards to better decision making or
improved financial performance of companies, but some work has been done in these areas.
However broadcast surveys of usage have difficulties in this respect, due to the wide variations
in definition of 'what a Balanced Scorecard is' noted above (making it hard to work out in a
survey if you are comparing like with like). Single organization case studies suffer from the 'lack
of a control' issue common to any study of organizational change - you don't know what the
organization would have achieved if the change had not been made, so it is difficult to attribute
changes observed over time to a single intervention (such as introducing a Balanced Scorecard).
However, such studies as have been done have typically found Balanced Scorecard to be useful

The four perspectives

The 1st Generation design method proposed by Kaplan and Norton was based on the use of three
non-financial topic areas as prompts to aid the identification of non-financial measures in
addition to one looking at Financial. Four "perspectives" were proposed

 Financial: encourages the identification of a few relevant high-level financial measures.

In particular, designers were encouraged to choose measures that helped inform the
answer to the question "How do we look to shareholders?"
 Customer: encourages the identification of measures that answer the question "How do
customers see us?"
 Internal Business Processes: encourages the identification of measures that answer the
question "What must we excel at?"
 Learning and Growth: encourages the identification of measures that answer the
question "Can we continue to improve and create value?".

These 'prompt questions' illustrate that Kaplan and Norton were thinking about the needs of
small to medium sized commercial organizations in the USA [citation needed] (the target demographic
for the Harvard Business Review) when choosing these topic areas. They are not very helpful to
other kinds of organizations, and much of what has been written on Balanced Scorecard since
has, in one way or another, focused on the identification of alternative headings more suited to a
broader range of organizations.

Measures
The Balanced Scorecard is ultimately about choosing measures and targets. The various design
methods proposed are intended to help in the identification of these measures and targets, usually
by a process of abstraction that narrows the search space for a measure (e.g. find a measure to
inform about a particular 'objective' within the Customer perspective, rather than simply finding
a measure for 'Customer'). Although lists of general and industry-specific measure definitions
can be found in the case studies and methodological articles and books presented in the
references section. In general measure catalogues and suggestions from books are only helpful
'after the event' - in the same way that a Dictionary can help you confirm the spelling (and usage)
of a word, but only once you have decided to use it proficiently.

Software tools
It is important to recognise that the balanced scorecard by definition is not a complex thing -
typically no more than about 20 measures spread across a mix of financial and non-financial
topics, and easily reported manually (on paper, or using simple office software).

The processes of collecting, reporting, and distributing Balanced Scorecard information can be
labour intensive and prone to procedural problems (for example, getting all relevant people to
return the information required by the required date). The simplest mechanism to use is to
delegate these activities to an individual, and many Balanced Scorecards are reported via ad-hoc
methods based around email, phone calls and office software.

In more complex organisations, where there are multiple Balanced Scorecards to report and/or a
need for co-ordination of results between Balanced Scorecards (for example, if one level of
Balanced Scorecard reports relies on information collected and reported at a lower level) the use
of individual Balanced Scorecard reporters is problematic. Where these conditions apply,
organisations use Balanced Scorecard reporting software to automate the production and
distribution of these reports.

A 2009 survey of software usage found roughly one third of organisations used office software
to report their Balanced Scorecard, one third used bespoke software developed specifically for
their own use, and one third used one of the many commercial packages available.

There are currently over 100 vendors of software suitable for Balanced Scorecard reporting (i.e.
supporting data collection, reporting and analysis)
Why Implement a Balanced Scorecard?

 Increase focus on strategy and results

 Improve organizational performance by measuring what matters
 Align organization strategy with the work people do on a day-to-day basis
 Focus on the drivers of future performance
 Improve communication of the organization’s Vision and Strategy
 Prioritize Projects / Initiatives

Kaplan and Norton describe the innovation of the balanced scorecard as follows:

"The balanced scorecard retains traditional financial measures. But financial measures tell
the story of past events, an adequate story for industrial age companies for which
investments in long-term capabilities and customer relationships were not critical for
success. These financial measures are inadequate, however, for guiding and evaluating the
journey that information age companies must make to create future value through
investment in customers, suppliers, employees, processes, technology, and innovation."

Adapted from Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,”
Harvard Business Review (January-February 1996): 76
2GC Conference Paper
Abstract
Recent research has indicated that the degree of strategic planning in organisations is likely to
have a direct impact on business performance and business evaluation. However, these
findings leave small and medium-sized businesses (SMEs) in particular, with the challenge of
matching the requirement for an improved strategic planning processes with the competitive
advantage associated with being a “simple” and highly responsive organisation.
In response to that challenge this paper discusses the potential benefits to SMEs in adopting
the Balanced Scorecard methodology and the underlying management processes most
relevant to SMEs. It also makes observations about how use and value may differ between
Balanced Scorecard application in large and smaller enterprises.
Introduction
Recent research has shown that clear links between an organisation’s approach to strategic
planning and its business performance exist in small as well as in large organisations (Lyles et.
al 1993; Jennings & Beaver 1997; Juul Andersen 2000; Ernst & Young 2000).
(“e root cause of either small business failure or poor performance is almost invariably a lack of
management attention to strategic issues”
Peter Jennings, e Business School, Loughborough University, UK and
Graham Beaver, Nottingham Business School Nottingham Trent University England)

Improved strategic management processes may also facilitate the development of the more
complex management structures that are needed as small firms grow (Miller 1959, Atkins &
Lowe 1997).
A popular tool used to support strategic management activity in large firms is the Balanced
Scorecard. To date, reported activity to deploy management systems that are based around use
of Balanced Scorecards has focused on large, multi-national, multi-divisional firms (e.g.
Mobil, Cigna, AT&T, Motorola).

is paper discusses from a practitioner point of view the potential merits and feasibility of
deploying Balanced Scorecard in SMEs as well as the way in which use and value may differ
between its application in large and smaller enterprises.

Neither comprehensive literature nor empirical research exist on the topic of Balanced
Scorecard in SMEs.
 erefore, the arguments presented in this paper are based on a
combination of general literature research on Balanced Scorecard, SMEs, strategic
management and corporate planning combined with the authors’ broad practical experience
of facilitating Balanced Scorecard design and implementation projects in large and some
smaller organisations including using it in our own small company.
The Balanced Scorecard in Large Enterprises
e Harvard Business Review, in its 75th Anniversary issue, cites the Balanced Scorecard as
being one of the 15 most important management concepts to have been introduced via
articles in the magazine. Since its introduction in 1992, the Balanced Scorecard has featured
in a wealth of academic and practitioner papers, and has been the subject of several best
selling books. But writing on the Balanced Scorecard focuses on its application in large
2GC Conference Paper - Balanced Scorecard implementation in SMEs
© 2GC Limited, 2009 Page 2 of 12
organisations, drawing on case examples like e.g. Mobil and CIGNA (Kaplan & Norton 1996,
2000), ABB, Skandia, SKF and Halifax (Olve et al 1999) – all multi billion dollar companies.
One explanation for this predominantly large company focus may be found in the challenges
of communication, coordination, and control in large organisations. e task specialisation
and levels of organisational hierarchy that is required to support the scale of the organisation
make all forms of change more difficult in large organisations (Miller 1959, Sprott 1973;
Simon 1976; Atkins & Lowe 1997).
Application of the Balanced Scorecard in SMEs
In our view, the fact that no comprehensive literature on Balanced Scorecard used by SMEs
exists today should not be taken as an indication that Balanced Scorecard implementation is
only appropriate for large organisations. Core to this view is our experience of benefiting
from having implemented the Balanced Scorecard in our own organisation and the
proposition that many basic strategic management issues are relevant in both small and large
organisations. Examples of these include:
e need for a clear sense of direction: where is the organisation headed?
Managers must have a profound understanding of the business model: is the
organisation doing all the things it needs to be doing?
An ability to focus and prioritise: how to strike the balance between long-term
development and short-term operational pressures?
Agility: flexibility driven by learning: how to incorporate new knowledge in the strategic
and operational planning processes?
Common to each of these issues is the need for the identification, pursuit and achievement of
strategic goals. Recently it has become common for these to collectively drive towards
fulfilling stakeholder expectations in general, and for publicly quoted firms in particular to
deliver Shareholder Value.
“Pick up most well respected finance texts and you will find the maximisation of returns
to shareholders being quoted as being the key business objective”
R. Mills, Professor of Accounting and Finance, Henley Management College

Using the Balanced Scorecard as part of a “Strategic

Management Framework”
e Balanced Scorecard was originally proposed as an approach to performance measurement
that combined traditional financial measures with non-financial measures to provide
managers with richer and more relevant information about organisational performance,
particularly with regard to key strategic goals (Kaplan & Norton 1992). By encouraging
managers to focus on a limited number of measures drawn from four ‘perspectives’, the
original Balanced Scorecard aimed to encourage clarity and utility.
Over time Balanced Scorecard has developed to form the centre-piece of a strategic
communication and performance measurement framework that helps management teams
articulate, communicate and monitor the implementation of strategy using a system interlinked
with the long-term destination of the organisation.
More recent insights suggest that a successful Balanced Scorecard implementation will require
adjustments to be made to other management processes used by the enterprise. Only in so
doing will the Balanced Scorecard be able to become a central part of a “strategic management
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© 2GC Limited, 2009 Page 3 of 12
framework” (Kaplan & Norton 1996a; Epstein and Manzoni 1997)
“To be successful the Balanced Scorecard must be viewed as the tip of the improvement
iceberg.”
A.M. Schneiderman, Consultant on process management
It is, in our experience, this evolution of Balanced Scorecard methodology that has increased
its relevancy for small companies. e reason being that in SMEs a greater proportion of the
value of Balanced Scorecard comes from its use to formalise the description of strategic
destination and associated strategic objectives and priorities in a way that builds consensus;
and the impetus it gives to the development and application of more effective strategic and
general management processes – both areas that are normally only weakly addressed in SMEs
(Jennings and Beaver 1997).
Characteristics of Small and Medium Sized Enterprises
Much work has been done to identify ways in which management practice in small and
medium-sized enterprises (SMEs) differ from larger ones. Two linked areas of comparison
have been differences in organisational structure, and differences in management processes.
SME’s (particularly small ones) have been characterised as being typically “simple structures”
or “simple systems” in which the leader (oen the entrepreneur or owner-manager) directs the
work of a small number of operators with the help of few or no other managers. At around
100 staff, this type of approach begins to become inefficient, and by the time the enterprise has
about 500 employees some sort of hierarchical structure has been introduced – most
commonly introducing a layer of managers each tasked with management of a functional area
of activity. As the organisation grows, further structure changes occur driven by the
increasing problems of communication and co-ordination. It has been observed that the
points of transition between organisational forms present or represent particularly risky
periods for the enterprise, during which enterprise failure is not uncommon (Mintzberg
1981). Coordination in small organisations mainly happens through direct instruction and
supervision, minimising the need for formal management (i.e. planning and control)
processes. Many see this as a key strength of the smaller enterprise, since by avoiding
extensive standardisation and coordination, and the associated need for support staff and linemanagement;
small firms maintain their flexibility, responsiveness and low cost structure
(Miller 1959, Mintzberg 1981).
Designing a Balanced Scorecard based Strategic Management
System in an SME
Balanced Scorecard design in an SME will include similar process steps to those required in
large organisations. e key difference is the duration of the process - it is quicker in small
organisations as there are fewer people and generally less complex organisational structures 1.
We certainly experienced this when designing our own Scorecard applying an approach
similar to what we have used to facilitate design projects in many large organisations.
We see Balanced Scorecard design as the initial effort to produce the physical documentation:
Destination statement, strategic objectives, measures and strategic initiatives 2 normally
2GC Conference Paper - Balanced Scorecard implementation in SMEs
© 2GC Limited, 2009
1 With efficient internal or external process facilitation, a small organisation can usually complete the initial design over a
period of 4 – 6 weeks, compared with 12 – 14 weeks in large organisations. Most of the work is then completed “live”
during two one-day workshops. Additional design activities by each participant normally don not require more than ½ to
1-½ workdays. (2GC Active Management 2000)
2 These elements are described below
Page 4 of 12
forming the basis for subsequent implementation and use of the Balanced Scorecard
methodology. e design process can therefore be said to form a structured or formalised
approach to strategic planning – the importance of which to SMEs was considered earlier.
Best practice in large organisations suggests that Balanced Scorecard design activity should be
a collective effort drawing upon the combined operational and strategic insights of key
employees involved with running the business. Failure to use a collective approach may
weaken the value of the strategy itself (Simon 1957, Mintzberg 1990) and its implementation
due to lack of support from those accountable for executing it (omson’s “dominant
coalition”: omson 1967).
Small organisations in particular were characterised earlier as being likely to have limited
planning and control systems (Mintzberg 1981; Atkins & Lowe 1997). Even so, there is always
potential to add value by including more staff in the decision making process, as Mintzberg
and Simons note. As an enterprise grows into a medium sized enterprise, the complexity of
the internal operational environment increases (Miller 1959; Atkins & Lowe 1997). As a
consequence, achieving "insight into value creation" (Campbell & Alexander 1997) becomes
more complicated – one person can no longer fully capture the activities of the enterprise and
determine better strategies for success.
“Most of the insights important for strategy formulation reside in the heads of the
operating managers.… excluding them from strategy development means excluding their
insights as well.”
Marcus Alexander & Andrew Campbell – Directors
Ashridge Strategic Management Centre
In both small and medium firms, the wider sense of ownership of a strategy by the
organisation is understood to be as important as effectives strategy formation. Whether an
organisation is large or small, success ultimately depends on persuading employees to align
their behaviours with the enterprise’s strategic goals.
“One may say that on the whole people do not like being ordered about…. it is not so
much being led that people resent, as being controlled by some external power whose
intentions are not coincident with theirs”
W J H Sprott, Social Psychologist
Describing Strategic Destination
In order to make rational decisions about organisational activity and not least set targets for
those activities, an enterprise should develop a clear idea about what the organisation is trying
to achieve (Senge 1990, Kotter 1996). Accordingly, the most effective Balanced Scorecard
design processes use the creation of a strategic destination statement describing, ideally in
some detail, what the organisation is likely to look like at an agreed future date (Olve et al.
1999; Shulver et al. 2000). In many cases this exercise builds on existing plans and documents
– but it is rare in practice to find a pre-existing document that fully serves this purpose within
an enterprise.
Strategic objectives
Once the strategic destination has been established the next step is for the same group to agree
on the most important strategic activities and outcomes (strategic objectives) required for the
destination to be achieved. Best practice calls for this process step to focus on the actions
directly within the scope of the team building the Balanced Scorecard – increasing the
likelihood that the objectives agreed will (or can) be pursued once the design process is
complete. By representing the selected objectives on a “strategic linkage model” (see Figure 1),
the design team is encouraged to apply “systems thinking” (Senge 1990; Senge et al. 1999) to
identify cause-and-effect relationships between the selected objectives – this is a useful test to
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ensure the objectives chosen are mutually supportive.
e importance of clearly articulated objectives is highlighted by. Lingle & Schiemann (1996),
who warns against what they call “fuzzy objectives” as a frequent cause for lack of
implementation and expected results.
Figure 1: Simplified example of strategic linkage model
Perspectives
In Figure 1 the chosen strategic objectives are spread across four zones or ‘perspectives’. is is
a typical feature of Balanced Scorecard designs.
e lower two perspectives contain objectives relating to the most important activities in
terms of business processes, cycle time, productivity etc. (Internal Processes) and what needs
to happen for these processes to be sustained and further developed in terms of people,
product and process development (Learning & Growth).
e two top perspectives house objectives relating to the desired outcomes of the activities
undertaken i.e. how we wish customers, partners and other external relations to perceive us
(External Relations) and how this will ultimately translate into financial results and economic
value (Financial).
Linking objectives together in this way helps with the articulation of ‘causality’ between
objectives – a key element of linking strategy to relevant performance measures according to
Robert Simons (1995) and also Epstein & Manzoni (1997).
Developing a ‘strategic linkage model’ as described above can thus help an SME to:
test the validity of a business model by developing a thorough understanding of the
model and its strategic/operational requirements
identify the most important strategic objectives in the form of a coherent strategy
spanning the whole spectre of the business and that way create the necessary focus for
things to get done
Measures
Balanced Scorecard designs in large enterprises normally include an elaborate process for
identifying and describing measures selected to inform management about the organisation’s
progress towards achievement of its goals (Olve et al. 1999). In SMEs (particularly small
enterprises) the utility of formal measure definition is lower. e limited size and complexity
of the organisation means that managers are oen well aware (at least collectively) of all
performance related issues due to the limited size and complexity of the organisation (Miller
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1959; Mintzberg 1981). But identification of measures, at least to the extent where targets can
be set and followed up, does help to test the validity of the assumptions about cause and effect
on which the design team has based its strategy. Without a deliberate approach to testing
assumptions aimed at informing the choice of corrective action, the idea of planning risk
loosing part of its value – an aspect further highlighted below. Because of this, some SMEs,
though not all, will find measure definition activities of value.
Deployment
It is a truism, but a Balanced Scorecard needs to be used to realise its full value. Balanced
Scorecards fail when, having developed strategic goals and identified relevant performance
measures an enterprise doesn’t use the information provided to drive changes in the way the
organisation works (Schneiderman 1999).
For example, if an organisation is strongly budget orientated in its planning approach, the
budgeting cycle will have to change and take its starting point at the Balanced Scorecard. If
not, the long-term strategic requirements highlighted during the Scorecard design process are
not likely to be integrated in the short-term financial planning of the budget. As noted by
Jennings & Graham (1997), the balancing of long-term development with short-term
requirements for survival is a particularly important issue for small companies and start-ups –
failing to get the budget process aligned with the strategic goals of the enterprise can make
achieving this balance harder.
Oen, implementing changes to management processes requires a management team or
manager to “take a leap of faith” in support of their new management system (Schneiderman
1999) and will then require long-term top management commitment to sustain the changes.
Herbert Simon, Robert Schrank and Rosabeth Moss Kanter suggests that, breaking these old
habits and instilling new behaviours should start with managers changing their own ways.
“If we are to change our institutional arrangements from hierarchy to participation,
particularly in our work places, we will need to look to transformation of ourselves as
well”
Robert Schrank, Sociologist
Instilling a sense of direction combined with focus and prioritisation
e use of the Balanced Scorecard as the centrepiece of a strategic management system, as
described in this paper, naturally promotes goal and task delegation. By jointly constructing
and communicating a well-articulated and logical plan, supported by an efficient approach for
monitoring its implementation, management and the rest of the organisation is encouraged to
focus on critical strategic outcomes in preference to narrow functional or tactical factors. By
enabling component parts of an SME organisation to coordinate activities with reference to a
clearly articulated corporate strategy, as described above, senior managers can reduce the time
spent on detailed operational management control, freeing up management resources that can
more valuably be applied to coordinate further developments of the organisation. Introducing
a strategic management system based on the Balanced Scorecard may therefore defer the need
for the organisation to move to more complex organisational structures (Miller 1959) with
potential positive consequences for cost base as well as potentially retaining more innovative
flexibility (Mintzberg 1981).
Finally, where an organisation has a clearly defined strategic destination and an equally welldefined
strategy for getting there, the risk of ‘scope creep’ is reduced. It is well documented
that organisations underestimate the risks of following novel opportunities for potential
growth in new and related business areas. For the innovative entrepreneurial organisation in
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particular taking them on may seem like an easy way to achieve added growth – “We just work
a bit harder”. But pursuing new opportunities carries both additional business risk, and the
risk of neglecting established long-term goals (Bhide 1996, Jennings and Beaver 1997). A
number of times, we have benefited from using our destination statement and strategic
objectives as basis for evaluating the added value and strategic fit of new opportunities.
Understanding the business model
Although the discussion so far has focused on introducing Balanced Scorecard thinking to an
established SME, this is not a pre-requisite. Adopting the Balanced Scorecard approach during
the planning stages of a business venture has its distinct advantages in terms of its ability to
help a management team clearly articulate the goals of the venture, and the activities that will
realise the goals. It also will highlight areas with the greatest need for change, and may prove
useful in securing the necessary external backing for the business.
Just as the Balanced Scorecard design process helps demonstrate and prove/disprove a
business model to the entrepreneur and/or management team themselves, so the ability to
communicate a well articulated and logically constructed plan supported by an efficient
approach for monitoring its implementation will help any organisation trying to gain or
sustain the support of external stakeholders (Bhide 1996) – another area where we feel our
Balanced Scorecard has been useful. e importance of demonstrating a sound approach to
management, not only while seeking initial funding but also for later investor evaluation of
the organisation is emphasised by recent research showing that 35% of investor decisions are
influenced by non-financial issues with strategy and quality of corporate strategy being the
most important (Ernst & Young 2000).
“e actual root cause of failure [of SMEs] may be seen to lie with the apparently nonrational
behaviour and decision-making of the entrepreneur and/or owner-manager who
does not obey the ‘rules’ of classical management theory”
Peter Jennings, e Business School, Loughborough University, UK and
Graham Beaver, Nottingham Business School Nottingham Trent University England
Increasing flexibility and learning
e concept of using the Balanced Scorecard as a central part of a strategic management
system (Kaplan & Norton 1996a, 2000) is based on a “double-loop learning cycle” (Argyris,
1977; 1991), which calls for regular appraisal of strategic performance by asking three
questions:
Have we done what we set out to do?
Have we achieved the results we thought we would?
What do we need to do differently in future?
e answers to these questions and information about changes in the external environment
form the basis for wider analysis and discussion leading to decisions about continuing validity
of the strategic choices originally described in the Balanced Scorecard. e information
provided by the Balanced Scorecard can therefore drive changes in both the objectives and
measures used to track them. Such changes are likely to reflect a combination of changing
market and organisational conditions as well as increased learning about cause and effect
assumptions. Mintzberg 1990 and Simons 1995 each suggest that enterprises that include this
type of “interactive component” (which can allow for ongoing adaptation of plans to include
“emergent strategies”) in their planning and review processes, are more flexible and adaptable
in their responses to external changes than those that do not.
How formal the Balanced Scorecard review process will need to be will vary greatly depending
on enterprise complexity and culture. Similarly the effort applied to the collection of Balanced
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Scorecard measures varies widely. Setting up formal processes to collect measure data may be
seen by small organisations as an unjustifiable administrative burden. But experience from
our own company shows that highly informal measurement collection processes work well in
small organisations: e greater transparency in these companies tends to make formal and
potentially time-consuming information collection exercises redundant. Instead, the output of
the design process serves mainly to provide a framework for organising a verbal or even
mental thought process “of asking questions and listening to answers…and [resolving
questions on] the relevance of basic assumptions about its objectives, strategy, and operations,
and their interactions.” (Hatten & Rosenthal 1999) – an oen-neglected process in small
companies according to e.g. Jennings & Beaver (1997).
Conclusion
Despite the lack of comprehensive literature focused on Balanced Scorecard implementation
in SMEs we believe Balanced Scorecard and its associated management processes can prove
equally beneficial to SMEs as to large organisations.
However, the potential benefits are likely to differ between the two. In large / complex
organisations much of the utility of Balanced Scorecard comes from the communications
elements: the two-way provision of concise and relevant summary information about ‘what is
going on’ in the organisation. In smaller firms such as our own, a greater proportion of the
value of Balanced Scorecard comes from two other elements: the description of strategic
destination and associated strategic objectives and priorities in a way that builds consensus;
and impetus given to the development and application of more effective strategic management
processes.
However, the Balanced Scorecard used at the centre of a strategic management system
addresses effectively a number of the fundamental issues relevant to large as well as small
businesses:
A clear sense of direction
e Balanced Scorecard framework is an efficient tool for clearly articulating long-term
strategic goals in the form of a destination statement that can be translated into shortterm
activities
A profound understanding of the business model
Identifying strategic objectives within the four business perspectives of the Scorecard
and linking them in an expression of cause-and-effect relationships forces managers to
apply “systems thinking” and develop a holistic strategy covering all aspects of their
business – an equally important exercise for mature organisations as well for start-ups.
An ability to focus and prioritise
Focusing on a clearly defined destination for the future and a clear strategy for how to
realise it will help any company reduce the risk of loosing sight of what they are trying
to achieve
Organisational agility
Using the Balanced Scorecard to regularly check whether the organisation is doing what
it set out to do and is achieving the results it expected, creates learning about the validity
of the cause-and-effect relationships. It also forms a useful foundation for deciding what
needs to get done in the future based on the above learning and any changes in the
external environment
In SMEs these Balanced Scorecard benefits can be achieved without the need for developing a
complicated and administratively demanding measurement regime by simply using the
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Balanced Scorecard and its measures as a mental or verbal frame of reference for addressing
general strategic and operational change issues resulting from the pursuit of long-term goals.
ese are real benefits experienced in our own company.
But successful Balanced Scorecard implementation in any organisation requires sustained
management commitment to using it making sure it drives the necessary behavioural changes
within the organisation, starting with the managers themselves.
Observing these success criteria, Balanced Scorecard can prove an effective tool for SMEs in
meeting the challenge posed by the need to introduce more efficient strategic planning
processes while retaining the competitive advantage of having relatively simple structures.
Finally, it should be noted that although this paper has highlighted the existence of important
potential and real benefits to SMEs from applying the Balanced Scorecard as a strategic
management tool, there is an obvious need for further substantiating these conclusions
through empirical research.
About 2GC
2GC is a research led consultancy expert in addressing the strategic control and performance
management issues faced by organisations in today's era of rapid change and intense
competition. Central to much of 2GC’s work is the application of the widely acknowledged 3 rd
Generation Balanced Scorecard approach to strategic implementation, strategy management
and performance measurement.
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Useful Web Resources

2GC Performance Management Frequently Asked Questions
(http://www.2gc.co.uk/resources-faqs)
2GC Performance Management Presentations
(http://www.2gc.co.uk/resources-presentations)
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