CHAPTER

The Balanced Scorecard

Central Focus and Learning Objectives

After studying this chapter students should be able to:
1. Understand why managers need a Balanced Scorecard to measure
and manage intangible assets for value creation.
2. Appreciate the role for strategy maps to visualize the cause-and-
effect linkages between outcomes in the financial and customer
perspectives and the drivers of those outcomes: the value
proposition, critical internal processes, and human, information, and
organization capital.
3. Translate mission, vision, and strategy statements into a Balanced
Scorecard.
4. Understand how to develop a coherent set of Balanced Scorecard
objectives, measures, targets, and initiatives.
5. Explain why key performance indicator scorecards are not
necessarily Balanced Scorecards.
6. Design a Balanced Scorecard for nonprofit and public sector
organizations.
7. Describe how to use the Balanced Scorecard to implement strategy
and explain the five principles that assist the transition to a strategy-
focused organization.
8. Recognize common pitfalls in implementing the Balanced Scorecard
and suggest ways to avoid the pitfalls.

The Balanced Scorecard 1

Chapter overview Chapter 9 introduces the concept of the Balanced Scorecard, a
means for measuring and managing all aspects of organizational
performance. The scorecard recognizes the importance of both
financial (e.g., ROI, profitability) and nonfinancial performance
indices. The scorecard examines four different but related elements
of organizational activity:
• financial: how is success measured by shareholders?
• customer: how do customers see us and how do we create value
for them?
• internal: what is the short list of internal processes, procedures
and activities at which we must excel to satisfy customers and
shareholders?
• learning and growth: what changes in employee capabilities,
information systems, and organizational climate are necessary
in order to continuously improve our internal processes and
customer relationships?
A key role of the scorecard is its linkage to organizational mission
and strategy. The scorecard should be a reflection of the strategy of
the organization, and provide clear signals about the achievement
of strategic goals.

Teaching tips • Stress the linkage to strategy; instructors may find Exhibits 9-1
and 9-2 useful to illustrate this point.
• Those wishing to use the Balanced Scorecard concept as the
foundation for a semester project may want to try something
like the following. Divide the class into teams of two to four
students. Each team selects a publicly traded organization (or
local not-for-profit about which significant information is
readily available) and develops a scorecard for their
organization. The groups can present their scorecards either as
PowerPoint presentations or as printed documents, depending
on the instructor’s preference. An assignment such as this
serves several purposes. It forces the students to think clearly
about the Balanced Scorecard categories and how performance
might be measured in a given industry. It also increases the
student’s familiarity with publicly available sources: annual
reports, 10-K filings, proxy statements, press releases, and
articles in the business press. Also, if the scorecards are
presented to the class as a whole, the assignment gives the
students practice at oral presentations in which each member of
a group must coordinate his/her efforts with those of their
colleagues.
• Another variation on this idea is to select a single firm. Divide
the class into four groups, each of which is assigned one of the

The Balanced Scorecard 2

 four aspects of a Balanced Scorecard. Each group brings its
scorecard recommendations to class, prepared to contribute to a
general discussion of the scorecard concept and its application
to the firm in question. This works best with a relatively small
class, and one in which the groups (or representatives thereof)
can meet to coordinate their ideas.

Recommended 1. My favorite Balanced Scorecard case is Chadwick, Inc. (HBS

cases 9-193-091; also available in an abridged version [9-196-124;
teaching note is 5-198-029]). The case is arguably a bit
simplistic, but the wealth of topics covered (leadership [or lack
thereof], change management, performance evaluation,
incentives, short run optimization, a myopic focus on the
bottom line) makes this case well worth the classroom time
spent on it.
2. Another good Balanced Scorecard case is the Mobil USM&R
series (A [9-197-025], A1 [9-197-120], A2 [9-197-121], B [9-
197-026], C [9-197-027], and D [9-197-028]). The teaching
note is 5-198-044.
3. Those interested in a shorter case exposure to the Balanced
Scorecard implementation case may want to use Chemical
Bank (HBS #9-195-210; TN is 5-108-090).

Chapter outline 1. Organizations tend to rely on financial indices (e.g., ROI, net
income) as indices of total organization performance.
Learning Objective 1: 1 However, this narrow focus ignores other important aspects
Understand why of performance and lends itself to a myopic preoccupation with the
managers need a short run.
Balanced Scorecard 2 The scorecard provides a balanced structure which enables
to measure and managers to consider a variety of relevant performance indicators
manage intangible which are tailored specifically to measure a short list of items
assets for value which are critical to achievement of an organization’s strategic
creation. goals.

Learning Objective 2: 2. Strategy maps provide a way to visualize the relationships

Appreciate the role between financial and customer outcomes and the drivers of
for strategy maps to those outcomes.
visualize the cause- 1 Before an organization can develop a Balanced Scorecard, a
and-effect linkages clear understanding of vision, mission, and strategy are essential.
between outcomes in
1 Vision is defined by the authors as “[a] concise statement that
the financial and
customer perspectives defines the mid to long-term (3-10 year) goals of the organization.
and the drivers of The vision should be external and market-oriented and should
those outcomes: the express – often in colorful or “visionary” terms - how the
value proposition, organization wants to be perceived by the world.”
critical internal 2 Mission is defined as “[a] concise, internally-focused
processes, and statement of how the organization expects to compete and deliver
human, information, value to customers. The mission often states the reason for the

The Balanced Scorecard 3

and organization organization’s existence, the basic purpose towards which its
capital activities are directed, and the values that guide employee’s
activities.”
3 An organization’s strategy consists of the specific operational
Learning Objective 3: steps required to achieve the mission.
Translate mission, 4 Refer students to Exhibit 9-1.
vision, and strategy
statements into a
Balanced Scorecard.

Learning Objective 4: 3. Instructors may want to use the Metro Bank illustration in the
Understand how to text to illustrate the various perspectives, the objectives
develop a coherent set associated with them, and the relevant measures. Introduce the
of Balanced four perspectives:
Scorecard objectives, 1 Financial
measures, targets, and
2 Customer
initiatives.
3 Internal
4 Learning and growth

Learning Objective 5: 4. Key performance indicator (KPI) scorecards often do not

Explain why key provide the same information as a true Balanced Scorecard.
performance indicator 1 KPI scorecards typically do not have the linkage to strategy
scorecards are not which is inherent in the Balanced Scorecard.
necessarily Balanced
2 KPI scorecards may omit measures which are in fact crucial
Scorecards.
to achievement of strategic objectives. A Balanced Scorecard is
more than a collection of diverse performance measures, or
performance measures which have been arbitrarily selected as
representative of the four perspectives.

Learning Objective 6: 5. Instructors may want to use one of the assignment suggestions
Design a Balanced in the Teaching Tips section, above. Alternatively, use problem
Scorecard for 9-34, 9-35, or 9-36 to reinforce the concepts in the chapter, and
nonprofit and public to help students deal with the task of developing a scorecard
sector organizations. which reflects the vision, mission, and strategy of an
organization. It may be useful to have the students “start from
scratch.” For example, in 9-35, rather than use a known fast-
food outlet (e.g., Burger King), develop a hypothetical
organization (e.g., “Burgers on the Run” or “Donuts to Go”) so
that the students can come up with their own vision, mission,
and strategic goals before working on the scorecard itself.

Learning Objective 7: 6. The authors cite 5 principles important in Balanced Scorecard

Describe how to use implementation:
the Balanced 1 Translate the strategy to operational terms
Scorecard to 2 Align the organization to the strategy
implement strategy
3 Make strategy everyone’s job
and explain the five
principles that assist
4 Make strategy a continual process
5 Mobilize leadership for change

The Balanced Scorecard 4

the transition to a
strategy-focused
organization.

Learning Objective 8: 7. There are a number of pitfalls to be avoided in Balanced

Recognize common Scorecard implementation:
pitfalls in 1 Use of too many measures diffuses management’s focus; it’s
implementing the better to focus on a smaller number of measures that can have a
Balanced Scorecard
real impact.
and suggest ways to
avoid the pitfalls.
2 Too few measures are a problem as well. Too few measures
provide an incomplete (and perhaps distorted) picture.
3 Full commitment by senior management is required. As in
virtually all management initiatives, support from the top is a
necessary but not sufficient condition for success.
4 A Balanced Scorecard is an organization-wide effort, not a
task for a single manger or small group.
5 Scorecard responsibilities must filter down to middle
managers and lower level workers. Everyone in the organization
needs to be on board.
6 Attempts to develop the perfect scorecard are likely to end in
failure. The scorecard should be an evolutionary process.
7 The Balanced Scorecard should not be treated as a “systems
project.” While information is an essential part of the scorecard
process, mere automation of data recording and observations does
not provide a sound basis for a scorecard.

The Balanced Scorecard 5

Chapter quiz

1. The information from a Balanced Scorecard is relevant only to the highest level
managers in an organization.
a. true
b. false

2. Cause and effect relationships are important in establishing a Balanced Scorecard.

The direction of causality is:
a. mission  vision  strategy
b. vision  strategy  mission
c. strategy  vision  mission
d. none of the above

3. Which of the following are potential measures for the customer perspective?
a. customer satisfaction
b. customer retention
c. market share
d. (a) and (b)
e. all of the above

4. An organization’s value proposition is:

a. the price charged for goods or services.
b. the unique mix of price, service, image, product attributes, and relationships that
an organization offers to customers.
c. a proposal submitted to shareholders about valuation of the company.
d. none of the above

5. The internal perspective of a Balanced Scorecard might include a focus on the

following:
a. operating processes
b. customer management processes
c. employee capabilities
d. (a) and (b)
e. all of the above

6. The learning and growth perspective of a Balanced Scorecard might include a focus
on the following:
a. information capabilities
b. organizational alignment
c. skills and education
d. all of the above
e. (a) and (b)

7. Nonprofit organizations have difficulty applying the Balanced Scorecard because:

a. the scorecard is relevant only to for-profit enterprises.
b. nonprofit organizations lack the skills necessary to use the scorecard.

The Balanced Scorecard 6

 c. nonprofit organizations often have ill-defined strategies.
d. all of the above

8. The authors identify several principles important in implementing a Balanced

Scorecard. Which of the following are included?
a. operationalize strategy
b. align the strategy to the organization
c. make strategy everyone’s job
d. all of the above
e. (a) and (c)

9. Pitfalls in Balanced Scorecard implementations include the following:

a. using too many measures, resulting in a diffusion of management attention
b. failure to link drivers for the internal perspective with customer outcomes
c. poor organizational processes for scorecard development and implementation
d. all of the above

10. The best scorecard implementations:

a. are undertaken by a single senior executive who is thoroughly committed to the
organization’s goals.
b. exclude lower level employees, since they are irrelevant to the achievement of
strategic objectives anyway.
c. are undertaken as a systems project.
d. none of the above

The Balanced Scorecard 7

Solutions to chapter quiz

1. b
2. d
3. e
4. b
5. d
6. d
7. c
8. e
9. d
10. d

The Balanced Scorecard 8