The Evolution of Strategic Management—Balanced Scorecard

In this fifth post on the evolution of strategic management, we will be looking at the Balanced Scorecard. Like Objectives and Key Results, it is an evolution of Management by Objectives (MBO). It is also influenced by Hoshin Kanri. In terms of popularity, it is slowly on the decline, albeit still quite popular.

History

Analog Devices

The balanced scorecard originated from the general idea of tracking your data to see where you are. Sort of a high-level management dashboard for the entire company. This was (and is) common in industry, and is something quite sensible to do. (If you don’t track performance data for your company, please do so!). One such system was the Analog Devices Balanced Scorecard at Analog Devices (an US semiconductor company) by Arthur M. Schneiderman, then Vice President of Quality and Productivity Improvement at Analog Devices, Inc.

Analog Devices did have a long-term planning process using five-year plans. However, they were not really working. These five-year plans were created with much effort and then quickly forgotten. In the words of Schneiderman, they were “dead documents.” (If this sounds familiar, yes, that still happens a lot.)

Hence, they improved this to make the overall direction more relevant, looking at both internal and external perspectives, trying to see what is relevant to all stakeholders. External perspectives included things like the price, the reliability, the responsiveness, and more in a qualitative sense. Internal perspectives were much more quantitative (e.g., reducing defects to below 10 parts per million [PPM], having 99.8% on time delivery, and more). These evolved in their five-year-plan goals for their quality-improvement process. This was also influenced by Hoshin Kanri, as Schneiderman also studied this method. He also followed quality guru Joseph Juran‘s recommendation to focus on fewer and relevant goals rather than having too many goals.

Having five-year long-term goals is good, but the next step is to break this down into smaller, and especially shorter, cycles. You need to link the long-term goals to an annual business plan, and that’s just what they did. In 1997, they introduced the first balanced scorecard. The term “balanced” refers to covering not only financials, but multiple aspects of business success. The four key areas are still very similar nowadays:

• Financial (revenue, revenue growth, profit, and return on assets)
• Customer (on-time delivery, lead time, outgoing quality)
• Internal (cycle time, yield, process quality, cost, employee productivity)
• Learning and growth (new product intros, new product bookings, new product booking ratio)

Kaplan and Norton

In 1990, Schneiderman had the chance to show his balanced scorecard to academic Robert Kaplan and consultant David Norton. They were working on expanding the mostly financial KPIs of companies into other, non-monetary measurements to give a holistic view of the company. This was a project that involved numerous companies (AMD, American Standard, Apple, BellSouth, CIGNA, Conner Peripherals, Cray Research, DuPont, Electronic Data Systems, General Electric, Hewlett-Packard, and Shell Canada). The balanced scorecard from Analog Devices was just what they wanted. One outcome of this project was a paper in the Harvard Business Review, “The Balanced Scorecard – Measures that Drive Performance,” which was quite well-received.

While they were not the only ones writing about the balanced scorecard, their articles and an eventual book The Balanced Scorecard in 1996 were quite successful (later books like The Strategy Focused Organization in 2000 and The Execution Premium in 2008 much less so). Overall, they made the balanced scorecard visible to a wider audience… albeit their focus was a bit too much on the design of the documents rather than how to actually use them. (That is also still often a problem, and the widely popular Hoshin Kanri X-Matrix also has more focus on the design of the document rather than how to actually use Hoshin Kanri.)

Further Evolution

Like any method, there exist quite a few variants in the world. Sometimes, the four “boxes” (financial, customer, internal, learning, and growth) were slightly modified, often for certain industries like healthcare, public sector, etc. Later, a “Strategy Map” or a “Strategic Linkage Model” was added. The long-term objectives are distributed across the four sectors to visualize the connections and show the cause-and-effect chain. This is sometimes called the second generation of the balanced scorecard.

This strategy map, unfortunately, also increased the complexity of the balanced scorecard. Hence, for the third generation of the balanced scorecard, a “Destination Statement” describing the long-term outcomes sought from the strategy was introduced. This additional document basically defined what the company considers a success. In lean terms, this could be considered the “Check” of the PDCA, which is sorely needed.

 

Popularity Comparison

The balanced scorecard is among the most popular strategic management tools. Below is a graph adapted from Google Trends, showing how often each search term (and related terms) were searched since 2004. (To my disappointment, Hoshin Kanri barely registers on the graph.) According to a study from the Gartner Group, 40% of the Fortune-1000 companies in 2000 claimed to use a balanced scorecard, and it continues to be the most popular strategic management tool.

The Balanced Scorecard in a Nutshell

Like other strategic management tools, balanced scorecard is often confused with a fancy dashboard. While it of course includes a representation of the KPIs, the main purpose is to have a long-term strategy toward the company vision, broken down into manageable goals, and the dashboard only helps with tracking.

In my view, the novel part of the balanced scorecard compared to the other tools (Objectives and Key Results, Management by Objectives) is the aim to cast a wider net, to ensure that the direction of the company is not only measured in terms of money. But, of course, experts that use it a lot would have a lot more to say about this. Maybe in the comments?

Now, go out, align your activities with the company vision across all aspects of business, and organize your industry!

Sources

Arthur M. Schneiderman wrote a good summary of his view of the History of the First Balanced Scorecard on his website.