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THE HIGH-PERFORMANCE ORGANIZATION
BEST OF HBR
By the 1980s, many executives were convinced that traditional measures of
financial performance didn't let them manage effectively and wanted to re-
place them with operational measures. Arguing that executives should track
both financial and operational metrics, Robert Kaplan and David Norton
suggested four sets of parameters.
First, how do customers see your company? Find out by measuring lead times,
quality, performance and service, and costs. Second, what must your company
excel at? Determine the processes and competencies that are most critical, and
specify measures, such as cycle time, quality, employee skills, and productivity,
to track them. Third, can your company continue to improve and create value?
Monitor your ability to launch new products, create more value for customers,
and improve operating efficiencies. Fourth, how has your company done by its
shareholders? Measure cash flow, quarterly sales growth, operating income by
division, and increased market share by segment and return on equity.
The balanced scorecard lets executives see whether they have improved in
one area at the expense of another. Knowing that, say the authors, will protect
companies from posting suboptimal performance.
The Balanced Scorecard:Measures That Drive Performanceby Robert S. Kaplan and David P. Norton
The balanced scorecardtracks all the importantelements of a company'sstrategy-from continuousimprovement andpartnerships to teamworkand global scale. And thatallows companies to excel.
^ ^ "ha t you measure is what youget Senk>r executives understand thattheii (rtganization's measurement sys-tem strongly affects the behavior ofmanagers and employees. Executivesalso understand that traditional finan-cial accounting measures like return oninvestment and earnings per share cangive misleading signals for continu-ous improvement and innovation - ac-tivities today's competitive environ-ment demands. The traditional finan-cial performance measures workedwell for the industrial era, but they areout of step with the skills and compe-tencies companies are trying to mastertoday.
As managers and academic research-ers have tried to remedy the inadequa-
cies of current performance measure-ment systems, some have focused onmaking financial measures more rele-vant. Others have said, "Forget the fi-nancial measures; improve operationalmeasures like cycle time and defectrates. The financial results will follow."But managers should not have tochoose between financial and opera-tional measures. In observing and work-ing with many companies, we havefound that senior executives do not relyon one set of measures to the exclusionof the other. They realize that no singlemeasure can provide a clear perfor-mance target or focus attention on thecritical areas ofthe business. Managerswant a balanced presentation of bothfinancial and operational measures.
172 HARVARD BUSINESS REVIEW
THE HIGH-PERFORMANCE ORGANIZATION
During a yearlong research projectwith 12 companies at the leading edge ofperformance measurement, we deviseda "balanced scorecard"- a set of mea-sures that gives top managers a fast butcomprehensive view ofthe business. Thebalanced scorecard includes financialmeasures that tell the results of actionsalready taken. And it complements thefinancial measures with operationalmeasures on customer satisfaction, in-ternal processes, and the organization'sinnovation and improvement activi-ties-operational measures that are thedrivers of future financial performance.
Think of the balanced scorecard asthe dials and indicators in an airplanecockpit. For the complex task of navi-gating and flying a plane, pilots need de-tailed information about many aspectsofthe fiight. They need information onfuel, airspeed, altitude, bearing, desti-nation, and other indicators that sum-marize the current and predicted envi-ronment. Reliance on one instrumentcan be fatal. Similarly, the complexityof managing an organization today re-quires that managers be able to viewperformance in several areas at once.
The balanced scorecard allows man-agers to look at the business from fourimportant perspectives. (See the exhibit"The Balanced Scorecard Links Perfor-mance Measures.") It provides answersto four basic questions: How do customers see us? (customerperspective)
What must we excel at? (internal busi-ness perspective)
Can we continue to improve and cre-ate value? (Innovation and learningperspective)
How do we look to shareholders?(financial perspective)While giving senior managers infor-
mation from four different perspec-tives, the balanced scorecard minimizesinfonnation overload by limiting thenumber of measures used. Companies
The Balanced ScorecardLinks Performance Measures
How docustomerssee us?
Financli l Panpectlv*
How do we lookto shareholders?
What mustwe excel at?
The Balanced Scorecard BEST OF HBR
ganization. The ECl scorecard was de-signed to focus the attention of its top ex-ecutives on a short list of critical indica-tors of current and future performance.
Customer Perspective:How Do Customers See Us?Many companies today have a corpo-rate mission that focuses on the cus-tomer. "To be number one in deliver-ing value to customers" is a typicalmission statement. How a company isperforming from its customers' per-spective has become, therefore, a prior-ity for top management. The balancedscorecard demands that managers trans-late their general mission statementon customer service into specific mea-sures that refiect the factors that reallymatter to customers.
Customers' concerns tend to fall intofour categories: time, quality, perfor-mance and service, and cost. Lead timemeasures the time required for thecompany to meet its customers' needs.For existing products, lead time can bemeasured from the time the companyreceives an order to the time it actu-ally delivers the product or service tothe customer. For new products, leadtime represents the time to market, orhow long it takes to bring a new prod-uct from the product definition stageto the start of shipments. Quality mea-sures the defect level of incoming prod-
ucts as perceived and measured by thecustomer. Quality could also measureon-time delivery-the accuracy oftheorganization's delivery forecasts. Thecombination of performance and ser-vice measures how the company's prod-ucts or services contribute to creatingvalue for its customers.
To put the balanced scorecard towork, companies should articulate goalsfor time, quality, and performance andservice and then translate these goals
To track the specific goal of providinga continuous stream of attractive solu-tions, ECl measured the percentage ofsales from new products and the per-centage of sales from proprietary prod-ucts. That information was availableinternally, but certain other measuresforced the company to get data fromoutside. To assess whether the com-pany was achieving its goal of providingreliable, responsive supply, ECl turnedto its customers. When it found that each
Traditional financial performance measuresworked well for the industrial era, but they are
out of step with the skills and competenciescompanies are trying to master today.
into specific measures. Senior manag-ers at ECl, for example, establishedgeneral goals for customer perfor-mance: Get standard products to mar-ket sooner, improve customers' time tomarket, become customers' supplier ofchoice through partnerships with them,and develop innovative products tai-lored to customer needs. The managerstranslated these general goals into fourspecific goals and identified an appro-priate measure for each. (See the exhibit"ECl's Balanced Business Scorecard.")
customer defined "reliable, responsivesupply" differently, ECl created a data-base ofthe factors as defined by eachof its major customers. The shift to ex-ternal measures of performance withcustomers led EC! to redefine "on time"so it matched customers' expectations.Some customers defined "on time"as any shipment that arrived withinfive days of scheduled delivery; othersused a nine-day window. ECl itself hadbeen using a seven-day window, whichmeant that it wasn't satisfying some of
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THE HIGH-PERFORMANCE ORGANIZATION
its customers and overachieving forothers. ECI also asked its top ten cus-tomers to rank the company as a sup-plier overall.
Depending on customers' evaluationsto define some of a company's perfor-mance measures forces that company toview its performance through custom-ers' eyes. Some companies hire third par-ties to perform anonymous customersurveys, resulting in a customer-drivenreport card. The J.D. Power quality sur-vey, for example, has become the stan-dard of performance for the automobileindustry, while the U.S. Department ofTransportation's measurement of on-time arrivals and lost baggage providesextemal standards for airlines. Bench-marking procedures are yet anothertechnique companies use to comparetheir performance against competi-tors' best practices. Many companieshave introduced "best of breed" com-parison programs: The company looksto one industry to find, say, the best dis-tribution system, to another industryfor the lowest cost payroll process, andthen forms a composite of those bestpractices to set objectives for its ownperformance.
in addition to measures of time, qual-ity, and performance and service, com-panies must remain sensitive to the costof their products. But customers seeprice as only one component ofthe costthey incur when dealing with their sup-pliers. Other supplier-driven costs rangefrom ord