Strategy and the Balanced Scorecard. (Strategic Management)
Frigo, Mark L., Strategic Finance
The balanced scorecard is a powerful management tool for strategy execution. When used as a true strategy scorecard, it can help management not only execute strategy but also refine it. Let's examine an important use of the balanced scorecard framework in today's business environment- strategy evaluation and refinement.
The Balanced Scorecard
The balanced scorecard, as developed by Robert Kaplan and David Norton (The Balanced Scorecard: Translating Strategy Into Action, Harvard Business School Press, 1996), is a strategy-focused approach to performance management that includes performance measures derived from the organization's vision and strategy. Scorecards include strategic objectives and performance measures in a hierarchy of areas, such as financial, customer, internal processes, and innovation. The strategic objectives and performance measures within the balanced scorecard framework are derived from the vision and strategy of the organization. Companies using the balanced scorecard include ABB Switzerland, AT&T Canada, Chemical Bank, Hilton Hotels, Sears, UPS, Wells Fargo Online Financial Services, and Wendy's International. The U.S. Army also has recently adopted it as part of its Strategic Readiness System.
The balanced scorecard provides a hierarchical framework that management can use to link or connect the unique strategic activities to the ultimate goal of financial value creation. At the top of the framework is financial performance, which is driven by a unique customer value proposition. This is in turn delivered by the right set of business processes (the value chain). At the base of the hierarchy is innovation and growth, which provide the capabilities and infrastructure for a continually evolving value proposition and processes. The cause-and-effect linkages within the balanced scorecard hierarchy can be powerful tools for strategy evaluation.
The IMA Survey
Some of the recent IMA surveys on performance management reflect these cause-and-effect linkages (Frigo, "Strategy, Business Execution, and Performance Measures' Strategic Finance, May 2002). The surveys found that, for balanced scorecard users, performance measurement systems better supported corporate strategies, and stronger linkages existed between performance measures in their performance measurement systems. The survey also found that the balanced scorecard facilitated identification of new performance measures. As organizations used the balanced scorecard and related strategy maps, they discovered cause-and-effect linkages and new performance measures that complete the linkages. The survey also found that the balanced scorecard improved the effectiveness of performance measurement systems in communicating strategy to employees.
Testing the Strategy
Strategy can be viewed as a set of if-then hypotheses. If certain strategic activities are undertaken, then expected financial results will occur--as will all the intermediate steps in between. How do we know whether a particular strategy is working, and, just as important, how soon do we know? How do customer performance measures link to financial results? And what is the time lag? Here, cause-and-effect analysis in the balanced scorecard framework can help. A recent study at Harvard Business School (Campbell, "Putting Strategy Hypotheses to the Test with Cause-and-Effect Analysis," The Balanced Scorecard Report, September-October 2002) examined how balanced scorecard cause-and-effect analysis could be used to evaluate the effectiveness of strategy.
Does Customer Loyalty Result in Financial Returns?
Using the goal tenets of Return Driven Strategy, we can posit that fulfilling unmet customer needs in large, growing market segments will lead to financial returns. But can we measure the magnitude and time response of the linkage? Fulfilling unmet customer needs can be measured in terms of customer loyalty or price premium. …