The Balanced Scorecard—Measures that
Robert S. Kaplan
David P. Norton
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What you measure is what you get. Senior executives understand that their organization’s
measurement system strongly affects the behavior of managers and employees. Executives also
understand that traditional financial accounting measures like return-on-investment and earningsper-share can give misleading signals for continuous improvement and innovation—activities
today’s competitive environment demands. The traditional financial performance measures
worked well for the industrial era, but they are out of step with the skills and competencies
companies are trying to master today.
As managers and academic researchers have tried to remedy the inadequacies of current
performance measurement systems, some have focused on making financial measures more
relevant. Others have said, “Forget the financial measures. Improve operational measures like
cycle time and defect rates; the financial results will follow.” But managers should not have to
choose between financial and operational measures. In observing and working with many
companies, we have found that senior executives do not rely on one set of measures to the
exclusion of the other. They realize that no single measure can provide a clear performance
target or focus attention on the critical areas of the business. Managers want a balanced
presentation of both financial and operational measures.
During a year-long research project with 12 companies at the leading edge of performance
measurement, we devised a “balanced scorecard”—a set of measures that gives top managers a
fast but comprehensive view of the business. The balanced scorecard includes financial measures
that tell the results of actions already taken. And it complements the financial measures with
operational measures on customer satisfaction, internal processes, and the organization’s
innovation and improvement activities—operational measures that are the drivers of future
Think of the balanced scorecard as the dials and indicators in an airplane cockpit. For the
complex task of navigating and flying an airplane, pilots need detailed information about many
aspects of the flight. They need information on fuel, air speed, altitude, bearing, destination, and
other indicators that summarize the current and predicted environment. Reliance on one
instrument can be fatal. Similarly, the complexity of managing an organization today requires
that managers be able to view performance in several areas simultaneously.
The balanced scorecard allows managers to look at the business from four important
perspectives. (See the exhibit “The Balanced Scorecard Links Performance Measures.”) It
provides answers to four basic questions:
The Balanced Scorecard Links Performance Measures
How do customers see us? (customer perspective)
What must we excel at? (internal perspective)
Can we continue to improve and create value? (innovation and learning perspective)
How do we look to shareholders? (financial perspective)
While giving senior managers information from four different perspectives, the balanced
scorecard minimizes information overload by limiting the number of measures used. Companies
rarely suffer from having too few measures. More commonly, they keep adding new measures
whenever an employee or a consultant makes a worthwhile suggestion. One manager described
the proliferation of new measures at his company as its “kill another tree program.” The balanced
scorecard forces managers to focus on the handful of measures that are most critical.
Several companies have already adopted the balanced scorecard. Their early experiences using
the scorecard have demonstrated that it meets several managerial needs. First, the scorecard
brings together, in a single management report, many of the seemingly disparate elements of a
company’s competitive agenda: becoming customer oriented, shortening response time,
improving quality, emphasizing teamwork, reducing new product launch times, and managing
for the long term.
Second, the scorecard guards against suboptimization. By forcing senior managers to consider all
the important operational measures together, the balanced scorecard lets them see whether
improvement in one area may have been achieved at the expense of another. Even the best
objective can be achieved badly. Companies can reduce time to market, for example, in two very
different ways: by improving the management of new product introductions or by releasing only
products that are incrementally different from existing products. Spending on setups can be cut
either by reducing setup times or by increasing batch sizes. Similarly, production output and
first-pass yields can rise, but the increases may be due to a shift in the product mix to more
standard, easy-to-produce but lower-margin products.
We will illustrate how companies can create their own balanced scorecard with the experiences
of one semiconductor company—let’s call it Electronic Circuits Inc. ECI saw the scorecard as a
way to clarify, simplify, and then operationalize the vision at the top of the organization. The
ECI scorecard was designed to focus the attention of its top executives on a short list of critical
indicators of current and future performance.
Customer Perspective: How Do Customers See Us?
Many companies today have a corporate mission that focuses on the customer. “To be number
one in delivering value to customers” is a typical mission statement. How a company is
performing from its customers’ perspective has become, therefore, a priority for top
management. The balanced scorecard demands that managers translate their general mission
statement on customer service into specific measures that reflect the factors that really matter to
Customers’ concerns tend to fall into four categories: time, quality, performance and service, and
cost. Lead time measures the time required for the company to meet its customers’ needs. For
existing products, lead time can be measured from the time the company receives an order to the
time it actually delivers the product or service to the customer. For new products, lead time
represents the time to market, or how long it takes to bring a new product from the product
definition stage to the start of shipments. Quality measures the defect level of incoming products
as perceived and measured by the customer. Quality could also measure on-time delivery, the
accuracy of the company’s delivery forecasts. The combination of performance and service
measures how the company’s products or services contribute to creating value for its customers.
Other Measures for the Customer’s Perspective
A computer manufacturer wanted to be the competitive leader in customer satisfaction, so it
measured competitive rankings. The company got the rankings through an outside organization
hired to talk directly with customers. The company also wanted to do a better job of solving
customers’ problems by creating more partnerships with other suppliers. It measured the
percentage of revenue from third-party relationships.
The customers of a producer of very expensive medical equipment demanded high reliability.
The company developed two customer-based metrics for its operations: equipment up-time
percentage and mean-time response to a service call.
A semiconductor company asked each major customer to rank the company against comparable
suppliers on efforts to improve quality, delivery time, and price performance. When the
manufacturer discovered that it ranked in the middle, managers made improvements that moved
the company to the top of customers’ rankings.
To put the balanced scorecard to work, companies should articulate goals for time, quality, and
performance and service and then translate these goals into specific measures. Senior managers
at ECI, for example, established general goals for customer performance: get standard products
to market sooner, improve customers’ time to market, become customers’ supplier of choice
through partnerships with them, and develop innovative products tailored to customer needs. The
managers translated these general goals into four specific goals and identified an appropriate
measure for each. (See the exhibit “ECI’s Balanced Scorecard.”)
ECI’s Balanced Business Scorecard
To track the specific goal of providing a continuous stream of attractive solutions, ECI measured
the percent of sales from new products and the percent of sales from proprietary products. That
information was available internally. But certain other measures forced the company to get data
from outside. To assess whether the company was achieving its goal of providing reliable,
responsive supply, ECI turned to its customers. When it found that each customer defined
“reliable, responsive supply” differently, ECI created a database of the factors as defined by each
of its major customers. The shift to external measures of performance with customers led ECI to
redefine “on time” so it matched customers’ expectations. Some customers defined “on-time” as
any shipment that arrived within five days of scheduled delivery; others used a nine-day window.
ECI itself had been using a seven-day window, which meant that the company was not satisfying
some of its customers and overachieving at others. ECI also asked its top ten customers to rank
the company as a supplier overall.
Depending on customers’ evaluations to define some of a company’s performance measures
forces that company to view its performance through customers’ eyes. Some companies hire
third parties to perform anonymous customer surveys, resulting in a customer-driven report card.
The J.D. Powers quality survey, for example, has become the standard of performance for the
automobile industry, while the Department of Transportation’s measurement of on-time arrivals
and lost baggage provides external standards for airlines. Benchmarking procedures are yet
another technique companies use to compare their performance against competitors’ best
practice. Many companies have introduced “best of breed” comparison programs: the company
looks to one industry to find, say, the best distribution system, to another industry for the lowest
cost payroll process, and then forms a composite of those best practices to set objectives for its
In addition to measures of time, quality, and performance and service, companies must remain
sensitive to the cost of their products. But customers see price as only one component of the cost
they incur when dealing with their suppliers. Other supplier-driven costs range from ordering,
scheduling delivery, and paying for the materials; to receiving, inspecting, handling, and storing
the materials; to the scrap, rework, and obsolescence caused by the materials; and schedule
disruptions (expediting and value of lost output) from incorrect deliveries. An excellent supplier
may charge a higher unit price for products than other vendors but nonetheless be a lower cost
supplier because it can deliver defect-free products in exactly the right quantities at exactly the
right time directly to the production process and can minimize, through electronic data
interchange, the administrative hassles of ordering, invoicing, and paying for materials.
Internal Business Perspective: What Must We Excel at?
Customer-based measures are important, but they must be translated into measures of what the
company must do internally to meet its customers’ expectations. After all, excellent customer
performance derives from processes, decisions, and actions occurring throughout an
organization. Managers need to focus on those critical internal operations that enable them to
satisfy customer needs. The second part of the balanced scorecard gives managers that internal
Other Measures for the Internal Business Perspective
One company recognized that the success of its TQM program depended on all its employees
internalizing and acting on the program’s messages. The company performed a monthly survey
of 600 randomly selected employees to determine if they were aware of TQM, had changed their
behavior because of it, believed the outcome was favorable, or had become missionaries to
Hewlett-Packard uses a metric called breakeven time (BET) to measure the effectiveness of its
product development cycle. BET measures the time required for all the accumulated expenses in
the product and process development cycle (including equipment acquisition) to be recovered by
the product’s contribution margin (the selling price less manufacturing, delivery, and selling
A major office products manufacturer, wanting to respond rapidly to changes in the marketplace,
set out to reduce cycle time by 50%. Lower levels of the organization aimed to radically cut the
times required to process customer orders, order and receive materials from suppliers, move
materials and products between plants, produce and assemble products, and deliver products to
The internal measures for the balanced scorecard should stem from the business processes that
have the greatest impact on customer satisfaction—factors that affect cycle time, quality,
employee skills, and productivity, for example. Companies should also attempt to identify and
measure their company’s core competencies, the critical technologies needed to ensure continued
market leadership. Companies should decide what processes and competencies they must excel
at and specify measures for each.
Managers at ECI determined that submicron technology capability was critical to its market
position. They also decided that they had to focus on manufacturing excellence, design
productivity, and new product introduction. The company developed operational measures for
each of these four internal business goals.
To achieve goals on cycle time, quality, productivity, and cost, managers must devise measures
that are influenced by employees’ actions. Since much of the action takes place at the department
and workstation levels, managers need to decompose overall cycle time, quality, product, and
cost measures to local levels. That way, the measures link top management’s judgment about key
internal processes and competencies to the actions taken by individuals that affect overall
corporate objectives. This linkage ensures that employees at lower levels in the organization
have clear targets for actions, decisions, and improvement activities that will contribute to the
company’s overall mission.
Information systems play an invaluable role in helping managers disaggregate the summary
measures. When an unexpected signal appears on the balanced scorecard, executives can query
their information system to find the source of the trouble. If the aggregate measure for on-time
delivery is poor, for example, executives with a good information system can quickly look
behind the aggregate measure until they can identify late deliveries, day by day, by a particular
plant to an individual customer.
If the information system is unresponsive, however, it can be the Achilles’ heel of performance
measurement. Managers at ECI are currently limited by the absence of such an operational
information system. Their greatest concern is that the scorecard information is not timely; reports
are generally a week behind the company’s routine management meetings, and the measures
have yet to be linked to measures for managers and employees at lower levels of the
organization. The company is in the process of developing a more responsive information system
to eliminate this constraint.
Innovation and Learning Perspective: Can We Continue to
Improve and Create Value?
The customer-based and internal business process measures on the balanced scorecard identify
the parameters that the company considers most important for competitive success. But the
targets for success keep changing. Intense global competition requires that companies make
continual improvements to their existing products and processes and have the ability to introduce
entirely new products with expanded capabilities.
A company’s ability to innovate, improve, and learn ties directly to the company’s value. That is,
only through the ability to launch new products, create more value for customers, and improve
operating efficiencies continually can a company penetrate new markets and increase revenues
and margins—in short, grow and thereby increase shareholder value.
ECI’s innovation measures focus on the company’s ability to develop and introduce standard
products rapidly, products that the company expects will form the bulk of its future sales. Its
manufacturing improvement measure focuses on new products; the goal is to achieve stability in
the manufacturing of new products rather than to improve manufacturing of existing products.
Like many other companies, ECI uses the percent of sales from new products as one of its
innovation and improvement measures. If sales from new products are trending downward,
managers can explore whether problems have arisen in new product design or new product
In addition to measures on product and process innovation, some companies overlay specific
improvement goals for their existing processes. For example, Analog Devices, a Massachusettsbased manufacturer of specialized semiconductors, expects managers to improve their customer
and internal business process performance continuously. The company estimates specific rates of
improvement for on-time delivery, cycle time, defect rate, and yield.
Other companies, like Milliken & Co., require that managers make improvements within a
specific time period. Milliken did not want its “associates” (Milliken’s word for employees) to
rest on their laurels after winning the Baldridge Award. Chairman and CEO Roger Milliken
asked each plant to implement a “ten-four” improvement program: measures of process defects,
missed deliveries, and scrap were to be reduced by a factor of ten over the next four years. These
targets emphasize the role for continuous improvement in customer satisfaction and internal
Financial Perspective: How Do We Look to Shareholders?
Financial performance measures indicate whether the company’s strategy, implementation, and
execution are contributing to bottom-line improvement. Typical financial goals have to do with
profitability, growth, and shareholder value. ECI stated its financial goals simply: to survive, to
succeed, and to prosper. Survival was measured by cash flow, success by quarterly sales growth
and operating income by division, and prosperity by increased market share by segment and
return on equity.
But given today’s business environment, should senior managers even look at the business from
a financial perspective? Should they pay attention to short-term financial measures like quarterly
sales and operating income? Many have criticized financial measures because of their welldocumented inadequacies, their backward-looking focus, and their inability to reflect
contemporary value-creating actions. Shareholder value analysis (SVA), which forecasts future
cash flows and discounts them back to a rough estimate of current value, is an attempt to make
financial analysis more forward looking. But SVA still is based on cash flow rather than on the
activities and processes that drive cash flow.
Some critics go much further in their indictment of financial measures. They argue that the terms
of competition have changed and that traditional financial measures do not improve customer
satisfaction, quality, cycle time, and employee motivation. In their view, financial performance is
the result of operational actions, and financial success sh ...
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