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
instructors 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 students
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
four aspects of a Balanced Scorecard. Each group brings its
scorecard recommendations to class, prepared to contribute to a

The Balanced Scorecard 2

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

Learning Objective 2: II.
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
Learning Objective 3:
Strategy maps provide a way to visualize the relationships
between financial and customer outcomes and the drivers of
those outcomes.
A. Before an organization can develop a Balanced Scorecard,
a clear understanding of vision, mission, and strategy are
essential.
1. Vision is defined by the authors as [a] concise
statement that defines the mid to long-term (3-10 year)
goals of the organization. The vision should be
external and market-oriented and should express
often in colorful or visionary terms - how the
organization wants to be perceived by the world.
2. Mission is defined as [a] concise, internally-focused
statement of how the organization expects to compete
and deliver value to customers. The mission often
states the reason for the organizations existence, the

The Balanced Scorecard 3

Translate mission,
vision, and strategy
statements into a
Balanced Scorecard.
basic purpose towards which its activities are directed,
and the values that guide employees activities.
3. An organizations strategy consists of the specific
operational steps required to achieve the mission.
4. Refer students to Exhibit 9-1.

Learning Objective 4: III. 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
of Balanced Scorecard the four perspectives:
objectives, measures,
A. Financial
targets, and initiatives.
B. Customer
C. Internal
D. Learning and growth

Learning Objective 5: IV. Key performance indicator (KPI) scorecards often do not
Explain why key provide the same information as a true Balanced Scorecard.
performance indicator A. KPI scorecards typically do not have the linkage to
scorecards are not strategy which is inherent in the Balanced Scorecard.
necessarily Balanced
B. KPI scorecards may omit measures which are in fact
Scorecards.
crucial 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: V.
Design a Balanced
Scorecard for
nonprofit and public
sector organizations.
Instructors may want to use one of the assignment suggestions
in the Teaching Tips section, above. Alternatively, use problem
9-34, 9-35, or 9-36 to reinforce the concepts in the chapter,
and to help students deal with the task of developing a
scorecard 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: VI. The authors cite 5 principles important in Balanced Scorecard
Describe how to use implementation:
the Balanced A. Translate the strategy to operational terms
Scorecard to B. Align the organization to the strategy
implement strategy
C. Make strategy everyones job
and explain the five
principles that assist D. Make strategy a continual process
the transition to a E. Mobilize leadership for change
strategy-focused
organization.

The Balanced Scorecard 4

Learning Objective 8: VII. There are a number of pitfalls to be avoided in Balanced
Recognize common Scorecard implementation:
pitfalls in A. Use of too many measures diffuses managements focus;
implementing the its better to focus on a smaller number of measures that
Balanced Scorecard
can have a real impact.
and suggest ways to
avoid the pitfalls. B. Too few measures are a problem as well. Too few
measures provide an incomplete (and perhaps distorted)
picture.
C. 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.
D. A Balanced Scorecard is an organization-wide effort, not a
task for a single manger or small group.
E. Scorecard responsibilities must filter down to middle
managers and lower level workers. Everyone in the
organization needs to be on board.
F. Attempts to develop the perfect scorecard are likely to end
in failure. The scorecard should be an evolutionary
process.
G. 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 organizations 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.
c. nonprofit organizations often have ill-defined strategies.
d. all of the above

The Balanced Scorecard 6

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 everyones 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
organizations 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