The Idea in Brief
In the same way that you can’t fly an airplane with just one instrument gauge, you can’t manage a company with just one kind of performance measure. Think of a balanced scorecard as the instrument panel in the cockpit of an airplane. It’s a set of interrelated gauges that links seemingly disparate information about a company’s finances and operations. Together, they give you a more complete view of how your company has been performing, as well as where it’s headed.
A balanced scorecard asks you to think of your company’s mission and strategy from four key perspectives:
1. How do customers see us?
2. What internal processes must we excel at?
3. How can we continue to improve and create value?
4. How do we look to shareholders?
Next, identify the handful of measures that are most critical to your company’s success in each of the four perspectives. Tracking all the important measures at once guards against suboptimization—that is, achieving gains in one area at the expense of another.
The Idea in Practice
What you measure is what you get: the measures you use strongly affect the behavior of your managers and employees. When building a balanced scorecard, tailor the measures to fit your company’s particular challenges. That way, you’ll be more likely to get the performance you need to succeed.
1. Customer perspective. Today’s typical corporate mission says something general about customers. The balanced scorecard requires specific measures of what customers get—in terms of time, quality, performance and service, and cost.
2. Internal business perspective. Focus on the core competencies, processes, decisions, and actions that have the greatest impact on customer satisfaction. ECI developed operational measures for submicron technology capability, manufacturing excellence, design productivity, and new product introduction. Company managers then made sure to “decompose” the measures to department and workstation levels, where much of the action took place.
3. Innovation and learning perspective. Measures in this area indicate future success. They measure continual improvements to existing products and processes and introduction of new products with expanded capabilities. Milliken & Co. implemented a “ten-four” improvement program, requiring reductions in key adverse measures (defects, missed deliveries, and scrap) by a factor of ten over four years.
4. Financial perspective. Financial measures are essential for indicating whether executives have correctly identified and constructed their measures in the three foregoing areas—but they can also help determine future direction. For example, a chemical company created a daily financial statement. Putting income and expense values on every production process helped plant supervisors see where process improvements and capital investments could generate the highest returns. Example:
A semiconductor company that the authors call Electronic Circuits Inc. (ECI) established the goal of becoming customers’ supplier of choice. To track this goal, the company conducted customer surveys, which revealed that each customer had a different definition of what constituted reliable and responsive supply. As a result, ECI discovered that it was not satisfying some customers and overachieving the expectations of others.
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 earnings-per-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.