A well-designed balanced scorecard has several features:
IT TELLS THE STORY OF A COMPANY’S STRATEGY, ARTICULATING A SEQUENCE OF CAUSE-AND-EFFECT RELATIONSHIPS—THE LINKS BETWEEN THE VARIOUS STRATEGIC OBJECTIVES THAT OUTLINE THE IMPLEMENTATION OF THE ORGANIZATION’S STRATEGY. In for-profit companies, each measure in the scorecard is part of a cause-and-effect chain leading to financial outcomes. Not-for-profit organizations, such as the World Bank and Teach for America, design the cause-and-effect chain to achieve their strategic service objectives—for example, reducing the number of people in poverty or raising high school graduation rates.
IT HELPS TO COMMUNICATE THE STRATEGY TO ALL MEMBERS OF THE ORGANIZATION BY TRANSLATING THE STRATEGY INTO A COHERENT AND LINKED SET OF UNDERSTANDABLE AND MEASURABLE OPERATIONAL TARGETS. Guided by the scorecard, managers and employees take actions and make decisions to achieve the company’s strategy. Companies that have distinct strategic business units (SBUs)—such as consumer products and pharmaceuticals at Johnson & Johnson—develop their balanced scorecards at the SBU level. Each SBU has its own unique strategy and implementation goals, so building separate scorecards allows managers of each SBU to choose measures that help implement its distinctive strategy.
IN FOR-PROFIT COMPANIES, THE BALANCED SCORECARD MOTIVATES MANAGERS TO TAKE ACTIONS THAT EVENTUALLY RESULT IN IMPROVEMENTS IN FINANCIAL PERFORMANCE. Managers sometimes tend to focus too much on quality and customer satisfaction as ends in themselves. For example, Xerox discovered that higher customer satisfaction, through service guarantees, did not increase customer loyalty and financial returns because customers also wanted product innovations, such as high-speed color printing, that met their needs. Some companies use statistical methods, such as regression analysis, to test the anticipated cause-and-effect relationships among nonfinancial measures and financial performance. The data for this analysis can come from either time-series data (collected over time) or cross-sectional data (collected, for example, across multiple stores of a retail chain). In the Chipset example, improvements in nonfinancial factors have, in fact, already led to improvements in financial factors.
IT FOCUSES ATTENTION ON ONLY THE MOST CRITICAL MEASURES. Chipset’s scorecard, for example, has 16 measures, between three and six measures for each perspective. Limiting the number of measures focuses managers’ attention on those that most affect strategy implementation. Using too many measures makes it difficult for managers to process relevant information.
IT HIGHLIGHTS LESS-THAN-OPTIMAL TRADEOFFS THAT MANAGERS MAY MAKE WHEN THEY FAIL TO CONSIDER OPERATIONAL AND FINANCIAL MEASURES TOGETHER. Consider, for example, a company that follows an innovation and product differentiation strategy and so invests in R&D. The company could achieve superior short-run financial performance by reducing R&D spending. A good balanced scorecard would signal that the short-run financial performance has been achieved by taking actions that hurt future financial performance because a leading indicator of future performance, R&D spending and R&D output, has declined.