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Balanced Scorecard – It’s not just the Money

Balanced Scorecard - Kaplan and Norton

Balanced Scorecard - Kaplan and NortonHow can you be sure that your management team is balancing its attention across all the things that matter – rather than focusing solely on one thing: the money? The answer is that what gets measured gets managed. So you need to score yourself on a balanced scorecard.

That’s the insight that Robert Kaplan and David Norton gave us in a stand-out Harvard Business Review article, ‘Putting the Balanced Scorecard to Work‘. The article may date back to 1993, but it’s still one of HBR’s most-read must-read articles.

Continue reading Balanced Scorecard – It’s not just the Money

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Robert Kaplan & David Norton: Balanced Scorecard

Take two electrical engineers. Put one into a management consulting role and the other into academia. Mix them up, and what do you get?

Yes, it is a trick question. Robert Kaplan and David Norton developed a powerful business strategy and performance measurement tool. Indeed, it’s a tool all managers should be aware of and understand: The Balanced Scorecard.

Robert Kaplan & David Norton - Balanced Scorecard
Robert Kaplan & David Norton – Balanced Scorecard

Robert Kaplan

Robert Kaplan was born in 1940 and studied Electrical Engineering at MIT, gaining a BS and then an MS, before moving to Cornell, to take a PhD in Operations research.

He started his academic career directly afterwards, moving to Carnegie Mellon’s Tepper School of Business in 1968. He remained there until 1983, serving as Dean of the school from 1977.

In 1984, Kaplan moved to the Harvard Business School, to take up the chair as Marvin Bower Professor of Leadership Development, which he now holds emeritus.

In 1987, Kaplan, along with William Bruns, first defined Activity Based Costing. It was to become a widely used methodology for gaining control of strategic revenue expenditure in industry. Ironically, it only started to lose ground when a new, more broadly-based approach started to gain popularity.

That approach was the Balanced Scorecard. And this was developed by Kaplan, along with David Norton. They first published their idea in a seminal paper in the Harvard Business Review, in 1992: ‘The Balanced Scorecard—Measures that Drive Performance‘.

David Norton

David Norton was born in 1941. He too studied Electrical Engineering, at Worcester Polytechnic Institute. He moved to the Florida Institute of Technology for an MS in Operations Research, and then to Florida State University for an MBA. He also gained a PhD from Harvard Business School.

Norton’s career was in consultancy, cofounding Nolan Norton & Co in 1975, and serving as president until it was acquired in 1987 by KPMG Peat Marwick. He became a partner, but shortly after the publication of Balanced Scorecard—Measures that Drive Performance‘ in 1992, he founded a new business to promote consulting with the Balanced Scorecard at its heart.

The Balanced Scorecard

We’ve covered the Balanced Scorecard before. But let’s revisit it in some more detail.The idea supposedly came from a conversation David Norton had on a golf course with IBM Executive, John Thompson. Thompson reportedly observed that he needed a scorecard, like the one they used in golf, for running his company.

In a variant metaphor, Kaplan and Norton suggest that it would be an unsafe airplane that had just one gauge in its cockpit. So the idea was born for a scorecard that looks at the business from multiple perspectives. Initially, it is four:

  1. Financial Perspective
  2. Customer Perspective
  3. Internal Business Perspective
  4. Organisational capacity and learning Perspective

Together, the key measures (or KPIs – Key Performance Indicators) under the headings articulate the organisation’s strategic priorities.

Kaplan & Norton - The Balanced Scorecard
Kaplan & Norton – The Balanced Scorecard

The Origins of the Balanced Scorecard

The original idea, however, tracks back to Art Schneiderman in 1987. He went on to work on a research project with Kaplan, and Norton’s firm Nolan Norton. This collaboration led to the publication by Kaplan and Norton in 1992, and their subsequent 1996 book, The Balanced Scorecard: Translating Strategy into Action. It’s now out of print and available only second hand or in digital editions.

One can’t help wondering what happened to Schneiderman – the Pete Best (5th Beetle) of the corporate strategy world. Well, it turns out he’s an independent consultant, and he gives his own history of the first balanced scorecard.

Implementing the Balanced Scorecard

The broad approach to implementing a balanced scorecard is:

  1. Make sure you have a clear vision and strategy
  2. Find the performance categories that best link your vision and strategy to success (Here are some different examples: service standards, thought leadership, marketing activity, performance management, internal morale)
  3. For each perspective, define a small number of objectives that support your vision and strategy
  4. Develop standards or ways to measure progress and build simple systems to monitor and communicate performance against each perspective
  5. Spread the word throughout your organisation that these measures will drive your reward and promotion mechanisms
  6. Monitor performance and compare it with your objectives
  7. Take action to bring performance in line with your objectives

The Legacy of the Balanced Scorecard

As a tool for controlling a business, the balanced scorecard tracks back to Taylorist Scientific Management. However, its flexibility allows managers to monitor and therefore control the measures they choose.

As a result, one of its most interesting descendants is John Elkington’s Triple Bottom Line.

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Business Strategy Tools

The Management Pocketbooks Pocket Correspondence Course

This is part of an extended management course. You can dip into it, or follow the course from the start. If you do that, you may want a course notebook, for the exercises and any notes you want to make.


Over the years, Pocketblog has covered some important business strategy thinkers, so we will start by reviewing what we have.

Good Strategy/Bad Strategy

This is the name of Richard Rumelt’s book and it neatly frames any discussion of business strategy by defining what your outcome needs to look like. Take a look at ‘What makes good business strategy?

The Balanced Scorecard

In one of the all-time classic Harvard Business Review articles, Robert Kaplan and David Norton set out to ensure that our business strategies are balanced across a range of different areas of the business. The tool they introduced is nearly ubiquitous in the upper reaches of the management world, and no manager can get away without at least a passing familiarity with the Balanced Scorecard. Take a look at ’Balance is Everything’.

The McKinsey 7S Model

One of my own favourite tools is also about balance, but this time about ensuring all the elements of your business strategy and planning are all aligned. It was developed by consultants at top US firm, McKinsey: Tom Peters and Robert Waterman. The seven S model reminds us that shared values, style, skills, staff, structure, systems, and strategy must all be consistent with one another. Take a look at ‘On Competition: Internal Forces and the 7-S Model’.

The Awesome Michael Porter

Over the years, three blogs have featured the thinking of business strategy specialist, Michael Porter.

‘On Competition: Five Forces’ briefly introduced two of his principal ideas: the five forces model and his three generic business strategies that flow from them.

‘On Competition, again: Porter’s Five Forces’ took a deeper look at the five forces model.

‘On Competition – The Far End of the Value Chain’ focused on the three generic business strategies and his concept of the value chain. Here, I speculated that some businesses have found a fourth, very successful business strategy.

By the way, a recent entry in the Pocket Correspondence course returned to the idea of the value chain. Take a look at ‘The Value Chain’.

The Boston Consulting Group Matrix

Having finished reviewing the archives, let’s take a look at one business strategy tool. This is designed to help us answer a very simple question:

‘We have a number of products (or services) but limited resources to invest in their development and marketing. Which products (or services) should we focus our investment on?’

The folk at Boston Consulting Group who developed the tool suggested that two considerations are paramount in making our judgements:

  1. What is our market share?
    Do we have a dominant market position with this product/service, or a modest share. This dictates the base from which investment can grow or maintain our position.
  2. What is the growth potential of the market?
    Is this product in a growing, static or declining market? Clearly static and declining markets offer far less opportunity to recoup investments.

The result was a simple matrix that plots these two conditions against one-another and identifies four generic strategies. You can click on the image to enlarge it.

The Boston Consulting Group (BCG) Business Strategy Matrix

The Matrix gives us four strategies, three compelling labels for our products/services and one label that is, frankly, honest but lame.

Stars

Place your biggest investment bets on the products which dominate markets with high growth potential. If you are Samsung, you will be investing highly in mobile telephone products because the market continues to expand and you already have a dominant position.

Dogs

Do not invest – arguably, disinvest – in products which have a small share of a static or declining market. There is not much to win and you are not placed to take much of it.

Cash Cows

What do you do if you are a dominant player in a static or declining market? BCG suggested it is like having invested in a cow: you should look after it and milk it while it is healthy. This is how I read the men’s razor market. If you are one of the big players in your region (Gillette, Wilkinson Sword, Bic, for example, here in the UK), then you have a lot of investment in products and marketing, and a strong, valuable revenue stream. Over investment can gain little, as the market will never expand until men grow two heads or we need to shave more of ourselves. But if you don’t invest, you will lose the benefit of your position to your rivals. So, what do we see? Incremental investment in new – but hardly innovative – products. When I started shaving, two blades was new. Now we are up to five. By the time I no longer need to shave (about thirty years or so, I guess) I predict an eight bladed razor will be common.

Question Marks

What to call these pesky products… Does the label attach to the products or the challenge BCG found in labelling them with a cute title? Set aside that curious linguistic conundrum and we face the most difficult challenge of all. Your market is growing, so there is a big prize for the skilled/lucky investor. But your market position is weak, so you have a low chance of success against bigger rival products. Like many good tools, the BCG matrix does not give you all the answers. But it does bring your choices into stark relief.

Further Reading 

From the Management Pocketbooks series:

  1. The Strategy Pocketbook
  2. Business Planning Pocketbook
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What is Performance Management?

‘Performance Management’ can sound scary to anyone who is new to organisational life.  Indeed, ‘I’m going to manage your performance’ can come across – even from the nicest of managers or supervisors – as just a little bit threatening.  But it shouldn’t be.

In fact; quite the opposite.  When you understand what performance management is, whether you are a staff member or a manager/supervisor, you will also understand just how valuable it is.  As Pam Jones describes it in The Performance Management Pocketbook:

‘Performance management is about getting results.
It is concerned with getting the best from people
and helping them to achieve their potential.’

What could be more benign than that?  Of course, these are excellent words, but how does it all happen?

Get out your Toolbox

Toolbox

I rather agree with Pam that the basis of any performance management approach is the skills of the manager.  I also really like her toolbox analogy, so nicely drawn in the book by Phil Hailstone.  Pam identifies and describes a lot of tools:

Delegating *
Coaching *
Feedback *
Dealing with poor performance
Motivating *
Empowering *
Team-building *
Performance reviews

This is such a core set of managerial skills that it is no surprise to find most of them (starred) addressed by their own Management Pocketbook.  What Pam does is bring them all together into a consistent framework.

Let’s take a look in a little more detail at the remaining two.  This week, at Performance Reviews, and next week, we’ll focus on dealing with poor performance.

Performance Reviews

To be at their most effective, performance reviews need to be a part of everyday management, rather than set piece events once a month or – heavens forfend – once a year.

However, you will need milestone performance reviews at key career points and stages in the business cycle, like annually or semi-annually.  The formal reviews, at these key points, need to be carried out with greater preparation and formality, but the process remains the same, for anything from a quick five-minute ‘catch-up’ review to a formally documented annual review.

Pam’s Performance Review Process is Simple,
yet Comprehensive.

Performance Review

  1. Preparation
    Do your research.  Observe performance carefully, gather data and evidence, review against performance objectives from the last review.  Schedule the review meeting and set aside enough time, in a suitable place.
  2. The Interview
    … or, less formally, the meeting, or even the chat.  Discuss performance  since the last meeting and agree performance requirements and support process to follow.  Pam sets out a lot of good tips – especially around objective-setting and the use of balanced scorecards to get  a good mix of objectives.
  3. Ongoing Review
    This is where Pam builds in a lot of the skills I listed above, like feedback, motivation and coaching.  It is the step where Performance Management can get a bad name, if, as a manager, all I do is tell you you need to do better at step 2, then abandon you without the right support and ongoing review.  Then, all I am doing, is setting you up to fail when the next cycle reaches the interview.

So, here’s the deal

Pretty simple, yes: but not necessarily easy.  Good performance management requires a partnership and hard work from both parties.  But the rewards are great.

Some Management Pocketbooks to help you with your Performance Management

The Performance Management Pocketbook, by Pam Jones

The Performance Management Pocketbook is supported by:

More Pocketblogs about Performance Management.

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Balance is everything

So much of western thinking divides the world into four.  You only have to look at management models to see this at its extremes: psychometric profiling, such as DISC®, personality types such as Merrill-Reid or Lifo®, and most common of all, the innumerable “four box models”.  These all have something valuable to tell us, but are all hampered by two features: they allow only four classes in an infinitely varying world and they have to go to great lengths to then assure users that  some admixture of classes is not only allowed, but encouraged.

This is South Korea’s national flag.  It too represents an ancient division of the world into four components; in this case, the four major tri-grams of the I Ching stand for (clockwise from top left): heaven, water, earth and fire.

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One model stands out by putting the balance to the forefront and making its four categories the secondary feature of the model.  This is Robert Kaplan and David Norton’s Balanced Scorecard.

Balanced Business Scorecard

In one of Harvard Business Review’s most read articles (it appears in their compilation of ten must-read articles), Kaplan and Norton set out how a business can achieve success by focusing on four different areas; not just on financial performance.

The principles at stake here are simple: if you build a great business, financial success will follow, focus only on the financial metrics and you cannot build a great long-term business, and if you are going to focus more widely, you need to develop measures of success that are as rugged as the well-established financial measured.

It takes me back to my old favourite adage: “what gets measured gets managed” – see the earlier pocketblog: “Are targets a waste of time?

Kaplan and Norton’s four Perspectives

The original article (Harvard Business Review Sept-Oct 1993) looked at a case study of engineering company, Rockwater, whose four perspectives were: financial, internal processes, innovation & learning, and customer.  These have become crystallised to the extent that many businesses take these categories off the shelf.

BalancedScorecard

However, whilst they are valuable for many businesses, the principle of selecting four perspectives that can dictate the future success of your enterprise is far more general than this.  Whether you run a business, a public service, a charity or a small group of people in any sphere of life, the fundamental methodology holds: find your key perspectives and develop the measures that you value most.

A Balanced Scorecard Methodology

Seven steps are all it takes… and a lot of careful thought and involvement of colleagues.  Skipping those tough parts, here it is in a nutshell.

  1. Make sure you have a clear vision and strategy
  2. Find the performance categories that best link your vision and strategy to success (Here are some different examples: service standards, thought leadership, marketing activity, performance management, internal morale)
  3. For each perspective, define a small number of objectives that support your vision and strategy
  4. Develop standards or ways to measure progress and build simple systems to monitor and communicate performance against each perspective
  5. Spread the word throughout your organisation that these measures will drive your reward and promotion mechanisms
  6. Monitor performance and compare it with your objectives
  7. Take action to bring performance in line with your objectives

Some Management Pocketbooks you might like

The balanced scorecard can be used at several levels from strategy to day-to-day operations.

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