Balanced Scorecard

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© 2001 American Accounting Association
Accounting Horizons
Vol. 15 No. 2
June 2001
pp. 147–160

COMMENTARY

Transforming the Balanced Scorecard
from Performance Measurement to
Strategic Management: Part II
Robert S. Kaplan and David P. Norton
Robert S. Kaplan is a Professor at Harvard University and David P. Norton is founder and president of the Balanced Scorecard Collaborative in Lincoln, Massachusetts. In a previous paper (Kaplan and Norton 2001b), we described the role for strategy maps and Balanced Scorecards to develop performance objectives and measures linked to strategy. With this paper, we show how organizations use their scorecards to align key management processes and systems to the strategy. We also discuss the relationship of the Balanced Scorecard (BSC) to other financial and cost measurement initiatives, such as shareholder value metrics and activity-based costing, and quality programs. We conclude with suggestions about opportunities for additional research on measurement and management systems.

THE FIVE PRINCIPLES OF A STRATEGY-FOCUSED ORGANIZATION
When asked to describe how the Balanced Scorecard helped them achieve breakthrough performance, executives of adopting organizations continually referred to two words: alignment and focus (Kaplan and Norton 2001a, Chapter 1). Although each organization achieved strategic alignment and focus in different ways, at different paces and in different sequences, each eventually used a common set of five principles, which we refer to as the Principles of a Strategy-Focused Organization, portrayed in Figure 1. Principle #1: Translate the Strategy to Operational Terms

Organizations translate their strategy into the logical architecture of a strategy map and Balanced Scorecard to specify in detail the critical elements for their growth strategies (Kaplan and Norton 2001b). These create a common and understandable point of reference for all organizational units and employees. Principle #2: Align the Organization to the Strategy

Organizations consist of numerous sectors, business units, and specialized departments, each with its own operations and often its own strategy. Functional departments, such as finance, manufacturing, marketing, sales, engineering, and purchasing, have

Source: Kaplan and Norton (2001a)

FIGURE 1
The Principles of a Strategy-Focused Organization

148
Accounting Horizons/June 2001

Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part II

149

their own bodies of knowledge, language, and culture. Functional silos arise and become a major barrier to strategy implementation since most organizations have great difficulty communicating and coordinating across these specialty functions. For organizational performance to be more than the sum of its parts, individual strategies must be linked and integrated. The corporate role defines the linkages expected to create synergy and ensures that the linkages actually occur. Figure 2 shows the linkages at the Mobil North American Marketing and Refining division (NAM&R). The high-level strategic themes in #1 guide the development of the Balanced Scorecards in the business units in #2, which are either geographic regions or product lines, such as lubricants. Each unit formulates a strategy appropriate for its target market in light of the specific circumstances it faces—competitors, market opportunities, and critical processes—but that is consistent with the themes and priorities of NAM&R. The measures at the individual business-unit levels do not have to add to a divisional measure, unlike financial measures that aggregate easily from sub-units to departments to higher organizational levels. The business-unit managers choose local measures that influence but are not necessarily identical to the divisional scorecard measures.

Beyond aligning the business units, strategy-focused organizations must align their staff functions and shared service...
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