Balanced measures

» THE HIGH-PERFORMANCE ORGANIZATION

1992

BEST OF HBR

By the 1980s, many executives were convinced that traditional measures of

financial performance didn't let them manage effectively and wanted to re-

place them with operational measures. Arguing that executives should track

both financial and operational metrics, Robert Kaplan and David Norton

suggested four sets of parameters.

First, how do customers see your company? Find out by measuring lead times,

quality, performance and service, and costs. Second, what must your company

excel at? Determine the processes and competencies that are most critical, and

specify measures, such as cycle time, quality, employee skills, and productivity,

to track them. Third, can your company continue to improve and create value?

Monitor your ability to launch new products, create more value for customers,

and improve operating efficiencies. Fourth, how has your company done by its

shareholders? Measure cash flow, quarterly sales growth, operating income by

division, and increased market share by segment and return on equity.

The balanced scorecard lets executives see whether they have improved in

one area at the expense of another. Knowing that, say the authors, will protect

companies from posting suboptimal performance.

The Balanced Scorecard:Measures That Drive Performanceby Robert S. Kaplan and David P. Norton

The balanced scorecardtracks all the importantelements of a company'sstrategy-from continuousimprovement andpartnerships to teamworkand global scale. And thatallows companies to excel.

^ ^ "ha t you measure is what youget Senk>r executives understand thattheii (rtganization's measurement sys-tem strongly affects the behavior ofmanagers and employees. Executivesalso understand that traditional finan-cial accounting measures like return oninvestment and earnings per share cangive misleading signals for continu-ous improvement and innovation - ac-tivities today's competitive environ-ment demands. The traditional finan-cial performance measures workedwell for the industrial era, but they areout of step with the skills and compe-tencies companies are trying to mastertoday.

As managers and academic research-ers have tried to remedy the inadequa-

cies of current performance measure-ment systems, some have focused onmaking financial measures more rele-vant. Others have said, "Forget the fi-nancial measures; improve operationalmeasures like cycle time and defectrates. The financial results will follow."But managers should not have tochoose between financial and opera-tional measures. In observing and work-ing with many companies, we havefound that senior executives do not relyon one set of measures to the exclusionof the other. They realize that no singlemeasure can provide a clear perfor-mance target or focus attention on thecritical areas ofthe business. Managerswant a balanced presentation of bothfinancial and operational measures.

172 HARVARD BUSINESS REVIEW


During a yearlong research projectwith 12 companies at the leading edge ofperformance measurement, we deviseda "balanced scorecard"- a set of mea-sures that gives top managers a fast butcomprehensive view ofthe business. Thebalanced scorecard includes financialmeasures that tell the results of actionsalready taken. And it complements thefinancial measures with operationalmeasures on customer satisfaction, in-ternal processes, and the organization'sinnovation and improvement activi-ties-operational measures that are thedrivers of future financial performance.

Think of the balanced scorecard asthe dials and indicators in an airplanecockpit. For the complex task of navi-gating and flying a plane, pilots need de-tailed information about many aspectsofthe fiight. They need information onfuel, airspeed, altitude, bearing, desti-nation, and other indicators that sum-marize the current and predicted envi-ronment. Reliance on one instrumentcan be fatal. Similarly, the complexityof managing an organization today re-quires that managers be able to viewperformance in several areas at once.

The balanced scorecard allows man-agers to look at the business from fourimportant perspectives. (See the exhibit"The Balanced Scorecard Links Perfor-mance Measures.") It provides answersto four basic questions:• How do customers see us? (customerperspective)

• What must we excel at? (internal busi-ness perspective)

• Can we continue to improve and cre-ate value? (Innovation and learningperspective)

• How do we look to shareholders?(financial perspective)While giving senior managers infor-

mation from four different perspec-tives, the balanced scorecard minimizesinfonnation overload by limiting thenumber of measures used. Companies

The Balanced ScorecardLinks Performance Measures

How docustomerssee us?

Financli l Panpectlv*

COALS MEASURES

How do we lookto shareholders?

What mustwe excel at?

Cuttomtr PtnpMtlv*

COALS MEASURES

<r

Innovation and LearningPenpectlve

"COALS

Internal Bu f lneuPenpectlve

COALS MEASURES

Cari we continueto improve andcreate value?

rarely suffer from having too few mea-sures. More commonly, they keep addingnew measures whenever an employeeor a consultant makes a worthwhilesuggestion. One manager described theproliferation of new measures at hiscompany as its "kill another tree pro-gram." The balanced scorecard forcesmanagers to focus on the handful ofmeasures that are most critical.

Several companies have alreadyadopted the balanced scorecard. Theirearly experiences using the scorecardhave demonstrated that it meets severalmanagerial needs. First, the scorecardbrings together, in a single managementreport, many ofthe seemingly disparateelements of a company's competitiveagenda: becoming customer oriented,shortening response time, improvingquality, emphasizing teamwork, re-ducing new product launch times, andmanaging for the long term.

Robert S. Kaplan is the Marvin Bower Professor of Leadership Development at Har-vard Business School in Boston. He is a cofounder of the Balanced Scorecard Collab-orative. David P. Norton is president and a cofounder ofthe Balanced Scorecard Col-laborative, a Palladium company. Kaplan and Norton are the coauthors of six HBRarticles and four books on the Balanced Scorecard.

Second, the scorecard guards againstsuboptimization. By forcing seniormanagers to consider all the importantoperational measures together, the bal-anced scorecard lets them see whetherimprovement in one area may havebeen achieved at the expense of an-other. Even the best objective can beachieved badly. Companies can reducetime to market, for example, in twovery different ways: by improving themanagement of new product intro-ductions or by releasing only productsthat are incrementally different fromexisting products. Spending on setupscan be cut either by reducing setuptimes or by increasing batch sizes. Sim-ilarly, production output and first-passyields can rise, but the increases maybe due to a shift in the product mix tomore standard, easy-to-produce butlower-margin products.

We will illustrate how companiescan create their own balanced scorecardwith the experiences of one semiconduc-tor company-let's call it Electronic Cir-cuits Incorporated. ECI saw the scorecardas a way to clarify, simplify, and then op-erationalize the vision at the top ofthe or-


The Balanced Scorecard • BEST OF HBR

ganization. The ECl scorecard was de-signed to focus the attention of its top ex-ecutives on a short list of critical indica-tors of current and future performance.

Customer Perspective:How Do Customers See Us?Many companies today have a corpo-rate mission that focuses on the cus-tomer. "To be number one in deliver-ing value to customers" is a typicalmission statement. How a company isperforming from its customers' per-spective has become, therefore, a prior-ity for top management. The balancedscorecard demands that managers trans-late their general mission statementon customer service into specific mea-sures that refiect the factors that reallymatter to customers.

Customers' concerns tend to fall intofour categories: time, quality, perfor-mance and service, and cost. Lead timemeasures the time required for thecompany to meet its customers' needs.For existing products, lead time can bemeasured from the time the companyreceives an order to the time it actu-ally delivers the product or service tothe customer. For new products, leadtime represents the time to market, orhow long it takes to bring a new prod-uct from the product definition stageto the start of shipments. Quality mea-sures the defect level of incoming prod-

ucts as perceived and measured by thecustomer. Quality could also measureon-time delivery-the accuracy oftheorganization's delivery forecasts. Thecombination of performance and ser-vice measures how the company's prod-ucts or services contribute to creatingvalue for its customers.

To put the balanced scorecard towork, companies should articulate goalsfor time, quality, and performance andservice and then translate these goals

To track the specific goal of providinga continuous stream of attractive solu-tions, ECl measured the percentage ofsales from new products and the per-centage of sales from proprietary prod-ucts. That information was availableinternally, but certain other measuresforced the company to get data fromoutside. To assess whether the com-pany was achieving its goal of providingreliable, responsive supply, ECl turnedto its customers. When it found that each

Traditional financial performance measuresworked well for the industrial era, but they are

out of step with the skills and competenciescompanies are trying to master today.

into specific measures. Senior manag-ers at ECl, for example, establishedgeneral goals for customer perfor-mance: Get standard products to mar-ket sooner, improve customers' time tomarket, become customers' supplier ofchoice through partnerships with them,and develop innovative products tai-lored to customer needs. The managerstranslated these general goals into fourspecific goals and identified an appro-priate measure for each. (See the exhibit"ECl's Balanced Business Scorecard.")

customer defined "reliable, responsivesupply" differently, ECl created a data-base ofthe factors as defined by eachof its major customers. The shift to ex-ternal measures of performance withcustomers led EC! to redefine "on time"so it matched customers' expectations.Some customers defined "on time"as any shipment that arrived withinfive days of scheduled delivery; othersused a nine-day window. ECl itself hadbeen using a seven-day window, whichmeant that it wasn't satisfying some of

JULY-AUGUST 2005 175


its customers and overachieving forothers. ECI also asked its top ten cus-tomers to rank the company as a sup-plier overall.

Depending on customers' evaluationsto define some of a company's perfor-mance measures forces that company toview its performance through custom-ers' eyes. Some companies hire third par-ties to perform anonymous customersurveys, resulting in a customer-drivenreport card. The J.D. Power quality sur-vey, for example, has become the stan-dard of performance for the automobileindustry, while the U.S. Department ofTransportation's measurement of on-time arrivals and lost baggage providesextemal standards for airlines. Bench-marking procedures are yet anothertechnique companies use to comparetheir performance against competi-tors' best practices. Many companieshave introduced "best of breed" com-parison programs: The company looksto one industry to find, say, the best dis-tribution system, to another industryfor the lowest cost payroll process, andthen forms a composite of those bestpractices to set objectives for its ownperformance.

in addition to measures of time, qual-ity, and performance and service, com-panies must remain sensitive to the costof their products. But customers seeprice as only one component ofthe costthey incur when dealing with their sup-pliers. Other supplier-driven costs rangefrom ordering, scheduling delivery,and paying for the materials; to receiv-ing, inspecting, handling, and storingthe materials; to the scrapping, rework-ing, and obsolescence caused by the ma-terials; and schedule disruptions (ex-pediting and value of lost output) fromincorrect deliveries. An excellent sup-plier may charge a higher unit pricefor products than other vendors butnonetheless be a lower cost supplierbecause it can deliver defect-free prod-ucts in exactly the right quantities atexactly the right time directly to the pro-duction process and can minimize,through electronic data interchange,the administrative hassles of ordering,invoicing, and paying for materials.

Internal BusinessPerspective: What MustWe Excel At?Customer-based measures are impor-tant, but they must be translated intomeasures of what the company mustdo internally to meet its customers' ex-pectations. After all, excellent customerperformance derives from processes,decisions, and actions occurring through-out an organization. Managers need tofocus on those critical internal opera-tions that enable them to satisfy cus-tomer needs. The second part ofthe bal-anced scorecard gives managers thatinternal perspective.

The internal measures for the balancedscorecard should stem from the busi-ness processes that have the greatestimpact on customer satisfaction - fac-tors that affect cycle time, quality, em-ployee skills, and productivity, for ex-ample. Companies should also attemptto identify and measure their com-pany's core competencies, the criticaltechnologies needed to ensure contin-ued market leadership. Companiesshould decide what processes and com-petencies they must excel at and specifymeasures for each.

Managers at ECI determined thatsubmicron technology capability wascritical to its market position. They alsodecided that they had to focus on man-ufacturing excellence, design produc-tivity, and new product introduction.The company developed operationalmeasures for each of these four inter-nal business goals.

To achieve goals on cycle time, qual-ity, productivity, and cost, managersmust devise measures that are influ-enced by employees' actions. Sincemuch of the action takes place at thedepartment and workstation levels,managers need to decompose overallcycle time, quality, product, and costmeasures to local levels. That way, themeasures link top management's judg-ment about key internal processes andcompetencies to the actions taken byindividualsthat affect overall corporateobjectives. This linkage ensures thatemployees at lower levels in the organi-zation have clear targets for actions,decisions, and improvement activitiesthat will contribute to the company'soverall mission.

Information systems play an invalu-able role in helping managers disaggre-

Other Measures for theCustomer's Perspective

> A computer manufacturer wanted to be the competitive leaderin customer satisfaction, so it measured competitive rankings. Thecompany gottherankingsthrough an outside organization hired totalk directly with customers. The company also wanted to do a betterjob of solving customers' problems by creating more partnershipswith other suppliers. It measured the percentage of revenue fromthird-party relationships.

> The customers of a producerof very expensive medical equipmentdemanded high reliability. The company developed two customer-based metrics for its operations: equipment up-time percentage andmean-time response to a service call.

> A semiconductor manufacturer asked each major customer to rankthe company against comparable suppliers on efforts to improvequality, delivery time, and price performance. When the chip makerdiscovered it ranked in the middle, managers made improvementsthat moved the company tothe top of customers'rankings.



Other Measures for theInternal Business Perspective

> One company recognized that the success of its total quality

management (TQM) program depended on all its employees

internalizing and acting on the program's messages. The company

performed a monthly survey of 600 randomly selected employees to

determine if they were aware of TQM, had changed their behavior

because of it, believed the outcome was favorable, or had become

missionaries to others.

> Hewlett-Packard uses breakeven time (BET) to measure the

effectiveness of its product development cycle. BET measures the time

required for all the accumulated expenses in the product and process

development cycle (including equipment acquisition) to be recovered

by the product's contribution margin (the selling price less

manufacturing, delivery, and selling expenses).

> A major office products manufacturer, wanting to respond rapidly to

changes in the marketplace, set out to reduce cycie time by 50%. Lower

leveis of the organization aimed to radically cut the times required to

process customer orders, order and receive materials from suppliers,

move materials and products between plants, make and assemble

products, and deliver products to customers.

gate the summary measures. When anunexpected signal appears on the baJ-anced scorecard, executives can querytheir information system to find the

management meetings, and the mea-sures have yet to be linked to measuresfor managers and employees at lowerlevels ofthe oi^anization. The company

cesses and have the ability to introduceentirely new products with expandedcapabilities.

A company's ability to innovate, im-prove, and learn ties directly to the com-pany's value. That is, only through theability to launch new products, createmore value for customers, and improveoperating efficiencies continually cana company penetrate new markets andincrease revenues and margins - inshort, grow and thereby increase share-holder value.

ECI's innovation measures focus onthe company's ability to develop andintroduce standard products rapidly,products that the company expects willform the bulk of its future sales. Itsmanufacturing improvement measurefocuses on new products; the goal is toachieve stability in the manufacturingof new products rather than to improvemanufacturing of existing products.Like many other companies, ECI usesthe percentage of sales from new prod-ucts as one of its innovation and im-provement measures. If sales from newproducts are trending downward, man-agers can explore whether problemshave arisen in new product design ornew product introduction.

As companies have applied the balanced scorecard, we havebegun to recognize that the scorecard represents a fundamental change

in the underlying assumptions about performance measurement.

source of the trouble. If the aggregatemeasure for on-time delivery is poor,for example, executives with a good in-formation system can quickly look be-hind the aggregate measure until theycan identify late deliveries, day by day,by a particular plant to an individualcustomer.

If the information system is unre-sponsive, however, it can be the Achilles'heel of performance measurement.Managers at ECI are currently limitedby the absence of such an operationalinfonnation system. Their greatest con-cern is that the scorecard infonnationis not timely; reports are generally aweek behind the company's routine

is in the process of developing a moreresponsive information system to elim-inate this constraint.

Innovation and LearningPerspective: Can WeContinue to Improveand Create Value?The customer-based and internal busi-ness process measures on the balancedscorecard identify the parameters thatthe company considers most impor-tant for competitive success. But the tar-gets for success keep changing. Intenseglobal competition requires that com-panies make continual improvementsto their existing products and pro-

In addition to measures on productand process innovation, some compa-nies overlay specific improvement goalsfor their existing processes. For exam-ple. Analog Devices, a Massachusetts-based manufacturer of specializedsemiconductors, expects managers toimprove their customer and internalbusiness process perfonnance continu-ously. The company estimates specificrates of improvement for on-time deliv-ery, cycle time, defect rate, and yield.

Other companies, like Milliken &Company, require that managers makeimprovements within a specific timeperiod. Milliken did not want its "asso-ciates" (Milliken's word for employees)



to rest on their laurels after winning theBaldrige Award. Chairman and CEORoger Milliken asked each plant to im-plement a "ten four" improvement pro-gram: Measures of process defects,missed deliveries, and scrap were to bereduced by a factor of ten over the nextfour years. These targets emphasize therole for continuous improvement incustomer satisfaction and internal busi-ness processes.

Financial Perspective:How Do We Lookto Shareholders?Financial performance measures indi-cate whether the company's strategy,implementation, and execution are con-tributing to bottom-line improvement.

Typical financial goals have to do withprofitability, growth, and shareholdervalue. ECl stated its financial goalssimply: to survive, to succeed, and toprosper. Survival was measured by cashfiow, success by quarterly sales growthand operating income by division, andprosperity by increased market shareby segment and return on equity.

But given today's business environ-ment, should senior managers evenlook at the business from a financialperspective? Should they pay attentionto short-term financial measures likequarterly sales and operating income?Many have criticized financial measuresbecause of their well-documented in-adequacies, their backward-lookingfocus, and their inability to refiect con-

ECl's Balanced Business Scorecard

Financial Perspective

COALS

Survive

Succeed

Prosper

MEASURES

Cash flow

Quarterly salesgrowth and operatingincome by division

Increased marketshare and ROE

Customer Perspective

COALS

New products

Responsivesupply

Preferredsuppliers

Customerpartnerships

MEASURES

Percentage of sales fromnew products

Percentage of sales fromproprietary products

On-time delivery(defined by customer)

Share of key accounts*purchases

Ranking by key accounts

Number of cooperativeengineering efforts

Internal BusinessPerspective

COALS

Technologycapability

Manufacturingexcellence

Designproductivity

New productintroduction

MEASURES

Manufacturinggeometry versuscompetition

Cycle time, unit cost,yield

Silicon efficiency,engineering efficiency

Actual introductionschedule versus plan

Innovation and LearningPerspective

COALS

Technologyleadership

Manufacturinglearning

Product focus

Time tomarket

MEASURES

Time to develop nextgeneration

Process time to maturi^

Percentage of productsthat equal 80% of sales

New product intro-duction versus compe-tition

temporary value-creating actions. Share-holder value analysis (SVA), which fore-casts future cash flows and discountsthem back to a rough estimate of cur-rent value, is an attempt to make finan-cial analysis more forward-looking. ButSVA still is based on cash fiow ratherthan on the activities and processes thatdrive cash fiow.

Some critics go much further in theirindictment of financial measures. Theyargue that the terms of competitionhave changed and that traditional fi-nancial measures do not improve cus-tomer satisfaction, quality, cycle time,and employee motivation. In their view,financial performance is the result ofoperational actions, and financial suc-cess should be the logical consequenceof doing the fundamentals well. Inother words, companies should stopnavigating by financial measures. Bymaking fundamental improvements intheir operations, the financial numberswill take care of themselves, the argu-ment goes.

Assertions that financial measuresare unnecessary are incorrect for at leasttwo reasons. A well-designed financial-control system can actually enhancerather than inhibit an organization'stotal quality management program.(See the sidebar "How One CompanyUsed a Daily Financial Report to Im-prove Quality.") More important, how-ever, the alleged linkage between im-proved operating performance andfinancial success is actually quite tenu-ous and uncertain. Let us demonstraterather than argue this point.

During the three-year period be-tween 1987 and 1990, a N YSE electronicscompany made an order-ofmagnitudeimprovement in quality an on-timedelivery performance. The outgoingdefect rate dropped from 500 parts permillion to 50, on-time delivery im-proved from 70% to 96%, and yieldjumped from 26% to 51%- E>id thesebreakthrough improvements in qual-ity, productivity, and customer serviceprovide substantial benefits to the com-pany? Unfortunately not. During thesame three-year period, the company'sfinancial results showed little improve-



ment, and its stock price plummeted toone-third of its July 1987 value. The con-siderable improvements in manufac-turing capabilities had not been trans-lated into increased profitability. Slowreleases of new products and a failureto expand marketing to new and per-haps more demanding customers pre-vented the company from realizing thebenefits of its manufacturing achieve-ments. The operational achievementswere real, but the company had failed tocapitalize on them.

The disparity between improvedoperational performance and disap-pointing financial measures createsfrustration for senior executives. Thisfrustration is often vented at namelessWall Street analysts who allegedly can-not see past quarterly blips in financialperformance to the underlying long-term values these executives sincerelybelieve they are creating in their orga-nizations. But the hard truth is that ifimproved performance fails to be re-flected in the bottom line, executivesshould reexamine the basic assump-tions of their strategy and mission. Notall long-term strategies are profitablestrategies.

Measures of customer satisfaction,internal business performance, and in-novation and improvement are derivedfrom the company's particular view ofthe world and its perspective on key suc-cess factors. But that view is not neces-sarily correct. Even an excellent set ofbalanced scorecard measures does notguarantee a winning strategy. The bal-anced scorecard can only translate acompany's strategy into specific mea-surable objectives. A failure to convertimproved operational performance, asmeasured in the scorecard, into im-proved financial performance shouldsend executives back to their drawingboards to rethink the company's strat-egy or its implementation plans.

As one example, disappointing fi-nancial measures sometimes occur be-cause companies don't follow up theiroperational improvements with an-other round of actions. Quality andcycle-time improvements can createexcess capacity. Managers should be

How One Company Used a DailyFinancial Report to Improve Quality

In the 1980s, a chemicals company became committed to a total qualitymanagement program and began to make extensive measurementsof employee participation, statistical process control, and key quality

indicators. Using computerized control and remote data entry systems,the plant monitored more than 30,000 observations of its productionprocesses every four hours. The department managers and operatingpersonnel who now had access to massive amounts of real-time opera-tional data found their monthly financial reports to be irrelevant.

But one enterprising department manager saw things differently. Hecreated a daily income statement Each day, he estimated the value oftheoutput from the production process using market prices and subtractedthe expenses of raw materials, energy, and capital consumed in the pro-duction process. Toapproximate the cost of producing outnaf-conformanceproduct, he cut the revenues from off-spec output by 50% to 100%.

The daily financial report gave operators powerful feedback and moti-vation and guided their quality and productivity efforts. The departmenthead understood that it is not always possible to improve quality, reduceenergy consumption, and increase throughput simultaneously; trade-offsare usually necessary. He wanted the daily financial statement to guidethose trade-offs. The difference between the input consumed and the out-put produced indicated the success or failure ofthe employees'efforts onthe previous day The operators were empowered to make decisions thatmight improve quality, increase productivi^, and reduce consumption ofenergy and materials.

That feedback and empowerment had visible results. When, for exam-ple, a hydrogen compressor failed, a supervisor on the midnight shiftsent an emergency repair crew into action. Previously, such a failure of anoncritical component would have been reported in the shift log, wherethe department manager arriving for work the following morning wouldhave to discover it. The midnight shift supervisor knew the cost of losingthe hydrogen gas and made the decision that the cost of expediting therepairs would be repaid several times over by the output produced byhaving the compressor back on line before morning.

The department proceeded to set quality and output records. Overtime, the department manager became concerned that employees wouldlose interest in continually improving operations. He tightened the pa-rameters for in-spec production and reset the prices to reflect a 25% pre-mium for output containing only negligible fractions of impurities. Theoperators continued to improve the production process.

Thesuccessof the daily financial report hinged on the manager's abil-ity to establish a financial penalty for what had previously been an intan-gible variable: the quality of output. With this innovation, it was easy tosee where process improvements and capital investments could generatethe highest returns.

Source: Texas Eastman Company," Robert S. Kaplan, HarvanJ Business School case number



prepared to either put the excess ca-pacity to work or else get rid of it. Theexcess capacity must be either used byboosting revenues or eliminated by re-ducing expenses if operational improve-ments are to be brought down to thebottom line.

As companies improve their qualityand response time, they eliminate the

modest increases in operating expenses.If marketing and sales and R&D do notgenerate the increased volume, the op-erating improvements will stand asexcess capacity, redundancy, and un-tapped capabilities. Periodic financialstatements remind executives that im-proved quality, response time, produc-tivity, or new products benefit the com-

The balanced scorecard is well suitedto the kind of organization

many companies are trying to become.The scorecard puts strategy and vision,

not control, at the center.

need to build, inspect, and rework out-of-conformance products or to resched-ule and expedite delayed orders. Elim-inating these tasks means that some ofthe people who perform them are nolonger needed. Companies are under-standably reluctant to lay off employ-ees, especially since the employeesmay have been the source ofthe ideasthat produced the higher quality andreduced cycle time. Layoffs are a poor re-ward for past improvement and candamage the morale of remaining work-ers, curtailing further improvement.But companies will not realize all thefinancial benefits of their improvementsuntil their employees and facilities areworking to capacity-or the companiesconfront the pain of downsizing to elim-inate the expenses ofthe newly createdexcess capacity.

If executives fully understood theconsequences of their quality and cycle-time improvement programs.they mightbe more aggressive about using thenewly created capacity. To capitalizeon this self-created new capacity, how-ever, companies must expand sales toexisting customers, market existingproducts to entirely new customers(who are now accessible because oftheimproved quality and delivery perfor-mance), and increase the fiow of newproducts to the market. These actionscan generate added revenues with only

pany only when they are translated intoimproved sales and market share, re-duced operating expenses, or higherasset turnover.

Ideally, companies should specifyhow improvements in quality, cycletime, quoted lead times, delivery, andnew product introduction will lead tohigher market share, operating mar-gins, and asset turnover or to reducedoperating expenses. The challenge is tolearn how to make such explicit link-age between operations and finance.Exploring the complex dynamics willprobably require simulation and costmodeling.

Measures That MoveCompanies ForwardAs companies have applied the bal-anced scorecard, we have begun to rec-ognize that the scorecard represents afundamental change in the underlyingassumptions about performance mea-surement As the controllers and financevice presidents involved in the researchproject took the concept back to theirorganizations, the project participantsfound that they were not able to imple-ment the balanced scorecard withoutthe involvement ofthe senior managerswho had the most complete picture ofthe company's vision and priorities.This was revealing, because most exist-ing performance measurement systems

have been designed and overseen by fi-nancial experts. Rarely do controllersneed to have senior managers so heav-ily involved.

Probably because traditional mea-surement systems have sprung from thefinance function, the systems have acontrol bias. That is, traditional perfor-mance measurement systems specifythe particular actions they want em-ployees to take and then measure to seewhether the empioyees have in facttaken those actions. In that way,the sys-tems try to control behavior. Such mea-surement systems fit with the engineer-ing mentality ofthe industrial age.

The balanced scorecard, on the otherhand, is well suited to the kind of orga-nization many companies are trying tobecome. The scorecard puts strategy andvision, not control, at the center. It es-tablishes goals but assumes that peoplewill adopt whatever behaviors and takewhatever actions are necessary to arriveat those goals. The measures are de-signed to pull people toward the over-all vision. Senior managers may knowwhat the end result should be, but theycannot tell employees exactly how toachieve that result, if only because theconditions in which employees op)erateare constantly changing.

This new approach to performancemeasurement is consistent with the ini-tiatives under way in many companies:cross-functional integration, customer-supplier partnerships, global scale,continuous improvement, and teamrather than individual accountability.By combining the financial, customer,internal process and innovation, andorganizational learning perspectives,the balanced scorecard helps managersunderstand, at least implicitly, manyinterrelationships. This understandingcan help managers transcend tradi-tional notions about functional barriersand ultimately lead to improved deci-sion making and problem solving. Thebalanced scorecard keeps companieslooking-and moving-forward insteadof backward. ^

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