Applying the Balanced Scorecard Concept a Case Study of ABB

long range planning

Long Range Planning 34 (2001) 441-461 www.lrpjournal.com

Applying the BalancedScorecard Concept:An Experience Report

Heinz Ahn

The Balanced Scorecard is often recommended as a comprehensive management toollinking strategic and short-term action planning. While the literature offering generalstatements about the successful introduction of the Balanced Scorecard is plentiful, fewreports of detailed experience are available. This article offers an insight into theprocess of elaborating the Balanced Scorecard for a strategic business unit of the ABBIndustrie AG, outlining the experiences the unit gained during its introduction of theBalanced Scorecard, as well as emphasising important issues concerning the limitationsof this approach. �c 2001 Elsevier Science Ltd. All rights reserved.

IntroductionTraditional systems measuring the performance of a businessunit are usually based on short-term financial goals. Such systemsare no longer appropriate to master the challenges which con-front companies nowadays. Besides a more thorough consider-ation of the objectives of relevant stakeholders, companies haveto ensure that their strategy is translated into correspondingactions.

In this context, Kaplan and Norton developed the BalancedScorecard concept, a methodology that has achieved wide pub-licity among both scientists and managers. The Balanced Score-card claims to fill the gap between the development of a strategyand its realisation by supporting and linking four “critical man-agement processes:

� clarify and translate vision and strategy;� communicate and link strategic objectives and measures;� plan, set targets, and align strategic initiatives;

0024-6301/01/$ - see front matter �c 2001 Elsevier Science Ltd. All rights reserved.PII: S 0 0 2 4 - 6 3 0 1 (0 1 ) 0 0 0 5 7 - 7

Heinz Ahn is an Associate

Professor at the Faculty of

Business Administration,

University of Aachen, Germany.

Corresponding address: RWTH

Aachen, Chair of Industrial

Controlling and Environmental

Management, Templergraben

64, 52080 Aachen, Germany.

E-mail: [email protected]

Balanced Scorecard442

� enhance strategic feedback and learning”.1

The characteristic feature of ‘balance’ is supposed to be guaran-teed by considering short- and long-term/financial and non-financial/lagging and leading indicators, concerning four per-spectives. On one hand, the strategy should be specified fromthe financial and customer point of view as external perspectives;while on the other hand, it should be specified from the processand learning/development point of view as internal perspectives.2

Serious problems with the processes outlined above led ABBIndustrie AG (Baden/Switzerland) to introduce the BalancedScorecard in their company. About 1,500 people are employed atABB Industrie AG, a leading worldwide supplier of automationproducts, drive units and complex electronic systems. The com-pany is divided into six strategic business units, supported by fivestaff departments (see Figure 1), which taken together, achieved aturnover of 634 billion CHF (about 380 billion USD) in 1999.

The problems that confronted ABB Industrie AG stemmedmainly from insufficient management tools and procedures. Inparticular, three aspects could be distinguished:

� Despite a very elaborate planning process, the generated com-pany strategy was not reflected by the yearly action plans ofthe business unit level: in fact, the short-term actions werebased on uncoordinated suggestions for improvements in thestatus quo. A systematic consideration of the strategy,especially with regard to budgeting, did not take place.

� The management information system used by ABB IndustrieAG focused on financial measures. Such measures were inap-propriate to support decision-making because they did notdepict the critical success factors, e.g. customer satisfaction orqualified employees, which are relevant to attaining the fin-ancial goals. The few non-financial measures provided by the

Figure 1. Organisational structure of ABB Industrie AG

information system, e.g. cycle times, had no explicit connec-tion with the company strategy.

� There was a general unawareness about the strategy to be pur-sued on the part of the employees: although the strategy wascommunicated to everybody in personnel meetings, the rel-evant information was soon forgotten.

To ABB Industrie AG, the Balanced Scorecard concept appearedto offer the most promise of overcoming the problems described.Hence, the decision was made to introduce this concept into thewhole company, with the aims of:

� leading to a more strategy-oriented action planning;� providing the management with a comprehensible infor-

mation tool;� giving all employees a better understanding of the company

strategy.

A specific Balanced Scorecard was to be developed for each stra-tegic business unit. This paper refers exclusively to the pilot pro-ject, begun in March 1999, which introduced the Balanced Score-card into the business unit ‘Printing Facilities’ (PF). The PFBusiness Unit has a simple organisational structure (see Figure2), with 150 employees, and offers various kinds of technical andelectronical systems for newspaper production, achieving about9% of the company’s turnover.

As Associate Professor for Industrial Controlling and CostManagement, I was involved in this pilot project through mycooperation with Petra Dickmeis, who was one of the projectmanagers at ABB Industrie AG, at the same time as being a stud-ent of mine. This allowed me a deeper insight into the processand problems of developing the Balanced Scorecard than couldhave been gained simply from an ‘outside observer’ perspective.3

The paper is structured as follows. Section 2 depicts the projectphases for introducing the Balanced Scorecard into the PF busi-

Figure 2. Organisational structure of the PF Business Unit

Long Range Planning, vol 34 2001 443


ness unit, and explains the elements of the concept. Section 3describes ABB Industrie AG’s experience with the concept so far,while Section 4 deals with substantial weaknesses in the approach.

Project phases for introducing the BalancedScorecard

Project organisationThe responsibility of coordinating the introduction of the Bal-anced Scorecard into all six of ABB Industrie AG’s business unitslay within the ‘Quality, Process, and IT Management’ department(see again Figure 1). This department was in charge of assemb-ling suitable business unit teams as well as initiating and manag-ing workshops for developing the specific Balanced Scorecards.

The team assembled for the PF Business Unit (the ‘BSC-team’), included the managers of all PF departments (see againFigure 2), a composition designed to ensure that the organis-ational divisions entrusted with implementing company strategywere represented by the BSC-team. The interdisciplinarity of theBSC-team enabled various interests to influence the developmentwork and facilitated the creation of a broad basis forimplementing the results generated.

Several workshop units were planned to handle the essentialelements of the Balanced Scorecard, i.e. strategic goals, chains ofcause and effect, measures, milestones/targets, and correspondingaction programs. A one-day workshop was scheduled for eachelement, with enough time reserved between these meetings forreappraisal of and reflection on the results generated.

Identifying strategic goalsThe objective of the initiating workshop was to deduce strategicgoals from the PF Business Unit’s given strategy and to assignthem to the Balanced Scorecard perspectives. As a first step, eachBSC-team member had the task of working out those strategicgoals which he viewed as relevant, thus including all team mem-bers in the process of goal identification, and ensuring that theirpoints of view were taken into account. To help enable parti-cipants to assign their strategic goals to the perspectives, theywere asked the questions listed in Figure 3.

As shown in Figure 3, ABB Industrie AG adopted Kaplan andNorton’s distinction of four perspectives:4

� the investors’ interests are taken into account in the finan-cial perspective;

� customer needs serve as a basis for choosing the strategic goalsof the customer perspective;

� the process perspective is directed at objectives related tointernal processes;

� the potential perspective refers to constant improvement con-cerning employee qualification and information management.

Only the title of the fourth perspective deviates from the original

Figure 3. Main questions for identifying strategic goals

title (‘learning and development perspective’)—however, there isno difference in terms of content.

The questions concerning the perspectives (see again Figure3) illustrate that:

� the goals in the customer perspective should especially sup-port the achievement of the financial goals;

� the choice of strategic goals in the process perspective shouldbe orientated according to the customer goals stated and tothose of shareholders;

� the goals in the potential perspective should promote theachievement of the goals in the other three perspectives.

To ensure uniformity in the way the goals were formulated,guidelines were given—for example, a combination of a nounand a verb should be used (‘we offer an innovative serviceconcept’)—and care was taken to ensure that the desired finalstate of affairs was properly expressed, since it was this goal thatwas to be described, rather than the path to its achievement.

The results of the individual work were brought together inthe next step. In order to direct management concentration andthe distribution of resources towards those concerns that had themost decisive effect on competition, a selection process tookplace. Out of forty goals proposed, a maximum of twenty stra-tegic goals were to be further pursued within the scope of theBalanced Scorecard.

A moderator guided the workshop participants through theselection process. He proceeded from top to bottom (i.e. startingwith the financial perspective and proceeding through the cus-tomer, process, and potential perspective) and examined thegoals with regard to their strategic significance. The top-downapproach was chosen according to the practice explained aboveof linking the goals of the perspectives.

For the selection of the final goals, the following filter criteriawere used:


goals were only

placed on the

Balanced Scorecard

with full team

consensus


� Strategic significance: A strategic goal should be connected toa competitive advantage;

� High improvement potential: The pursuance of ambitious tar-gets should be possible;

� Zone of influence: The expertise and action competenciesrequired for the fulfilment of the goals must exist in theorganisation;

� Correct ‘flight altitude’: This criterion serves to prevent goalsfrom being adopted which are beyond the influence of thehierarchy level in question;

� Measurability: The requirement of measurability focuses onthe possibility of monitoring the degrees to which goals arebeing achieved;

� Feasibility of implementation: The resources required to achi-eve the goals (e.g. financial means or management capacity)should be available.

The selection process in the BSC-team entailed long discussions;however, these were accepted as necessary to arrive at a situationwhere goals were only placed on the Balanced Scorecard with fullteam consensus. Finally a total of nineteen goals were selected,arranged according to the Balanced Scorecard perspectives (seeFigure 4).

Modelling chains of cause and effectThe workshop ‘Networking of Strategic Goals’ served to forgechains of cause-and-effect between the previously determinedgoals. (In basing the networking process on the strategic goals,ABB Industrie AG’s approach differed from suggestions in theliterature. Kaplan and Norton, for instance, recommend ident-ifying the links after measures for the goals have been defined.5)ABB Industrie AG chose to network the selected goals directlyas it was intended to determine only those measures which reflectthe identified chains of cause and effect.

The development of cause-and-effect chains took place in twophases. Each team member was given the task of identifying linksbetween the strategic goals, and the results of this individualwork were then condensed to create a common network. Thusall participants took part in the linking process, ensuring thatthe final network had the support of and was understood byeveryone.

To begin with, the team members received a chart showingthe identified goals, grouped according to the perspectives. Theparticipants were asked to pursue a bottom-up approach: thelinks were to be first identified within the perspectives and thenbetween them, starting from the potential perspective throughthe process and customer perspectives up to the financial per-spective. This approach corresponds to the basic idea of the Bal-

Figure 4. Strategic goals of the PF Business Unit

anced Scorecard concept that the goals of the various perspec-tives build on one another and finally affect the achievement ofthe financial goals. Only the most important links should benoted in order to prevent the creation of a confusing networkof causal relations.

The second phase started with collecting and explaining all theproposed links. Proceeding from bottom to top, the moderatorthen put the links up for discussion, questioning whether theyformed a direct and strong causal relationship, and confirmingor eliminating links only once the BSC-team had reached a con-sensus. In order to facilitate further communication, the agreedlinks were numbered, and their assumed effects were noted. Fig-ure 5 illustrates the resulting network of chains of cause andeffect, showing a total of thirty-six identified essential linksbetween the strategic goals.

In Figure 5, one succession of arrows is specially marked asan example of the description of cause-and-effect chains. The PFbusiness unit bases the symbolised links on the followingassumptions:

� Link number 1: Pro-active human resources management can



Figure 5. Network of the strategic goals

increase the competence and motivation of the PF staff. (Forexample, employees with high capabilities for maintaining theproducts and systems supplied should be hired.)

� Link number 2: In order to make the systems easy to projectand maintain, competent employees with specialist serviceknowledge are necessary. Such employees are capable of takingthe service aspect into account when planning customer-specific system applications.

� Link number 3: Easily maintained systems support an innov-

ative service concept by making it easier to realise system opti-misations.

� Link number 4: The innovative service concept will continueto be encouraged by a properly functioning product manage-ment, as the PF area product management includes the taskof perceiving customer needs for new services.

� Link number 5: The innovative service concept influences thenet margin goal because the PF Business Unit can demand ahigh price for the new services, process optimisations, andservice contracts, in comparison to the time and energyinput required.

� Link number 6: The goal of a 30 per cent ROCE is supportedby the service concept, since the amount of capital tied up inservice tasks is only small and a quicker return of expendi-ture occurs.

� Link number 7: Turnover with customers at the end of thesupply chain is increased by service activities as they are car-ried out directly for these customers.

Defining measures for quantifying achievement of goalsIn the next workshop, the identified strategic goals were linkedto measures in order to allow for monitoring goal-achievements.First, a creative collection of measures took place with regard tothe following requirements.6 Measures should:

� quantify the benefit of goal achievement and not the amountof effort required;

� have a motivating effect on the employees;� cover the various aspects of a goal.

The measures proposed were then reduced to a maximum oftwo measures for each goal. For this the moderator introducedfurther requirements into the discussion—e.g. it should be poss-ible to record the measures with a reasonable amount of effort,and it should be ensured that they are suitable for derivingactions. As a result of the selection process, a total of twenty-five measures were recorded. Not all of these measures can berevealed here, but Figure 6 shows, as an example, the measuresfor the goals linked by the succession of arrows marked in Fig-ure 5.

The selected measures were subjected to a plausibility testbefore finally being accepted, to ensure that the measuresreflected the identified chains of cause and effect. It provedpossible to confirm corresponding relations for all twenty-fivemeasures.



Figure 6. Examples of measures selected by the BSC-team

Setting milestones and targets for the measuresThe fourth step of the process set the desired target and severalmilestones for each of the previously determined measures. Thetarget should describe the final goal level to be achieved at theend of the 3-year strategic planning rhythm, and from this, stagevalues (‘milestones’) for the individual years were derived.

Since the analysis of a considerable amount of data was neces-sary for a sound estimation of the values, this was done by theBSC-team members without the support of the moderator andin preparation for the next Balanced Scorecard workshop. Thedesired targets were to represent high but realistic challenges forthe PF Business Unit, and the chains of cause and effect—i.e.the fact that the achievement of some goals influence the achieve-ment of others—had to be taken into account. Table 1 depictsthe milestones and targets set for the measures listed in Figure 6,with the accompanying goals grouped according to the BalancedScorecard perspectives.

As can be seen in Table 1, the intervals between the values arenot equidistant. This corresponds with the Balanced Scorecardidea that the goals of perspectives beneath the financial perspec-tive form the prerequisite for achieving the monetary goals. It canbe assumed that the financial values will develop more stronglytowards the end of the strategic planning horizon.

Table 1. Examples of Milestones and Targets for the PF Business Unit

Perspectives Strategic Goals Measures Milestones Target

End of 1st End of 2nd End of 3rdyear year year

Financial Our net margin is Net margin 13% 15% �15%

perspective constantly �15%

Our ROCE is �30% ROCE 15% 20% �30%Our turnover with Turnover with end 15% 20% 30%

end customers is customers

�30%Customer We offer an Number of realised 1 3 5

perspective innovative process optimisationsservice concept Share of sold systems 15% 30% 40%

with additional

service contractsProcess Our systems are easy Number of inquiries �300 �100 �50

perspective to project and necessary to carry

maintain out service tasksWe have a Number of new 3 7 �10

functioning product development projects

management initiated by theproduct manager

Potential Our employees are Average number of 5 7 9

perspective competent and jobs to which anmotivated employee can be

assigned

We pursue a pro- Average number of 5 3 2active human months needed until

resource management free resources are

available to fulfil anew task

Developing strategic programs for achieving the goalsIn the final Balanced Scorecard development workshop, strategicprograms were determined in order to attain the targets. Witha view to encourage creative participation in the process, theteam members were first given the task of individually determin-ing possible strategic programs. At least one program was to beset for each strategic goal of the customer, process, and potentialperspectives. (The goals of the financial perspective were nottaken into consideration, as they only depict the results of theinitiatives on the other three levels.)

All suggestions were then collected and examined with regardto their programmatic character, their support of a goal, andtheir feasibility in terms of implementation. Only those sugges-tions that fulfilled these requirements and upon which the BSC-team reached a consensus were selected. (Correspondingexamples are shown in Table 2.) One team member wasappointed for each chosen strategic program, with the particular


there is a lack of

decision-making aids

for companies


Table 2. Examples of Strategic Programs

Perspectives Strategic Goals Strategic Programes

Customer perspective We offer an Introduction of pro-active

innovative service service in sales negotiations

concept Hiring or training ofemployees competent to

carry out the service tasks

‘optimisation’ and‘instruction’

Process perspective Our systems are easy Determination of

to project and suggestions to improve themaintain systems and products

We have a Making available enoughfunctioning product time for product

management management tasks

Potential perspective Our employees are Encouragement of jobcompetent and rotation

motivated Development of training

We pursue a pro- programsactive human Hiring and training

resource management according to the capacity

requirement plan one yearin advance

responsibility of driving forward the implementation of that pro-gram sector over the following three years.

Experiences with the Balanced Scorecard concept

Particular difficulties of introducing the BalancedScorecardThe problems which arose during the introduction of the Bal-anced Scorecard at ABB Industrie AG’s PF Business Unit can bedivided into those associated with its development, and thoseconcerning its use. The following explains the difficulties, andthe approaches pursued in solving them.

Problems in developing the Balanced ScorecardMost of the problems which appeared in developing the BalancedScorecard were a result of insufficient recommendations con-cerning the elaboration of the Balanced Scorecard concept.7

Above all, there is a lack of decision-making aids for companiesboth when generating and linking the strategic goals and whengenerating the measures and their values to be attained. Forexample, Kaplan and Norton suggest voting on the objectives inorder to select the strategic goals, instead of supporting a rationalgroup decision process.8 The BSC-team at ABB Industrie AGmanaged this problem by compiling goal requirements given inliterature and using them as a filter in the selection process.

The over-complexity caused by the derivation of too manycause-and-effect chains was another problem. The recommen-dation that such links should be expressed in ‘if–then’ statementswas judged to be insufficient, as it was always possible to findarguments in favour of links. The BSC-team at ABB IndustrieAG failed to find an analytical solution for this problem.

The task of defining measures also led to difficulties. TheKaplan and Norton recommendation of considering the lifecycleconcept when deriving the measures for the goals of the financialperspective was not seen as particularly helpful by the BSC-team.The lack of predictability regarding lifecycle development madeit difficult to derive reliable future-orientated statements. Inorder to solve this problem, the BSC-team followed a procedurethat first encourages a creative determination of possible meas-ures, and then selects those measures which were most easilyrecorded and of most significance.

The guidelines found in literature for determining the valuesfor setting milestones and targets for the measures were alsojudged to be insufficient. Kaplan and Norton, e.g., only rec-ommending ‘setting stretch targets’. Here, the BSC-team tried totake into account the interdependencies between the goals whenquantifying the values of the measures to be attained each year.

To sum up, it can be said that the very generally expressedrecommendations for developing the Balanced Scorecard causedsignificant problems. A detailed elaboration of the Balanced Sco-recard proved necessary, and involved an unexpectedly largeamount of time being required of the BSC-team to fulfil its task.The warning of Weber and Schaffer that the introduction of theBalanced Scorecard requires more management capacity thanexpected9 can be confirmed by ABB Industrie AG’s experience.Five full-day workshops were spent just elaborating the BalancedScorecard elements, with each workshop requiring an additionalone or two days for preparation and review. The whole processof developing the Balanced Scorecard lasted four months.

Problems in using the Balanced ScorecardThe problems which occurred in using the Balanced Scorecardover the period of study mainly concerned recording and moni-toring the twenty-five defined measures. Gathering the respectivedata required a great amount of time and energy, and in orderto be able to cope with the effort needed, the PF Business Unitintroduced the measures into the organisation step by step.

The question of whether the employees would accept newmeasures alongside the numerous measures already presentproved to be another problem, and consideration had to be givenas to which of the measures recorded to date should continueto be recorded in the future. One possibility considered to reducethe effort required was to handle them as ‘diagnostic measures’in the sense that they are only presented to the managementwhen their values exceed a given range. Moreover, it is plannedto substantially cut down the number of measures existing in thecompany that are outside the scope of the Balanced Scorecard.



Management-oriented strengths of the BalancedScorecardThe Balanced Scorecard is used in the PF Business Unit to pre-pare action planning and budgeting, to control the unit as wellas to provide information on strategy within the organisation.The concrete benefit of the Balanced Scorecard for supportingthese processes is explained in the following.

The Balanced Scorecard as a guarantee for strategy-orientedaction planning and budgetingInitial experience with the use of the Balanced Scorecard hasproved it to be of considerable benefit for connecting long-termstrategic planning and short-term action and budget planning. Inthis regard, the strategic programs were translated into individualactions oriented towards step-by-step attainment of the mile-stones pursued. As an example, Table 3 shows some of the indi-vidual actions derived for the strategic programs of the potentialperspective listed in Table 2, with the actions’ planned start- andfinish-times marked by arrows. A broader circle of participantsthan just the BSC-team was included in order to determine theseactions, as they have a concrete influence on everyday companylife and on operational processes.

Budgetary resources were allocated on the basis of the actionplan. The expected costs of each action were estimated, and themilestones for monetary and non-monetary measures havingalready been determined during Balanced Scorecard develop-ment were adopted directly into the budget. The explicitinclusion of non-monetary values was intended to prevent thefeature of balance of the strategic planning from being destroyedin short-term planning by a focus on financial values.

Integrating the Balanced Scorecard into the process ofcompany controlABB Industrie AG regards the Balanced Scorecard as suitable forsupervising and leading the employees. It is used as an infor-mation-gathering tool, recording selected monetary and non-monetary measures on a quarterly basis, serving to keep manage-ment informed of the current status of strategy implementation.

Quarterly Balanced Scorecard meetings examine strategyimplementation status. In such half-day meetings, the managersof the PF departments and their superiors compare the actualvalues of the measures with the milestones set. A negative devi-ation between these and the expected developments leads to con-siderations to optimise strategy implementation.

Once a year, the assumptions regarding the Balanced Score-card—especially the presumed chains of cause and effect—arechecked for their correctness, and the Balanced Scorecard isadapted if the causal relations originally drawn up cannot beconfirmed. A lack of correlation between presumed driving fac-tors and expected results is regarded as a signal that the pre-viously planned path towards strategy implementation shouldbe reconsidered.

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uar

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The Balanced Scorecard is also the basis for obligatory dis-cussions between every employee and their superior. Scheduledat least once a year, these meetings serve to balance the individualemployee objectives with the targets set by the business unit. Thechains of cause and effect are used to explain how the employeecan contribute to the attainment of the set milestones and tar-gets, ensuring that the connection to strategy implementation ismade clear. However, ABB Industrie AG has not yet connectedtheir incentive system to the Balanced Scorecard.

The Balanced Scorecard as an aid for communicatingstrategyABB Industrie AG views an easily understood communication ofstrategy to the employees as an important prerequisite for itsrealisation, and has introduced a ‘Communication Program’ torun alongside the development of the Balanced Scorecard. Thisprogram started with a first publication in the in-house companymagazine, giving employees an overview of the Balanced Score-card methods, the motives for its introduction and the develop-ment process of the pilot project in the PF Business Unit.

In the next step, a ‘Communication Day’ took place for theemployees of the PF Business Unit to inform them of thedeveloped Balanced Scorecard in detail, with the aim of encour-aging an active role on the employees’ part. A workshop whichall employees had to attend was organised for each area ofresponsibility in the PF Business Unit, where the strategic goalsrelevant to the respective area were discussed with the employees,as well as the specific chains of cause and effect, measures andstrategic programs. During the workshops, the employees weregiven the task of explaining from their point of view the contri-bution they could make to the implementation of the strategicprograms. The employees’ contributions were noted so that theycould be referred to again in future discussions as well as be usedfor continuing detailed action planning.

The Communication Day produced a broad acceptance andunderstanding of the strategic goals and accompanying programsamong the employees, and the structured procedure providedby the Balanced Scorecard concept appeared to be suitable forexplaining the strategic thrust of the PF Business Unit clearly.

As Kaplan and Norton pointed out, communicating theelements of the Balanced Scorecard just once will not be suf-ficient to create awareness of strategy and to influence theemployees’ behaviour durably.10 It is intended to reinforce theBalanced Scorecard idea regularly with employees, for exampleby presenting the strategic goals together with their links visuallyin offices and by informing employees periodically about thestatus of strategy implementation.

The Balanced Scorecard as a comprehensive managementtoolAs already outlined at the start of this paper, Kaplan and Nor-ton’s Balanced Scorecard concept claims to be the central

element of a four-step management process.11 The following sec-tion discusses to what extent this claim is justified from ABBIndustrie AG’s point of view.

The first step of the management process promises to createa more precise strategy and a consensus about this strategy inthe management team. And indeed, the process of developingthe Balanced Scorecard for the PF Business Unit really did con-tribute to clarifying strategy and expressing it in concrete terms.(This experience is confirmed by, e.g., the American chemicalcorporation Amoco.12) A clear strength of the Balanced Score-card was that of being an easily understood concept. Viewingthe strategy from the four different perspectives, and identifyingby links between them, clearly illustrated the causal relationshipbetween the fulfilment of customers’ and employees’ expec-tations and those of shareholders.13

However, the structure of the Balanced Scorecard can be criti-cised in that the four perspectives suggested by Kaplan and Nor-ton have to be translated into the specific needs of individualcompanies. Potential shortcomings might include, for example,that suppliers are not adequately taken into account,14 or thatthe financial goals lose too much importance when ‘competing’with three—or even more—other perspectives.15

For ABB Industrie AG, these arguments were not of great rel-evance. The crucial problem ABB Industrie AG had to deal withconcerned the fact that Kaplan and Norton’s Balanced Scorecardconcept does not give sufficient guidelines regarding structure.Creating a consensus on strategy, therefore, essentially dependson the way the process is designed.

The second step within the strategic management process con-cerns the communication of strategy within the company, andABB Industrie AG found the Balanced Scorecard a useful toolfor this purpose. Its logical structure and the tying of actionsto the strategic goals enabled the employees to understand thecompany’s goals and to recognise their contribution to achiev-ing them.

At first glance, the feature of linking the strategic goals to oper-ational actions creates the impression that the Balanced Score-card concept is also sufficient to carry out strategy-orientedaction planning and resource allocation. ABB Industrie AG’sexperience, however, has shown that the concept needs to bespecified for this third management process. In particular, thedelayed attainment of individual targets due to chains of causeand effect needs to be considered within the scope of action plan-ning so that the focus of action can be decided upon accordingly.

The fourth management process—strategic feedback andlearning—is probably the most critical. In this process ABBIndustrie AG deems the chains of cause and effect to be a crucialelement of the Balanced Scorecard. With their aid, feedback andlearning can be triggered by comparing those correlations thatactually occurred with the assumptions made. As yet, however,ABB Industrie AG does not have sufficient reliable experience to


A clear strength of

the Balanced

Scorecard was that of

being an easily

understood concept


judge whether the Balanced Scorecard tool can be really used forchecking their original premises.

Critical reflection on the Balanced ScorecardThe detailed description of the case study gives a goodimpression of how the development and implementation of aBalanced Scorecard may be managed. In this context, the sol-utions ABB Industrie AG adopted to overcome their problemswith the concept are of special interest. Although some of theseproblems were serious, they were never crucial, and the experi-ences ABB Industrie AG had with the concept were for the mostpart satisfactory. In spite of the promising picture that the casestudy painted of the Balanced Scorecard, however, managers whoare considering whether to adopt the approach should be awareof its limitations. Some important issues concerning these limi-tations are pointed out in the following.

To begin with, the Balanced Scorecard is not an elaboratedsystem but a framework for performance measurement. Thisframework has to be worked out according to the strategy pur-sued. Applying another company’s Balanced Scorecard develop-ment process as a guideline may be helpful, but it also increasesthe risk of not paying enough attention to the company’s owncompetitive position. It is essential to realise that the competitiveadvantages can only be taken adequately into account by estab-lishing a Balanced Scorecard unique to the company involved.In particular, the four original perspectives of the concept needto be individually adapted. Here, the stakeholder approach isconsidered a helpful instrument to identify the relevant perspec-tives, especially for those companies which are confronted withthe new ‘information age’ competition.16

From the point of view of decision theory, the determinationof relevant perspectives is the first step to build a multi-levelhierarchy of goals (in decision theory called ‘objectives’), leadingto a set of measures (in decision theory called ‘attributes’) cap-able of quantifying performance at the lowest level of the hier-archy. According to decision theory, such attributes as well asthe hierarchy of objectives should meet a number of require-ments, e.g. ‘decomposability’ and ‘non-redundancy’.17 Thesedesirable properties, based on findings of decision-makingresearch are, however, not even mentioned in the common Bal-anced Scorecard literature. With respect to this, the concept hasto be revised in order to design a more sophisticated process ofdeveloping a Balanced Scorecard, especially regarding the identi-fication of strategic goals and their measures.

To master the high complexity of such a process, the assistanceof decision-making specialists can be very helpful. Epstein andManzoni, e.g., illustrate how they functioned as consultants fora group of business unit executives in order to support two stepsof their Balanced Scorecard development, ‘translating strategyinto objectives’ and ‘selecting performance indicators’.18 As theirexplanations reveal, their suggestions for overcoming the prob-

lems faced by these executives were closely connected with therequirements outlined above: concerning the first step, theyapplied a hierarchical approach; concerning the second step, theyfocussed on desirable properties of measures, namely ‘controlla-bility’ and ‘completeness’.

The importance of decision-making skills is also underlinedby the findings of Lipe and Salterio.19 Their experimental studycovers several business units of a company, each of which hasdeveloped its own Balanced Scorecard measures: some measuresapplying to every business unit, while others are unique. Theseunique measures are of great significance because they reflect theindividual strategy of the respective business unit. Lipe and Sal-terio discover, however, that managers who asked to evaluatemultiple subordinate business units underestimate or even ignorethe unique measures. Thus, the cognitive limitations of untraineddecision-makers can significantly reduce the outstanding poten-tial of the Balanced Scorecard concept to capture a businessunit’s characteristic features.

There is little research on how to connect the Balanced Score-card concept to other management tools, reinforcing theimpression that the Balanced Scorecard concept is far from beingfully developed. It seems relatively easy to integrate individualmethods like Benchmarking and Quality Function Deploymentinto the concept. But more effort will be needed to create coher-ence between the Balanced Scorecard concept and additionalmanagement systems, e.g. planning and budgeting systems, sothat the employees receive consistent information.20 In this con-text, special importance is ascribed to linking a company’s com-pensation system to the Balanced Scorecard measures,21 but thereare also those who consider such an approach to have risks.22

The following judgement, however, meets with considerableapproval: ‘In order to play the dedicated key part in the manage-ment process, the Balanced Scorecard should replace—notcomplement—a company’s current performance measurementsystem.’

Beyond such concerns for the improvement of the BalancedScorecard concept, some experts question the concept itself. Forexample, Weber and Schaffer argue that the Balanced Scorecardcan only be seen as a diagnostic system of performance measure-ment.23 Given the multitude of measures, managers who try touse it as an interactive system will be overburdened, and strategicsupervision of original premises cannot be adequately taken intoaccount. Both arguments lead Weber and Schaffer to the con-clusion that the Balanced Scorecard approach is only one steptowards an active management of performance measures.

The close linkage between the strategy pursued and the Bal-anced Scorecard—usually judged to be an important advan-tage—is the reason for an even more critical view of the concept.Such views start from the assumption that the traditional, formalplanning systems will be more and more replaced by proceduresof incremental planning, leading to strategies that will be con-tinuously redefined.24 This scenario is of special relevance for


the Balanced

Scorecard should

replace—not

complement—a

company’s current

performance

measurement system


companies which are facing increasing pressure due to rapidchange and fierce competition. Under such conditions, a com-paratively inflexible performance measurement system like theBalanced Scorecard is judged to be inappropriate.25

There are thus a number of reasons why the introduction ofthe Balanced Scorecard may fail. Managers consideringimplementing the concept should therefore consider the limi-tations as well as the possible benefits of this approach, andfurther research is necessary in order to help them make the rightdecision. However, it will remain impossible to predict the valueof the Balanced Scorecard approach before implementation.“Managers will have to be content with case studies and articleswhich attempt to outline some of its advantages and disadvan-tages”.26

References1. R. S. Kaplan and D. P. Norton, The Balanced Scorecard, Har-

vard Business School Press, Boston, MA (1996).2. P. Hepworth, Weighing it up—a literature review for the

Balanced Scorecard, Journal of Management Development17(8), 559–563 (1998).

3. H. Ahn and P. Dickmeis, Experiences with the introduction ofthe Balanced Scorecard at ABB Industrie AG, Working ReportNo. 2000/01, Chair of Industrial Controlling and Environ-mental Management, University of Aachen, Aachen (2000).

4. R. S. Kaplan and D. P. Norton, The Balanced Scorecard—measures that drive performance, Harvard Business Review70(January-February), 71–79 (1992).

5. Kaplan and Norton (1996) (see Reference 1).6. J. Creelman, Building and Implementing a Balanced Score-

card—An International Study of Corporate Best Practice inStrategy Implementation, Business Intelligence, London(1998).

7. Kaplan and Norton (1996) (see Reference 1).8. C. -L. Hwang and M. -J. Lin, Group Decision Making Under

Multiple Criteria—Methods and Applications, Springer,Berlin (1987).

9. J. Weber and U. Schaffer, Balanced Scorecard—Gedankenzur Einordnung des Konzepts in das bisherige Controlling-Instrumentarium, Zeitschrift fur Planung 9(4), 341–365(1998).

10. Kaplan and Norton (1996) (see Reference 1).11. R. S. Kaplan and D. P. Norton, Using the Balanced Scorecard

as a strategic management system, Harvard Business Review74(January-February), 75–85 (1996).

12. R. W. Scalpone, Building a strategic scorecarding process atAmoco Corporation, Employment Relations Today (Winter),41–56 (1998).

13. J. Geanuracos and I. Meiklejohn, Performance Measure-ment—The New Agenda, Business Intelligence, London

(1993); R. Newing, Benefits of a Balanced Scorecard,Accountancy 114(November), 52–53 (1994).

14. A. Atkinson, J. H. Waterhouse and R. B. Wells, A stakeholderapproach to strategic performance measurement, SloanManagement Review 38(3), 25–37 (1997).

15. A. Butler, S. R. Letza and B. Neale, Linking the BalancedScorecard to strategy, Long Range Planning 30(2), 242–253(1997).

16. T. Clarke, The stakeholder corporation—a business philo-sophy for the information age, Long Range Planning 31(2),171–180 (1998); M. Martinsons, R. Davison and D. Tse, TheBalanced Scorecard—a foundation for the strategic manage-ment of information systems, Decision Support Systems 25(1),71–78 (1999).

17. R. L. Keeney and H. Raiffa, Decisions with Multiple Objec-tives—Preferences and Value Tradeoffs, Cambridge UniversityPress, Cambridge, MA (1993).

18. M. Epstein and J.-F. Manzoni, Implementing corporate strat-egy—from Tableaux de Bord to Balanced Scorecards, Euro-pean Management Journal 16(2), 190–203 (1998).

19. M. G. Lipe and S. E. Salterio, The Balanced Scorecard—judgemental effects of common and unique performancemeasures, The Accounting Review 75(3), 283–298 (2000).

20. S. Mooraj, D. Oyon and D. Hostettler, The Balanced Score-card—a necessary good or an unnecessary evil?, EuropeanManagement Journal 17(5), 481–491 (1999).

21. D. P. Norton and F. Kappler, Balanced Scorecard best prac-tices—trends and research implications, Controlling 12(1),15–22 (2000); Epstein and Manzoni (1998) (see Reference18).

22. C. W. Chow, K. M. Haddad and J. E. Williamson, Applyingthe Balanced Scorecard to small companies, ManagementAccounting 79(3), 21–27 (1997).

23. J. Weber and U. Schaffer, On the way to active managementof performance measures, in A. Neely (ed.), PerformanceMeasurement 2000—Past, Present and Future, pp. 672–679,Conference Proceedings, Cranfield (2000); J. Weber and U.Schaffer, On the Way to Active Management of PerformanceMeasures, Working Report No. 66E, Chair of Controllingand Logistics, Otto Beisheim Graduate School of Manage-ment, Vallendar (1999).

24. P. Lorange, Strategy implementation—the new realities, LongRange Planning 31(1), 18–29 (1998).

25. D. Dinesh and E. Palmer, Management by objectives andthe Balanced Scorecard—will Rome fall again?, ManagementDecision 36(6), 363–369 (1998).

26. Mooraj, Oyon and Hostettler (1999) (see Reference 20).


Documents

Applying the Balanced Scorecard Concept a Case Study of ABB