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Henry: Understanding Strategic Management

Chapter 06

Executives know that a company's measurement systems strongly affect employee behavior. But the traditional financial performance measures that worked for the industrial era are out of sync with the skills organizations are trying to master. Frustrated by these inadequacies, some managers have abandoned financial measures like return on equity and earnings per share. "Make operational improvements, and the numbers will follow," the argument goes. But managers want a balanced presentation of measures that allow them to view the company from several perspectives at once. In this classic article from January 1992, authors Robert Kaplan and David Norton propose an innovative solution. During a year-long research project with 12 companies at the leading edge of performance management, the authors developed a "Balanced Scorecard," a new performance measurement system that gives top managers a fast but comprehensive view of their business. The Balanced Scorecard includes financial measures that tell the results of actions already taken. And it complements those financial measures with three sets of operational measures related to customer satisfaction, internal processes, and the organization's ability to learn and improve--the activities that drive future financial performance. The Balanced Scorecard helps managers look at their businesses from four essential perspectives and answer some important questions: How do customers see us? What must we excel at? Can we continue to improve and create value? How do we appear to shareholders? By looking at all of these parameters, managers can determine whether improvements in one area have come at the expense of another. Armed with that knowledge, the authors say, executives can glean a complete picture of where the company stands--and where it's headed.

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The balanced scorecard revolutionized conventional thinking about performance metrics. When Robert Kaplan and David Norton first introduced the concept in 1992, companies were busy transforming themselves to compete in the world of information; their ability to exploit intangible assets was becoming more decisive than their ability to manage physical assets. The scorecard allowed companies to track financial results while monitoring progress in building the capabilities needed for growth. The tool was not intended to be a replacement for financial measures but rather a complement--and that's just how most companies treated it. Some companies went a step further, however, and discovered the scorecard's value as the cornerstone of a new strategic management system. In this article from 1996, the authors describe how the balanced scorecard can address a serious deficiency in traditional management systems: the inability to link a company's long-term strategy with its short-term financial goals. The scorecard lets managers introduce four new processes that help companies make that important link. The first process--translating the vision--helps managers build a consensus concerning a company's strategy and express it in terms that can guide action at the local level. The second--communicating and linking--calls for communicating a strategy at all levels of the organization and linking it with unit and individual goals. The third--business planning--enables companies to integrate their business plans with their financial plans. The fourth--feedback and learning--gives companies the capacity for strategic learning, which consists of gathering feedback, testing the hypotheses on which a strategy is based, and making necessary adjustments.

Link to purchase full article:
http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=R0707M&referral=2340