The Balanced Scorecard is a strategic management and measurement system that links strategic objectives to comprehensive indicators.
It recognizes that companies have a tendency to fixate on only a few measurements – and this blinkers their assessment of how the business is performing overall. The Balanced Scorecard focuses management attention on a set of other key performance indicators to provide an overall view.
The concept was originally created by Robert Kaplan, the Marvin Bower Professor of Leadership Development at Harvard Business School, and David Norton, co-founder of the consulting company Renaissance Solutions. The two explore the concept at length in their co-authored 1996 bestseller The Balanced Scorecard: Translating Strategy into Action (1996).
Kaplan and Norton compared running a company to flying a plane. The pilot who relies on a single dial is unlikely to be safe. Pilots must utilize all the information contained in the cockpit. “The complexity of managing an organization today requires that managers be able to view performance in several areas simultaneously,” wrote Kaplan and Norton. “Moreover, by forcing senior managers to consider all the important operational measures together, the Balanced Scorecard can let them see whether improvement in one area may be achieved at the expense of another,” they added.
Kaplan and Norton suggested there are four important elements that need to be balanced.
First, is the “customer perspective”. Companies must ask how customers perceive them. The second element is “internal perspective.” Companies must ask what it is at which they must excel. Third is the “innovation and learning perspective”. Companies must ask whether they can continue to improve and create value. Finally, there is the “financial perspective”. Companies must ask how they view shareholders. By focusing on all four of these dimensions, companies become driven by their mission rather than by only short-term financial performance.
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