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.

The Balanced Scorecard: Review

By the-198os, 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 Performance by Robert S. Kaplan and David P. Norton
The balanced scorecard tracks all the important elements of a company’s strategy—from continuous improvement and partnerships to teamwork and global scale. And that allows companies to excel.

What you measure is what your executives understand that anization’s measurement system strongly affects the behavior of managers and employees. Executives also understand that traditional financial accounting measures like return on investment and earnings per share can give misleading signals for continuous improvement and innovation activities today’s competitive environment demands. The traditional financial performance measures worked well for the industrial era, but they are out of step with the skills and competencies companies are trying to master today. As managers and academic researchers have tried to remedy the inadequacies of current performance measurement systems, some have focused on making financial measures more relevant. Others have said, “Forget the financial measures; improve operational measures like cycle time and defect rates. The financial results will follow.” But managers should not have to choose between financial and operational measures. In observing and working with many companies, we have found that senior executives do not rely on one set of measures to the exclusion of the other. They realize that no single measure can provide a clear performance target or focus attention on the critical areas of the business. Managers want a balanced presentation of both financial and operational measures.
HARVARD BUSINESS REVIEW