Chapter 1
Internal-Business-Process Perspective: Executing the Strategy
For the internal-business-process perspective, managers identify the most critical processes for achieving customer and shareholder objectives. Unlike traditional measurement systems that merely track departmental performance, the Balanced Scorecard measures cross-functional processes that span multiple departments.
Each business has unique value-creating processes, but a generic value-chain model provides a customizable template with three principal business processes:
1. The innovation process represents the "long wave" of value creation, where companies identify new markets and customer needs before designing products to serve them. Advanced Micro Devices measures the percentage of sales from new products, percentage from proprietary products, and new product introduction versus competitors.
2. The operations process represents the "short wave" of value creation, starting with customer order receipt and ending with product or service delivery. Beyond traditional cost metrics, companies now measure cycle times, quality, and flexibility.
3. The postsale service process includes warranty and repair activities, defect handling, returns processing, and payment administration. Companies like Otis Elevator and GE Medical Systems enhance value by offering rapid, reliable service-even embedding technology that senses imminent failures, allowing preventive maintenance before customers notice performance degradation.
The power of this perspective lies in identifying entirely new processes needed for strategic success rather than merely improving existing ones. For example, National Insurance used its scorecard to drive reengineering of underwriting, claims management, and agency-management processes. Their Underwriting Performance Model identified factors that contributed most to desired scorecard outcomes, generating the foundation for a Desktop System supporting underwriters in the field.
The fourth Balanced Scorecard perspective develops objectives and measures to drive organizational learning and growth. While the financial, customer, and internal-business-process perspectives identify where the organization must excel for breakthrough performance, the learning and growth perspective provides the essential infrastructure to enable and sustain these ambitious objectives. This foundational perspective is crucial because it directly impacts an organization's ability to innovate, improve, and create value.
This perspective addresses three principal sources of future performance: people, systems, and organizational procedures. Key measures include employee satisfaction, retention, training, skills development, information system capabilities, and rates of improvement in critical processes. Organizations must invest continuously in these areas to maintain competitive advantage and adapt to changing market conditions.
Employee satisfaction has emerged as a critical strategic indicator, with research showing direct correlations between employee satisfaction and business outcomes. For example, Rockwater's comprehensive study found that employees scoring highest in satisfaction surveys consistently generated the most satisfied customers, with satisfaction scores 20% higher than those of less engaged employees. Similarly, Echo Engineering discovered that their most satisfied customers were served by employees with highest morale scores, with these employees achieving 15% higher customer retention rates. These findings transformed employee satisfaction from being perceived as merely a "warm fuzzy" measure into a recognized strategic necessity that directly impacts bottom-line results.
Beyond core employee measurements, companies identify situation-specific drivers in the learning and growth perspective. These include reskilling the workforce, enhancing information systems capabilities, and fostering motivation, empowerment, and alignment. For massive reskilling efforts, organizations may measure the cycle time required to bring existing employees to new competency levels, often tracking metrics such as training hours completed, certification rates, and performance improvements post-training. For information systems, they might track the percentage of processes with real-time quality feedback or the percentage of customer-facing employees with online access to customer information. Leading companies typically aim for 90% or higher real-time system availability and comprehensive customer data access.
Organizations also focus on cultural and structural elements that support continuous learning. This includes implementing mentoring programs, creating knowledge-sharing platforms, and establishing innovation labs. Companies like Google and 3M are known for allowing employees dedicated time for personal projects and learning, resulting in numerous breakthrough innovations. Regular measurement of these initiatives through metrics like innovation rate, knowledge-sharing participation, and implementation of employee suggestions helps organizations track their progress in building a learning culture.
The learning and growth perspective ultimately serves as a leading indicator of future organizational success, highlighting the critical link between employee development, technological infrastructure, and long-term business performance. Organizations that excel in this dimension typically demonstrate superior adaptability to market changes and sustained competitive advantage.
A successful Balanced Scorecard translates strategy into an integrated set of financial and nonfinancial measurements that communicates strategic objectives to managers and employees. Three principles enable an organization's Balanced Scorecard to link to its strategy: cause-and-effect relationships, performance drivers, and linkage to financials.
A strategy consists of hypotheses about cause and effect, expressed as if-then statements. A properly constructed scorecard tells the business unit's strategy through these cause-and-effect relationships. For example, employee training about products leads to product knowledge, which improves sales effectiveness, which ultimately increases product margins.
An effective Balanced Scorecard combines outcome measures (lagging indicators) with performance drivers (leading indicators). Generic outcome measures like profitability and customer satisfaction must be complemented by unique performance drivers that reflect the business unit's particular strategy. Without performance drivers, outcome measures don't show how to achieve results. Without outcome measures, performance drivers may enable short-term improvements but fail to show whether these translate into enhanced business performance and financial results.
Metro Bank's scorecard effectively illustrated this system of cause-and-effect relationships. The bank faced two strategic challenges: excessive reliance on deposits and an unprofitable cost structure for 80% of customers. Their two-pronged strategy focused on revenue growth (broadening revenue sources) and productivity improvement (shifting unprofitable customers to cost-effective channels). For revenue growth, they needed to transform customers' perception from seeing the bank as a transaction processor to a financial adviser. This required internal process improvements in understanding customers, developing new products, and cross-selling. The learning and growth perspective identified the need for broader salesperson skills, improved information access, and realigned incentives.
While many organizations implement the Balanced Scorecard as a measurement system, its real power emerges when transformed from measurement system to management system. Companies increasingly use the scorecard as their central organizing framework to clarify strategy, communicate it throughout the organization, align goals, link objectives to budgets, identify strategic initiatives, conduct systematic reviews, and obtain feedback to improve strategy.
Four specific barriers to effective strategy implementation have been identified, which the Balanced Scorecard helps overcome:
1. Vision and strategy not actionable: The Balanced Scorecard building process clarifies strategic objectives and identifies critical drivers for success, creating consensus among executives and translating vision into key strategic themes that can be communicated throughout the organization.
2. Strategy not linked to departmental, team, and individual goals: Organizations use the Balanced Scorecard to communicate strategies to employees and align departmental, team, and individual goals with strategic implementation. For example, one oil company's exploration group created personal pocket-sized scorecards with three levels: corporate objectives, business unit goals, and personal performance objectives.
3. Strategy not linked to resource allocation: The Balanced Scorecard provides a mechanism to incorporate strategic considerations into resource allocation. Organizations establish long-term targets for strategic measures, direct initiatives and significant resources toward achieving them, and specify short-term milestones along the strategic path.
4. Feedback that is tactical, not strategic: The Balanced Scorecard enables strategic reviews with three essential ingredients: a shared strategic framework, a feedback process collecting performance data to test hypotheses about strategic interrelationships, and a team problem-solving process to analyze performance data and adapt strategy to emerging conditions.
Kenyon Stores integrated these management processes around the Balanced Scorecard into their management calendar. Their system used a two-level review process that connected monthly operational reviews with quarterly strategic reviews. Operational reviews compared short-term performance against budget targets, while quarterly strategic reviews examined longer-term trends in scorecard measures to assess whether the strategy was working effectively.
Perhaps the most innovative and important aspect of the Balanced Scorecard is its ability to facilitate strategic learning. Traditional management systems operate with single-loop learning where objectives remain constant and deviations are treated as defects requiring correction. But information age organizations need double-loop learning capability where managers question underlying assumptions and test whether their strategy remains viable.
The Balanced Scorecard facilitates this by articulating the business theory through cause-and-effect relationships between measures. When performance drivers improve but expected outcomes don't materialize, managers must engage in intense dialogue about market conditions, value propositions, and internal capabilities. This hypothesis testing process may lead to adjustments in measure relationships or even an entirely new strategy.
One organization leveraged their scorecard linkages to advance strategic learning through an innovative management game. At their first scorecard anniversary, senior managers held a two-day offsite meeting where they evaluated the previous year's strategy to identify flaws, determining whether poor results stemmed from environmental changes or missing drivers in the model. Based on this analysis, they constructed an improved forward strategy, with the Balanced Scorecard serving as the foundation for quantifying new strategic scenarios.
This process of data gathering, hypothesis testing, reflection, and adaptation is fundamental to successful strategy implementation. By completing the loop from vision to implementation to feedback and back to vision, the strategic learning process enables organizations to continuously adapt their strategy to changing conditions.
While the Balanced Scorecard was initially developed for strategic business units, it has proven valuable for various organizational structures, including corporations with multiple business units, joint ventures, support departments, and not-for-profit and governmental enterprises.
For corporations with multiple SBUs, a corporate scorecard should articulate the rationale for having multiple SBUs under one corporate structure rather than as independent entities. Corporate-level scorecards can clarify two elements of corporate strategy: corporate themes (values and beliefs shared by all SBUs) and corporate roles (actions that create synergies across SBUs).
Joint ventures and strategic alliances often struggle with defining shared goals. The Balanced Scorecard can effectively define a shared agenda and performance measures. Oiltech, a joint venture of several oil-field services companies, used a scorecard to improve productivity by eliminating inefficiencies at company interfaces.
Corporate resources like maintenance, purchasing, HR, IT, or finance can provide competitive advantage when they offer unique capabilities that business units cannot acquire elsewhere at comparable quality, price, and reliability. The Balanced Scorecard helps these functions demonstrate their value or risk being outsourced to more responsive external suppliers.
The Balanced Scorecard offers even greater potential for governmental and not-for-profit organizations than for private enterprises. Unlike corporations where financial metrics provide clear long-term targets, government agencies can't measure success by how closely they adhere to budgets. Success must instead be measured by how effectively they meet constituency needs, with financial considerations playing an enabling rather than primary role.
What began as an effort to improve performance measurement has evolved into a powerful approach for implementing strategy, particularly radical change. The scorecard development process gives organizations a clear picture of their future and path forward while engaging the energy and commitment of senior management.
When organizations make the critical transition from vision to action, they experience the real excitement and value of the Balanced Scorecard. By building the management system around the scorecard framework, executives can orchestrate their agendas and achieve the ultimate payoff-translating strategy into action.
As one executive noted after implementation: "Our division had always measured hundreds of operating variables. In building a Balanced Scorecard, we chose 12 measures as the key to implementing our strategy. Of these 12 measures, 7 were entirely new measurements for the division." The Balanced Scorecard doesn't replace day-to-day measurement systems but directs attention to factors expected to lead to competitive breakthroughs.
In today's rapidly changing business environment, organizations need more than just good strategy-they need effective systems to implement that strategy throughout the organization. The Balanced Scorecard provides that missing link, enabling companies to navigate the complex journey from vision to results with clarity, alignment, and focus. It represents perhaps the most significant management innovation of recent decades, providing a framework that has proven its value across industries, geographies, and organizational types.
