JULLIETTA NOORRIZKY

1501204451, 04PLF
Balanced Scorecard

Readings

2-1: “How to Report A Company’s Sustainability Activities” by Gwendolen B. White, PH.D., CPA,
Management Accounting Quarterly (Fall 2005), Vol. 7, No. 1 pp. 36-43.

This article explains the concept of sustainability and its role in the corporation. It describes how a firm can measure and report
its outcomes and efforts regarding sustainability within a balances scorecard.

Discussion Questions:
1. What is meant by sustainability? What measures are included in a sustainability report?

Sustainability It’s more than environmentalism. It’s about living and working in ways that don’t jeopardize the future of our
social, economic and natural resources. . In business, sustainability means managing human and natural capital with the same
vigor we apply to the management of financial capital. It means widening the scope of our awareness so we can understand fully
the ‘true cost’ of every choice we make.”—Ray Anderson, founder of Interface, Inc.
Sustainability measurement is a term that denotes the measurements used as the quantitative basis for the informed
management of sustainability. The metrics used for the measurement of sustainability (involving the sustainability of
environmental, social and economic domains, both individually and in various combinations) are still evolving: they
include indicators, benchmarks, audits, indexes and accounting, as well as assessment, appraisal and other reporting systems.
They are applied over a wide range of spatial and temporal scales

2. How many companies issued sustainability reports in 2005? Cite your source for this information.

Sustainability reports had primarily addressed environmental issues until 1999, when they began to include economic and social
indicators as well. Fewer than 100 U.S. companies issued sustainability reports in 1993, but that number had grown to
1,500 by 2005. That figure includes 68% of the top 250 companies in the Fortune 500. The increase in sustainability reporting
has not gone unnoticed by the investment community. Since 1999, the Dow Jones Sustainability Indexes (DJSI) have been
tracking the financial performance of companies that are “sustainability driven.” In addition, the Dow Jones STOXX Indexes and
Sustainable Asset Management provide asset managers with benchmarks to manage portfolios of issuers who practice
sustainability. More than 50 asset managers in 14 countries are using the DJSI to manage €3.6 billion.

3. Are sustainability goals important to shareholders of public companies? Why or why not?

Yes, sustainable goals important to shareholders of public company. Executives say it is crucial to report progress against
publicly stated sustainability goals, and that the scrutiny helps to improve progress in meeting these targets “Bright lights kill
microbes,” as Mr Swartz of Timberland puts it. Leading firms are also filtering stakeholder issues in a structured way—and
tailoring their communication with them. Some executives say actively engaging with stakeholders can be a source of
competitive advantage.

4. How can sustainability be included within the balances scorecard? Base your answer on the Global Reporting Initiative
(GRI) reporting guidelines and its three categories of indicators:
 economic indicators
 environmental indicators
 social indicators

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 1) ECONOMIC INDICATORS

Rather than measuring changes in the organization, GRI economic performance measurements track economic changes that
result because of an organization’s sustainability activities that affect stakeholders. Although the GRI economic indicators are
similar to the BSC financial perspective, they are broader. They focus more on the way an organization affects the stakeholders
with whom it has direct and indirect economic interactions. For example, the GRI categorizes economic indicators in terms of
stakeholders: customers, suppliers, employees, providers of capital, and the public sector

2) ENVIRONMENTAL INDICATORS

GRI environmental indicators are divided into materials, energy, water, biodiversity, emissions, effluents, waste, products and
services, and compliance. These environmental sustainability indicators are then subdivided. For example, materials—other than
water—are grouped by type, use, and quantity. Materials that are waste are classified as those from internal sources and those
from external sources. Energy indicators are divided into direct energy use, segmented by primary source, and indirect energy
use. These measures would be useful as part of cost reduction in the BSC financial perspective. The environmental indicators are
also relevant from the BSC internal business processes perspective. In particular, innovation is applicable. Companies can reduce
their emissions by developing new products and/or processes that emit fewer greenhouse gases and other ozone-depleting
substances. The environmental indicators are good measures to ensure that the company is moving to reduce environmental
impacts. GRI environmental indicators are also important from a BSC risk management perspective because a company that does
not manage its pollution problems faces the risk of fines and lawsuits for environmental damage. Biodiversity indicators include
location and size of land owned, leased, or managed in biodiversity-rich habitats. These indicators also report the effect industrial
activity has on the biodiversity in terrestrial, freshwater, and marine environments. Biodiversity indicators are important for the
customer perspective of the BSC. Companies that are thoughtful about their growth in environmentally sensitive areas are likely
to attract customers who are interested in sustainable practices.

3) SOCIAL INDICATORS

The social component of sustainability details an organization’s impacts on the social systems within which it operates. Social
performance analyzes an organization’s impacts on stakeholders at the local, national, and global levels. Social performance
indicators are grouped into labor practices and “decent” work, human rights, and product responsibility, . GRI labor practices and
decent work indicators are measures related to employment, labor-management relations, health and safety, nondiscrimination,
child labor, forced and compulsory labor, training and education, and diversity and opportunity. Employment indicators show,
where possible, the breakdown of the workforce by region/country, status (employee/ non-employee), by employment type (full-
time/part-time), and by employment contract (indefinite, permanent/fixed-term, or temporary). Net employment creation and
average turnover segmented by region/ country are reported. High employee turnover can be an indication that the objectives of
internal business processes are not being met. Health and safety indicators include the number of accidents and fatalities, and
focusing on worker health and safety can reduce costs. Labor practice indicators that cover nondiscrimination policies, child
labor policies, and compulsory labor policies are particularly relevant for the financial, internal business processes, and learning
and growth perspectives of the BSC. GRI indicators for nondiscrimination, child labor, forced and compulsory labor, diversity,
and opportunity are statements of a company’s policies to prevent these activities. These indicators can be useful in risk
management of the BSC financial perspective. Meanwhile, training and education indicators provide detail about employee
training programs at all levels of the company. Training and education are part of the objectives of the BSC learning and growth
because they deal with employee morale and productivity. Ultimately, employees who are treated fairly with regard to wages, a
decent work environment, and a healthy and safe place to work are likely to be more productive. Human rights indicators cover
community, bribery and corruption, and political contributions.

2-2:“Applying the Balanced Scorecard to Small Companies” by Chee W. Chow, Kamal M. Haddad,
and James E. Williamson, CPA, Management Accounting (August 1997).

This article reports the findings of a case study of four small firms to identify the potential use of the balanced scorecard in these
firms and to determine the differences in the use of the scorecard across industries. The industries include a food ingredients

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Discussion Questions:

1. Did these four firms adopt the balanced scorecard? Why or why not?

The electronics firm selected the customer perspective, emphasizing the goals of quality, price, delivery, and development of
new products as of primary importance. This selection probably is typical of the contemporary world view that customers and
their values must come first if the company is going to maintain long-term financial stability and growth.
The second component selected is internal capabilities. But analysis of the goals and measures attached to this component
indicates that customer values and market penetration are still on the minds of the company’s management. There definitely is a
linkage here that the management clearly recognizes.
Third, the company values innovation which, again, clearly reflects the linkage with customer values and market
penetration. In this area, we also see that they are very concerned with quality, the cost of quality, and its cause and effect on
competitive market prices.
Fourth, the company indicates, but with little discussion, that there is a need to provide shareholders some relatively short-
run traditional financial results. That the company places this component fourth is an indication that it sees customer values,
product development and innovation, and market penetration as drivers of financial performance.
Finally, the company management’s explicit identification of an employee perspective reflects its belief that a well-paid and
satisfied workforce is key to attaining the company’s overall goals and objectives.

A company in the food ingredients industry says it is first interested in the financial perspective but then proceeds to identify
many goals and measures in the other perspectives that will enhance the financial goals along with the goals of perspective.

The responses from a commercial bank. An interesting observation about this scorecard is that it sets out a separate community
perspective. This viewpoint probably reflects the traditional community role that bank managers think may be expected of them.

A biotechnology firm in its Balanced Scorecard selected the customer perspective as of primary importance. The financial
perspective comes after customers and technological leadership. Thus, across the four types of companies considered there is a
clear indication that management is designing the goals and measures to fit the company’s unique needs and perceived role.
Further, these responses suggest that the Balanced Scorecard can be an effective management tool for small companies as well.

2. For each of the firms, examine the scorecard presented in the article and use it to determine what you think is likely to
be or should be the competitive strategy of the firm. Does it seem that the balanced scorecard is consistent with the
nature of the firm’s business and strategy?

The first process—translating the vision—helps managers build a consensus of opinion about the organization’s vision and
strategy. Because it is very important to translate vision and strategy into operational terms that employees can understand and
use to guide actions at their local level, the vision and strategy statements must be expressed as an agreed-upon integrated set of
objectives and measures that describe the long-term drivers of success.
The second process—communicating and linking—helps management tie overall objectives and strategies to department and
individual objectives. This process replaces the traditional way departments are evaluated by financial performance and
individual incentives. The advantages of this new approach is the way it ensures that all levels of the organization are made
aware of and understand the company’s long-term strategy. The scorecard also ensures that individual and departmental
objectives are in agreement with the long-term strategy.
The third process—business planning—helps organizations integrate their business and financial plans. Kaplan and Norton
explain that most organizations today are trying to implement a variety of change programs that are competing with each other
for time, energy, and resources.8 This competition can be so intense and inner focused that it is difficult to integrate these diverse
initiatives to achieve the firm’s overall strategic goals. The Balanced Scorecard can be used to set goals that provide a basis for
allocating resources and setting priorities. The scorecard also can aid in eliminating some initiatives and selecting others that are
more effective for moving the organization toward its long-term strategic objectives.
The fourth process—feedback and learning—helps management direct the organization toward strategic learning. This process is
different from traditional feedback and review models that focus on whether the company, departments, or individuals have met
their budgeted financial objectives. An advantage of the Balanced Scorecard approach over traditional models is that it focuses
management’s attention on managing results from the perspective of customers, internal business processes, and learning and

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growth. This real-time learning perspective can increase organizations’ nimbleness in modifying strategies in response to
changing circumstances.

3. How do the scorecards differ across firms? Can you explain why?
Another objective of our study was to explore how the Balanced Scorecard might vary across industries, so we looked
at four companies from different industries: electronics manufacturing, food ingredients, banking, and biotechnology.
The Balanced Scorecards suggested by these companies are shown in Tables 1-4. Because of space limitations,
however, we will discuss only the responses from the electronics firm, as shown in Table 1, in any detail.
We also asked each of the top managers to what extent their company had implemented a performance monitoring
system similar to the Balanced Scorecard and if they thought such a system could be beneficial to their company. Only
one of the responding companies said it had totally implemented such a system, with the other companies reporting that
their current implementation status ranged from 3 to 7 on a scale of 1 to 10. All responding companies, however, said
they thought such a system would be extremely beneficial, with the lowest score being 8 on a scale of 1 to 10, and half
of the companies gave the value of the concept a perfect 10 rating.

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 Readings

2-1: HOW TO REPORT A COMPANY’S

SUSTAINABILITY ACTIVITIES
By combining two metrics, management accountants can create a comprehensive methodology for
reporting a company’s use of economic, environmental, and social resources.
by Gwendolen B. White, PH.D., CPA Sustainability reporting is becoming a mainstream
practice.4 Sustainability reports had primarily addressed
“What is sustainability? It’s more than environmentalism. environmental issues until 1999, when they began to
It’s about living and working in ways that don’t jeopardize include economic and social indicators as well. Fewer than
the future of our social, economic and natural resources. In 100 U.S. companies issued sustainability reports in 1993,
business, sustainability means managing human and natural but that number had grown to 1,500 by 2005. 5 That figure
capital with the same vigor we apply to the management of includes 68% of the top 250 companies in the Fortune 500.
financial capital. It means widening the scope of our The increase in sustainability reporting has not gone
awareness so we can understand fully the ‘true cost’ of unnoticed by the investment community. Since 1999, the
every choice we make.”—Ray Anderson, founder of Dow Jones Sustainability Indexes (DJSI) have been
Interface, Inc. tracking the financial performance of companies that are
“sustainability driven.” In addition, the Dow Jones STOXX
More and more, corporations and other organizations are Indexes and Sustainable Asset Management provide asset
reporting their “sustainability” activities—their managers with benchmarks to manage portfolios of issuers
responsibilities to keep the environment clean, treat people who practice sustainability. More than 50 asset managers in
humanely, and achieve economic goals. In fact, 14 countries are using the DJSI to manage €3.6 billion.6
sustainability reporting has become a vital part of the
information that external and internal decision makers use. The number of investment management companies that are
“For many corporations, sustainability is becoming not just evaluating companies’ sustainability practices illustrates
‘a nice thing to do’ but a core requirement, enabling them to that, for investment purposes, some external users are no
increase their value and sustain profitability in the long longer satisfied with historical financial reports as the
term,” Willem Bröcker of PricewaterhouseCoopers (PwC) predominant source of a company’s reported information.
says.1 Increased scrutiny of corporate behavior is being demanded
by consumers, governments, employees, and local
Sustainability reporting includes economic, environmental, communities as well as investors. Large companies have a
and social indicators that help monitor progress toward substantial impact on the people in their communities and
sustainable practices. Eighty-one percent of senior on their employees. Corporate misbehavior is costly in
executives at large U.S.-based businesses report that many ways. It can harm workers, cultures, and the
sustainability practices will be essential or very important to environment. Ultimately, corporate misbehavior damages
their company’s strategic mission.2 That may be because reputations and profits. For example, in 1996, Nike suffered
the way a company manages its social and environmental a consumer backlash, a boycott, and long-term damage to
responsibilities influences its financial success.3 In this its reputation because it employed children to manufacture
article I will discuss the emergence of sustainability its products in Pakistan. Reports of poor working conditions
reporting as a major source of information for external and pollution in Nike’s factories in Vietnam also plagued
decision makers. I will pay special attention to the Global the company. Many other large companies also have come
Reporting Initiative’s (GRI) Sustainability Reporting under scrutiny for their treatment of workers. For example,
Guidelines and how they fit into the balanced scorecard Wal-Mart’s stakeholders have demanded more transparency
(BSC). because of the company’s employee compensation
practices. Sustainability reports can provide some of this
EMERGENCE OF SUSTAINABILITY REPORTING transparency. Stakeholders are increasingly interested in
evaluating profits and the processes that create them

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because processes that involve innovation, production, and activities in accordance with the GRI’s Sustainability
worker and consumer safety are influenced by a company’s Reporting Guidelines.
values about the environment and financial and human
capital. Jeffrey Immelt, GE’s chairman and CEO, views SUSTAINABILITY REPORTING AND
execution, growth, great people, and being a good corporate THE BALANCED SCORECARD
citizen by helping to solve world problems as drivers of
GE’s success. Its practices of global citizenship affect how Sustainability reports also help internal users better manage
GE operates and treats its employees, the kinds of risks associated with environmental and social incidents.
companies and countries it chooses to do business with, and Rather than reacting to problems as they arise, managers
the technologies it invests in, Immelt said in a news report. can engage in proactive strategies to reduce problems.
For example, GE is making better energy-efficient Many corporations report that adopting sustainable
locomotives to protect the environment along with practices and reporting them reduces operating costs,
requiring supply chain audits to protect against the use of improves efficiency, improves their reputation, helps them
sweatshops. These values are important to stakeholders and develop innovative products and services, and integrates
can be communicated in terms of sustainable practices in risk management.12 For example, Canon Corporation has
sustainability reports. By embracing sustainable been redesigning its production processes and products to
development, companies can improve their reduce the use of hazardous materials to meet the
competitiveness, performance, and image.8 company’s environmental performance targets. Meeting its
environmental targets results in progress toward economic
Another indication of the emerging relevance of and social objectives by reducing costs and increasing
sustainability reporting is the direct involvement of major worker safety, respectively. One specific change in Canon’s
public accounting firms. For example, KPMG in the U.K. production process involves the production of lead-free
offers a variety of services related to sustainable cables for all of its printers.13 By not using lead, Canon is
development: public opinions on environmental and social able to reduce its costs, lessen the negative impact on the
reports, assurance on environmental and social management environment, and provide a safer workplace. Although the
systems, and advisory services (risk management, Sustainability Reporting Guidelines are not a management
performance measurement, and reporting) in relation to system, they can provide companies with an approach to
“hot issues” in the marketplace, such as climate change, achieving sustainable practices that involves the entire
emerging standards and regulations, supply-chain risks, company. Involving the entire company increases the
human rights, and stakeholder activism. PwC offers similar likelihood of achieving successful outcomes. Many
services. It sees sustainable reporting as a fast-growing initiatives in managerial accounting, such as total quality
market and an opportunity to expand its business. 9 The management (TQM), activity-based costing (ABC), just-in-
major accounting firms are already performing 65% of the time (JIT) production and distribution systems, and
verifications of companies’ sustainability reports, a report reengineering, appeared promising but did not produce the
from KPMG’s Global Sustainability Services said.10 desired economic benefits.14 In many companies, the
Verifications of these reports are not the same as an audit of programs were fragmented and not tied to the overall
financial statements because sustainability reports are corporate strategy. This could be the fate of sustainability
published in a variety of formats. reporting if it is not viewed from a strategic management
viewpoint.
Unlike generally accepted accounting principles (GAAP),
there are no generally accepted standards of sustainability The balanced scorecard is considered a strategic
reporting. In most instances, sustainability reports cover a management system that ties financial and nonfinancial
company’s economic, environmental, and social activities, performance measures to the overall mission of the
but not all companies use the same indicators to gauge their organization. The measures on a BSC should be used to
activities, and this makes comparison difficult. To address “articulate the strategy of the business, to communicate the
this consistency problem, the Global Reporting Initiative, strategy of the business, and to help align individual,
an independent institution, offers sustainability reporting organizational, and cross-departmental initiatives to achieve
guidelines that help make the reports more standardized. 11 a common goal,” according to Robert Kaplan and David
The GRI began in 1997 and became independent in 2002. It Norton.15 The BSC was not intended to be a system to
is an official collaborating center of the United Nations achieve compliance with a predetermined plan but a system
Environment Programme. To develop reporting guidelines, that fosters communication, informing, and learning. It is a
the GRI works with representatives from business, set of measures derived from a top-down process and
accounting, investment, environmental, human rights, driven by the mission and strategy of the company. By
research, and labor organizations from around the world. incorporating the GRI sustainability indicators into the
There are 665 organizations that report their sustainable BSC, organizations can easily tie their sustainability
measures to their overall mission. Sustainability practices

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can be instituted throughout a company with the intent of considerations), and social performance (integrating social,
achieving an integrated strategy of sustainable human rights, and health and safety). Many of the GRI
development. Measurements involving the four indicators correspond to the financial, customer, internal
perspectives of the BSC (financial, customer, internal business, and the learning and growth perspectives of the
business processes, and learning and growth) can be BSC.
combined with the three components of sustainability
reporting (economic, environmental, and social). This ECONOMIC INDICATORS
combination could result in obtaining the most from the
external measures intended for shareholders and customers Rather than measuring changes in the organization, GRI
and the internal measures of business processes, innovation, economic performance measurements track economic
and learning and growth. Let’s examine the GRI’s changes that result because of an organization’s
Sustainability Reporting Guidelines in connection with the sustainability activities that affect stakeholders. Although
BSC’s four perspectives. First, the balanced scorecard the GRI economic indicators are similar to the BSC
measures of financial performance are revenue growth and financial perspective, they are broader. They focus more on
mix, cost reduction/productivity improvement, asset the way an organization affects the stakeholders with whom
utilization/investment strategy, and risk management, and it has direct and indirect economic interactions. For
they are aimed primarily at how a “company’s strategy, example, the GRI categorizes economic indicators in terms
implementation, and execution are contributing to bottom- of stakeholders: customers, suppliers, employees, providers
line improvement.”16 of capital, and the public sector, as shown in Table 1. This
reporting blends the needs of the external and internal users
The BSC customer perspective includes core customer because it enables external users to monitor progress toward
outcome measures such as satisfaction, loyalty, retention, sustainability, and internal users can identify areas that need
acquisition, and profitability. In the BSC internal business corrective action. The GRI economic indicators involving
processes perspective, objectives and measures are derived customers include net sales and geographic breakdown of
from explicit strategies to meet shareholder and targeted markets. Companies report their net sales by geographic
customer expectations. Kaplan and Norton recommend a region and type of product. From an internal perspective,
value-chain model that includes innovation, operations, and managers are able to monitor whether they are on target for
post-sale service. In the learning and growth perspective, their financial goals in each of these markets. From a BSC
the BSC develops objectives and measures to help achieve financial perspective, GRI economic indicators correspond
the objectives in the financial, customer, and internal to revenue growth and sources of revenue. They can also be
business processes perspectives. The three principal tied to the BSC customer perspective, which measures
categories for learning and growth are employee profitability of the core customer. Stakeholders can also
capabilities, information systems capabilities, and determine where the customer base is and what financial
alignment and empowerment. The BSC complements the impact the company is having in different regions
sustainability goals of continuously improving financial worldwide. This information is also relevant to risk
performance (growth and value creation), environmental assessment from both external and internal viewpoints.
performance (integrating environmental and bioethical

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Unpredictable events in different parts of the world can
have a dramatic impact on a company’s profits. For GRI environmental indicators are divided into materials,
instance, if war or natural disaster affects a particular region energy, water, biodiversity, emissions, effluents, waste,
of the world, a company’s risk exposure to loss can be products and services, and compliance, as shown in Table
assessed by analyzing its customer base in that location. 2. These environmental sustainability indicators are then
Economic indicators for suppliers are cost of all goods, subdivided. For example, materials—other than water—are
materials, and services that suppliers provide and the grouped by type, use, and quantity. Materials that are waste
percent of contracts that are paid in accordance with agreed are classified as those from internal sources and those from
terms, excluding agreed penalty arrangements. These external sources. Energy indicators are divided into direct
indicators could help with cost reduction and with risk energy use, segmented by primary source, and indirect
management in the BSC financial perspective. The cost of energy use. These measures would be useful as part of cost
goods, materials, or services is often a major component of reduction in the BSC financial perspective. The
a company’s expenses and can be evaluated in terms of its environmental indicators are also relevant from the BSC
impact on profits. Whether a company is complying with internal business processes perspective. In particular,
contract terms helps internal and external users evaluate innovation is applicable. Companies can reduce their
contract risk. emissions by developing new products and/or processes
that emit fewer greenhouse gases and other ozone-depleting
Indicators for employees are total payroll and benefits, such substances. The environmental indicators are good
as wages, pension, and other benefits, broken down by measures to ensure that the company is moving to reduce
country or region. From the BSC financial perspective, environmental impacts. GRI environmental indicators are
these indicators can be categorized under cost reduction and also important from a BSC risk management perspective
risk management. Internal users can monitor and control because a company that does not manage its pollution
these costs for specific countries and regions. Stakeholders problems faces the risk of fines and lawsuits for
can assess the impact that the company has as a provider of environmental damage. Biodiversity indicators include
employment and wealth to workers in different regions of location and size of land owned, leased, or managed in
the world. Stakeholders may be able to determine whether biodiversity-rich habitats. These indicators also report the
fair wages are being paid according to the standards of effect industrial activity has on the biodiversity in
specific countries. Failure to pay fair wages puts a company terrestrial, freshwater, and marine environments.
at risk for charges of exploitation and may damage its Biodiversity indicators are important for the customer
reputation. Indicators about capital providers show perspective of the BSC. Companies that are thoughtful
distributions to creditors and shareholders. These indicators about their growth in environmentally sensitive areas are
are interest on debt and borrowings; dividends on all classes likely to attract customers who are interested in sustainable
of shares, with any arrears of preferred dividends to be practices.
disclosed; and the change in retained earnings at the end of
the period. The last item includes return on average capital This approach to sustainable development provides
employed, one of the BSC’s financial measurements. goodwill for the company. Total amount of waste by type
Payments for interest can affect profitability, and their and destination also is reported. Destination is the method
reduction would be considered part of cost reduction goals by which waste is treated, such as composting or reuse.
in the BSC. The public sector indicators include total sum Companies are finding cost-effective ways to reuse their
of taxes of all types paid, broken down by country; waste. By monitoring where their waste goes, companies
subsidies received, broken down by country or region; and can also focus on cost reduction and risk management.
donations to community, civil society, and other groups, Canon, for example, uses large quantities of fresh water to
broken down in terms of cash and in-kind donations per clean its lenses during production. To reduce its costs and
type of group. These payments are a measure of the impact on the environment, the company redesigned its lens
financial impact that a company has on the local economy washing process to reduce water use and discharges into the
through taxes and contributions. For example, in its environment. The water is now cleaned and reused. Other
sustainability report for 2003, British Petroleum reported its GRI environmental indicators are significant discharges
total charitable contributions as $74.4 million, broken down into water and significant spills of chemicals, oils, and
by projects in different countries. Many companies make fuels. This information is relevant to cost reduction and risk
these donations to local communities to generate goodwill, assessment in the financial perspective of the BSC.
which can be viewed as an objective of the financial
perspective of the BSC, measured by new local customer In addition, these measures could be useful for internal
acquisition or revenue growth in the local communities. business processes. Companies can establish processes that
are aimed at reducing the chances that spills will occur.
Indicators for products and services include significant
ENVIRONMENTAL INDICATORS environmental impacts of principal products and services,

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percentage of the weight of products sold that is carpet producer that has used these ideas about
reclaimable at the end of the products’ useful life, and environmental impacts of products and services to meet its
percentage that is actually reclaimed. When companies customers’ needs. The company’s customers lease its
report these impacts, they are more likely to look for ways carpets, and, when the carpets need to be replaced, Interface
to reduce the waste associated with the product at the end of replaces only the worn pieces. Then Interface reworks or
its life. This can reduce costs and, in many instances, meet composts the worn pieces.
customers’ specific needs. Interface, Inc., for example, is a

GRI compliance reports include fines and incidents of Employment indicators show, where possible, the
noncompliance with all applicable international breakdown of the workforce by region/country, status
declarations/conventions/treaties and national, subnational, (employee/ non-employee), by employment type (full-
regional, and local regulations associated with time/part-time), and by employment contract (indefinite,
environmental issues. These reports assist companies with permanent/fixed-term, or temporary). Net employment
their compliance so they can avoid costly fines and negative creation and average turnover segmented by region/ country
media attention. In addition, these GRI indicators address are reported. High employee turnover can be an indication
cost reduction and risk management in the financial that the objectives of internal business processes are not
perspective of the BSC. being met. Health and safety indicators include the number
of accidents and fatalities, and focusing on worker health
SOCIAL INDICATORS and safety can reduce costs. Labor practice indicators that
cover nondiscrimination policies, child labor policies, and
The social component of sustainability details an compulsory labor policies are particularly relevant for the
organization’s impacts on the social systems within which it financial, internal business processes, and learning and
operates. Social performance analyzes an organization’s growth perspectives of the BSC. GRI indicators for
impacts on stakeholders at the local, national, and global nondiscrimination, child labor, forced and compulsory
levels. Social performance indicators are grouped into labor labor, diversity, and opportunity are statements of a
practices and “decent” work, human rights, and product company’s policies to prevent these activities. These
responsibility, as shown in Table 3. GRI labor practices and indicators can be useful in risk management of the BSC
decent work indicators are measures related to employment, financial perspective. Meanwhile, training and education
labor-management relations, health and safety, indicators provide detail about employee training programs
nondiscrimination, child labor, forced and compulsory at all levels of the company. Training and education are part
labor, training and education, and diversity and opportunity. of the objectives of the BSC learning and growth because

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they deal with employee morale and productivity. place to work are likely to be more productive. Human
Ultimately, employees who are treated fairly with regard to rights indicators cover community, bribery and corruption,
wages, a decent work environment, and a healthy and safe and political contributions.

Community indicators are descriptions of policies to they intersect specifically with customer satisfaction,
manage impacts on communities in areas affected by a loyalty, retention, and profitability.
company’s activities, as well as descriptions of procedures
to address this issue, including monitoring systems and
results of monitoring. Community indicators can be tied to A FUTURE OF SUSTAINABILITY REPORTING
the internal business processes objective of the BSC
because companies can manage their operations better Sustainability reporting is a growing trend that promises to
when they know how their activities affect communities in become a competitive edge for many companies. It is
which they are located. Bribery and corruption indicators proving to be a valuable tool internally and externally,
involve a description of the organization’s policy, giving management a means of analysis and stakeholders
procedures/management systems, and compliance more transparency. By combining economic,
mechanisms for addressing bribery and corruption. Political environmental, and social indicators across Kaplan and
contribution indicators are descriptions of policy, Norton’s balanced scorecard, management accountants can
procedures/management systems, and compliance produce meaningful financial and non-financial
mechanisms for managing political lobbying and sustainability measures that give decision makers a better
contributions. They also include the amount of money paid view of a company’s short-term and long-term profitability
to political parties and institutions whose prime function is as well as long-term viability.
to fund political parties or their candidates. In terms of the
BSC financial perspective, the bribery and corruption and ENDNOTES
political contributions indicators are useful for managing 1 PricewaterhouseCoopers, “Discussion with PwC Managing Partner:
Willem Bröcker,” Amsterdam, The Netherlands,
risk associated with the prevention of illegal activities on
2004.
the part of the company. Customer health and safety 2 PricewaterhouseCoopers, “Corporate Governance and Sustainability
indicators, part of product responsibility, include a Survey,” New York, N.Y., 2002.
description of policy for preserving customers’ health and 3 KPMG International, “KPMG International Survey of Environmental
Reporting,” KPMG Environmental Consulting, Amsterdam, The
safety when they use the company’s products and services.
Netherlands, 1999.
This includes the extent to which this policy is visibly 4 Ibid.
stated and applied as well as a description of procedures to 5 Association of Chartered Certified Accountants, “Towards
address this issue, including monitoring systems and results Transparency: Progress on Global Sustainability Reporting 2004,”
London, England, 2004.
of monitoring. In addition, descriptions of policy,
6 SAM Indexes GmbH, www.sustainability-indexes.com, Zurich,
procedures/ management systems, and compliance Switzerland.
mechanisms related to product information and labeling are 7 Marc Gunther, “Money and Morals at GE,” Fortune, November 10,
part of this set of indicators. These indicators can be viewed 2004, p. 176.
8 PricewaterhouseCoopers, 2004.
as important from the customer perspective of the BSC, and
9 PricewaterhouseCoopers, 2002.

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10 KPMG International.
11 Global Reporting Initiative, Sustainability Reporting Guidelines,
Boston, Mass., 2002.
12 PricewaterhouseCoopers, 2002.
13 Canon Inc., “Canon Sustainability Report 2004,” Tokyo, Japan, 2004.
14 Robert S. Kaplan and David P. Norton, The Balanced Scorecard,
Harvard Business School Press, Boston, Mass., 1996.
15 Ibid., p. 25.
16 Ibid.

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 2-2: APPLYING THE BALANCED SCORECARD TO
SMALL COMPANIES
Companies are designing their performance goals—and keeping score—based on their
unique needs and perceived critical success factors.

by Chee W. Chow, Kamal M. Haddad, and James E. Essentially, the Balanced Scorecard is a set of
Williamson, CPA financial and nonfinancial measures relating to a company’s
critical success factors. What is innovative about the
On October 30, 1996, Pacific Inland Bank of concept is that the components of the scorecard are
Anaheim, Calif., announced that it had changed its vision designed in an integrative fashion such that they reinforce
and strategy to such an extent that it was also changing its each other in indicating both the current and future
name to Security First Bank in a complete restructuring to prospects of the company. More than others, Kaplan and
transform it into “a true community bank, one that serves Norton probably deserve much of the credit for
small businesses, professionals, and consumers.”1 elucidating and increasing the awareness of this
The restructuring at Security First is only one example concept.4
of how American companies are making major changes in When Kaplan and Norton introduced the concept of
responding to an increasingly competitive global economy. the Balanced Scorecard they were looking for ways to
Indeed, the need for fundamental change is so strong that concentrate corporate focus on performance measurement
some leading authorities from academia and industry have innovation. This focus was considered necessary because
called for a complete rethinking and reengineering of traditional management reporting systems have been found
Corporate America. For example, in their book, to be not much help in measuring performance in the new
Reengineering the Corporation,2 authors Hammer and manufacturing environment. While these backward-looking
Champy emphasize that it no longer is enough to do “task” or “cost object” oriented measurement systems
traditional tasks better. Rather, the realities of the current generated financial results for numerous organizational
competitive environment require that the old “individual- units—including results by entity, lines of business, cost
based task-oriented” management concept be discarded centers, and profit centers—they failed to supply the
completely and replaced with a “team-based process- information necessary to pull strong future performance out
oriented” management concept. of the organization.
The current emphasis on restructuring has created a Today’s managers know that yesterday’s accounting
new problem for management because traditional measures results tell little about what actually can help grow market
of financial performance no longer are adequate to fully share and profits—things like employee development and
assess how the newly restructured organization is doing. turnover, innovative services that enhance customer values,
Not only will successful restructuring require innovation in the quality of vendor services, and benefits from
the way organizations view and measure performance, but advancements in research and development. A key
developing, implementing, and evaluating such measures advantage of the Balanced Scorecard is that it puts
may be the greatest challenge that companies will have to strategy, structure, and vision at the center of
face. In fact, a recent survey has found that “80% of management’s focus.
large American companies want to change their Another advantage is that because the Balanced
performance measurement systems.”3 The “Balanced Scorecard emphasizes an integrated combination of
Scorecard” may be just what organizations need to help traditional and nontraditional performance measures, it
them restructure successfully to meet the demands of keeps management focused on the entire business process
the 21st Century. and helps ensure that actual current operating performance
is in line with long-term strategy and customer values. In so
doing, the Balanced Scorecard helps maintain a balance

WHAT IS THE BALANCED SCORECARD?

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 Figure 1. TRANSLATING STRATEGY INTO OPERATIONAL TERMS*

Financial Perspective
“To succeed financially, what
kinds of financial performance
should we provide to our
investors?”

Customer Internal Business

Perspective Perspective
“To achieve our Vision “To satisfy our
vision, how should And shareholders and
we be seen by our customers, at what
Strategy
customers?” business processes
must we excel?”

Learning and Growth

Perspective
*Adapted from R. Kaplan
and D. Norton, “Using the “To achieve our vision, how
Balanced Scorecard as a will we sustain our ability to
Strategic Management change and improve?”
System,” Harvard Business
Review, January-February
1996, p.76.

between building long-range competitive abilities and MAJOR COMPONENTS OF A BALANCED

recognizing investors’ attention to financial reports. To this SCORECARD
extent the Balanced Scorecard does retain traditional A well designed Balanced Scorecard combines
financial measures. But these financial measures are viewed financial measures of past performance with measures of
in the larger context of the company’s competitive the firm’s’ drivers of future performance. The specific
strategies for creating “future value through investment in objectives and measures of an organization’s Balanced
customers, suppliers, employees, processes, technology, Scorecard are derived from the firm’s vision and strategy.
and innovation.”5 As such, the relevance perspectives and their relative
Because of the way the Balanced Scorecard aids in importance can be expected to vary among firms. There is
successful restructuring by linking together all subunits and some agreement, however, that the framework for a
members in a concerted effort to enhance the overall goals Balanced Scorecard will include at least four major
and objectives of the organization, many leading-edge perspectives: financial, customer, internal business process,
companies have begun to adopt this new approach. For and learning and growth (Figure 1).
example, in late 1989, Bank of Montreal’s “corporate The financial perspective serves as the focus for the
performance was heading downhill fast.” Chairman and objects and measures in the other scorecard perspectives.
Chief Executive Officer Mathew Barrett and his team, This perspective reflects the concern in for-profit
deciding that “a successful turn-around strategy had to enterprises that every action should be part of a network of
include a new approach to performance measurement,” cause-and-effect relationships that culminate in improving
used the Balanced Scorecard to help solve the company’s short- and long-run financial performance. In the process of
problems. A partial list of other adopters includes KPMG identifying goals and measures, different financial metrics
Peat Marwick, Tenneco, Allstate, AT&T, and Elf may be appropriate for different units within the
Atochem.6 organization, linking that unit’s financial objectives to the
overall business unit strategy.
But how is a company to achieve its financial goals?
Current wisdom is that every company needs to pay
attention to the needs and desires of its customers because

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customers pay for the company’s costs and provide for its customer values (i.e., satisfaction, loyalty, retention,
profit. Companies need to identify the customer and market acquisition, and profitability) with targeted customers and
segments in which they choose to compete. This customer market segments.
perspective allows companies to align their measures of

RESPONSE FROM AN ELECTRONICS FIRM

Goals Measures
Customer Perspective
Quality Own quality relative to industry standards; number of defects; first pass yields;
delivered product quality; number of visits to customers to calibrate quality;
number of returns; number and quality of customers.
Price Own price relative to competitive market price; sales volume; customer
willingness to pay.
Delivery Actual versus planned; number of ontime deliveries; number of days
early/late; current backlog; aging of past due orders.
Shipments Sales growth; number of customers that make up 90% of shipments; %
military sales; number of new-to-us part numbers shipped.
New products Number of new products to support new semiconductors; rate of technology
improvements; % of sales from products introduced in last two years.
Support Response time; customer satisfaction surveys.
Internal Capabilities
Efficiency of manufacturing Cycle time; lead time; manufacturing overhead cost/quarter; rate of increase
process in use of automation each quarter; days’ sales in WIP; yield.
New product introduction Rate of new product introduction/quarter
New product success New products quarterly sales; number of orders.
Sales penetration Actual sales versus plan; increases in number of $1 million customers each
quarter.
New businesses Number of new businesses each year.
Innovation
Technology leadership Product performance compared to competition; number of new products with
patented technology in them; annual rate of increase in number of new
products per engineer.
Cost leadership Manufacturing overhead per quarter as a percent of sales; rate of decrease in
cost of quality per quarter.
Market leadership Market share in all major markets; number of systems developed to meet
customer requests and requirements.
Research and development Number of new products; number of patents.
Financial Perspective
Sales Annual growth in sales and profits.
Cost of sales Extent it remains flat or decreases each year.
Profitability Return on total capital employed.
Prosperity Cash flows.
Employees and Community Perspective
Competitive salaries and Salaries compared to norm in local area.
benefits
Opportunity Individual contribution, personal satisfaction in job; opportunity to share in
company financial success.
Citizenship Company contributions to community and the institutions that generate the
environment; extent to which employees are encouraged to contribute to the
community.

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 Another component of the scorecard focuses on those To date, reported applications of the Balanced
internal business processes that will deliver the objectives Scorecard mostly have been confined to large, international
that the financial and customer perspectives have companies. These companies tend to face more turbulent
established for customers and shareholders. This and competitive environments, have more dispersed and
component expands the focus beyond improving existing varied products and processes that they to coordinate and
operating processes to defining a complete internal process monitor, and also have more resources for undertaking
value chain that includes identifying current and future change initiatives. In comparison, small or local companies
customer needs and developing solutions for those needs. may have different needs such that what works for large
This perspective will be unique to each company as it companies may be ineffective or unnecessary for them. To
identifies the complete chain of processes that add to the gain some insights into the potential applicability of the
value customers receive from its products and services. Balanced Scorecard in small or local companies, we
Based on the objectives established in the financial, undertook a dialogue with four such companies
customer, and internal business process perspectives, a operating in Southern California whose size ranged
company needs to identify objectives and measures to drive from 100 to 1,200 employees. This dialogue with a top-
continuous organizational learning and growth. The level manager, either the CEO or a senior vice president
objectives in the learning and growth perspective should be from each company, was loosely structured in the form of a
the drivers of successful outcomes in the first three question and response survey asking to what extent the
perspectives. company had considered developing a Balanced Scorecard
Because the Balanced Scorecard expands the to fir its particular needs. Each company was asked to
company’s set of objectives beyond traditional financial identify up to five major components, along with the goals
measures, managers will be able to measure how their and associated performance measures, that might form the
business units create value for current and future customers. basis for an effective Balanced Scorecard for it.
The Balanced Scorecard also helps to measure the need to Another objective of our study was to explore how the
enhance internal capabilities and the firm’s investment in Balanced Scorecard might vary across industries, so we
people, systems, and those procedures necessary to improve looked at four companies from different industries:
future performance. In other words, the Balanced Scorecard electronics manufacturing, food ingredients, banking,
is an attempt to capture the essence of the organization’s and biotechnology. The Balanced Scorecards suggested by
critical value-creating activities. The Balanced Scorecard these companies are shown in Tables 1-4. Because of space
also aids in communicating the company’s goals and limitations, however, we will discuss only the responses
rewarding those employees whose efforts enhance those from the electronics firm, as shown in Table 1, in any
goals. Because of the financial perspective, the Balanced detail.
Scorecard retains an interest in short-term performance but, We also asked each of the top managers to what extent
at the same time, clearly reveals those drivers leading to their company had implemented a performance monitoring
long-term financial and competitive performance. system similar to the Balanced Scorecard and if they
thought such a system could be beneficial to their company.
FITTING THE BALANCED SCORECARD TO THE Only one of the responding companies said it had totally
ORGANIZATION implemented such a system, with the other companies
reporting that their current implementation status ranged
Developing a Balanced Scorecard involves a process
from 3 to 7 on a scale of 1 to 10. All responding companies,
of custom designing a strategic management measurement
however, said they thought such a system would be
system for a specific organization. The process is begun by
extremely beneficial, with the lowest score being 8 on a
making a preliminary assessment of the overall business
scale of 1 to 10, and half of the companies gave the value of
strategy of the organization. The focus is on integration of
the concept a perfect 10 rating.
the entire business process but not overly emphasizing the
The electronics firm selected the customer
individual tasks. Once the overall business process is
perspective, emphasizing the goals of quality, price,
identified, along with its goals and objectives, it should be
possible to identify and rank the measures believed to
capture the essence of the organization’s progress toward
those goals and objectives.

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 Table 2. RESPONSE FROM A FOOD INGREDIENTS COMPANY
Goals Measures
Financial Perspective
Capture an increasing share of industry growth. Company growth versus industry growth.
Secure the base business while remaining the Volume trend by line of business; revenue trend
preferred supplier to our customers. by line of business; gross margin.
Expand aggressively in global markets. Ratio of North American sales to international
sales.
Commercialize a continuous stream of profitable Percent of sales from products launched within
new ingredients and services. the past five years; gross profit from new
products.
Customer Perspective
Become the lowest-cost supplier. Total cost of using our products and services
relative to total cost of using competitive
products and services.
Tailor products and services to meet local needs. Cross-sell ratio.
Expand those products and services that meet Percent of products in R&D pipeline that are
customers’ needs better than competitors. being test-marketed by out customers (percent
of pipeline value).
Customer satisfaction. Customer surveys.
Internal Perspective
Maintain lowest cost base in the industry. Our total costs relative to number one competitor;
inventory turns; plant utilization.
Maintain consistent predictable production First pass success rate.
processes.
Continue to improve distribution efficiency. Percent of perfect orders.
Build capability to screen and identify profitable Change in pipeline economic value (risk-adjusted
products and services. decision tree approach similar to option pricing
methodology).
Integrate acquisitions and alliances efficiently. Revenues per salary dollar.
Learning and Growth Perspective
Link the overall strategy to the reward and Net income per dollar of variable pay.
recognition system.
Foster a culture that supports innovation and Annual preparedness assessment; quarterly
growth. reports (done by VP-MGR).
Develop those competencies critical to the overall Percent competency deployment matrix filled.
critical gaps to be filled.

delivery, and development of new products as of Third, the company values innovation which,
primary importance. This selection probably is typical again, clearly reflects the linkage with customer values
of the contemporary world view that customers and and market penetration. In this area, we also see that
their values must come first if the company is going to they are very concerned with quality, the cost of quality,
maintain long-term financial stability and growth. and its cause and effect on competitive market prices.
The second component selected is internal Fourth, the company indicates, but with little
capabilities. But analysis of the goals and measures discussion, that there is a need to provide shareholders
attached to this component indicates that customer some relatively short-run traditional financial results.
values and market penetration are still on the minds of That the company places this component fourth is an
the company’s management. There definitely is a indication that it sees customer values, product
linkage here that the management clearly recognizes.

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development and innovation, and market penetration as statements must be expressed as an agreed-upon
drivers of financial performance. integrated set of objectives and measures that describe
Finally, the company management’s explicit the long-term drivers of success.
identification of an employee perspective reflects its The second process—communicating and linking—
belief that a well-paid and satisfied workforce is key to helps management tie overall objectives and strategies to
attaining the company’s overall goals and objectives. department and individual objectives. This process replaces
the traditional way departments are evaluated by financial
DIFFERENT GOALS AND SCORECARDS performance and individual incentives. The advantages of
As we mentioned earlier, an important consideration this new approach is the way it ensures that all levels of the
in applying the Balanced Scorecard approach is to organization are made aware of and understand the
recognize that each organization is unique and, therefore, company’s long-term strategy. The scorecard also ensures
requires a different set of goals, objectives, and strategies to that individual and departmental objectives are in
attain its mission. This fact is evident when we look at the agreement with the long-term strategy.
items selected by some of the other companies for their The third process—business planning—helps
scorecard. organizations integrate their business and financial plans.
A company in the food ingredients industry (Table Kaplan and Norton explain that most organizations today
2) says it is first interested in the financial perspective are trying to implement a variety of change programs that
but then proceeds to identify many goals and measures are competing with each other for time, energy, and
in the other perspectives that will enhance the financial resources.8 This competition can be so intense and inner
goals along with the goals of perspective. focused that it is difficult to integrate these diverse
The responses from a commercial bank are initiatives to achieve the firm’s overall strategic goals. The
illustrated in Table 3. An interesting observation about Balanced Scorecard can be used to set goals that provide a
this scorecard is that it sets out a separate community basis for allocating resources and setting priorities. The
perspective. This viewpoint probably reflects the scorecard also can aid in eliminating some initiatives and
traditional community role that bank managers think selecting others that are more effective for moving the
may be expected of them. organization toward its long-term strategic objectives.
Finally, a biotechnology firm in its Balanced The fourth process—feedback and learning—helps
Scorecard (Table 4) selected the customer perspective as management direct the organization toward strategic
of primary importance. The financial perspective comes learning. This process is different from traditional feedback
after customers and technological leadership. Thus, and review models that focus on whether the company,
across the four types of companies considered there is a departments, or individuals have met their budgeted
clear indication that management is designing the goals financial objectives. An advantage of the Balanced
and measures to fit the company’s unique needs and Scorecard approach over traditional models is that it
perceived role. Further, these responses suggest that the focuses management’s attention on managing results from
Balanced Scorecard can be an effective management the perspective of customers, internal business processes,
tool for small companies as well. and learning and growth. This real-time learning
perspective can increase organizations’ nimbleness in
FOUR NEW MANAGEMENT PROCESSES modifying strategies in response to changing circumstances.
Kaplan and Norton show how the Balanced Scorecard
THE PERSONAL SCORECARD
will let managers introduce “four new management
processes that, separately and in combination, contribute to Because achieving a company’s goals requires a
linking long-term strategic objectives with short-term concerted effort on the part of everyone, there is a need to
actions.”7 Figure 2 shows how the integration of the four translate the goals and objectives down to the individual
processes lead to the Balanced Scorecard. level. Translating the company scorecard into specific goals
The first process—translating the vision—helps and measures at the individual level is important for
managers build a consensus of opinion about the motivating and focusing the individuals and teams
organization’s vision and strategy. Because it is very performing the work. There is no reason why all the
important to translate vision and strategy into operational individual scorecards should be identical because each
terms that employees can understand and use to guide member may have a unique role in the
actions at their local level, the vision and strategy

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 Table 3. RESPONSE FROM A COMMERCIAL BANK
Goals Measures
Shareholders — Financial Perspective
Return on assets of 1% or more and Net interest margin; noninterest income; noninterest
return on equity of 15% or more. expense.
Efficiency ratio of 68% or less. Overhead expenses.
Growth in assets of 15% or more. Asset growth.
Loan losses of .5% or less. Number of problem loans; early detection rate.
Loan delinquencies over 30 days of Number of bad loan underwriting; number of loan
2% or less. delinquencies.
Customer Perspective
Personalized quality service Number of complaints; amount spent on training; number
of rewards and recognitions; customer satisfaction.
Competitive products Sales volume; number of customers; number of products
offered a year; extent products are “user friendly”
compared to competition; degree of use of technology
(where appropriate).
Pricing Cost of doing business; own price relative to competition;
extent service is better than competition.
Customer satisfaction Customer surveys.
Employee Perspective
Competitive wages and benefits. Annual market review.
Participation in success of the Bonuses based on corporate and personal performance;
organization. sales incentives; recognition.
Enhanced job skills. Training/schooling; coaching.
Objective evaluation of performance. Performance standards; job descriptions.
Enhance upward career movement. Number of promotions from within; posting of most open
positions.
Community Perspective
Support worthwhile community Extent of employee participation; extent of financial
activities. support.
Act as good corporate citizens. Extent employees are encouraged to vote; extent of
support and activities that foster this attitude.

organization. The goals and needs of any organization are A question that remains is whether an organization’s
many and varied, and skills, talents, and interests also vary compensation system should be linked to its Balance
across individuals. To attain the greatest success as a whole Scorecard measures. Some companies believe that tying
requires organizations to exploit these individual financial reward to performance is a powerfully motivating
differences and to seek and create synergies among its incentive and have done so.9 If an organization is
members. Thus, unlike a golf team, where the team score is considering using such a linkage in its compensation
simply the sum of individual team members’ scores, most scheme, however, it is important to realize that there also
organizations are more like a football team, where the team are risks involved with this approach. Does the organization
outcome depends on coordination and cooperation in have the right measures on the scorecard? Does the
addition to specialization among team members. organization have valid and reliable data for the selected
Accordingly, while the individual personal scorecards need measures of performance? Are there undesirable
to be consistent with the organization’s overall strategies, consequences that could arise from actions aimed at
goals, and measures, there also needs to be flexibility in achieving the
accommodating individual strengths and weaknesses.

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 Table 4. RESPONSE FROM A BIOTECHNOLOGY FIRM
Goals Measures
Customer Perspective (How can we improve customer perceptions and relationships?)
New products Percent of sales from new products.
Early purchase of seasonal products Percent of sales recorded by early purchase date.
Accurate invoices Percent error-free invoices.
Early payment Percent of customers who pay early.
Product quality Product performance vs. industry quality standards.
Customer satisfaction Customer satisfaction surveys.
Internal Business Perspective (Efficiency; how can we be more cost-effective?)
Low-cost producer Unit cost vs. competitors.
Reduce inventory Inventory as percent of sales.
New products Number of actual introductions vs. target.
Innovation Perspective (How can we establish and maintain technological leadership?)
New active ingredients Number of new ingredients identified by internal
discovery program.
Proprietary positions Number of patents that create exclusive marketing rights.
Financial Perspective (How do we build shareowner value?)
Growth Percent increase in top line revenue.
Profitability Return on equity; earnings per share.
Industry leadership Market share.

established targets? Those types of questions need to be achieve a consensus among the individual members
explored before an organization adopts an incentive concerning the company’s overall vision and strategic goals
strategy based on achieving certain targeted goals. and objectives. This step should lead to identifying the
We do know that if the current trend of shifting critical perspectives in the company’s Balanced Scorecard.
emphasis from individual achievement to cooperation and
teamwork continues, companies will need to reexamine Stage 2. A strategic planning committee is formed to
their short-term formula-based incentive compensation formulate objectives for each previously identified
systems. Moreover, when companies adopt the Balanced perspective in the firm’s Balanced Scorecard.
Scorecard approach, they move to a longer-term viewpoint
and may need to set incentive rewards more subjectively. Stage 3. Using the Balanced Scorecard as a communication
According to Kaplan and Norton, the longer-term tool, the strategic planning committee seeks comments on
subjective evaluation process appears to have the advantage and acceptance of the company’s Balanced Scorecard from
of being less susceptible to the game playing and distortions all members of the organization.
associated with explicit, formula-based rules.10 There is
little doubt that the Balanced Scorecard has a role to play in Stage 4. Based on feedback from the dialogue with the
incentive compensation systems. Exactly what that role will individual members, the strategic planning committee
be will become clear as companies experiment with various revises the company’s Balanced Scorecard.
ways to link rewards to scorecard measures.

IMPLEMENTING THE BALANCED SCORECARD

If the experience of other companies is any guide,11
the design and implementation process for installing a
Balanced Scorecard may take two years or more. A typical
schedule may contain all or some of the following
component stages.
Stage 1. A strategic planning retreat involving all levels of
management is held to identify strategic issues and discuss
possible solutions. A major purpose of this meeting is to

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 Figure 2. MANAGING STRATEGY: FOUR PROCESSES*

Translating the Vision

 Clarifying the vision
 Gaining consensus

Communicating Feedback
and Linking And Learning
Balanced  Articulating the shared
 Communicating Scorecard feedback
objectives  Supplying strategic
 Setting goals information
 Linking strategies  Facilitating learning

Business Planning
 Setting targets
*Adapted from R. Kaplan
and D. Norton, “Using the  Aligning strategic
Balanced Scorecard as a initiatives
Strategic Management  Allocating resources
System,” Harvard Business  Establishing
Review, January-February
1996, p.77. milestones

Stage 5. The revised balanced Scorecard is communicated plan based on external and internal scanning of the
to the individual members. Thereupon, each individual company’s current condition and changes in the economic
member is required to develop a personal Balanced environment.
Scorecard that supports the company’s overall goals and Because the process is so lengthy, managers should
objectives described in its Balanced Scorecard. lose no time in evaluating the Balanced Scorecard concept
to see if they want to implement it or other methods that
Stage 6. The strategic planning committee reviews the will promote and support change to better measurement and
individual Balanced Scorecards and may revise not only the reward systems.
personal scorecards but also the company’s Balanced
Scorecard. A SCORECARD FOR THE 21ST CENTURY
Maybe it is time to try something new. The Balanced
Stage 7. Based on final Balanced Scorecards, management Scorecard appears to be an exciting new idea that may help
formulates a five-year strategic plan for the overall firms restructure to survive in difficult times. The scorecard
organization. The first-year plan is expanded into the also appears to be a concept that helps management direct
annual operating plan for the following year. its attention to those goals and objectives and the measures
that drive the company toward achieving those goals and
Stage 8. Individual and company progress is reviewed objectives that will allow the company to reengineer or
quarterly to identify areas that need immediate attention and restructure to meet the needs of the 21st Century.
additional work. The Balanced Scorecard is not so structured that it can
serve all organizations uniformly. But, instead, its strength
Stage 9. Based on the individual personal Balanced really lies in providing for management the ability to design
Scorecards, the company’s personnel committee in a unique scorecard that specifically firs the needs of that
conjunction with each individual’s supervisor evaluates company, subunit, or individual employee.
each member’s performance for the past year and makes Perhaps most important, while the Balanced Scorecard
recommendations relating to retention promotion, salary is relatively new on the performance measurement scene,
increases, or other rewards. its perceived advantages at this time indicate that it may be
with us for quite awhile.
Stage 10. The strategic planning committee revises the
company’s Balanced Scorecard and the five-year strategic

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 Chee W. Chow, Ph.D., is Vern Odmark Professor of
Accountancy, San Diego State University, San Diego,
Calif. Kamal M. Haddad, Ph.D., is professor of finance, San
Diego State University, and James E. Williamson, Ph.D.,
CPA, is director of the School of Accounting, San Diego
State University. He is a member of the San Diego Chapter,
through which he submitted this article. He may be
contacted at (619) 594-6021 or e-mail
jameswilliamson@sdsu.edu.

1
James Granelli, “Troubled Bank Tries Fresh Start,” Los
Angeles Times, October 31, 1996, pp. D1, D4
2
Michael Hammer and James Champy, Reengineering the
Corporation, Harper Business, New York, N.Y., 1993.
3
Bill Birchard, “Making it Go,” CFO, October 1995, pp.
42-51.
4
Robert Kaplan and David Norton, “The Balanced
Scorecard—Measures That Drive Performance,” Harvard
Business Review, January-February 1992, pp. 71-79.
5
Robert S. Kaplan and David P. Norton, Translating
Strategy Into Action: The Balanced Scorecard, Harvard
Business School Press, Boston, Mass., 1996, p.7.
6
Birchard, pp. 49-51.
7
Robert Kaplan and David Norton, “Using the Balanced
Scorecard as a Strategic Management System,” Harvard
Business Review, January-February 1996, p. 75.
8
Kaplan and Norton, p. 75.
9
Kaplan and Norton, p. 81.
10
Kaplan and Norton, p. 82.
11
Kaplan and Norton, p. 78-79.

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