By ROBERT S. KAPLAN and DAVID P. NORTON

WE began our collaboration in 1990 with a multi-company research
project that explored new ways to measure organisational
performance. We believed, at the time, that knowledge-based
assets – primarily employees and information technology – were
becoming increasingly important for companies’ competitive
success.

But companies’ primary measurement systems remained the
financial accounting system, which treated investments in
employee capabilities, databases, information systems, customer
relationships, quality, responsive processes, and innovative
products and services as expenses in the period in which they
were incurred.

Financial reporting systems provided no foundation for measuring
and managing the value created by enhancing the capabilities of
an organisation’s intangible assets.

We believed that executives and employees paid attention to what
they measured, and that people could not manage well what they
were not measuring. Consequently, executives’ attention and
effort were overly focused on influencing short-term financial
measures, and insufficiently on investing in and managing the
intangible assets that provided the foundation for future
financial success.

Without an improved performance measurement system, executives
would not develop and mobilise their intangible assets
effectively, and thereby forfeit major opportunities for value
creation.

From this one-year research project came the concept of a
Balanced Scorecard of measurements. We recommended that
organisations retain financial measures, to summarise the
results of actions previously taken, but that they should
balance these outcome measures with non-financial measures in
three additional perspectives – customer, internal, and learning
and growth – that represented the drivers, the lead indicators,
of future financial performance. This was the foundation of the
Balanced Scorecard.

We began to work with several organisations to facilitate their
implementation of the Balanced Scorecard. But we soon learned
that, while executives appreciated a more comprehensive new
performance measurement system, they wanted to use their new
system in a more powerful application than we had originally
envisioned.

They wanted to apply the system to solve the more important
problem they faced – how to implement new strategies. For not
only was the nature of their internal value creation process
shifting from tangible to intangible assets, the nature of
competition in their external markets was shifting as well.

Manufacturing companies, which formerly competed merely on
production capabilities and product characteristics, discovered
that success now required deep understanding of their markets
and customers, and an ability to provide unique value
propositions to their targeted customers.

Newly deregulated service companies now faced vigorous
competition from companies that had historically been outside
their protected markets. Often, entirely new companies had
entered their industries based on effective deployment of
advanced information technology. Even public sector agencies and
not for profit organisations were being asked to demonstrate how
they created value for their constituents and stakeholders.

So, executives in all sectors and in all parts of the world were
facing the dual challenges of how to mobilise their human
capital and information resources and how to transform their
organisations to new strategies.

Companies, public sector and non-profit organisations generally
responded to the challenge by formulating new strategies and
rededicating themselves – through inspirational new mission and
vision statements – to deliver increased value to their customer
segments and constituents.

The deep problem that virtually all organisations encountered,
however, was their inability to execute successfully on their
new strategies. Employees could hear the words of the new
mission, vision, and strategy statements but they didn’t
understand what the words meant to them.

How should they do their jobs better to help the organisation
succeed with its new strategy? Various studies indicated that
70% to 90% of organisations failed to realise success from their
strategies.

During the next four years, we tracked the performance of these
adopting companies, and a new set of companies, some that we had
assisted in the implementation and others that had implemented
on their own.

We learned that they were achieving breakthrough performance,
and in relatively short periods of time – within two to three
years of launching their BSC projects and their organisational
transformations.

When we asked the executives about the role of the BSC in their
remarkable transformations, they responded typically with two
words: “alignment” and “focus.” The BSC had enabled them to
align all their organisational resources – executive teams,
business units, support groups, information technology, and
employee recruiting and training – to focus intensively on
implementing their strategies.

We documented the experiences and practices of these companies
in our second book, The Strategy-Focused Organisation, which
expanded on the strategic management system we introduced in
Part II of The Balanced Scorecard. It showed how successful
adopters followed five management principles to become
strategy-focused:

- Translate strategy to operational terms
- Align the organisation to the strategy
- Make strategy everyone’s everyday job
- Make strategy a continual process
- Mobilise change through executive leadership

We also learned how to choose measurements that would be more
meaningful to executives and employees.

Measurement is a powerful motivator because employees pay much
attention to the selected measures, and we had to be careful
that we were measuring the right things. As the saying goes, “be
careful what you wish for; you may get it.”

Managers and employees strive to perform well on whatever
measures get selected, particularly if these are tied to an
incentive compensation plan. So before deciding what to measure,
we had to ask executives what their objectives were.

This innocent question turned out to have far-reaching
consequences.

We learned to start each engagement by getting executives to
agree on word statements of their objectives in the four BSC
perspectives. Once the executives agreed to the word statements
of what they wanted to accomplish, and how they wanted to
describe success, the selection of measurements became much
simpler.

And, in an interesting twist, the selection of measures became
somewhat less consequential. After all, when agreement existed
about the objective to be achieved, even if the initial
measurements for the objective turned out to be less than
perfect, the executives could easily modify the measurements for
subsequent periods without having to redo their discussion about
strategy. The objectives would likely remain the same even as
the measurements of the objectives evolved with experience and
new data sources.

The focus on objectives led to a breakthrough. Objectives should
be linked in cause-and-effect relationships. Executives, as they
listed objectives in the four perspectives, instinctively
started to draw arrows to link the objectives. They could now
articulate their strategy, of how improving employee
capabilities and skills in certain job positions, coupled with
new technology, would enable a critical internal process to
improve.

Soon we were coaching all the executive teams to describe their
strategy by explicit cause-and-effect relationships. We named
this diagram a strategy map. And while every organisation’s
strategy map was different, reflecting their different
industries and strategies, we could, after facilitating the
development of hundreds of strategy maps, see a basic pattern
emerge. We then formulated a generic strategy map to serve as a
starting point for any organisation in any industry.

The strategy map has turned out to be as important an innovation
as the original Balanced Scorecard itself. As one executive
speaker exclaimed at the start of her talk at a conference, “I
love strategy maps.”

The realisation of the importance of strategy maps motivated us
to write this third book in the Balanced Scorecard series. The
“equation” below positions this book relative to its two
predecessors.

Successful execution of a strategy requires three components:

- Describe the strategy
- Measure the strategy
- Manage the strategy

The Balanced Scorecard addressed the second component, and The
Strategy-Focused Organisation provided a more comprehensive
approach for how to manage the strategy.

The current book, Strategy Maps, goes into much more detail on
this aspect, using linked objectives in strategy maps to
describe and visualise the strategy.

* Robert Kaplan is scheduled to visit Singapore in May 2004. His
presentation is based on his latest book “Strategy Maps” due out
soon. MIM is offering a special price to Malaysians to attend
this event and learn from Dr Kaplan. For information or to
register for this event, please call MIM Customer Service at
03-21654611, visit www.mim.edu or e-mail enquiries@mim.edu.