Financial Strategy, Second Edition

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Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part I

Robert S. Kaplan and David P. Norton

Several years ago we introduced the Balanced Scorecard (Kaplan and Norton 1992). We began with the premise that an exclusive reliance on financial measures in a management system is insufficient. Financial measures are lag indicators that report on the outcomes from past actions. Exclusive reliance on financial indicators could promote behavior that sacrifices long-term value creation for short-term performance (Porter 1992; AICPA 1994). The Balanced Scorecard approach retains measures of financial performance – the lagging outcome indicators – but supplements these with measures on the drivers, the lead indicators, of future financial performance.

THE BALANCED SCORECARD EMERGES

The limitations of managing solely with financial measures, however, have been known for decades.¹ What is different now? Why has the Balanced Scorecard concept been so widely adopted by manufacturing and service companies, nonprofit organizations, and government entities around the world since its introduction in 1992?

First, previous systems that incorporated nonfinancial measurements used ad hoc collections of such measures, more like checklists of measures for managers to keep track of and improve than a comprehensive system of linked measurements. The Balanced Scorecard emphasizes the linkage of measurement to strategy (Kaplan and Norton 1993) and the cause-and-effect ...