Think of your business’s most valuable assets. Talented employees, customer relationships, brand loyalty, research capabilities, and a strong company culture may come to mind. Yet, the things that often create the most value are intangible and difficult to measure and track.
When crafting business strategy, you must account for intangibles and give them as much weight as financial goals. In the online course Strategy Execution, Harvard Business School Professor Robert Simons introduces the concept of the balanced scorecard to help you do just that.
Here’s a primer on the balanced scorecard and three steps to apply it to your organizational strategy.
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The balanced scorecard is a tool designed to help track and measure non-financial variables. Developed in 1992 by HBS Professor Robert Kaplan and David Norton, it captures value creation’s four perspectives.
“The balanced scorecard combines the traditional financial perspective with additional perspectives that focus on customers, internal business processes, and learning and development,” Simons says in Strategy Execution. “These additional perspectives help businesses measure all the activities essential to creating value.”
The four perspectives include:
- Financial perspective: Do your plans and processes lead to desired levels of economic value creation? Metrics include sales revenue, operating expenses, net income, and investment in assets.
- Customer perspective: Does your target audience perceive your product, services, and brand in the desired way? Metrics include quality, delivery speed, and customer service experience.
- Internal business process perspective: Do your organizational processes create value for customers? Metrics to track are related to operations and customer management, innovation, regulatory, and social processes.
- Learning and growth perspective: Does your organization support and utilize human capital and infrastructure resources to meet goals? Areas to consider are human capital (people, talent, and knowledge), information capital (databases, networks, and technology), and organizational capital (leadership capabilities and cultural alignment to company goals), each with its own set of metrics.
You should use the balanced scorecard in tandem with a strategy map, a visual way to illustrate the cause-and-effect relationships underpinning your business strategy.
“Without a strategy map, what you’re calling a balanced scorecard is really just a list of measures,” Simons says in Strategy Execution. “And those measures may or may not tie back to your intended strategy. Without a strategy map to tell the story, people in your organization will have no clue where those measures came from.”
The purpose of a balanced scorecard is to add actions to your strategy map and clarify which goals make others possible.
To get started, here are three steps to crafting your organization’s strategy map and balanced scorecard.
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How to Create a Balanced Scorecard: 3 Steps
1. Craft a Strategy Map
Before creating your balanced scorecard, you must craft a strategy map to base it on. Start by listing the scorecard’s four perspectives in this order:
- Financial perspective
- Customer perspective
- Process perspective
- Learning and growth perspective
“Learning and growth” will be the foundation, so position it at the bottom of your strategy map.
Next, list your goals in each category using action verbs. What do you intend on doing? For example, in the “learning and growth” category, you could write “train staff on a new content management system.” Next to “customer perspective,” you could write “increase customer satisfaction.”
These goals are what Simons calls “critical performance variables.” For your strategy to succeed, you must achieve them.
“This exercise is asking you to imagine what variables are so serious that—if you failed to deliver on them—you could imagine your entire strategy collapsing,” Simons says in Strategy Execution. “These are the critical performance variables that you must monitor if you want your business to succeed.”
Finally, draw arrows pointing upward between each perspective category, so “learning and growth” points to “process,” which points to “customer,” which points to “financial.”
“The arrows are the most important part of a strategy map,” Simons says in the course. “They reveal cause-and-effect relationships so that everyone in a business can understand the theory of value creation. The outputs from one stage are the inputs to the next.”
2. Select Measures
Once you’ve created your strategy map, start your balanced scorecard by selecting how you’ll measure progress for each objective.
Assess measures using three questions:
- Does the measure link to my strategy map?
- Is it objective, complete, and responsive?
- Does it link to economic value?
For example, if your objective is to “increase customer satisfaction,” measures could include:
- Number of referrals
- Number and speed of resolved support tickets
- Number of testimonials
- Net promoter score (NPS)
Link these measures to the goal in the strategy map to objectively measure, change, and tie them to your organization’s economic value.
Selecting the right measures is critical because, as the balanced scorecard’s creators note in the Harvard Business Review, “What you measure is what you get.”
“You can have the best strategy in the world,” Simons says in Strategy Execution. “You can communicate that strategy to employees in different ways—town hall meetings, videos, company newsletters. But at the end of the day, what everyone pays attention to is what they're measured on. So, you need to be sure that measures throughout the business reflect your strategy, so that every employee will devote their efforts to implementing that strategy.”
However you decide to measure objectives is where your team will focus its efforts, so choose wisely.
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3. Set Targets
The final step to creating your balanced scorecard is setting targets. What metrics must you hit to achieve your goals using your selected measurements? Consider the metric you want to reach and within what timeframe.
In the case of increasing customer satisfaction, targets for each sample measurement could be:
- Number of referrals: Garner 500 referrals next year
- Number and speed of resolved support tickets: Resolve 75 percent of support tickets within 48 hours
- Number of testimonials: Gather 100 testimonials next year
- Net promoter score (NPS): Target an average score of eight or above by 2026
Setting targets helps quantify what successful strategy execution means for each measure.
In Strategy Execution, Simons notes that, when looking at your balanced scorecard, the further you move to the right, the more you can objectively measure and reward performance. The further you move left, the more performance is subjective.
Set challenging but achievable targets. Remember that not accomplishing your “learning and growth” goals can impact the rest of your strategy map.
Building and Leveraging Your Strategy Toolkit
After creating your strategy map and balanced scorecard, the last, ongoing step is tracking and reporting progress toward each objective.
Use both to align on strategy, flag areas needing more attention, and highlight how goals connect. Everyone’s efforts funnel into a specific part of the strategy critical to the team’s overall success.
The balanced scorecard is just one tool to help execute your organization’s strategy. By opening up to new ways of thinking about strategy, you can reach business goals and advance your career as a strategic leader.
Are you interested in designing systems and structures to meet your organization’s strategic goals? Explore our eight-week Strategy Execution course, and other online strategy courses, to hone your strategic planning and execution skills. To find the right HBS Online strategy course for you, download our free flowchart.
