Last Updated on March 12, 2024 by Lukas Rieder
Whether and how successful the implementation has been can be measured by means of profitability ratios such as EBIT or – taking into account the assets invested to generate profits – with the Return on Investment, ROI. As mentioned, these metrics are only the tip of the iceberg. The drivers that lead to their achievement are found in planning and implementation efforts throughout the organization.
In their early publications, Kaplan and Norton assumed that the strategic plans were already in place and that metrics could be found to measure and assess the success of their implementation. Later, e.g., in their book The Strategy Focused Organization (2001, Harvard Business School Publishing Corporation), they focused on how to develop strategic plans and translate them into operational goals.
The Four Development Perspectives of the BSC
Recognizing that profits are the consequences of inputs, the authors defined four development perspectives of a BSC:
Finance: What returns do our owners expect on their invested funds?
Customers: How do we meet our customers’ requests while being financially successful?
Processes: How are our internal processes to be designed and implemented to meet customer needs?
Potentials: What skills, abilities, knowledge and commitment must our employees have and be able to apply in order to manage the processes, and what equipment and facilities are required to do so?
We derived the explanations for the four perspectives from various publications. It may be that other perspectives are significant in individual organizations, but it is recommended that no more than six perspectives be identified to facilitate focusing on the essentials).
Strategies as Objectives and the Measurability of Results
Kaplan and Norton recommend that the balanced scorecards be broken down to the managers and areas responsible for implementation and recorded in the form of results to be achieved. This is necessary, on the one hand, for decisions about the deployment of people and resources, and, on the other hand, to define metrics for the achievement of the objectives of the individual areas (cf. ibid., p. 360f.). This means that strategic plans and the operational plans derived from them can only be regarded as agreed objectives if it is also specified how their achievement will be measured in the individual management areas. This requirement is consistent with the rules for agreeing personal annual objectives formulated in the post “Master Plan for Integrated Planning and Control”. In other words, the BSC can only be effective if all employees know what results they are expected to achieve and how their bosses will measure them. Declarations of intent or descriptions of activities are not sufficient (see also the post “OKR: Ideas are easy, implementation is everything”).
Measurable and verifiable strategies are therefore a central prerequisite for the derivation of BSCs. Often, strategy development as a creative process and strategic planning and control are not clearly distinguished. Strategy development is based on ideas, assumptions and assessments. Once a strategy has been decided, however, it must be concretized with measurable objectives and formulated in a verifiable manner. If the plan is not documented with measurable results, it is unclear which results are to be measured and how the achieved results are to be assessed.