HOW TO BUILD A BALANCED SCORECARD©
Part 1: The Strategic Planning Process
Arthur M. Schneiderman
The objective of a strategic planning process is to identify opportunities
where the organization’s current or potential capabilities can be successfully
and sustainably matched against the needs of its various stakeholder groups.
Success is defined by the objective (vision and mission) of each organization.
It is measured by the value that it actually delivers to these stakeholders,
relative of course, to that provided by their other alternatives.
In a competitively based society, each of the organization’s various
stakeholders has choices. The owner’s of its capital have the option of
selling that capital and investing the proceeds in other organizations that they
believe will provide them with a greater return on their loaned financial
assets. Employees have the freedom to associate with a different
organization where they expect to receive a greater return on the time that they
invest. Customers usually have the ability to select a different product,
service, or supplier for fulfillment of their needs. Suppliers have the
choice of providing the inputs required by the organization when it wants them
and at the price it’s is willing to pay. And communities can commit their
limited resources (land, infrastructure, etc.) to those organizations that they
believe will prove to be the greatest asset to their constituents.
A successful organization manages its internal processes in order to win
against the competition on these stakeholder battlefields. The strategic
planning process distributes the organization’s always-limited resources among
these concurrent challenges. How it deploys them will determine whether it
survives as an entity in order to compete again another day.
I offer the following as a generalized model for a Strategic Planning
Figure 1. The
Strategic Planning Process
for a PowerPoint version of this figure)
This process forms a closed-loop system. It operates in a continuous
cycle, with neither a beginning nor an end. Since most organizations
implementing a BSC already have an explicit or tacit strategy in place, I’ll
start my description with the step identified as number one in this figure.
Also, for simplicity, I’ll describe the process in terms of the “customer”
stakeholder group and leave it as an exercise for the reader to extend it to its
organization’s other important stakeholders. They usually include owners,
employees, union leaders, suppliers, regulators, communities, etc.
Step 1: Choose targeted stakeholder segments
For decades we have been admonished to make explicit in our strategy the
customer segments that we intend to serve as well as those we will leave for
others to serve. This decision is sometimes referred to as strategic
intent. We do this in recognition of the view that we cannot be all things
to all potential customers and therefore must focus our limited organizational
resources on those chosen market segments. We will secure leadership in
them if we can satisfy their members needs better than our competition.
Our level of reward will depend on our market share and the maturity and growth
rate of that segment’s demand.
To make our decision on target market segments, we must understand the
opportunity space (potential market segments) and the competitive environment as
well as our own organizational competencies. For much of the later part of
the last century, we could rely on normative models to predict our chances of
success based on the assumption that cumulative experience (as determined by
historic relative market share) was its principal driver. Today we
understand that flexibility, agility, and rapid learning are more important
competitive advantages given the rapidity of technological change and the
increasing contribution of often-volatile organizational knowledge.
Making the wrong initial choice may trigger a doom loop from which there’s
little chance of recovery. However, rapid cycling of this strategic
planning process can quickly lead to convergence to a sustainable competitive
position. So let’s assume that we have initially chosen a set of related
market segments where we have a reasonable chance of long-term success.
We’ll return to this assumption in Step 9 to determine its validity.
Step 2: Identify their requirements
Each customer segment is characterized by its own unique set of requirements.
Either objectively or subjectively potential customers test each candidate
supplier against these requirements. They choose the one that comes
closest to meeting their aggregate needs. They do not weight each
criterion equally, and that is what makes them different from one another.
One segment might weight price much more highly than reliability. Another
may have just the opposite weighting. Once the targeted segments have been
selected, it is important to determine their importance weighted supplier
Step 3: Determine performance gaps (external
By asking our targeted customers how we are doing in meeting their various
requirements we can identify our performance gaps. Our hope is to close
these gaps in order to maintain or improve our relative competitive position.
We recognize that if we do nothing, we are likely to loose ground against more
aggressive competitors who are pursuing their own improvement objectives.
Performance gaps will differ from one targeted segment to another, so we need to
apply this step separately for each of the market segments that we are currently
serving or considering.
Step 4: Set stakeholder improvement priorities
Improving requirements that are unimportant to a targeted customer segment is
often a waste of precious organizational resources that could better be used
elsewhere. It’s therefore essential that we focus our improvement efforts
on major gaps in important customer requirements. The combination of high
importance and low performance is the logical basis for ranking opportunities
for improvement. Once we have completed this step, we have essentially
generated a Pareto diagram of externally identified improvement priorities -
tempered by our own strategic objectives.
Step 5: Link stakeholder requirements to internal
Many organizations stop at Step 4. Doing so leaves both the
responsibility and accountability for improvement unassigned. They may
achieve acceptance of the objective but leave undefined each individual’s role
in making it happen. Naturally, with this uncertainty, they usually
conclude that closing critical performance gaps is someone else’s job.
Like spectators at an athletic event, they sit cheering in the stands, when they
should in fact by out on the field as players in this struggle to win. The
key to getting their involvement is the linkage of external improvement
priorities to internal processes.
One very powerful view of an organization sees it is a collection of
interacting processes whose collective output is the vehicle for creating
stakeholder value. At the highest level are the macro processes such as
product development, customer acquisition, production, procurement, and human
resources management. But processes are fractals. As we look at each
of their steps through a virtual magnifying glass, we see imbedded within them
similar looking processes … and within them sub-processes … and within them
micro-processes. Every employ has a daily job in which they execute one or
more of the steps that are contained within this hierarchy of value creating
activities. Their personal link to the overall goals and objectives of the
organization flows with the output of these processes as they cumulatively
create more value and the consequent increased stakeholder satisfaction.
Step 5 identifies the relationship of each process within the organization to
the key stakeholder requirements identified in step 2. It is the transition step
from the external to the internal perspective.
Step 6: Establish process improvement priorities
Knowing which internal processes drive the various targeted stakeholder
requirements (from Step 5) and which of those requirements are most in need of
strategic improvement (from Step 4), we are now in a position to set internal
process improvement priorities. Once completed, we have identified the
focal points for changes in the way those involved should do their daily jobs.
The organization can now concentrate its limited resources on the improvement
of those leveraged processes with the knowledge that this will produce the
greatest strategic return on the investment of those precious resources.
And each individual who spends their time executing those key processes will
understand why its improvement will be worth their effort. They’ll realize
that their help is likely to be critical to the organization’s strategic success
… that they are an important link in that chain of critical actions.
Step 7: Establish metrics and goals for the process
improvement priorities - the Balanced Scorecard
In my experience, few organizations today make it through Step 6.
Identifying with confidence those critical internal processes whose improvement
will have the greatest strategic impact is no easy matter. More and more,
they are hidden behind a cloud of complexity and confounded by uncertainty and
chaos. But for those who do, they now face several nearly daunting
Choosing metrics: What exactly should we measure?
Setting Goals: How will we define success?
Avoiding over commitment: Do we have the organizational capacity to do all of
Defining measures of the output of a process that relate directly to
stakeholder requirements is usually straightforward. But these results
metrics are not directly actionable. We need to identify the internal
process metrics that are the drivers of the desired improvement in these
results. Once we have successfully identified them, we need to set
time-based goals. In general, they will be stretch goals: difficult but
not impossible to achieve.
I can’t imagine an organization in today’s world where people are sitting
around looking for something to do. Everyone already has a pretty full
plate of work. They can only squeeze in a limited amount of time to work
on process improvement without adversely affecting the performance of those
daily jobs. In other words, organizations have a limited improvement
capacity. Asking them to do everything will guarantee that the easy ones,
not necessarily the most leveraged ones will get done first. We need to
filter the priorities established in Step 6 against this limited capacity.
In doing so, we create a cut-list. We can do the things above the
cut-line, but we don’t have the capacity to do the ones below that line … at
least not right now. Acknowledging our limited capacity diffuses the
organizational paralysis usually brought on by over commitment.
To focus everyone’s attention on the short list of improvement priorities and
goals, we create the instrument that has been called the Balanced Scorecard.
It captures the results of all of the proceeding steps on a single sheet of
paper. It represents a set of metrics and their associated tangible goals
that are the best that we can do in advancing our strategic objectives, subject
to our available organizational constraints. In a sense the balanced
scorecard is merely a rallying flag for all of the effort that has gone into its
creation. It is not an end, but an intermediate means for the strategic
The resulting balanced scorecard is the organization’s guide to its
improvement priorities. Because it is rooted in the process view of the
organization, it can be easily linked from the corporate level down through the
process hierarchy to the teams and individuals that are the only ones that make
Step 8: Improve critical processes
If it were easy to close the gap between current performance and the
improvement imperatives established in the previous step, those gaps would have
been closed long ago. Certainly focusing the organization’s energy around
a few specific objectives is a great help. But there is a wide range of
approaches that can be used to address these vital few gaps, and they can lead
to strikingly different rates of improvement.
The fastest method is to assemble a cadre of process engineers to
fundamentally redesign each key process; but this is also the most expensive way
to do it. Using the traditional trial-and-error approach not only takes
too long, but its actual cost rivals that of the use of an army of process
experts. Fortunately, there is a low cost, high-speed approach that was
pioneered in the 1930’s by Kepner and Tragoe and refined in the 1960’s by
Japanese TQM practitioners. This improvement model uses teams of process
executors who are trained in the basics of the scientific methodology and spend
a portion of their time (typically 5-10%) improving their processes. This
has proven to be the best way of closing performance gaps when many processes
contribute to them.
I am not in any way suggesting that processes that do not make this list
should not be improved. A basic cornerstone of TQM is that ALL processes
should be continuously improved and that EVERY employee should spend a portion
of their time in those activities. What Step 7 does is set priorities for
those improvement efforts. Process teams should focus their efforts on
improving those outputs that are directly derived from that step.
Individuals involved in multiple processes should concentrate first on those
that lie on this critical strategic path. When teams or individuals do not
have a clear role in strategic improvement priorities, they should still spend a
portion of their time improving the way that they do their daily jobs. But
they need to recognize and accept that scarce resources, such as training and
internal and external experts, as well as management attention will go first to
those who are working on improving the critical processes.
Step 9: Reassess strategy
Organizational defense mechanisms often mandate that our processes be run
open loop. We like to plan and do, but have a
natural reluctance to check subsequent results against the
original plan and take corrective action based on what we learn
from that diagnosis. We find this distasteful because the result of the
check process all too often is blame rather than learning.
When I first met Ed Deming he was around 80 years old and often noted that
80% of the root causes of defect generation were the process and only 20% the
people executing those processes. Each year that went by, that 80% number
seemed to grow by 1%. Ed died at age 94 and the last time I saw him he
said: “nearly 95% of the problems lie in the process, not the people.” I
wonder what he would have said had he lived to be 100?
Once we outlaw blame as a management reaction and replace it with
constructive learning, we can hope to continuously improve the strategic
planning process itself. That is the purpose of Step 9. Before
reaching this step, we have identified exactly what we need to do in order to
achieve our strategic objectives. We have focused every bit of our
available organizational capacity on those required actions. We now ask,
“Did we get the results we planned for, and if not, why not?” Out of this
diagnosis we can understand weaknesses in our strategic planning process and
make improvements for the next cycle. In doing so, we are learning how to
plan and act more successfully, and that, after all, is what this is all about.
One sobering result from this reflection step may be that we are doing the
best that we can, but we do not have the organizational capacity to do what is
necessary in order to achieve our strategic objectives. Often this is the
result of competitors who have greater organizational capacity or process
know-how, so that although we’re improving, we’re inevitably loosing ground to
them. This painful knowledge should prompt us to seek other competitive
niches were we have a chance of winning or face up to the unpleasant reality
that our owners remaining equity might best be used by them in some other
endeavor. Since very few organizations use their process improvement capacity to
their highest strategic advantage, mastery of all of these nine steps has the
potential to produce some really unexpected, dark horse winners in the
ever-present competitive race.
Dealing with today’s strategic planning reality
I’m fascinated by the current notion, often promoted by self-serving
consultants, that there’s a simple, secret formula for developing a good
strategy and it’s called a balanced scorecard. “Buy our BSC software,”
“Attend our BSC seminar,” or “Retain our BSC team of experts” and in a few short
weeks or months you’ll have a winning strategy.” And the evidence does
seem to suggest that Abe Lincoln may have been right: “... you can fool
(nearly) all of the people, some of the time...” But the truth is that
developing and implementing a successful strategy still is a very difficult
challenge. Their are several contributing factors:
increasing real-world complexity,
chaos and uncertainty,
getting organizational commitment and buy-in.
By any measure, organizational life is getting more and more complicated.
Everything seems to be both interconnected and important. Clear visions of
the future are obscured by this complexity and each group within the
organization tries to see through that cloud with their own uniquely colored
glasses. The ideal solution - fact based knowledge - is becoming both
expensive and time-consuming to generate. In many instances, the important
things “are both unknown and unknowable” to quote Ed Deming. We live in a
period of unprecedented change. The future is increasingly unpredictable
as wave after wave of technological, sociological, and political change break
over us. It is a truly exciting time to live in, but an equally
frustrating time for strategic planning.
Finally, as organizations transform from physical labor to knowledge based,
employees are less willing to simply do as they are told. They need to be
enrolled in the strategy before they will work hard to make it happen.
Given these formidable challenges, how can an organization maximize its
chances of developing and implementing a winning strategy? Notice that I
said “maximize its chances,” not guarantee its success. That’s the best
that any organization can hope for given its tumultuous environment.
Here’s my advice:
Take every feasible opportunity to expose employees first hand to
that environment and make sure that they share what they learn with
others within the organization.
Maximize employee involvement in the strategic planning process
itself, by assuring that those with the best knowledge contribute to its
Use tools that can analyze “fuzzy data”, which often is in the form
of sentences rather than hard numbers.
Seek group gut feel, rather than that of individuals who may be
distant in both time and intimacy with the current situation.
Make strategy development an open rather than a secret process within
Sure, there is a risk that by running a wide-open, highly visible strategic
planning process a competitor may learn something that they can use against you;
but that danger is grossly exaggerated. In reality that risk pales
compared to the cost of poor internal alignment caused by a strategy hidden
behind a shroud of secrecy. All employees have a “need to know” if they
are to contribute effectively to the organization’s success.
How an organization executes this 9-step strategic planning process will
greatly influence its probability of success. At one extreme, members of
the strategic planning department can sit around an isolated table and talk
through each of the steps to come up with a scorecard and its associated metrics
and goals. In my experience, that approach has a low probability of
producing a decisive scorecard and a convincing call to action to those whose
efforts are needed to make it happen. At the other end of the practical
spectrum, the strategic planning function can orchestrate a broad based effort
that synthesizes both internal and external knowledge into a compelling and
In doing so, they will encounter difficulty in processing all of the
information and opinions that are generated unless they use some framework and
an appropriate toolset for drawing actionable conclusions from the resulting
maize of information. That’s the purpose of
Steps 1a, 2a, and 3a in my model. By numerically weighting the
strategic importance of the various stakeholder segments, each segment’s
hierarchy of requirements, and their perception of our performance on each of
their important ones a list of improvement priorities can be generated that
separates Juran’s “vital few” from his “important many.” Part 2 will expand more
on these “a” steps.
In this, Part 1 of the article, I have described a 9-step framework that I
believe represents a comprehensive process that has as one of its many important
outputs a set of balanced scorecards that deploy strategic goals down to the
action agents that really make strategy happen. In the next two parts, I
will describe in detail the actual methodology that I use in implementing Steps
1-6 (Part 2: Setting Process Improvement Priorities) and Step 7 (Part 3:
Selecting Scorecard Metrics). Step 8 is the theme of my
Process Management Model.
I’m a long-time advocate of the KISS principle: “Keep it simple,
stupid,” or its more formal ancestor known as
But as problems become more complex, so unfortunately do their simplest
solutions. Scan ahead in this part and your initial reaction may
be that what I’m proposing looks awfully complicated. But, if
there’s a simpler way of getting to a truly effective answer, I’ve yet
to find it; nor am I aware of anyone else who has.
That’s because one of the inevitable consequences of our current form
of progress is that over time it creates ever-increasing complexity.
We can no longer manage that complexity with the basic toolset that
worked in a simpler, bygone era. Those tools helped in
understanding systems where the whole effectively behaved as the sum of
its individual parts. The tools were used to break a big problem
into a set of small, manageable pieces. By optimizing the pieces,
we could expect to optimize the whole system. The very best of
mangers could even do this in their heads.
Today, complexity arises from the increasing interdependencies
between the many small pieces of a big issue. The response “it
depends” that once served as a ubiquitous excuse, now takes on
legitimate meaning. The interdependencies become further
compounded by their eventual non-linearity. Together these two
effects have pushed the critical problem space well beyond the
capabilities of simple tools and individual gut feel. More and
more often we are confronted with situations where the whole is much
greater than the sum of its individual parts. The setting of
process improvement priorities now resides in that elusive domain.
Yet it is essential to identify the real improvement priorities, not
just for the effective use of limited organizational change capacity,
but also to weave the convincing story needed to marshal organizational
support and buy-in.
Even when an insightful executive can see through that cloud of
complexity, verbal explanations are ineffective in transferring his gut
feel to others. They must take his conclusions on faith. But
today, fewer and fewer organizations can rely on faith as their
alignment mechanism. Knowledge workers in particular demand a
compellingly and logical argument before they will sincerely commit to
“making it happen.”
In 1979 the Japanese Union of Scientists and Engineers, the driving
force behind Japan’s TQM revolution, codified a set of tools that they
called the 7-Management and Planning Tools (or 7-MP). Over the
last thirty years the 7-MP have proven their effectiveness in the
achievement of consensus or what we might call “collective” or “group
gut feel.” It’s one of those tools, the Matrix Diagram, which I
will be using here.
Other tools useful in dealing with this increased complexity have
been around for half-a-century. The challenge is to choose the
simplest of these tools that can adequately address the issue at hand.
Oversimplifying the problem in order force-fit it to our more familiar
approaches can only create the illusion of understanding, which cannot
be a sound foundation for action. So be forewarned that what
follows, in my view is the least complicated way of correctly
identifying strategic process improvement priorities in today’s
increasingly complex environment.
This Part describes a methodology for deriving process improvement priorities
from an organization’s strategy. It relies heavily on the framework used in
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