Editing Balanced scorecard (section)

== Design ==
Design of a balanced scorecard is about the identification of a small number of financial and non-financial measures and attaching targets to them, so that when they are reviewed it is possible to determine whether current performance 'meets expectations'. By alerting managers to areas where performance deviates from expectations, they can be encouraged to focus their attention on these areas, and hopefully as a result trigger improved performance within the part of the organization they lead.<ref name=Muralidharan_2004>{{cite journal|last=Muralidharan|first=Raman|title=A framework for designing strategy content controls|journal=International Journal of Productivity and Performance Management|year=2004|volume=53|issue=7|pages=590–601|doi=10.1108/17410400410561213|hdl=2022/23514|hdl-access=free}}</ref>

The original thinking behind a balanced scorecard was for it to be focused on information relating to the implementation of a strategy, and over time there has been a blurring of the boundaries between conventional strategic planning and control activities and those required to design a balanced scorecard. This is illustrated by the four steps required to design a balanced scorecard included in Kaplan & Norton's writing on the subject in the late 1990s:

# Translating the vision into operational goals;
# Communicating the vision and link it to individual performance;
# Business planning; index setting
# Feedback and learning, and adjusting the strategy accordingly.

These steps go beyond the simple task of identifying a small number of financial and non-financial measures, but illustrate the requirement for whatever design process is used to fit within broader thinking about how the resulting balanced scorecard will integrate with the wider business management process.

Although it helps focus managers' attention on strategic issues and the management of the implementation of strategy, it is important to remember that the balanced scorecard itself has no role in the formation of strategy.<ref name=Lawrie_Cobbold_2004 /> In fact, balanced scorecards can co-exist with [[strategic planning]] systems and other tools.<ref name=Epstein_Manzoni_1997 />

=== First generation ===

The first generation of balanced scorecard designs used a "four perspective" approach to identify what measures to use to track the implementation of strategy. The original four "perspectives" proposed<ref name=Kaplan_Norton_1992/> were:
* '''Financial''': encourages the identification of a few relevant high-level financial measures. In particular, designers were encouraged to choose measures that helped inform the answer to the question "How do we look to shareholders?". Examples: cash flow, sales growth, operating income, return on equity.<ref name=simons_1994>{{cite book|last=Simons|first=Robert L.|title=Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal: How Managers Use Control Systems to Drive Strategic Renewal|date=1 December 1994|publisher=Harvard Business School Press|location=Boston, MA.|isbn=978-0-87584-559-3|url=https://archive.org/details/leversofcontrolh00simo}}</ref>
* '''Customer''': encourages the identification of measures that answer the question "What is important to our customers and stakeholders?". Examples: percent of sales from new products, on time delivery, share of important customers’ purchases, ranking by important customers.
* '''Internal business processes''': encourages the identification of measures that answer the question "What must we excel at?". Examples: cycle time, unit cost, yield, new product introductions.
* '''Learning and growth''': encourages the identification of measures that answer the question "How can we continue to improve, create value and [[innovation|innovate]]?". Examples: time to develop new generation of products, life cycle to product maturity, time to market versus competition.

The idea was that managers used these perspective headings to prompt the selection of a small number of measures that informed on that aspect of the organization's strategic performance.<ref name=Kaplan_Norton_1992/> The perspective headings show that Kaplan and Norton were thinking about the needs of non-divisional commercial organizations in their initial design. These categories were not so relevant to public sector or non-profit organizations,<ref name=Moulin_PSS /> or units within complex organizations (which might have high degrees of internal specialization), and much of the early literature on balanced scorecard focused on suggestions of alternative 'perspectives' that might have more relevance to these groups(e.g. Butler et al. (1997),<ref name=Butler_1997 /> Ahn (2001),<ref name=Ahn_2001 /> Elefalke (2001),<ref name=Elefalke_2001 /> Brignall (2002),<ref name=Brignall_2002 /> Irwin (2002),<ref name=Irwin_2002 /> Flamholtz (2003),<ref name=Flamholtz_2003 /> Radnor et al. (2003)<ref name=Radnor_2003 />).

These suggestions were notably triggered by a recognition that different but equivalent headings would yield alternative sets of measures, and this represents the major design challenge faced with this type of balanced scorecard design: justifying the choice of measures made. "Of all the measures you could have chosen, why did you choose these?" These issues contribute to dis-satisfaction with early balanced scorecard designs, since if users are not confident that the measures within the balanced scorecard are well chosen, they will have less confidence in the information it provides.<ref name=Kellermans_2013>{{cite journal|last=Kellermans|first=Walter J.|author2=Floyd F. W. |author3=Veiga S. W. |author4=Matherne C. |title=Strategic Alignment: A missing link in the relationship between strategic consensus and organisational performance|journal=Strategic Organization|year=2013|volume=11|issue=3|pages=304–328 |doi=10.1177/1476127013481155|s2cid=11720578}}</ref>

Although less common, these early-style balanced scorecards are still designed and used today.<ref name=2GC_Survey />

In short, first generation balanced scorecards are hard to design in a way that builds confidence that they are well designed. Because of this, many are abandoned soon after completion.<ref name=Epstein_Manzoni_1997 />

=== Second generation ===

In the mid-1990s, an improved design method emerged.<ref name=Olve_1999 /> In the new method, measures are selected based on a set of "strategic objectives" plotted on a "strategic linkage model" or "[[strategy map]]". With this modified approach, the strategic objectives are distributed across the four measurement perspectives, so as to "connect the dots" to form a visual presentation of strategy and measures.<ref name=Kaplan_Norton_CMR_1996>{{cite journal|last=Kaplan|first=Robert S.|author2=Norton D. P. |s2cid=15409777|title=Linking the Balanced Scorecard to Strategy|journal=California Management Review|year=1996|volume=39|issue=1|pages=53–79|doi=10.2307/41165876|jstor=41165876}}</ref>

In this modified version of balanced scorecard design, managers select a few strategic objectives within each of the perspectives, and then define the cause-effect chain among these objectives by drawing links between them to create a "strategic linkage model". A balanced scorecard of strategic performance measures is then derived directly by selecting one or two measures for each strategic objective.<ref name=Lawrie_Cobbold_2004 /> This type of approach provides greater contextual justification for the measures chosen, and is generally easier for managers to work through. This style of balanced scorecard has been commonly used since 1996 or so: it is significantly different in approach to the methods originally proposed, and so can be thought of as representing the "2nd generation" of design approach adopted for the balanced scorecard since its introduction.

=== Third generation ===
{{Main|Third-generation balanced scorecard}}
In the late 1990s, the design approach had evolved yet again. One problem with the "second generation" design approach described above was that the plotting of causal links amongst twenty or so medium-term strategic goals was still a relatively abstract activity. In practice it ignored the fact that opportunities to intervene to influence strategic goals are (and need to be) anchored in current and real management activity. Secondly, the need to "roll forward" and test the impact of these goals necessitated the reference to an additional design instrument: a statement of what "strategic success", or the "strategic end-state", looked like (which in turn would be related to the organization's Mission or Vision Statement). This reference point was called a '''Destination Statement'''. It was quickly realized that if a Destination Statement was created at the beginning of the design process then it became easier to select the appropriate strategic activity and outcome objectives which if achieved would deliver it. Measures and targets could then be selected to track the achievement of these objectives. Design methods that incorporate a Destination Statement or equivalent (e.g. the [[results-based management]] method proposed by the UN in 2002) represent a tangibly different design approach to those that went before and so have been proposed as representing a "third generation" design method for balanced scorecards.<ref name=Lawrie_Cobbold_2004 />

Design methods for balanced scorecards continue to evolve and adapt to reflect the deficiencies in the currently used methods, and the particular needs of communities of interest (e.g. NGOs and government departments have found the third generation methods embedded in results-based management more useful than first or second generation design methods).<ref name=Lawrie_Kalff_Andersen_2005>{{cite journal|last=Lawrie|first=Gavin J. G.|author2=Kalff D. |author3=Andersen H. |title=Balanced Scorecard and Results-Based Management – Convergent Performance Management Systems|journal=Proceedings of 3rd Annual Conference on Performance Measurement and Management Control, the European Institute for Advanced Studies in Management (EIASM), Nice, France|year=2005|url=https://2gc.eu/resources/research/balanced-scorecard-and-results-based-management-convergent-performance-mana|access-date=11 July 2017}}</ref>

Third generation balanced scorecards improved the utility of second generation of balanced scorecards, giving more relevance and functionality to strategic objectives. The major difference is the incorporation of Destination Statements. Other key components are strategic objectives, strategic linkage model and perspectives, measures and initiatives.<ref name=Lawrie_Cobbold_2004 />