The Balanced Scorecard Makes Intangibles Tangible and Your Strategy Workable

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The snow was blowing wildly as my plane touched down that December night in Madison, Wisconsin. Armed against the wintry elements with nothing but a vest, I was sure glad to shake the hand of my new client, Bob Whip, of Horizon Fitness, who had graciously offered to meet me that blustery evening.

As we drove to the hotel, Bob gave me the Horizon story: A new company in 2000, it amassed $6.6 million of revenue in that first year. But Bob had a grand strategy for the manufacturer and distributor of fitness equipment, one that would see sales grow dramatically over the next few years. The strategy Bob laid out was sound, but the problem, as we both knew, was execution.

There is an old story about three frogs sitting on a fence. One frog decides to jump off, so how many are left? The answer is three. One has decided to jump. But there is a gap the size of the Grand Canyon between deciding and doing.

Strategy pioneer
So it is with strategy. It’s one thing to create a brilliant plan that will lead you heroically into the future and another thing entirely to execute it. Sadly, that’s where the heartache and heartburn begin for many organizations, with statistics suggesting that just one in 10 will bridge the execution gap and successfully implement its strategy. (See The Strategy Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment by Robert S. Kaplan and David P. Norton, Harvard Business School Publishing, Boston, MA., 2001.)

So why is strategy so difficult for even the best organizations to effectively execute? There are a number of reasons, the first being the rise and power of intangible assets in modern enterprises, which account for about 75 percent of value created today, according to Margaret Blair of the Brookings Institute (in an Oct. 27, 2000, interview with David Molpus on National Public Radio’s Morning Edition, October 27, 2000).

Our traditional systems of measuring performance struggle to track the value of intangibles. Add a strong legacy of financial dominance to the measurement mix—bookkeeping systems have been around thousands of years, yet financial measures provide a backward look, at best—and you begin to understand why strategy execution is so perplexing. Bob was committed to defying the odds and turned to a tool used by thousands of organizations around the world in effectively implementing strategy: the Balanced Scorecard.

Developed in 1990 by Kaplan and Norton, the Balanced Scorecard is based on a simple, yet profound, basic premise. Financial measures are, and always will be, important, but they must be supplemented with other indicators that predict future financial success. With that as their goal, Kaplan and Norton developed the Balanced Scorecard framework that you see below.

At the center of the diagram, you can see the words, "vision" and "strategy." Unlike traditional performance measurement systems that have financial controls at their core, the Balanced Scorecard begins with an organization’s vision and strategy. You seek to translate the vision and strategy into performance measures that can be tracked and used to gauge your success in the successful implementation of vision and strategy. To do that, measures are created in four balanced and inter-related perspectives: Financial, Customer, Internal Processes and Employee Learning and Growth.

Bob and a team of senior managers at Horizon translated their strategy into a set of measures in each of the four Scorecard perspectives and soon began using the results to drive the agenda of monthly and quarterly management review sessions.

Additionally, they transformed the Balanced Scorecard from a mere measurement tool to a powerful strategic management and communication device by linking resource-allocation decisions to Scorecard measures and communicating Scorecard objectives and measures to all employees in an effort to ensure they could define their unique contribution to the growing company’s success.

On the resource allocation link, Bob noted in a conversation we had, "It definitely makes budgeting easier. For example, if the proposed expenditures are not in alignment with our strategy, then the expense is rejected.

"This has given us a great deal of focus in settling our annual budgets, as it tests our expenditures and takes a lot of the guesswork and emotion out of budget decision-making. It also makes it easier to justify expenditures to our board of directors."

Horizon Fitness, in just its third year of Balanced Scorecard use, has seen transformative results from its leaders’ investment in strategy execution. The Scorecard has become a powerful tool for training and orienting new employees to the company’s strategy, has introduced a new level of accountability to the management ranks, is relied upon to communicate strategy to all stakeholders and, most importantly, has given the company a focus that has helped it reach more than $85 million of sales in its most recent fiscal year.

"We like the flexibility of the BSC system of management and would strongly recommend it to any company," Bob said. Given those impressive results, I wasn’t at all surprised to hear that.

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