DOES THE BALANCED SCORECARD TELL THE WHOLE PICTURE ABOUT STRATEGIC CAPABILITIES?The Balanced Scorecard (BSC) has become a standard de facto, widely used in manycorporations to support strategy formulation and execution. And capabilities, the drivers ofcompetitive advantage (and the main topic of this blog) are key components of any soundbusiness strategy. Is it possible that firms that have adopted the BSC approach are missing partof the picture about strategic capabilities? I argue that some companies might run the risk ofstrategic myopia by becoming BSC-fundamentalists. The BSC is not to blame here, but the waysome firms misinterpret what the BSC is and what is not!I have a confession to make. When the BSC makes his entrance in the business literature, myfirst reaction was: What is the point? What is new about this? I knew of many practitioners (myselfincluded) that had been using strategic maps to graphically depict corporate, business andfunctional strategies, as well as scorecards with initiatives, metrics and responsibility centers tomake strategies operational enough for execution. Even the “balanced” part was not so hot, since“practical” strategy maps in the late 80s and early 90s were already distinguishing between atleast three different levels of objectives related to: a) financial results, b) strategic positions thatprovided those results, and c) key assets and capabilities (tangible or not) that drive marketsuccess in the strategic positions.So what is the value added by the BSC movement? I think its key contribution has been soundstandardization. A four-perspective architecture (finance, client, process, learning & development)for strategy maps and a standard structure for a scorecard. From that base, Kaplan and Nortonhave reviewed the extensive literature on strategy formulation and implementation and createdstandard templates to draw and connect strategy maps at corporate, business and functionallevels, as well as standard recommendations about how to use the BSC as a shared frameworkthat integrates the key components of a management system: planning, budgeting, control,evaluation, compensation and incentives. The rapid adoption of the BSC approach acrosssectors and countries suggests that this standard is an authentic source of communication,decision and coordination economies within corporate management systems.So, how do firms go astray when adopting the BSC approach? These are the usual suspects Ihave encountered in practice:• Expect strategic thinking from the BSC: The BSC provides tools and rules to express abusiness strategy, but is clueless about the strategic thinking underlying your strategy. Do notexpect the BSC would give you “strategic content”. It will only give you “strategic form”. Todevelop content, strategists have to exercise creativity assisted by a diversity of strategic thinkingframeworks that have been proposed and tested over several decades.• Ignore stakeholders beyond shareholders and customers: the first two perspective of aBSC are associated to two stakeholders: shareholders and customers. Other stakeholders arenot explicitly represented by a perspective. The financial perspective lies at the apex of a BSCstrategy map. The firm efforts are directed to create shareholder value. This in turn is the result ofhaving created customer value in a cost-effective way. If other stakeholders are crucial to thefirm’s continuity and prosperity, you will have to adapt the standard BSC to incorporate theirperspective.
• Interpret “process” narrowly and forget about “activities”: the third perspective of a BSCshould describe key levers in the “activity system” that drive cost and customer value advantages.The activity system has two components: activities and linkages. Activities are the units of work;their identity comes from their specific functional, technological and economic profile. Linkagesamong activities coordinate them in order to create and delivery customer value. Since the 80s,“process” is the modern term for linkages. When the BSC named the third perspective as“process”, it was using it to refer to the whole activity system; it was not emphasizing linkages atthe expense of activities. The firm that concentrates only on linkages is looking at part of thepicture of their activity system. This myopia will affect its understanding of cost and customervalue drivers.These pitfalls reflect BSC-fundamentalism. Executives would derive greater benefits from theBSC approach if they realized that it is a syntax system; it is agnostic in terms of semantics. If thesyntax side is glorified at the expense of semantics, you could end up having a “properlyconstructed” strategic management system, with strategic thinking deficiencies built within it!As I said before, the BSC approach is not to blame. Kaplan and Norton took an action researchapproach when they derived the BSC. Starting from the “first scorecard” that Kaplan found atAnalog Devices (see www.schneiderman.com), adding the insight obtained from case studies ofother companies by Norton, they generated by induction the BSC approach. It is an open systemthat evolves by learning.How might BSC-fundamentalism affect negatively the development of strategic capabilities?• Lack of “edge” in strategic objectives: those firms that expect strategic thinking from theBSC tend to construct strategy maps with no strategic edge. Use this acid question: would yourBSC be 80% relevant to your competitor’s strategy? If the answer is yes, you probably have usedcritical success factors at the industry level to build your BSC. But, what is your corporate andcompetitive advantage, and where is it expressed in your BSC? These firms run the risk ofinvesting in capabilities that are not aligned to their key strategic business segments and their keydrivers of competitive advantage.• Lack of attention to key stakeholders beyond shareholders and customers: in academia,there is an interesting controversy going on regarding what is the “corporative objective function”Underlying this fancy term, there are key questions: Should companies pursue other objectivesbeyond shareholder’s value? Should management pursue simultaneous optimization of diversestakeholders´ objectives? Is this a feasible task for managers? Would society be better off ifcompanies would practice maximization of (multiple) stakeholders´ value? These are some of thetoughest questions that economists, management and organizational theorists, and politicalphilosophers will attempt to answer in the following decades. But, from a practical point of view,companies do have key stakeholders beyond shareholders and customers. In heavily regulatedindustries and societies, compliance with governmental regulations is a necessary condition forbusiness continuity. In some industries where supply markets are more imperfect than customermarkets, suppliers are key stakeholders and the firm needs to present them with a “supplier valueproposition”, to guarantee access to scarce inputs. In many global industries, as value chainshave been deconstructed and specialist firms have positioned themselves as the best performersof certain activities, global firms are now coordinating a dynamic network of suppliers, serviceproviders, strategic partners, distributors and intermediaries, as well as final customers/clients.The firm’s success depends on maintaining a healthy ecosystem where it is important that eachmember of the ecosystem is being successful too. The ecosystem maintains its bonds through
the crossed value propositions among its members. These examples illustrate that many firmsneed to strategize their relationships with multiple stakeholders. If strategic capabilities aredeveloped only for the two stakeholders explicitly recognized in the BSC (shareholders andcustomers), it is possible that these firms are in fact missing a key part of the picture of theirstrategic landscape.• Lack of focus in configuration of the total activity system: as firms focus on processes asthe coordination of activities, they could downplay the importance of activity configuration.Horizontal coordination of activities across functions, products, markets and geographies isindeed a deep source of ideas for strategic advantage. But activity configuration is equallyimportant. Three macro-configuration decisions have a great economic impact on firm’sperformance: a) insource-outsource to strategic partner - outsource to market, b) execute activityat the corporate or divisional/business unit level, and c) geographical location (concentration vs.distribution). If the activity dimension is missing at the BSC´s process perspective, strategiccapabilities that are critical for the operational and service activity models might not be developedIf your company has adopted the BSC approach, take advantage of its great contributions tomanagement processes, but do not become a BSC-fundamentalist that confuses syntax withsemantics. The BSC is a language. As any language, its standardization adds great value tocommunication and collective action. Useful languages are not “closed”, they are open and alive;they evolve with the advances in the society that uses them. Do not worship the rules of BSCsyntax. That attitude may become a liability, reduce the breadth and depth of your strategic visionand jeopardize the identification and development of strategic capabilities. Instead, use the BSCapproach to reflect the strategic reality of your company and if you find the “standard” version ofthe language does not have the capability to express those strategic concerns, expand it. Yourversion of the BSC might be an input to the way this language is used in the future.