Managers have long relied on three key financial statements – the income statement,
balance sheet, and cash flow statement
– to provide the information required
to run their businesses. In the early
1990s enlightened companies recognized that these tools reported dated,
often difficult-to-interpret information.
Managers of today’s complex operations
need timelier, easily understood reports
describing the performance of the key
processes that drive dollars-and-cents
outcomes. Equally as important, all
employees must know how their efforts
can help the company succeed.
That realization led to the development of a new management tool,
performance measurement, and its
most visible component, the scorecard.
Consisting of a carefully selected set
of metrics, the scorecard monitors in
near-real time the strategic processes
and activities that are critical to an
operation’s success. While retaining
financial metrics like cash flow and rev-
enue growth, today’s typical scorecard
also includes many non-financial met-
rics such as first pass quality, on-time
delivery, customer satisfaction, and
A well-designed scorecard is rooted
in the organization’s theory of its
business. In the language of sports the
theory is the company’s game plan. Its
purpose is to answer two key questions:
✚ What objectives must be reached
to achieve strategic success?
✚ How will those strategic objectives be achieved?
A theory of business can be developed
by asking senior management a series of
what and how questions and mapping
their answers in a flow chart. The exercise
begins by answering what is the compa-
ny’s highest-level strategic objective.
In Figure 1 the answer is improve return on investment. Then ask how will
that objective be attained. The answer
is twofold: reduce the cost of goods
and grow revenues. Following on, ask
what activities will reduce the cost
of goods. The hows in the example
are improve productivity and reduce
lumber costs. Continuing on, ask what
activities will improve productivity.
The answer is two hows: improve skills
and reduce turnover.
To describe a company’s complete
theory of its business, the what-how
question-and-answer process resumes
until every key objective and activity is
listed. In doing so, every strategic process
at which the company must excel is
defined in clear language. The next step
is assigning quantifiable metrics that will
track the scores or ratios for each activity.
Figure 2 lists the strategic objectives and
their metrics for the example.
By highlighting the critical activi-
ties, defining acceptable outcomes, and
reporting actual performance through-
out the organization, a well-designed
scorecard can become a company’s
core information system. Such a system
educates every employee of his responsi-
bilities in clear language and numbers,
Focusing on the important
A well-designed performance measurement tool can become a company’s core
Increase sales to existing
Improve delivery reliability Improve quality
Reduce throughput time
Improve return on
Figure 1 Theory of Business
In this simplified example, how will return on investment be improved?
The answer is twofold: reduce the cost of goods and grow revenues
turnover Improve worker skills
Reduce cost of goods
Reduce lumber costs Improve productivity