Third-generation balanced scorecard

The third-generation balanced scorecard is a tool used by management to measure and analyze the performance of businesses. This scorecard grew from previous generations of an evaluation concept that originated in the early 1990s with the writings of Dr. Robert Kaplan and Dr. David Norton. The third-generation version updated past versions with an increased focus on business goals and the strategies by which businesses intend to meet these goals.

Brief History

The idea of the balanced scorecard became popular in the early 1990s following publications by business theorists Dr. Robert Kaplan of Harvard University and Dr. David Norton. One of those publications was their influential 1992 article, “The Balanced Scorecard—Measures that Drive Performance” in Harvard Business Review. In their writing, Kaplan and Norton stressed that measurements are some of the most important functions of any modern business. These measurements theoretically allow business leaders and analysts to assess past actions, current strengths, and future prospects of their businesses.

Traditional measurements, such as returns on investment and other financial analyses, worked well in past generations, but by the late twentieth century, with the onset of the digital age, they no longer provided accurate estimates of company progress, health, and efficiency. Many experts saw a need for change, calling for new measurement criteria to determine performance and predict the future of businesses based on newer models.

Many business leaders began to de-emphasize financial measuring criteria and focus on operational measurements, such as the amount of time various production processes took and the ratio of defective versus functional products being produced. Kaplan and Norton believed operational measures were important, but not at the cost of all financial considerations. Rather, Kaplan and Norton posited that the solution lay in a compromise between financial and operational measurements.

The theorists collaborated with twelve forward-thinking companies for a year, studying how they operated and how they measured their performance. Following this period of observation, the theorists devised a new system that would merge both branches of measurement, which they termed the “balanced scorecard.” The balanced scorecard provided a set of criteria for measurement that would allow business analysts and leaders to quickly assess and review the state of their business.

This system of measurement considers the business’s financial history, decisions, and stability to provide an estimate of the business’s current standing. Then, the scorecard uses operational criteria, including pushes for innovation, customer satisfaction, and communication within the company hierarchy, to analyze the future prospects for that business.

Kaplan and Norton compared their creation to an airplane’s control panel, which shows an array of complex and vitally important information in an easy-to-see tableau. Just like pilots, business managers could not safely rely on just one or two indicators, but rather need to survey many—quickly and efficiently—to make the best-informed decisions for the business.

Overview

Kaplan and Norton’s plan for the balanced scorecard spread throughout the business world in the early 1990s. It became a staple of many businesses in the United States, United Kingdom, Japan, and parts of Europe. Many business leaders and analysts adopted it and found its structure useful for establishing innovative guidelines for evaluating business performance. Many found that using the first version of the balanced scorecard helped them stabilize struggling businesses and begin viewing measurements in a more comprehensive way.

In time, business leaders began to feel they had gotten as much advantage as possible from the first balanced scorecard system and searched for a subsequent step. This arrived in the so-called second-generation balanced scorecard system, which emphasized approaches to measurement intended to boost a business’s performance. This modified approach became highly popular and helped many companies improve their models and streamline production.

Later, many business leaders, particularly those who followed the balanced scorecard system from its earliest days, felt that they had also outgrown the second generation. This led to a new iteration, dubbed the third-generation balanced scorecard, which aimed to tighten management to ensure that strategies work properly. Like the previous generations, the third-generation balanced scorecard integrated four main approaches to evaluation—how the business learns and grows, the internal processes that allow the business to function, the perspective of customers, and the business's financial performance. The third generation expanded this somewhat limited set of criteria to incorporate other means of evaluation, such as destination statements—explanations of a business’s goals, missions, and expectations for the future. Generally, these detail what business leaders hope to accomplish in the months, years, and potentially decades to follow. Another major feature of the third generation was a focus on strategy. Using strategy mapping techniques, managers could outline their plans to move from their current situations to the goals in their destination statements. Strategy maps could be customized to match each business's unique situations and destinations.

Proponents of the third-generation system found it to be a successful evolution from prior versions of the balanced scorecard. The measurable parameters that can show progress or uncover weak points in operations allow businesses to focus on their goals and adjust strategic plans to meet them. The third generation also helped make the strategy clear and easily communicable to all members of a business. This allowed all business members to understand their individual and shared roles and responsibilities. These measurements positively affected employee behavior by clarifying what actions and attitudes would help or hinder the collective mission. Finally, the third-generation balanced scorecard allowed room for feedback and the incorporation of these ideas into the business’s ever-evolving plans.

In the late 2000s and early 2010s, many business analysts found that the third-generation balanced scorecard system, like its predecessors, was waning in its applicability and usefulness to growing, modern businesses. Leaders managing in uncertain and risky markets require flexibility and a responsive model that incorporates the human aspect of business. This elicited a call for a new, fourth-generation iteration of the balanced scorecard system. To meet evolving management needs, the fourth-generation scorecard model looks beyond financial and operational criteria to consider employee behavior, communication, empowerment, and creative thinking.

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