A good balanced scorecard is seen by many as a panacea. What started as a simple performance measurement tool is now viewed by many as a pathway to continuing and self-refining performance and strategic management. Through successful strategy mapping the scorecard promises unfettered progress towards success. It does this by monitoring operations and providing the management information that is key to strategic decision-making.

How it works: the theory
The simplicity and flexibility at the heart of the scorecard approach – that actions have results which are both measurable and manageable – allows you to realise almost any identified objective, at least in theory. Many organisations have investigated using the scorecard as a route to strategic success.

To realise this success the organisation's core purpose must first be agreed, then a clear mission-focused strategy devised. The strategy underpins the mission, functioning as a high level "route map" to the organisation's destination. It sets out the means by which this mission will be delivered. At this corporate level, the strategy identifies the relevant sources (resources or processes) through which value is to be delivered.

Input factors may be tangible (staff, machinery, finance, raw materials) or intangible (expertise, relationships, operations, brand). In developing a balanced scorecard many organisations find it helpful to note the relationships between input factors and their contribution to the results in a strategy map.

Appropriate performance indicators for each input factor are identified to provide guidance on progress made. Using these indicators, and with reference to the strategy map, performance targets are set. This process is performed at board level where it relates to corporate factors such as total sales levels and expenses. It can then be cascaded down to divisional, departmental and individual levels. Strategy-consistent scorecards are devised for each.

Corporate juggling
Where only two or three inputs exist and relationships between these, and their outcomes, are transparent and easily measured, the answers to the questions "what needs to happen for strategy to be realised" and "how will we know when it has been", may be obvious. For example, to make more profit we need to buy fewer inputs more cheaply; sell more outputs at higher prices; and streamline the transformation process.

However, corporate operations are rarely so straightforward. Larger organisations are likely to manage myriad inputs and tasks all with different relationships between them. The tasks may be carried out in different locations, even countries, by different departments. By disentangling the various inputs and operations, and understanding the relationships between each (the transforming of inputs into outputs at each stage of the production chain), a comprehensive strategy map can be configured. From this a balanced scorecard that is consistent with strategy can be devised.

The highest level corporate scorecard identifies both the source of value and the operations underpinning this. By identifying key performance indicators (KPIs) for each of these operations, managers have a set of tools by which progress may be measured.

A guide for management
For organisations with an established scorecard, where staff are familiar with the network of relationships on which it is founded, the scorecard may be used as an agenda to guide and focus senior management meetings. Discrepancies between predicted and actual performance levels are reported by reference either to simple manual systems, such as the RAG (red, amber green) traffic light device, or to the reports generated by highly sophisticated and specialised computer programmes. Their root causes should then be identified and investigated. Investigations may reveal either lower level operational difficulties which need to be addressed, or a flaw in the adopted strategy. In the latter case, a new strategy should be devised, and a new scorecard formulated.

Even when the underlying strategy and assumptions regarding supporting relationships are sound, the scorecard’s success depends, at least in part, on its effective communication and the support of staff. Where pervading corporate values and customer and staff promises are woven into the scorecard through appropriate KPIs, the scorecard becomes a living document rather than just a plan.

Tesco's approach
Such an integrated approach was taken by Tesco. In the 1990s Tesco was third in the UK retail market and losing market share. The recession had hit performance hard and Tesco was purely a food retailer with no operations outside the UK. Tesco subsequently turned around. It became the UK's preferred supermarket (third in the world), reporting a pre-tax profit of £2 billion for the year ending 26 February (a rise of 21 per cent) and 13 per cent growth to £7.6 billion total international sales in 2004.

Tesco then formulated its “steering wheel” approach. This is its own customised balanced scorecard. It communicates strategy-aligned goals and manages strategic performance. It monitors progress and measures success. The organisation's core purpose – "to create value for our customers and to earn their lifetime loyalty" – has been delivered on a clear and simple strategy of long-term growth.

This strategy underpins Tesco's four operational elements:
• core UK business
• non-food business
• retailing services
• international operations.

Tesco's steering wheel framework comprises four perspectives - people, customer, financial and operations. Each is driven and monitored by demanding but achievable business targets. Throughout Tesco's retail operations, every store has its own individual steering wheel, to which all staff members' objectives are linked, and which relate strategy to day-to-day work. At every organisational level, where the KPIs are not on track and targets are not being met, the steering wheel group investigates the reasons why, and plans corrective action.

Performance is reported quarterly to Tesco's board and a summary report is sent to the top 2,000 managers in the company to pass on to staff. Further, the remuneration of senior managers is shaped by KPIs, with bonuses based on a sliding scale according to the level of achievement on the corporate steering wheel.

Tesco's values and priorities (concerning customers, staff, business, and compliance issues) are embedded in the steering wheel through appropriate KPIs. These values pervade operations and are instrumental in securing staff commitment to the steering wheel. It is arguable that by embedding its values in the steering wheel, Tesco transformed its balanced scorecard from a management framework to a cohesive living strategy.

Widespread use and study of the scorecard have created a whole industry around it. The original basic concept has developed into second- and third-generation scorecards and beyond. Moreover, alternative implementation approaches (the Value Dynamics Framework, the Business Modelling Approach) and tools (Value Creation Analysis), have helped many organisations to implement and refine their scorecard projects.

This article is contributed by CIMA (The Chartered Institute of Management Accountants) and it first appeared in Insight, CIMA’s on-line newsletter for its members.