Playing To Win
Balanced Scorecard & Playing to Win
Utility & Compatibility
As readers would know, I have done a mini-series on strategy models and tools, and their link to Playing to Win. I covered Blue Ocean Strategy and Business Model Generation in the former category and Jobs to be Done in the latter. I often get asked about the Balanced Scorecard tool, so I decided to make it the next one in the series, my 31st Year III Playing to Win Practitioner Insights (PTW/PI) piece: Balanced Scorecard & Playing to Win: Utility & Compatibility. You can find the previous 141 PTW/PI here.
Background
In 1992, Bob Kaplan and David Norton wrote a Harvard Business Review article that would go on to be a classic: The Balanced Scorecard — Measures That Drive Performance. (And they reprised it in a 1996 book: The Balanced Scorecard: Translating Strategy into Action). A Harvard Business School legend, Bob Kaplan is both one of the most accomplished business professors of his generation and a lovely human being. At the time of the article development, David Norton was a principal of consulting firm Nolan, Norton & Company, and went on to found and work in various firms thereafter. I have never met him, though I assume from his reputation that he is a good person too!
The article argued that rather than having only financial goals, or, slightly better, just financial and operational goals, a company should have a scorecard that balances four distinct dimensions — financial (how we look to shareholders), operational (what we excel at), customer (how customers see us), and innovation (how we continue to improve and create value).
The article was clear, easy to understand, and straightforward to act upon — and became a best-selling HBR article that spawned a best-selling book.
My Initial Take on It
That notwithstanding, when the article first came out, I wasn’t terribly keen on it. When my friend and academic mentor Chris Argyris heard my lack of enthusiasm, he brokered a conversation between Bob and me because he didn’t like having his two friends in opposition.
The reason I wasn’t keen was that at the time I was more enamored with prescriptive models, and this was a categorical model. A prescriptive model specifies an appropriate set of actions based on a given set of circumstances. For example, BCG founder Bruce Henderson’s view of the learning curve and strategy was that a company should ‘price ahead of its learning curve’ in order to secure greater cumulative volume than any competitor, so that its cost position will always be better than that of all competitors, and over time, it will earn enough to more than make up for the profitability that it gave up early while pricing ahead of its learning curve. Alternatively, one of Michael Porter’s most well-known models is a prescriptive model: you need to either pursue a strategy of cost leadership or differentiation.
A categorical model holds that when thinking about a given issue, you should pay attention to a particular set of categories. Porter’s five forces model (in contrast to his low cost versus differentiation model) is a categorical model. It holds that if you want to understand your industry, you should pay attention to five particular forces. It also specifies a useful way of thinking about those categories. But it stops short of telling you what to do based on your assessment of those categories.
As you can imagine, when I was younger, I liked more deterministic things, like learning curve strategy and low cost vs. differentiation. I didn’t like what I saw as the vagueness of the Balanced Scorecard. How could you tell whether your balance was good, bad, or indifferent? How were you supposed to make the tradeoffs between the disparate measures? I just didn’t love it!
As Time Went On…
As time went on, I became more supportive of categorical models in general. A consequential impact on my thinking was The Checklist Manifesto, the 2009 best-seller by Atul Gawande. I was on the Board of Trustees of the Hospital for Sick Children in Toronto from 2000 to 2010, and Chair of the Quality Committee for most of that time, so operating room effectiveness was a big deal for me. The book was a revelation to me and to a huge swath of the medical world. Its core premise was that to ensure a successful surgery, you need to carefully follow a specific checklist of steps.
In one respect, the premise seems shallow and simplistic. For a group of highly sophisticated surgeons and nurses, how could a checklist make a difference? But the data in the book is compelling. Without the reminder of a checklist, terrible patient-damaging mistakes get made. Consequentially, a reminder of the categories to which you need to pay attention has a powerful impact on results. That warmed me up to categorical models.
Another piece of the puzzle occurred two years earlier, in 2007, when I wrote a book, The Opposable Mind, which argued that dealing productively with what might appear, at first blush, to be irreconcilable tradeoffs is an important managerial capability. That sort of Integrative Thinking is hard to do, but exceedingly valuable.
Over the subsequent decade or so, I came to the conclusion that a categorical model that contains internally conflicting categories could serve a useful purpose and actually discussed it in my 2020 book, When More is Not Better, with respect to goal-setting models. I argued against a company setting singular goals because that could lead to surrogation, a syndrome that Michael Harris and Bill Tayler described in an enlightening 2019 HBR article. Surrogation happens when a metric designed to measure progress against a goal gets treated as the goal itself. The authors use the Wells Fargo scandal to illustrate. The goal was deep customer banking relationships. The metric used to measure progress against that goal was number of accounts per customer. The metric became the goal and employees started to open accounts without customer permission to reach what they thought of as the goal but was really the metric.
In my book, I argued that the multiplicity and internal conflicts of Balanced Scorecard could help fight damaging surrogation:
“This approach, while being driven from a different logic, is consistent with the popular concept and tool from Robert Kaplan and David Norton, who (very appropriately from my perspective) called it the “balanced scorecard” in their famous 1992 Harvard Business Review article. They argue for multiple, independent proxies for performance, including financial, customer, operational, and innovation proxies. With its (at least somewhat) internally contradictory measures, the “balanced scorecard” approach holds the promise of preventing damaging surrogation of the sort seen at Wells Fargo and in the capital markets generally.” (p. 129)
Net, while I started in a different place, I became a fan of the Balanced Scorecard!
Fit with Playing to Win
I think of Balanced Scorecard as fitting nicely with Playing to Win in one of two alternative ways. To explain, I need to go back to the origins of the Strategy Choice Cascade.
When I created the first version of the Strategy Choice Cascade in 1995–1996, the five boxes were Aspirations & Goals (A&G), Where-to-Play (WTP), How-to-Win (HTW), Capabilities, and Management Systems. When AG Lafley and I wrote Playing to Win in 2013, we updated the first box to Winning Aspiration (WA). That was AG’s push, by the way. He wanted to be crystal clear that it wasn’t to be any old aspiration: it had to be a winning one for the resultant strategy to be valuable. As usual with AG, it was a good insight. (BTW, the next tweaking of the Cascade happened a couple of years ago when I made the last two boxes more descriptive: Must-Have Capabilities (MHC) and Enabling Management Systems (EMS).)
In any event, in the original cascade, Balanced Scorecard would have fit naturally into the A&G box at the front of the cascade. That is, you should state your broader strategic aspiration and then describe the goals in specific enough terms to help you measure progress against the aspiration. And for the latter, you could use the Balanced Scorecard. I still think that is a perfectly good way to go.
But the alternative is to follow the lead of the recasting of the Cascade in Playing to Win. In this conception, goals become a form of measurement at goes into Management Systems (or now EMS). On that front, I think of Balanced Scorecard as an EMS. It isn’t all of EMS — but one consistent aspect of EMS. It is a categorical model that helps you translate your WA, WTP, HTW, and MHC into a set of measurements that you can track to see whether or not you are on track.
Each works perfectly fine for me — under WA or EMS. Balanced Scorecard is a useful tool regardless of your choice on that front.
Practitioner Insights
A map is always a useful tool. (My wife would say it is an essential tool to avert travel disaster for this spatially challenged strategist!) It helps you where you are today and the potential paths toward your destination. Analogously, you need a WA as your destination and measures that enable you to judge your progress toward it. With no measures, bad things will happen. You will get lost! Every choice along the way must be guided by the WA destination and the signpost measures along the way.
On this front, Balanced Scorecard has features that I like. It drives away from employing a singular metric, which protects against surrogation. And it is reflective of the reality that no organization can be usefully guided by a singular measure.
My advice is to make the measures at least partially conflictual because that will drive you to be cleverer in your choices. Southwest Airlines set its goals as lowest cost, highest customer satisfaction, and highest employee satisfaction. It is really hard to pull off those three at the same time. Southwest had to be really clever to achieve those three elements and that helped it be the best performing airline in America. Costco set goals of giving customers great prices and having highly paid and happy employees. Again, that combination is very hard to accomplish — but Costco made it happen and created a truly fabulous company. You can use Balanced Scorecard in this way to pressure test your thinking and push your strategy toward more distinctiveness.
