The balanced scorecard is a strategic planning and management system that is used extensively in

business and industry, government, and nonprofit organizations worldwide to align business
activities to the vision and strategy of the organization, improve internal and external
communications, and monitor organization performance against strategic goals. It was originated by
Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement
framework that added strategic non-financial performance measures to traditional financial metrics
to give managers and executives a more 'balanced' view of organizational performance. While the
phrase balanced scorecard was coined in the early 1990s, the roots of the this type of approach are
deep, and include the pioneering work of General Electric on performance measurement reporting in
the 1950’s and the work of French process engineers (who created the Tableau de Bord – literally, a
"dashboard" of performance measures) in the early part of the 20th century.

The balanced scorecard has evolved from its early use as a simple
performance measurement framework to a full strategic planning
and management system. The “new” balanced scorecard
transforms an organization’s strategic plan from an attractive but
passive document into the "marching orders" for the organization
on a daily basis. It provides a framework that not only provides
performance measurements, but helps planners identify what
should be done and measured. It enables executives to truly
execute their strategies.

Why Implement a Balanced

This new approach to strategic management was first detailed in a
Scorecard?
series of articles and books by Drs. Kaplan and Norton.
Recognizing some of the weaknesses and vagueness of previous
management approaches, the balanced scorecard approach  Increase focus on
provides a clear prescription as to what companies should strategy and results
measure in order to 'balance' the financial perspective. The  Improve organizational
balanced scorecard is a management system (not only a performance by
measurement system) that enables organizations to clarify their measuring what
vision and strategy and translate them into action. It provides matters
feedback around both the internal business processes and external  Align organization
outcomes in order to continuously improve strategic performance strategy with the work
and results. When fully deployed, the balanced scorecard people do on a day-to-
transforms strategic planning from an academic exercise into the day basis
nerve center of an enterprise.  Focus on the drivers of
future performance
Kaplan and Norton describe the innovation of the balanced  Improve
scorecard as follows: communication of the
organization’s Vision
and Strategy
"The balanced scorecard retains traditional financial measures. But
 Prioritize Projects /
financial measures tell the story of past events, an adequate story
Initiatives
for industrial age companies for which investments in long-term
capabilities and customer relationships were not critical for
success. These financial measures are inadequate, however, for Also see:
guiding and evaluating the journey that information age
companies must make to create future value through investment The Benefits of Balanced Scorecard
in customers, suppliers, employees, processes, technology, and Strategic Planning and Management
Return on investment is an important
innovation." consideration before investing a significant
amount of money to build and implement a
new strategic management system. Read
 More >>

A Balancing Act by Institute

President & CEO Howard Rohm
A seminal article on how to implement
the balanced scorecard.
Read More >>

Sustaining New
Directions by Howard Rohm and
Larry Halbach
Sequel to A Balancing Act -- an article.
Read More >>

What are the Primary

Implementation Success Factors?
Click Here to Find Out
Adapted from Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a
Strategic Management System,” Harvard Business Review (January-February 1996): 76.

Perspectives
Want to learn more?
The balanced scorecard suggests that we view the organization Please visit the Institute's Public
Workshop Schedule or contact the
from four perspectives, and to develop metrics, collect data and
Institute about on-site training or
analyze it relative to each of these perspectives:
consulting services. Or schedule a
live, customized webinar with an
The Learning & Growth Perspective Institute consultant, or try the
This perspective includes employee training and corporate cultural Institute's new E-Learning program.
attitudes related to both individual and corporate self-
improvement. In a knowledge-worker organization, people -- the
only repository of knowledge -- are the main resource. In the
current climate of rapid technological change, it is becoming
necessary for knowledge workers to be in a continuous learning
mode. Metrics can be put into place to guide managers in focusing
training funds where they can help the most. In any case, learning Other Resources:
and growth constitute the essential foundation for success of any
knowledge-worker organization. Definitions of Balanced
Scorecard Strategic
Kaplan and Norton emphasize that 'learning' is more than
Planning & Management
'training'; it also includes things like mentors and tutors within the
organization, as well as that ease of communication among Terms
workers that allows them to readily get help on a problem when it
is needed. It also includes technological tools; what the Baldrige
criteria call "high performance work systems."
Definitions of General
The Business Process Perspective
Management Terms
This perspective refers to internal business processes. Metrics
based on this perspective allow the managers to know how well
their business is running, and whether its products and services Using the Balanced Scorecard
conform to customer requirements (the mission). These metrics to Align Your Organization
have to be carefully designed by those who know these processes by Howard Rohm
most intimately; with our unique missions these are not Balanced Scorecards, when developed as
strategic planning and management
something that can be developed by outside consultants. systems, can help align an organization
behind a shared vision of success.
Read More >>
The Customer Perspective
Recent management philosophy has shown an increasing
realization of the importance of customer focus and customer
satisfaction in any business. These are leading indicators: if The Balanced Scorecard -- Not
customers are not satisfied, they will eventually find other Just Another Project
by Paul Arveson
suppliers that will meet their needs. Poor performance from this The balanced scorecard management
perspective is thus a leading indicator of future decline, even system is not just another project. It is
though the current financial picture may look good. fundamentally different from project
management in several respects.
Read More >>
In developing metrics for satisfaction, customers should be
analyzed in terms of kinds of customers and the kinds of
processes for which we are providing a product or service to those Web 2.0 and the Automated Balanced
customer groups. Scorecard
by David Wilsey
Improve Your Performance "News"
The Financial Perspective Read More >>
Kaplan and Norton do not disregard the traditional need for
financial data. Timely and accurate funding data will always be a
priority, and managers will do whatever necessary to provide it. In
fact, often there is more than enough handling and processing of The Balanced Scorecard
financial data. With the implementation of a corporate database, it
and Measurement-Based
is hoped that more of the processing can be centralized and
automated. But the point is that the current emphasis on Managementby Paul Arveson
financials leads to the "unbalanced" situation with regard to other
perspectives. There is perhaps a need to include additional
financial-related data, such as risk assessment and cost-benefit
data, in this category. Improve Government
Performance
Strategy Mapping Read More>>

Strategy maps are communication tools used to tell a story of how

value is created for the organization. They show a logical, step-
by-step connection between strategic objectives (shown as ovals What is a Balanced
on the map) in the form of a cause-and-effect chain. Generally Scorecard?
speaking, improving performance in the objectives found in the Need more information? Sign up for a
webinar or our e-learning program for
Learning & Growth perspective (the bottom row) enables the more.
organization to improve its Internal Process perspective Objectives
(the next row up), which in turn enables the organization to create
desirable results in the Customer and Financial perspectives (the
top two rows).
Balanced Scorecard Software

The balanced scorecard is not a piece of software. Unfortunately,

many people believe that implementing software amounts to
implementing a balanced scorecard. Once a scorecard has been
developed and implemented, however, performance management
software can be used to get the right performance information to
the right people at the right time. Automation adds structure and Professional Certification
discipline to implementing the Balanced Scorecard system, helps
transform disparate corporate data into information and
Did you know that
knowledge, and helps communicate performance information. The
the Institute's
Balanced Scorecard Institute formally recommends the QuickScore
Professional
Performance Information SystemTM developed by Spider Strategies
Certification
and co-marketed by the Institute.
Program is offered in
More about Software >>
association with
GWU?
Read More >>
View Schedule >>

Close Move

What are the Primary Implementation Success Factors?

 Obtaining executive sponsorship and commitment

 Involving a broad base of leaders, managers and employees in scorecard development
 Agreeing on terminology
 Choosing the right BSC Program Champion
 Beginning interactive (two-way) communication first
 Working through mission, vision, strategic results, and strategy mapping first to avoid
rushing to judgement on measures or software
 Viewing the scorecard as a long-term journey rather than a short-term project
 Planning for and managing change
 Applying a disciplined implementation framework
 Getting outside help if needed

Close Move

Definitions of Balanced Scorecard Strategic Planning &

Management Terms
Customer Value Proposition
The Customer Value Proposition is the unique added value an organization offers customers through its operations;
the logical link between action and payoff that the organization must create to be effective. Three aspects of the
proposition include Product/Service Attributes (Performance/ Functionality considerations such as quality, timeliness
or price), Image and Relationship.

Mission
A mission statement defines why an organization exists; the organization's purpose

Performance Measures
Performance Measures are metrics used to provide an analytical basis for decision making and to focus attention on
what matters most. Performance Measures answer the question, 'How is the organization doing at the job of meeting
its Strategic Objectives?' Lagging indicators are those that show how successful the organization was in achieving
desired outcomes in the past. Leading indicators are those that are a precursor of future success; performance
drivers.

Perspectives
A Perspective is a view of an organization from a specific vantage point. Four basic perspectives are traditionally
used to encompass an organization's activities. The organization's business model, which encompasses mission,
vision, and strategy, determine the appropriate perspectives.

Strategic Initiatives
Strategic Initiatives are programs or projects that turn strategy into operational terms and actionable items, provide
an analytical underpinning for decisions, and provide a structured way to prioritize projects according to strategic
impact. Strategic Initiatives answer the question, ‘What strategic projects must the organization implement to meet
its Strategic Objectives?’

Strategic Objectives
Objectives are strategy components; continuous improvement activities that must be done to be successful.
Objectives are the building blocks of strategy and define the organization's strategic intent. Good objectives are
action-oriented statements, are easy to understand, represent continuous improvement potential and are usually not
'on-off' projects or activities.

Strategic Result
Strategic results are the desired outcome for the main focus areas of the business. Each Strategic Theme has a
corresponding Strategic Result.

Strategic Theme
Strategic Themes are key areas in which an organization must excel in order to achieve its mission and vision, and
deliver value to customers. Strategic Themes are the organization's "Pillars of Excellence."

Strategy Map
A Strategy Map displays the cause-effect relationships among the objectives that make up a strategy. A good
Strategy Map tells a story of how value is created for the business.

Strategy
How an organization intends to accomplish its vision; an approach, or “game plan”.

Targets
Desired levels of performance for performance measures

Vision
A vision statement is an organization's picture of future success; where it wants to be in the future

©1998-
2010
Balanced
Scorecard
Institute, a
Strategy
Manageme
 nt Group
company

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The matrix organization is an attempt to combine the advantages of the pure functional
structure and the product organizational structure. This form is identically suited for
companies, such as construction, that are “project-driven”. The figure below shows a typical
Matrix organization.

In a matrix organization, each project manager reports directly to the vice president and the
general manager. Since each project represents a potential profit centre, the power and
authority used by the project manager come directly from the general manager.

Information sharing is mandatory in such an organization, and several people may be

required for the same piece of work. However, in general, the project manager has the total
responsibility and accountability for the success of the project. The functional departments, on
the other hand, have functional responsibility to maintain technical excellence on the project.
Each functional unit is headed by a department manager whose prime responsibility is to
ensure that a unified technical base is maintained and that all available information can be
exchanged for each project.

Typical Matrix organization

 The basis for the matrix organization is an endeavor to create synergism through shared
responsibility between project and functional management. Other advantages of a pure matrix
organizational form, to project management, include:

• Because key people can be shared, the project cost is minimized

• Conflicts are minimal, and those requiring hierarchical referrals are more easily
resolved

• There is a better balance between time, cost and performance

• Authority and responsibility are shared

• Stress is distributed among the team

Material Requirements Planning (MRP)

A computerized system for managing dependent-demand

inventory, scheduling replenishment orders, and meeting demand
for end items as given in the Master Production Schedule.

Two basic characteristics of MRP:

1. MRP derives demand for components, subassemblies, materials, etc.,

from demand for and production schedules of parent items.
2. MRP offsets replenishment orders (purchase orders or production
schedules) relative to the date when replenishment is needed.

Information Needed for MRP Information Obtained from MRP

• Planned orders: replenishment orders to
• Demand for all products.
be released at a future time
• Lead times for all finished
• Order release notice: notices to release
goods, components, parts
planned orders
and raw materials
• Action notices: notices to expedite, de-
• Lot sizing policies for all
expedite, or cancel orders, or to change
parts
order quantities or due dates
• Opening inventory levels
• Priority reports: information regarding
• Safety stock requirements
which orders should be given priority
• Inventory status information
• Any orders previously
placed but which haven't
• Performance reports such as inactive
arrived yet
items, actual lead times, late orders, etc.
MRP Inputs
1. 1. Master Production Schedule
2. Product Structure
3. Inventory Levels

• p and np Control Charts

• Control Limits
• Binomial Distribution
• Small Sample Case
• Summary
• Quick Links

Greetings,
Two control charts used with yes/no type data are the p and np control charts.
We usually collect the data and then calculate the average and the control limits,
either manually or with software. But did you know that the control limit equations
for the p and np control charts are only valid under certain conditions? The
equations are not valid when you have what is called the "small sample case" for
p and np control charts. This newsletter discusses this small sample case and
how the control limits are determined.

Best regards,
Bill

p and np Control Charts

p and np control charts are used with yes/no type attributes data. These two
charts are commonly used to monitor the fraction (p chart) or number (np chart)
of defective items in a subgroup of items.
With this type of data, there are only two possible outcomes: either the item is
defective or it is not defective. For example, suppose you are using a p control
chart to track the fraction (or %) of hospital admissions that had incorrect
insurance information each week. There are only two possible outcomes: either
the admission had the correct insurance information or it did not have the correct
insurance information. This type of data is referred to as yes/no data. It either
meets some preset specification (yes) or it does not meet the preset specification
(no). You would collect data each week on the number of hospital admissions (n,
the subgroup size) and the number with incorrect insurance information (np, the
number defective). Each week you calculate the fraction defective, p, which is
equal to np/n. The values of p are plotted over time. Once enough data is
available, you calculate the average (pbar) and control limits (LCLp and UCLp).
For more information on p control charts, please see our July 2005 newsletter
that is available on our website.

If the subgroup size is the same each time, the np control chart can be used in
place of the p control chart. In this case, the number of defective items (np) is
plotted over time. Again, once enough data is available, you calculate the
average (npbar) and control limits (UCLnp and LCLnp).
Both these charts involve counts. You are counting items. To use a p or np
control chart, the counts must also satisfy the following two conditions:

1. You are counting n distinct items. np is the number of items

in those n items that fail to conform to specification.
2. Suppose p' is the probability that an item will fail to conform
to the specification. The value of p' must be the same for each of
the n items in a single sample.
If these two conditions are met, the binomial distribution can be used to estimate
the distribution of the counts and the p or np control charts can be used. Be
careful here because condition 2 does not always hold. For example, some
people use the p control chart to monitor on-time delivery on a monthly basis.
This is not valid unless the probability of each shipment during the month being
on-time for all the shipments is the same. Big customers often get priority on their
orders, so the probability of their orders being on time is different than for other
customers and you can't use the p control chart.

Click here to access all our previous newsletters.

Control Limits
The control limits for the p control chart are given below.

where pbar is the average fraction defective, n is the subgroup size, UCLp is the
upper control limit and LCLp is the lower control limit.
The control limits for the np control chart are given below.

where npbar is the average number of defective items, UCLnp is the upper
control limit and LCLnp is the lower control limit.
These equations for the control limits are commonly used. However, these
control limits are only valid under certain conditions. The basic probability
distribution for the calculation of control limits for the p and np charts is the
binomial distribution. Under certain conditions, the binomial distribution is
symmetrical and the control limits for the p and np control charts are those given
above.
Suppose you have a process that is in statistical control with an average fraction
defective of pbar. Since the process is in control, any p values obtained should
fall between the control limits in a random fashion. The chance that p will fall
outside the control limits is approximately 3 out of 1,000. These control limits are
good as long as n*pbar is sufficiently large. In these cases, the binomial
distribution is symmetrical and the equations above provide good estimates of
the control limits.
Our SPC for Excel software easily constructs and updates control charts. And it
automatically handles the small sample case for p and np control charts. Click
here.

Binomial Distribution
If n*pbar is not sufficiently large, the binomial distribution is not symmetrical. In
these cases, the control limit equations are no longer valid. n*pbar is not
sufficiently large if n*pbar < 5 or if n*(1-pbar) < 5. This is referred to as small
sample case for p and np charts. The figures below demonstrate how the shape
of the binomial distribution changes as n*pbar changes from 0.5 to 5.0. As can
be seen in the figures, the binomial distribution becomes more symmetrical and
approaches the shape of a normal distribution as n*pbar becomes larger. When
the distribution is symmetrical, the control limit equations are valid.
 Small Sample Case
If n*pbar < 5 or if n*(1-pbar) < 5, the above control limit equations cannot be used
to determine the control limits. The control limits must be derived from the
binomial distribution. We have generated a table that gives you the control limits
in this small sample case. The table is available for download from the website at
this link (small sample case p and np charts download).
The table gives the upper and lower control limits for various values of pbar from
0.001 to 0.5 and for values of n from 5 to 50. These control limits are exact
solutions of the equation governing the binomial distribution with the assumption
that the probability (P) of obtaining a point beyond the control limits is less than
or equal to 0.003:

P(p <= LCLp) + P(p >= UCLp) <= 0.003

The limits given in the table are for np charts for various values of p and n. To
obtain the limits for a p chart or convert np to p, use the following relationships:
UCLp = UCLnp/n
LCLp = LCLnp/n
pbar = n*pbar/n
To understand how to use the table and how it was developed, consider the
following example. Suppose you are sampling 10 items (such as invoices or
expense accounts) on a regular basis. The average fraction defective has been
determined to be 0.01. Thus:
n*pbar= (10)(0.01) = 0.1
Since n*pbar < 5, the table must be used to determine the control limits. The
table gives the control limits for the np chart. The control limits from the table for
p = 0.01 and n = 10 are:
UCLnp = 3
 LCLnp = None
A portion of the table is shown below.

n 8 9 10
pbar LCL UCL LCL UCL LCL UCL
0.01 - 2 - 3 - 3
0.02 - 3 - 3 - 3
0.03 - 3 - 3 - 3
0.04 - 4 - 4 - 4
0.05 - 4 - 4 - 4
0.06 - 4 - 4 - 4
0.07 - 4 - 4 - 5
0.08 - 4 - 5 - 5
0.09 - 5 - 5 - 5
0.10 - 5 - 5 - 5
0.11 - 5 - 5 - 5
0.12 - 5 - 5 - 6
0.13 - 5 - 5 - 6
0.14 - 5 - 6 - 6
0.15 - 5 - 6 - 6
0.16 - 6 - 6 - 6
0.17 - 6 - 6 - 6
0.18 - 6 - 6 - 7
0.19 - 6 - 6 - 7
0.20 - 6 - 7 - 7

The control limits are converted from an np chart to a p chart by dividing by n:

UCLp = UCLnp/n = 3/10 = 0.3
LCLp = LCLnp/n = None/10 = None
If the control limit equations were used, the control limits would be:

The LCLp is actually -0.08 but since it is less than zero, there is no LCLp. Note
the difference between the UCLp calculated using the equations (UCLp = 0.1)
and that obtained from the table (UCLp = 0.3). This difference is simply due to
the fact that, when npbar < 5, the binomial distribution is no longer symmetrical.
The control limit equations no longer provide the same probability as when npbar
> 5.
The control limits in the table were obtained from the equation governing the
binomial distribution. In Microsoft Excel, you can use the function "Binomdist" to
determine this. For this example, the probability of finding 0, 1, 2, and 3 defective
items in the sample size of 10 with npbar = 0.01 can be calculated. The
calculation results are summarized below.

Number Defective  Probability

0 0.904
1 0.091
2 0.004
3 0.0001

The probability of the sample containing 0 defective items is 904 out of 1,000.
The probability of the sample containing 0 or 1 defective item is 995 out of 1,000.
The probability of the sample containing 0, 1, or 2 defective items is 999 out of
1,000. The control limits in the table are determined so that the probability of
obtaining a point beyond the control limits is less than or equal to 0.003 (or 3 out
of 1,000). For this case, the probability becomes less than 0.003 when the
number of defective items is 3 or more. Thus, the upper control limit for this
example is 3.
The table does go beyond n*pbar < 5. It has values of n to 50 and pbar to 0.5 For
n = 50 and pbar = 0.5, the table gives the following limits for the np chart:
LCLnp = 14
UCLnp = 36
Note that n*pbar = 25 in this case. The control limit equations for the np chart
give the following results:
UCLnp = 35.6
LCLnp = 14.3
When n*pbar is large enough, the control limit equations are valid.

Summary
The p and np chart are used to monitor variation in yes/no type data. The control
limit equations are valid as long as n*pbar > 5 or n*(1-pbar) > 5. If this is not true,
the binomial distribution which governs the p and np control charts is not
symmetrical. This is called the small sample case for the p and np control charts.
In the case when n*pbar < 5 or n*(1-pbar) < 5, the actual binomial distribution
must be used. A table has been provided for pbar = .001 to .5 and n from 4 to 50
that provides these control limits.
Attachment Size
small sample case for p and np charts.xls 68 KB

Quick Links
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What is it: The NP-Chart is used for monitoring the number of

times a condition occurs, relative to a constant sample size,
when each sample can either have this condition, or not have
this condition. The Np-Chart monitors the number of times a
condition occurs, relative to a constant sample size, when each
sample can either have this condition, or not have this condition.
For our example, we would sample a set number of transactions
each month from all the transactions that occurred, and from this
sample count the number of transactions that had one or more
errors. We would then track on the control chart the number of
transactions with errors per month.

Why use it: The Np Control Chart is used to determine if the

rate of nonconforming product is stable, and will detect when a
deviation from stability has occurred. There is a difference
between a "P-Chart" and an "Np-Chart". A P-Chart is one that
shows the fraction defective (p), whereas the NP-Chart shows
the NUMBER of defectives (Np). They are practically the same
thing with the exception that an NP-Chart is used when the size
of the subgroup (N) is constant, and a P-Chart is used when it is
NOT constant.

Where to use it: In industrial statistics, the NP-Chart is a

type of control chart that is very similar to the P-Chart except
that the statistic being plotted is a number count rather than a
sample proportion of items. For example, an NP-Chart often
shows the number of nonconforming items in each sample.
Since we are counting failures or successes, clearly the
appropriate data for NP-charts need to be attribute data. The
subgroup size must be constant, as comparisons of counts
would otherwise be meaningless.

When to use it: To measure the number of defective items

along a time sequence.

How to use it: NP-Chart overview:

1. The "NP" stands for the number of nonconforming items,

which can be expressed as n (sample size) times P
(proportion of nonconforming items)
2. Need a good definition of nonconforming items – usually
a categorical definition
3. Subgroup size must be constant
4. Normally need large subgroups – can even be up to total
for the period

Control limits for the NP-Chart are calculated on the basis of the
binomial distribution and an approximation based on the central
limit theorem.

Steps In Constructing a NP-Chart

1. Collect the data recording the number inspected (N) and

the number of defective products (NP). Divide the data
into subgroups.
2. Record the number of defectives on a chart or
spreadsheet, along with the subgroup size.
3. Record the number of defectives for each subgroup and
record on the data sheet. Then total both columns.
4. Compute the Control Limits.
5. Draw in the Control Limits and plot the number of
defective parts listed in our chart above. Connect the
dots and observe the chart to determine if there are any
points out of the control limits.
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