The Tyranny

8/3/2019 The Tyranny

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The tyranny of the BalancedScorecard in the innovation

economySven C. Voelpel

International University Bremen, Bremen, Germany

Marius LeiboldUniversity of Stellenbosch, Matieland, South Africa, and

Robert A. Eckhoff EMPRISE Consulting Group, Du¨ sseldorf, Germany

AbstractPurpose – To trace the rationale, features, development and application of the Balanced Scorecard(BSC) over the past ten years, to provide a critical review of its key problematic effects, and to suggesta future direction.Design/methodology/approach – The shift from the industrial to the innovation economyprovides a background to identifying ve major problem areas of the BSC which are then discussedwith reference to selected case examples. An alternative systemic scorecard is then proposed.Findings – The tyranny of the BSC as a measurement “straightjacket” is beginning to jeopardize thesurvival of rms, hinders much-needed business ecosystem innovation, thereby negatively affectingcustomer value rejuvenation, shareholders’ benets, other stakeholders as well as societal benets ingeneral. A more systemic alternative is proposed.Research limitations/implications – Future research might focus on further development of thesystemic scorecard in different industries and organisational settings with detailed systemic

measurement techniques.Practical implications – Rather than relying on the static BSC, it would be more effective to adopt asystemic perspective in measuring/managing intangible assets.Originality/value – An alternative to the BSC is proposed that involves radical change in itsunderlying assumptions by moving to a more systemic, dynamic framework – a systemicmanagement system, including a systemic scorecard.Keywords Balanced scorecard, Innovation, Intellectual capitalPaper type Research paper

IntroductionWhen introduced by Kaplan and Norton (1992; 1996) the Balanced Scorecard (BSC)represented an innovative approach to measuring a rm’s performance. Instead of justmeasuring the nancial results of a rm, the important and logical causal factors fornancial outcomes were identied and included in an expanded and “balanced scorecard’.Others had previously proposed the measurement of rm performance in non-nancial

The current issue and full text archive of this journal is available atwww.emeraldinsight.com/1469-1930.htm

The authors wish to thank the anonymous reviewers, Stephan Abe ´e and David O’Donnell as wellas participants in the intellectual capital stream at the 4th International Critical ManagementStudies Conference in July 2005, Cambridge University, UK, for their valuable contributions anddiscussions.

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Journal of Intellectual CapitalVol. 7 No. 1, 200

pp. 43-60q Emerald Group Publishing Limited

1469-1930DOI 10.1108/1469193061063976



terms (see Eccles, 1991), but this was the rst time that performance measurement wasproposed in an integrated causal, and most importantly systematic, way.

Firms had already been measuring non-nancial indicators such as customersatisfaction, cycle times, market share, product quality, and service quality. The BSC,which was developed from a multi-company study, now provided a multi-dimensionalview of the rm, linking nancial and non-nancial measures in a coherent system.The new measurement approach has been considered as a very useful tool inenhancing the understanding of organizational dynamics in terms of cause-effectrelationships, and in improving a rm’s efciency. The BSC approach becamewell-known and generally accepted in the academic as well as in the business world(Ampuero et al., 1998), being widely adopted in various industries and organizations,including large US companies as different as Federal Express, General Electric,Wal-Mart, and public and non-prot organizations.

From industrial to innovation economyWith a shift from the industrial economy towards an economy now predominantlycharacterized by intangible assets, such as knowledge and innovative capability,organizations have to manage increasing levels of complexity, mobility anduncertainty. The often disruptive changes that have occurred since about the lastdecade of the twentieth century have blurred traditional industry and organizationalboundaries and have shed new light on traditional business competencies, processesand practices. The ability to manage knowledge-based intellect is of critical importancein this new environment (Quinn, 1992). The evolution of the globally networked societyhas changed our world into a global village; one that constantly undergoes dynamicand unpredictable socio-cultural changes (Leibold et al., 2002). At the root of thesedevelopments are the advancing technological possibilities that enhance the pace of

communication, causing an increase in organizational connectivity and innovation.Moore’s law (1965) and Metcalfe’s law (Buckman, 2004, p. 99) demonstrate that thespeeds of technological advancement and connectivity are growing exponentially andwith seemingly unfathomable velocity. This is resulting in an unprecedented increasein the rate of value innovation, and new ways in how it is generated, with someobservers now contending that we have entered the era of the innovation economy (seeChristensen and Raynor, 2003).

The core principles that underpin the modern enterprise are all being challengedtoday – replication, specialization, hierarchy, extrinsic rewards, functional integration,restructuring, business process reengineering, enterprise resource planning, supplychain synchronization, customer relationship management – if not in theirfundamental nature, then in their application. In many instances key internalfunctions and traditional “core competencies” are moving outside the rm, beingoutsourced to network partners in integrated supply and demand chains. While mosttraditional business management principles of the industrial economy remain valid ina limited sense (for existing and proven business models that are still successful insome environments), they now seem inadequate in coping with disruptive change,either in an adaptive or creative way. Figure 1 depicts the major differences in featuresbetween the industrial economy of the twentieth century and the innovation economyof the early twenty-rst century.

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Competition in the innovation economy is now increasingly characterized by the rapidemergence of brand-owning companies that devote their energies to organizationaltness (Beer, 2002) in creating and meeting customer need experiences, and in drivingvalue innovation in business processes across supply and demand chains and withintheir particular internal linkages. Effective supply and demand chains support deeperlevels of customer “success” (beyond customer satisfaction and relationships), as well

as leveraging and utilizing customer knowledge (Gibbert et al., 2002) and value chainpartner knowledge for appropriate innovation. These new developments result infundamentally new ways of viewing the nature of the rm, core capabilities, premisesof strategy creation and implementation and, critically, in measuring the performanceof business activities.

Although this article focuses on the BSC and its relevance for companies in theinnovation economy, the subsequent reviews and implications are also relevant forother types of business performance measurements (or scorecards), such asshareholder value, market share, human resource accounting, economic value-added,intellectual capital indices, and knowledge management scorecards. All of thetraditional business performance measures suffer to some degree because of theunderlying and increasingly invalid assumptions rooted in the industrial economy.After the analysis of the rationale, development, features and applications of the BSC,as well as a critical review, we propose an alternative, systemic approach that is moreappropriate for dealing with today’s networked corporate world in the innovationeconomy.

Rationale, development, features and applications of the BSCA balanced view on companies’ operations and performance, including nancial aswell as non-nancial measures, related to marketing, research and development, social

Figure 1.From the industrial

economy to the innovationeconomy


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responsibility and employees had already been described 25 years ago by Parker(1979). Since then Kaplan and Norton’s BSC (1992, 1996, 2000) has become a majormanagement planning and measuring tool (see Figure 2).

The rationale of the BSC focuses on providing a systematic tool, combiningnancial and non-nancial performance indicators in one coherent measurementsystem. Metrics are constructed according to a predened strategy, and the company’sprocesses are aligned towards this strategy. Accordingly, the mindset of the BSC isbased on the perception of the rm as a protability machine, which needs to beoptimized to reach maximum efciency through measuring and controlling for mostlycompany-owned processes. The focus of the BSC is the individual company and itsperformance causes and results.

In order to do this, the BSC is designed to systematically measure the company infour areas:

(1) The nancial perspective uses traditional accounting measures in order toevaluate a rm’s short-term nancial results.

(2) The customer perspective measures relate to customer satisfaction of identiedtarget groups and is generally marketing-focussed.(3) The internal business process view is based on the concept of the (rm-internal)

value chain, including the process (or steps) needed to realize the intendedproduct or service.

(4) The nal dimension comprises the innovation and learning perspective that isinherent in a company by measuring various human resources (HR) focusedeffects as well as learning systems support effectiveness.

By combining these four measures within the BSC, Kaplan and Norton attempt toestablish the BSC as a representation of an organization’s shared vision. In doing so,the BSC becomes not only a tool for measurement, but also a tool for strategicmanagement. Intangible assets, however, often run the risk of being underestimatedsince neglecting them doesn’t show up as immediately and as clearly as in the case of

Figure 2.The BSC and its majordimensions

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tangible assets. It follows that the BSC shifts attention from those areas that are notmeasured, to areas that are measured, since what is measured can be evaluated andwhat can be evaluated can be appraised (Hauser and Katz, 1998). Managers, in turn,will try to maximize performance in those areas that are measured and evaluated, evenat the cost of neglecting other elds that are not included in the performance metrics.

By clarifying the companies’ strategy and facilitating its communication, the BSCsets out to serve as a “pull rope” in order to efciently align the rm with a denedstrategy towards which managers can align their actions and efforts. The systematicway in which the BSC is designed helps to reduce information overload and leadsmanagers to prioritize important issues more easily. Finally, by trying to include futureoriented measures, long-term planning is encouraged and regularly, as much aspossible, controlled for.

In general, the top management team needs to be heavily involved in making theBSC work. After setting the strategy and creating a scorecard accordingly, the fourperspectives of the BSC are applied in a recursive way to move the company forwardalong these measures. A coherent and logical view on the company should evolve andprovide a view on the efciency of the company. Kaplan and Norton (2000) use theexample of Mobil Northern American Marketing and Rening, for which a BSC or astrategy map had been developed, to emphasize the importance the BSC plays incommunicating strategy in a top down manner. Their latest work (Kaplan and Norton,2004) similarly builds upon the earlier concept of the BSC, including the measurementof intangible assets. These recent extensions of the BSC are, however, limited by theve major problem categories of the original BSC approach, which we highlight below.

The changing premises and mindsets of the innovation economyIn the innovation economy, the core truths of business and strategy still apply;businesses must create value for customers and capture some of that value (adequatefor survival) for shareholders. However, as illustrated in Figure 3, a fundamental shifthas taken place in how competitive value creation and provision to customers are noweffected, in comparison to the industrial economy, and managers must thoroughlygrasp this to adopt the appropriate underlying mindsets for strategic management inthe innovation economy.

Business in the twenty-rst century will never again be the same as it was in thetwentieth century; the rules of the innovation economy have made a seemingly verysudden transition from a state of continuity to a state of discontinuity. Some companieshave made the mental “jump” successfully: under Jack Welch, General Electric hasreframed its business and has seen performance benets as a result; IBM hastransformed from a mainframe computer company to a computing services company;others such as Johnson & Johnson, L’Oreal, General Motors, Shell, Proctor & Gambleand Corning are shedding their traditional business identities and business models andemerging with new ones.

Besides the signicant shifts in managerial mindsets during the twentieth century,as indicated in Figure 3 (Vargo and Lusch, 2004), the great shock in the late twentiethand early twenty-rst century is that systems cannot be fully understood byNewtonian-based analysis. The properties of the parts are not intrinsic properties, butcan be understood only within the context of the larger whole. Thus, when we speak of management as a co-evolutionary process, we do not mean systematic processes that


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can be analytically reduced, mechanistically planned, or fully controlled, but rathersystemic processes that can be holistically understood, inuenced, guided, cultivated,and broadly measured – concepts which are revisited later in this paper.

The traditional approaches to strategic management are predicated upon anemphasis on analysis, instrumental rationality, and periods of stability. The analyticalmindset typical of most of the twentieth century presumes that any organization,

industry, or market can be understood through reductionism; that is, reducing thewhole to its constituent parts for scrutiny and future direction. This indicates astrategic imagination that identies the patterns in the environment, labels theregularities that associates images necessary to cut through and perceive the mass of data generated by analysis, and utilize judgment and action based on experience. Themajor fallacy of the descriptive strategic mindset is a continuously expanding range of new descriptions, such as different industry analyses, different SWOT analyses,different competence analyses, different portfolio analyses, different scenario analyses,different value chain and scorecard mappings, and so on. All these attempts are aimedat searching for a “perfect” strategy based on ever-increasing complex analyses,descriptions and alternative reaction scenarios. Both the prediction and learningapproaches to strategic management focus on analytical activities and gathering of experience, which, like data and information, are arguably essential resources forstrategy making. Both Hamel (1998), and Roos and Victor (1999) call for a new theoryof strategic management that would enable the eld to develop creative, proactivestrategic mindsets. In today’s dynamic networked world, it is increasingly beingaccepted that the whole is more than the sum of the parts, and holistic thinking andapproaches should replace, or at least complement, analytical ones. Leibold et al. (2002),present a systemic strategic management approach as an alternative to the traditionalones.

Figure 3.Toward a new dominantmindset for strategicmanagement

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For the past 50 years, competition has dominated the mindset of strategic thinking,planning, and implementation. With strategic thinking on “out-performing”competition embedded in the construction of competitive advantage, companiesoften achieve no more than incremental improvement; imitation and incrementalinnovation, and not core value (or disruptive) innovation (Kim and Mauborgne, 1999).Companies need to escape from the conventional competitive-goods mindset and adopta collaborative value-innovation mindset, as illustrated in Figure 4.

The tyranny of the BSC in the innovation economy: critical review andimplicationsWhen applied in the innovation economy, the BSC displays signicant limitations indealing with the new, rapidly changing and networked corporate environment.Research and practice in the 1990s have been very much engaged in improvingmeasurable performance in order to optimize operational efciency (Bontis et al., 1999;Roos et al., 1997; Russ, 2001). The BSC follows this logic of seeking efciency and

enabling organizations to react to changes by aligning business processes to a denedstrategy. However, as heavy hiking boots are a blessing when trying to climb amountain, and a curse for the 100 metres sprint, the BSC in the innovation economyexerts a tyrannical impact and inuence on the rm and its stakeholders. The specicdisadvantages of the BSC can be identied that endanger the survival of the rm in theinnovation economy; ve major problem categories arise which are discussed.

First, the BSC is a measurement tool that is relatively rigid. The four perspectives arethe main categories, according to which key success factors are dened. In consequence,

Figure 4.Contrasting a

conventional mindset witha value innovation

mindset


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the BSC tends to force indicators into one of the four perspectives. By doing so, it limitsperspectives on the company, since it leaves little room for cross-perspectives that mighthave a simultaneous impact. Those that do not t, or cannot be categorized, within thegiven framework of the four dimensions are in danger of being neglected. Kaplan andNorton, however, state that these categories should not become a straitjacket, but stilltreat them as an all encompassing view of possible measures (Bontis et al., 1999). Thisdraws managerial attention away from other possible categorizations and views thatmight provide a better picture of the business system. Moreover, the BSC might not onlyenhance a particular conrmation bias, enabling managers only to see what they want tosee (or measure), but it ignores the changing nature of today’s business environment. Anexample of the danger of sticking with given categories of performance measurement isthe case of Encyclopaedia Britannica, which was locked into its traditional key successfactors derived from the BSC and nearly going out of business before eventually beingsold off (see the following):

The Encyclopaedia Britannica saga

In 1768, three Scottish printers began publishing an integrated compendium of knowledge;the earliest and most famous in the English-speaking world. Since then, EncyclopaediaBritannica has evolved through fteen editions and, to this day, is regarded as the world’smost comprehensive and authoritative encyclopaedia. In 1920, Sears, Roebuck and Company,an American mail-order retailer, acquired Britannica and moved its headquarters fromEdinburgh to Chicago. Ownership passed to William Benton in 1941 who then willed thecompany in the early 1970s to the Benton Foundation, a charitable organization whoseincome supports the communications programs at the University of Chicago. Under itsAmerican owners Britannica grew into a serious commercial enterprise, while sustaining itsreputation as the world’s most prestigious and comprehensive encyclopaedia. The contentwas revised every four or ve years. The company built one of the most aggressive andsuccessful direct sales forces in the world. By 1990, sales of Britannica’s multi-volume setshad reached an all-time high of about US$650 million. Dominant market share, steady if

unspectacular growth, generous margins, and a two-hundred year history all testied to anextraordinarily compelling and stable brand. Since 1990, however, sales of Britannica, as of all printed encyclopaedias in the USA, have collapsed by over 80 percent. Britannica wasunder serious threat from a new competitor, the CD-ROM. The CD-ROM came from nowhereand destroyed the printed encyclopaedia business. Whereas Britannica sells for $1,500 to$2,200 per set (depending on the quality of the binding), CD-ROM encyclopaedias sell for $50to $70. But hardly anybody pays even that: the vast majority of copies are given away topromote the sale of computers. With a marginal manufacturing cost of $1.50 per copy, theCD-ROM as a freebie makes economic sense. The marginal cost of Britannica, in contrast, isabout $250 for production plus about $500 to $600 for the salesperson’s commission.

Judging from their inaction, Britannica’s executives initially seemed to have viewed theCD-ROM encyclopaedia as an irrelevance; a child’s toy, one step above video games. Asrevenues plunged, it became obvious that regardless of the quality, CD-ROM encyclopaediaswere serious competition. Britannic executives reluctantly considered manufacturing theirown CD-ROM product. Months passed, and sales continued to plummet. In response, thecompany eventually put together their own CD-ROM version of the encyclopaedia.

The CD-ROM version engendered yet another crises: a revolt by the sales force. Even if priced at a signicant premium over its CD-ROM competitors such as Encarta, the CD-ROMversion of Britannica could not possibly produce the $500 to $600 sales commission itstraditional counterpart produced, and from which it would obviously detract sales. Indeed, aCD-ROM version would have demanded a completely different channel. To avoid a revolt bythe sales force, Britannica executives decided to bundle the printed product with its digital

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counterpart. The CD-ROM was given free to buyers of the multi-volume set. Anyone whosimply wanted to buy the CD-ROM would have to pay $1,000! The decision appeased thesales force briey, but did nothing to stem the continuing collapse of sales. Losses mounted,and in 1995 the Benton Foundation nally put the company up for sale. For nearly eighteen

months, investment bankers tried to nd a buyer. Microsoft declined, as did TechnologyMedia and others. Finally, in 1996, nancier Jacob Safra agreed to buy the company, payingless than half of the book value. In less than ve years one of the greatest brand names in theEnglish-speaking world, with a heritage of more than 200 years, was nearly destroyed by acheap, shiny disk (adapted from Evans and Wurster (1997, 2000)).

In a dynamic business world, a rm has to co-evolve in collaboration with others. Onlyif a company co-evolves with its environment can it benet from change and newdevelopments and harness the energy that resides within the system, such ascollaborative synergies in costs and innovation or by co-creating the businessenvironment pro-actively.

Second, the BSC creates a static-ism that tends to struggle with the challenges of highly competitive and changing business world. Within the BSC approach, a centrallydened strategy is translated into certain measures that align all company activities toachieving its BSC goals. In consequence, the optimal implementation of a BSC leads toa high level of uniformity and goal orientation. This increases and possibly maximizesthe focus on the given goal; but it limits any further activities and initiatives that mightgo beyond the originally set targets. Static-ism therefore results in a high level of entropy, namely loss of a signicant amount of energy that is not used within anorganization. In such an aligned organization employees might have a clear perceptionof their job, e.g. in the objectives and achievements of BSC metrics, but they will dolittle more than only achieving just these (Falk and Kosfeld, 2004).

Thus, the potential that resides within a company is reduced towards theachievement of a given and centrally dened BSC goal, and towards this end it is very

efcient. However, the overall potential is not fully used. An individual as well as anorganization is able to deploy its potential in many ways, of which the BSC metrics are just one aspect. The rest remains unused and the system or company as a whole,therefore, becomes inefcient because of under-utilizing the potential energy thatwould be available beyond mere BSC targets. Dynamism, in contrast, is open-endedand able to partly absorb and renew the energy residing within a company or abusiness network. In this way an organization can constantly rejuvenate in co-creativecollaboration with others.

Third, the external innovative connectivity of an organization is hampered by theBSC, which is mostly an internal document; this is a critical limitation in its ability toaccount for the external environment and systemic linkages. The BSC is a managementand measurement tool that is primarily concerned with “driving performance” and“translating strategy into action” efciently within an organization. It widely ignoresthe needs of an interlinked and highly networked innovation economy in whichcompanies co-evolve and where competition is partly giving way to co-opetition.Companies are embedded into a network that consists of many other actors such assuppliers, local communities, alliance partners, unions, and the nal customer, whoseems to be the only “external” accounted for by the BSC.

Business is more and more based on networks of rms or so-called businessecosystems in which successful rms such as Microsoft collaborate within their


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network and thereby improve their own performance signicantly (Iansiti and Levien,2004). Through the supply of tools and technologies, Microsoft allows other companiesand partners to create programs that supplement “Windows”, its widely usedoperating system. In turn, Microsoft benets from a constant inux of new “Windows”applications. Wal-Mart connects to suppliers by providing real-time information aboutcustomers’ preferences and demand which improves the speed of the entire system.This kind of open innovation (Chesbrough, 2003) is faster and includes reliance onoutside stakeholders. A necessary postulate however, is the dense network thatsupports the effective exchange of innovative ideas and knowledge. The BSC is basedon the view of the rm in relative isolation and in adversarial in relationships withsuppliers. Such limitations with regard to a systemic systems orientation become morepronounced the more a company has to deal with rapid and disruptive change as wellas a globally networked environment.

The four perspectives of the BSC are mainly focussed on a single organization anddo not take the activities of the co-performing industry into account. Even though thecustomer perspective does take external actors into account, it remains focused on theindividual company. More dramatically, rms can be so interconnected with theirenvironment that there is no need for them anymore to own the physical resourcesnecessary for producing the product they sell. The most extreme example is the virtualorganization (Chesbrough and Teece, 1996). In such a case the limitations of the currentBSC approach become obvious since the single company focus would not takesufcient account of these vital externalities. Moreover, as the cases of Vinfruco andWestern Wines in the global wine industry demonstrates, the company also needs to beaware of the system in which it is embedded, and its measurement system needs toreect this. The BSC, with its systematic single company focus, is incapable of servingthese newly evolving needs (see the following):

External focus and innovation in the wine industry

Traditionally, the global wine industry was dominated by large wine producing companies,often vertically integrated with extensive wine farms (or farming members), large wineproducing facilities, bottling and labeling plants, distribution facilities, and extensivemarketing (including branding) activities. This situation was more prevalent in the “NewWorld” wine countries such as Australia, USA, Chile, and South Africa. But also in the “OldWorld” wine countries such as France, Spain, Italy, and Germany, the focus was similarly oncultivation, production and quality, and geographic controls. The most important economicvalue was regarded as control of farm (grape) production, wine production capabilities andquality controls, and protection of origin-specic “terroir” image.

In the mid-1990s a new type of wine industry entrepreneur emerged, the so-called“negociant”, a Francophile word for “merchant”, but actually having a larger and moreinnovative content. These companies do not own any wine farms, do not own or operate anywine production activities, do not package wine, do not design wine labels or bottle any wine,and also do not own or operate any distribution facilities. However, what they do own areinnovative and market-relevant brands and their related sustaining capabilities. In the spaceof just ten years, some of these companies sell more of their own wine brands than the leadingtraditional large wine producing companies. They are still regarded as “upstarts” and atemporary phenomenon by some, but others have realized that in the global wine industryvalue (and income) has shifted irrevocably from the production side to the demand side.Consider two leading “negociants” in the South African wine industry, Vinfruco (recentlymerged with other wine rms, and now called Omnia Wines) and Western Wines, that startedin the mid-1990s. In the space of ten years their leading brands, Arniston Bay and Kumala,

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have become the top-selling South African brands in the United Kingdom, the world’s largestwine importing market, outperforming the leading brands of traditional large South Africanwine companies such as Distell and KWV. An innovative new business model has in arelatively short period of time transcended the existing (traditional) business models in the

wine industry.Why and how did this happen? When speaking to executives at Vinfruco (now OmniaWines) and Western Wines, they reveal their particular focus on three core capabilities:leading-edge knowledge of customer needs and required benets; innovative capability toco-design brands with key retailers in the market; and ensuring integrated and reliablesupply and demand chains to deliver consistent customer value as promised in their brands.In essence, they focus on superior knowledge and brand innovation, realizing that this iswhere value now resides, and not in ownership of physical resources – the traditionaleconomy view. Of course, this requires knowledge of customer trends, needs, and behavior,knowledge of wine farming (where, what, and how to source the right grapes, and ensuringsupply), knowledge of wine production and quality levels, design of wine styles that are rightfor certain markets, co-design of wine labels, knowledge of wine packaging, knowledge of wine distribution and logistics, and knowledge of wine retailing and merchandising. But

these capabilities (and value) reside in knowledge and innovation, not in physical resources.In the innovation economy, characterized by the predominant value of intangible resources,companies stuck in the traditional industry value parameters are likely to increasingly sufferif they do not adapt or extend their traditional business models.

In the global wine industry the struggle for “ownership” of prominent brands and theirmarkets are evidenced by increasing mergers and takeovers in 2003-2005; for example,Constellation Brands (BRL Hardy, Mondavi, Nobilo), Foster’s (Wolf Blass, Beringer Blass),Gallo (Gallo, Ecco Domani), and Southcorp (Lindemans, Rosemount, Penfolds). Buyingbrands is one strategy, but the important issue is to re-energize and manage innovativecapabilities of an enterprise for sustainability.

Fourth, yet another limitation of the BSC is the way it deals with knowledge creation,learning and growth. The BSC follows the traditional logic of innovation through

internal R&D which works on an innovation from its beginning to its end, keeping itsecret from the external environment and especially from competitors. Kaplan andNorton (2004) recently extend this concept throughout the company; but it remains verymuch rooted in the framework set by the earlier concepts of the BSC. The nature of innovation today is similarly changing from incremental towards being more and moredisruptive, from closed to open, and becoming increasingly networked. This tendency of companies “opening up” in targeted connectivity, sharing and acceptance of disruptivepractices is of growing signicance. In the past, internal R&D departments were a veryeffective innovation instrument for large corporations, simultaneously keepingcompetitors from entering the market. In the era of the knowledge economy thegrowing number and mobility of skilled employees as well as the improved accessibilityof venture capital demands more open forms of innovation (Chesbrough, 2003).

The difculty, which is not solely limited to the BSC, is to measure such distributedinnovation. In times when innovation was limited to the R&D division, evaluating thepotential of a new idea was easier because it addressed a known market with knowncustomers and the source of the innovation was also most likely the R&D “lab”.Companies would set a future goal to be achieved and any technical developmentscould be assessed by asking whether they serve this one goal. Innovation arising fromexternal sources or applied outside known markets and customers is much moredifcult to evaluate. Constantly changing information ows and opportunities can also


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shift the perspectives on a new idea. Evaluating whether an innovation is applied in thebest way possible is very difcult to do in such environments.

Innovation, a key factor to intellectual capital, is viewed by the BSC as an internalbusiness process and categorized under this perspective; it appears to be a routineprocess rather than a creative endeavor by skilled employees throughout the company.Knowledge, learning and growth have become essential and good measurementsystems need to acknowledge that innovation has to be practiced in all business areas.According to Bontis et al. (1999) the consequence of a mechanistic BSC view of employees and innovation is that the difculties of managing certain aspects of corporate life, such as promoting dynamic innovation and knowledge creation, areunderestimated. The process of knowledge creation is not sufciently accounted forwithin the BSC approach. Therefore, instead of creating a separate and isolateddimension called “learning and growth” as in the BSC, a systemic measurement tool intoday’s business environment needs to integrate a knowledge, learning and growthperspective in all dimensions of measurement.

Fifth and nally, the BSC is grounded in a mechanistic mindset. Companies with abureaucratic and hierarchical structure, in which job responsibilities are still clearlydened and in which deviations from the standard and routine processes are treated asproblems of temporary nature before going back to the norm, might very well benetfrom a BSC that provides a rationalistic, systematic approach to measurement.However, as business processes become more complex, an understanding of most of the key success factors within a rm needs to take cross-perspectives into account. In aknowledge driven company, simple cause-effect relationships are not sufcientanymore to understand complex relationships that the BSC tries to reduce to a linearone-way relationship. Customer satisfaction, for instance, might be linked to variousfactors such as employee satisfaction, quality, delivery time and so on. However,customer satisfaction might also enhance employee satisfaction, which in turn might

inuence product quality positively and so forth. Thus, the problem of how to link theindicators of the BSC remains unsolved (Andre asson and Svartling, 1999). Thepredominant mindset connected to the application of the BSC is that of mechanistic andlinear thinking, making it difcult to deal with an interconnected and networked world.Today’s business reality involves non-linear and interactive activities that consider theentire system, not only the direct and visible factors, but also those that reside unseenwithin the environment in which they take place.

In summary, the BSC exerts a remarkably tyrannical inuence. It is based oninvalid assumptions for the innovation economy, and it sets dangerous limitations onrm survival and value rejuvenation. As such, the BSC operates as an instrument of domination in attempting to maintain the status quo and avoid change. The BSC isgrounded in the traditional and mechanistic mindset. Its rigidity, static-ism, linear

thinking, conception of knowledge and innovation as a routine process, and its focus onthe individual company renders the BSC an insufcient tool for understanding anddealing with the innovation economy.

An alternative approach to the BSC: a systemic scorecard approachThe way corporate systemic performance is measured differs fundamentally fromtraditional scorecards and their way of measuring against historic goals andobjectives. Successful rms are dened by their ability to adapt to changing business

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environments through co-evolution with the system. Businesses need to reassess theircurrent situation continuously and in a much more timely manner than ever before.Systemic co-evolution of businesses make companies more and more interdependent. Itfollows that an effective measurement and management tool in today’s innovationeconomy needs to account for the socio-cultural system in which a company isembedded. Networked knowledge systems are becoming the point of measurement;this extends traditional approaches focused on the single rm.

In order to expand the BSC by Kaplan and Norton (1992, 1996, 2000), we propose theconcept of the systemic scorecard (SSC), rst conceptualized by Leibold et al. (2002).Shifting the focus from the corporation towards the socio-cultural (and ecosystems)environment, the systemic scorecard extends the four dimensions of the BSC (nancial,customer, business processes, learning & growth) towards an embedded systemicapproach to measuring (see Table I).

In order to achieve this networked view, the SSC consists of four perspectives:customer value, systemic change and renewal, networked extended businessprocesses, and stakeholder value. Within the customer value perspective, companiesreview their capability to constantly provide new customer value. In contrast to theBSC, the main focus of this view should be shifted from the goal of delivering morevalue than others to trying to co-create new value for customers in the businessecosystem. The creation of not only the same value in improved ways, but the ability tond ways in which value can be created differently on a regular basis is a decisiveability. By nding different ways to address customer needs, new markets can becreated and unrealized potential can be harnessed. It is a shift from delivering a betterproduct in comparison to others, to delivering a product that really addresses the needsof the customer, including those that the customer may not even be aware of. Customerknowledge management for instance can help to achieve such new and heightenedcustomer value improvements. Amazon.com serves as an example of a rm thatmanages customer knowledge successfully through customer book reviews, individualorder histories and customized suggestions for other books. In another instanceNetscape published the source code of its internet browser, externalizing developmentto an open source project, thus challenging Microsoft, the market leader. Proting fromits customers, Netscape then incorporated the knowledge and innovation gained from

Dimension BSC focus SSC focus

Financial Improve organizational shareholdervalue

Improve network stakeholder value

Customer Improve customer satisfaction andrelations

Improve customer success andcustomer partnerships

Business Processes Optimize particular internal businessprocesses

Robustness and resilience of business-network processes, bothcompetitive and collaborative

Learning and growth Continuous organizational learningand growth

Systemic knowledge management andinnovation through all fourdimensions

Source: Leibold et al. (2002)

Table I.Contrasting the four

dimensions in the BSCand the SSC


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its open source software into the new and improved Netscape version that is soon tore-enter the market.

The systemic knowledge and renewal dimension is the extension of the innovationand learning perspective known from the BSC. In contrast to the internally focusedlearning and growth perspective of the BSC, this systemic dimension acknowledges thepotential of the entire system. In order to track networked innovation processes thesystemic view should include all knowledge involved in the process of innovation. Itneeds to become a cross-section through all internal and externally-linked business areasthat transcends the traditional focus on the R&D department. All knowledge in this casemeans that not only the nancial outcomes of marketed products are measured, but thatknowledge is assessed in all its developing stages, ideally from the surfacing of the ideato the death of a product or service that is nally taken off the market.

In the networked-extended business processes view, companies focus on creating,maintaining and fostering business networks and their processes. Since today’sbusiness operations are not carried out in a vacuum until the nal product is delivered,but accompanied by continually-linked stakeholder interaction, feedback andexchange, the former business processes perspective introduced by the BSC needs tobe extended to include these networks, both competitive and collaborative. Theevaluation of this view may take into account how many networks exist, theirperceived potential and usefulness, as well as their quality, by reviewing members’experience and success through, e.g. regular surveys.

The stakeholder value perspective gathers information about the nancial andnon-nancial value added for stakeholders. The traditional shareholder value issubsumed into this view. As part of the business eco-system, the rm should also aimto get an insight into the value objectives of their stakeholders and whether theseobjectives are met. The relevant communities should be included in this view as well asemployees, suppliers and other organizations. By closely keeping in touch with the

co-evolving environment, rms would not only work more efciently, but moreeffectively as well. Such collaborations as practiced by DaimlerChrysler and GM inentering the market of hybrid gas-electric automobiles together, by joining forces in itsdevelopment, show the signicance of such practices between competitors. In this case,the two industry giants emphasized the gains in time-to-market and costs to face thecompetition by early-to-market leaders Toyota and Honda. The embeddedness into thesocio-cultural system supports, instead of impedes, dynamic change initiatives to movethe company forward. Moreover, it can be used as a tool for monitoring and makingsense of the business environment. The knowledge gained here can be used as valuableinformation for evaluating innovation, answering the question of whether to developideas into a product or service by own efforts or to externalize them, or through acombination.

ConclusionThe BSC has become a tyrannical concept and instrument that is rooted in twentiethcentury economic and strategy paradigms. During the last decade, the basis of competition has changed fundamentally. A company’s fate is increasingly tied to thatof other rms that are part of its business eco-system. In the nature of our universe andevolvement of organisms, including the business organization, nothing remains thesame and the BSC, in due course, has become obsolete as a managerial concept and tool

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in the signicantly changing environment of the early twenty-rst century. Thechallenge is now for further research to apply and test more extensively the systemicscorecard in various industries and rm settings, and especially to determineappropriate systemic measuring techniques at all levels. Today’s world, its global andlocal business practices, and the understanding of these through systemic lenses, notanalytical (or systematic) lenses only, necessitates that we now seriously consider if theBSC has any value at all if applied in its current format and with its traditionalassumptions.

ReferencesAndre asson, M. and Svartling, A. (1999), “Knowledge management methods: practical

approaches to managing knowledge”, The Balanced Scorecard: A Tool for Managing Knowledge? , available at: www.handels.gu.se/epc/archive/00001973/01/Andreasson_ 1999_7.pdf (accessed April 18, 2005).

Ampuero, M., Goransson, J. and Scott, J. (1998), “Solving the measurement puzzle: how EVA and

the balanced scorecard t together”, Perspectives on Business Innovation , No. 2, Ernst &Young Center for Business Innovation, Capgemini, New York, NY.Beer, M. (2002), “Building organizational tness”, in Chowdhury, S. (Ed.), Organization 21C ,

Financial Times Prentice Hall, Englewood Cliffs, NJ, pp. 311-30.Bontis, N., Dragonetti, N.C., Jacobsen, K. and Roos, G. (1999), “The knowledge toolbox: a review

of the tools available to measure and manage intangible resources”, European Management Journal , Vol. 17 No. 4, pp. 391-403.

Buckman, R. (2004),Building a Knowledge Driven Organization , McGraw Hill, New York, NY.Chesbrough, H.W. (2003), “The era of open innovation”,MIT Sloan Management Review , Vol. 44

No. 3, pp. 35-41.Chesbrough, H.W. and Teece, D.J. (1996), “Organizing for innovation: when is virtual virtuous?”,

Harvard Business Review , January-February, pp. 65-74.Christensen, C.M. and Raynor, M.E. (2003),The Innovator’s Solution: Creating and Sustaining

Successful Growth , Harvard Business School Press, Boston, MA.Eccles, R.G. (1991), “The performance measurement manifesto”, Harvard Business Review ,

January-February, pp. 131-7.Evans, P.B. and Wurster, T.S. (1997), “Strategy and the new economics of information”, Harvard

Business Review, September-October, pp. 71-81.Evans, P.B. and Wurster, T.S. (2000), Blown to Bits, Harvard Business School Press, Boston, MA.Falk, A. and Kosfeld, M. (2004), “Distrust: the hidden cost of control”, CEPR Discussion Paper

No. 4512, available at: http://ssrn.com/abstract=590102Gibbert, M., Leibold, M. and Probst, G. (2002), “Five styles of customer knowledge management

and how smart companies use them to create value”, European Management Journal ,Vol. 20 No. 5, pp. 459-69.

Hamel, G. (1998), “The challenge today: changing the rules of the game”, Business Strategy Review, Vol. 9 No. 2, pp. 19-27.

Hauser, J.R. and Katz, G.M. (1998), “Metrics: You are what you measure!”,European Management Journal , Vol. 16 No. 5, pp. 517-28.

Iansiti, M. and Levien, R. (2004),The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability , Harvard Business SchoolPress, Boston, MA.


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Kaplan, R.S. and Norton, D.P. (1992), “The balanced scorecard: measures that driveperformance”, Harvard Business Review , Vol. 70 No. 1, pp. 71-85.

Kaplan, R.S. and Norton, D.P. (1996),The Balanced Scorecard: Translating Strategy into Action ,Harvard Business School Press, Boston, MA.

Kaplan, R.S. and Norton, D.P. (2000), “Having trouble with your strategy? Then map it”, Harvard Business Review, September-October, pp. 167-76.

Kaplan, R.S. and Norton, D.P. (2004), “Measuring the strategic readiness of intangible assets”, Harvard Business Review , January-February, pp. 52-63.

Kim, W.C. and Mauborgne, R. (1999), “Strategy, value innovation, and the knowledge economy”,Sloan Management Review , Vol. 40 No. 3, pp. 41-54.

Leibold, M., Probst, G. and Gibbert, M. (2002),Strategic Management in the Knowledge Economy ,Wiley, New York, NY.

Moore, G.E. (1965), “Cramming more components onto integrated circuits”, Electronics , Vol. 38No. 8, pp. 114-7.

Parker, L.D. (1979), “Divisional performance measurement: beyond an exclusive prot test”,

Accounting and Business Research , Autumn, pp. 309-19.Quinn, J.B. (1992),Intelligent Enterprise: A Knowledge and Service Based Paradigm for Industry ,

Free Press, New York, NY.Roos, J. and Victor, B. (1999), “Towards a new model of strategy-making as serious play”,

European Management Journal , Vol. 17 No. 4, pp. 348-55.Roos, J., Roos, G., Dragonetti, N.C. and Edvinsson, L. (1997),Intellectual Capital: Navigating in the

New Business Landscape , Macmillan, Basingtoke.Russ, R. (2001), “Economic value added: theory, evidence, a missing link”, Review of Business,

Vol. 22 No. 1, pp. 66-71.Vargo, S.L. and Lusch, R.F. (2004), “Evolving to a new dominant logic for marketing”, Journal of

Marketing , Vol. 68 No. 1, pp. 1-17.

Further readingKim, W.C. and Mauborgne, R. (2004a), “Blue Ocean Strategy”, Harvard Business Review ,

pp. 76-84.Kim, W.C. and Mauborgne, R. (2004b), “Value innovation: the strategic logic of high growth”,

Harvard Business Review , pp. 172-80.

Commentary: on Voelpel, Leibold and Eckhoff’s “The tyranny of the BalancedScorecard in the innovation economy”Managerial practices are characterized by the continuous appearance and disappearance of management tools, conceptual frameworks, fads and fashions. Thereby, the relevance andimpact of such tools and concepts is heavily debated in terms of their impact on strategicactivities and processes, their importance for managerial thinking and acting, their justifyingpower within particular industries and contexts, their coordinative effect in distributed businessactivities and so on. As a consequence, a more detailed discussion of the characteristics,premises, implications and limitations of an inuential concept such as the Balanced Scorecard isof great importance. Such a discussion is even more interesting from the perspective of aknowledge-based view of the rm and the recent debates on intellectual capital and knowledgemanagement; this due to the epistemological view of the rm and of management which isimplied by this perspective (Spender, 1996, this issue; Tsoukas, 1996; von Krogh and Grand,

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2002). Our commentary explores three major insights from Voelpel and his colleagues’ “Thetyranny of the Balanced Scorecard in the innovation economy”, as well as some implications forthe development of a knowledge-based theory of the rm, and of management more generally.

First, it is interesting to recognize to what extent rm-specic knowledge systems and related

tools and concepts inuence the denitions, expectations and specications of such coreconstructs as “strategy” and “success”. Depending on the predominant metrics (Callon, 1999) of acompany, an industry, or an economy, particular activities and initiatives are interpreted asbeing essential to the development and advancement of a company; or they are viewed asproblematic and dissident. If such calculations in terms of performance and success are to beperformed and completed, the agents and goods involved in these calculations must bedisentangled and framed:

. . . in short, a clear and precise boundary must be drawn between the relations, which theagents will take into account and which will serve in their calculations, on the one hand, andthe multitude of relations, which will be ignored by the calculation as such, on the other.(Callon, 1999, pp. 186-187)

Traditional performance metrics focusing on nancial success in a narrow sense, or the

performance metrics introduced by the Balanced Scorecard, which include a variety of dimensions, thus imply fundamental assumptions concerning the successful development of acompany, independent of whether these assumptions are made explicit or are taken for granted.

Second, Voelpel et al. emphasize that companies which consider the importance of intangibleassets and innovative capabilities are confronted with substantial uncertainty and ambiguity.Thereby, uncertainty and ambiguity not only result from the complexity and openness of futureactivities and developments in the context of innovation and change, but more fundamentallyfrom the logical fact that we cannot know our future knowledge of those activities anddevelopments; otherwise it would already be our knowledge today (Elkana, 1986). The critique of the Balanced Scorecard presented here is very interesting from this perspective on uncertainty:To what extent is the rigidity of a particular tool problematic, or to the contrary productive,under uncertainty? To what extent is the “static-ism” of a metric or reference system limiting, orenabling, under uncertainty? How exactly does a mechanistic mindset work under those

conditions? What are the implications for our understanding of rm boundaries, as well as forknowledge creation and distributed innovation? From the perspective of the knowledge-basedview, management tools like the Balanced Scorecard can no longer be understood asrepresentations of organizational reality, but must be seen as particular artifacts, shaping andbeing shaped by managerial practices under uncertainty (Latour, 1999).

Third, it is interesting to explore how the authors integrate those insights into their systemicscorecard approach, an “embedded systemic approach to measuring”. While the authorsconcentrate on deducing a systemic scorecard approach as a new tool, which considers issuesand dimensions neglected by the traditional Balanced Scorecard, we see the key implications of their critique on a different level. First, it is impossible to understand the metrics and referencesystem of a company without understanding their situated, distributed, contextual enactment inthe managerial practices of the company (Bruner, 1990). Second, any management tool, includinga systemic scorecard, makes key distinctions and implies conceptual blind spots; no tool orconcept can represent the inherent complexity of a knowledge system (Law, 1999). Third, welearn from a knowledge-based view that the major focus should move from assuming theexistence of organizational knowledge to the more detailed understanding of the processes,which affect the transition from questionable, fragile claims to self-evident, robust knowledge, aswell as the failures of such a transition (Latour, 1987; 1999). Fourth, this implies that we have toconsider the inherent reexivity of anyscientic attempt to study knowledge creation (von Kroghand Grand, 2002).

In sum, we argue that no calculation is possible without a metric and reference system, whichidenties relevant entities, states of the world, possible actions and expected outcomes. This is


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what management tools and conceptual frameworks, including the Balanced Scorecard and theSystemic Scorecard approach can provide. In parallel, we learn from the knowledge-based viewof management that total framing is impossible; every representation of a company, if weunderstand it as a knowledge system, is fragile, problematic, context-dependent, but

nevertheless an important artifact for managerial practice. Studying and understanding thenecessity and the impossibility of self-evident, unquestioned metric and reference systems forcalculations in managerial practice, given uncertainty and ambiguity, should thus be at the coreof management research and management practice in a knowledge-based perspective.

Simon Grand and Georg von Krogh Institute of Management, University of St Gallen HSG, St Gallen, Switzerland

ReferencesBruner, J. (1990),Acts of Meaning , Harvard University Press, Cambridge, MA.Callon, M. (1999), “Actor network theory – the market test”, in Law, J. and Hassard, J. (Eds.), Actor Network Theory and After , Blackwell, Oxford, pp. 181-195.

Elkana, Y. (1986), Anthropologie der Erkenntnis , Suhrkamp, Frankfurt am Main.Latour, B. (1987),Science in Action , Harvard University Press, Cambridge, MA.Latour, B. (1999),Pandora’s Hope: Essays on the Reality of Science Studies . Harvard UniversityPress, Cambridge, MA.Law, J. (1999), “After ANT: complexity, naming and topology”, in Law, J. and Hassard, J. (Eds.), Actor Network Theory and After , Blackwell, Oxford, pp. 1-14.Spender, J.-C. (1996), “Making knowledge the basis of a dynamic theory of the rm”,Strategic Management Journal , Vol. 17, Winter special issue, pp. 45-62.Tsoukas, H. (1996), “The rm as a distributed knowledge system: a constructionist approach”,Strategic Management Journal , Vol. 17, Winter special issue, pp. 11-25.von Krogh, G. and Grand, S. (2002), “From economic theory toward a knowledge-based theory of

the rm: conceptual building blocks”, in Choo, C.W. and Bontis, N. (Eds.), The Strategic Management of Intellectual Capital and Organizational Knowledge , Oxford University Press,New York, NY, pp. 163-184.

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