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 / First Quarter 2002 / Issue 26(originally published by Booz & Company)


What Are the Measures That Matter?

“ABC represents the supply curve from Microeconomics 101,” says Professor Kaplan. “It tells you what things cost, but not what they’re worth. The Balanced Scorecard is like a multidimensional demand curve. It tells you what’s creating value.” Together, he says, the two systems “make the concepts of economics operational for complex organizations.”

That’s where his opponent in the feud draws the line. To H. Thomas Johnson, the Retzlaff Professor of Quality Management at Portland State University in Oregon, the adaptation of microeconomics to management decision making has been a kind of original sin dating back at least to the 1950s. As he explains in his recent book (written with Swedish consultant Anders Bröms), Profit Beyond Measure: Extraordinary Results through Attention to Work and People (Simon & Schuster Inc., Free Press, 2000), economics-dominated business schools mistakenly teach young MBAs to make decisions entirely from quantitative information, rather than from explicit, detailed knowledge of how a company conducts work. “In time, this teaching contributed to the modern obsession in business with ‘looking good’ by the numbers,” writes Professor Johnson, “no matter what damage [it] does to the underlying system of relationships that sustain any human organization.”

Professor Johnson doesn’t like to think of himself as a fervent or proselytizing person, but he comes across as one. Writing about the use of numbers to set priorities and control operations, he uses words like “crippling” and “lethal.” He blames the troubles that mainstream companies get into — for example, the current predicaments of the U.S.’s big three automakers — on the misuse of measurement. He says if companies would focus on the “means” (for instance, designing a production system that makes errors visible and correctable the moment they occur), they wouldn’t have to worry about enforcing targets and goals. Error counts would naturally get lower. The “ends” would take care of themselves.

Even to some of Professor Johnson’s friends, this sounds like a utopian dream sometimes, and he would have an awfully hard time making his case if it weren’t for the fact that one major multinational corporation is successfully running all its factories this way. That corporation is quite possibly the most admired and envied manufacturing organization in the world: the Toyota Motor Corporation.

Dying by the Numbers
Unquestionably, Professor Kaplan is the more successful of the two feuders, at least if you judge by the number of companies adopting his ideas. The Exxon Mobil Corporation’s attractive new retail strategy emerged from a Balanced Scorecard exercise; Fannie Mae, Brown & Root, Cigna, and the city of Charlotte, N.C., are all featured in Professor Kaplan and Mr. Norton’s new book, The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (Harvard Business School Press, 2000). Dozens of companies use ABC, and the apparent value of “stretch targets” and other kinds of performance measures has never been higher.

What, then, does Tom Johnson see that Bob Kaplan does not? Or, more to the point: Which is more likely to succeed? Toyota? Or just about every other well-known manufacturer today?

To get a satisfying answer to that question, you have to look back to 1983, when Professor Kaplan was dean of the Graduate School of Industrial Administration at Carnegie-Mellon University in Pittsburgh. A Westinghouse Electric Company executive named Thomas J. Murrin (now a dean at Duquesne University’s business school) pointed Professor Kaplan to a controversial article in the Harvard Business Review published several years earlier. Called “Managing Our Way to Economic Decline,” by the Harvard Business School’s William J. Abernathy and Robert H. Hayes, the article was the first of a series of broadsides against the tenets of financially oriented management. American companies that lived by the numbers, said the article, were dying by the numbers; they were shutting down profitable product lines because they looked costly on paper, and were making themselves unnecessarily vulnerable to competition from Japan.

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