11: Balanced Scorecard - much better with a digital-twin business model

Explains the benefits and limitations of Balanced Scorecard, and how a digital-twin business model is actually the only balanced scorecard you need.

When Balanced Scorecard (BSC) first hit the business world in the 1990s, it offered for the first time a method that joins up what happens across the organisation and connects those activities to winning customers and making money.

Some estimates are that more than a third of world-wide corporations still make significant use of BSC. Sometimes they use it to guide the business unit strategies. Other times, it is used to plan and manage significant initiatives or business improvement programs.

But the method has limitations - limitations that we can now sweep away to achieve so much more.

Just a reminder of BSC basics. The method is predicated on four perspectives, with a logic that says:

We can only deliver great financial results if we make sure our customers are super-satisfied

... and we can only do that if we have effective and efficient business processes

... and to develop those processes, we need to build strong capabilities

The best explanation for how teams use this logic to develop a detailed BSC is probably offered by its originators, Robert S Kaplan and David P Norton in "Strategy maps: Converting intangible assets into tangible outcomes." Harvard Business Press, 2004. This book gives many examples, and shows how you get detailed objectives and the metrics to help manage progress of the strategy or initiative.

But, in a side comment, Kaplan and Norton mentioned that the power of BSCs would be much extended if we were able to build them on a strong "system view" of how an enterprise actually works.

They maybe did not realise just how right they were!

So how do our digital twin business models (DTMs) relate to those BSC principles?

Well, the first thing to note is that DTMs capture all the 'things' in the business - the customers, staff, capacity, products, cash ... BSC starts with some of that, with cash and customers, but misses others and goes on to processes that act on those things.

Next, DTMs quantify everything. So the DTM can replicate the system's behaviour and performance, which no BSC can do. It also eliminates any ambiguity about what exactly each element in the model actually is. (Other management methods, too, are plagued by a reliance on ambiguous and subjective terminology).

And DTMs are (of course!) dynamic - they capture how all those numbers of things change over time, and will likely change in future under alternative scenarios and strategies.

This goes on to mean that DTMs can incorporate timed action plans. Indeed, they cannot not include them, because the model's future behaviour reflects choices on everything from prices to promotions to product launches to capacity changes to hiring to ...

Then DTMs are wider in scope. The BSC has a great focus on customers/sales/revenue, but says little about the supply side of the business. And DTMs deal with competition (not even mentioned in BSCs) and other dynamics of the market like changing numbers, types and needs of customers.

All this means that ...

a digital twin business model actually IS a balanced scorecard.

But it's a BSC that is rigorous, as comprehensive as you need it to be, and that mimics the real world situation that we are trying to manage. And it's a BSC that lives, updated as often as needed to show how recent actions and decisions have affected the development and performance of the system.

I know executives are practical-minded folk, who have no time for "theory". (And to be fair, most of the theory in the strategy field is pretty weak!) But the reason they can be so confident in their digital twin dynamic business models is that they are grounded on rock-solid theory.

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Categories: : business models, strategy