Sie sind auf Seite 1von 10

Utilizing the balanced scorecard for R&D performance measurement

Wayne G. Bremser and Noah P. Barsky

Villanova University, College of Commerce & Finance, Villanova, PA 19085, USA. wayne.bremser@villanova.edu and noah.barsky@villanova.edu

R&D programs are critical for many firms to achieve and sustain competitive advantage. Yet, measuring R&D performance over time can be quite complex due to inherent uncertainty. The paper responds to calls in the R&D literature to explore integrated performance measurement systems that capture financial and nonfinancial performance. We integrate the Stage-Gate approach to R&D management with the Balanced Scorecard to present a framework to show how firms can link resource commitments to these activities and the firm’s strategic objectives. In this paper, we provide specific examples of how firms can apply this integrated performance measurement system to the R&D function.

T he resource-based theory of the firm suggests that a firm’s long-term competitive advan-

tage stems from its ability to develop, leverage and renew core resources (Wernerfelt, 1984). In the information economy, service and technology oriented industries are growing in importance; and firms are becoming more reliant on resources that are not easily measured by traditional finan- cial metrics. For example, many firms explicitly state that their long-term competitive advantage stems from commitments to ongoing research and development and these firms have used various methods to measure performance (Brown and Svenson, 1988; Kerssens-van Drongelen and Bil- derbeek, 1999; Kerssens-van Drongelen et al., 2000; Pearson et al., 2000; Tipping et al., 1995; Werner and Souder, 1997). In today’s changing environment, implement- ing management strategies requires integrated performance measurement (PM) systems that capture changes in financial and nonfinancial measures. Integrated PM systems strive to align the organization’s processes (i.e. R&D, produc- tion, marketing and other traditional functional areas) with corporate strategy using both perfor- mance drivers and outcome measures. Integrated

PM systems strive to provide managers at all levels a clearer statement of what actions they should take to effectively implement strategy. In particular, there has been widespread recognition that R&D activities do not exist as independent, isolated operations, but rather as a critical com- ponent of strategy execution (i.e. Klein, 1998; Kerssens-van Drongelen and Bilderbeek, 1999; Pearson et al., 2000). Consequently, R&D is a key strategic issue that must be aligned with corporate strategy (Pearson et al., 2000; Roberts, 1988; Rogers, 1996; Roussel et al., 1991). Pearson et al. (2000) conclude that there is a need for application of the substantive existing PM literature in the context of R&D profit centers. The primary challenge facing R&D per- formance measurement stems from integrating past-oriented cost data with prospective long- term strategic and financial objectives. Kerssens- van Drongelen and Bilderbeek (1999) and Ker- ssens-van Drongelen et al., (2000) cite limitations in the extant R&D literature of utilizing popular existing corporate strategic planning and perfor- mance measurement tools and suggest that the Balanced Scorecard (BSC) framework can be used as an integrated performance measurement

R&D Management 34, 3, 2004. r Blackwell Publishing Ltd, 2004. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

229

Wayne G. Bremser and Noah P. Barsky

program for research and development . Further, Neufeld et al. (2001) argue that the BSC offers the ‘most promising approach’ to help research orga- nizations measure performance and achieve op- erational excellence. We specifically extend Kerssens-van Drongelen et al. (1999) and Pearson et al. (2000) by integrat- ing a popular R&D management framework, the Stage-Gate approach (Cooper, 1993), with the BSC (Kaplan and Norton, 1996a). The under- lying premise is measuring financial performance in the context of overall strategic and operational goals to provide a practical means to consider R&D performance measurement. Shareholder value implications are considered as they relate to balancing strategic and financial objectives. We cite the Stage-Gate approach to evaluating and controlling R&D investment to demonstrate the applicability and relevance of the BSC frame- work. This paper responds to Kerssens-van Dron- gelen and Bilderbeek (1999)’s call for research that draws on business and performance manage- ment literatures. This paper has four main sec- tions. Section 1 discusses the importance of the strategic integration of performance measure- ment. Section 2 describes the strategic importance of R&D activities. Section 3 outlines the useful- ness of the BSC to R&D managers, and Section 4 provides conclusions.

1. Strategic integration of performance measurement

Managers often have a keen awareness of R&D’s strategic impact. At firms reliant on innovation strategies, research and development is the most critical determinant of strategic success. In a spring 1999 survey, 230 Industrial Research In- stitute member company representatives voted ‘Managing R&D for Business Growth’ (16%) the biggest problem they currently faced as technology leaders (Blake, 1999). This was closely followed by ‘Balancing long-term and short-term R&D objectives focus’ (14%) and ‘Integration of technology planning with business strategy’ (13%). Such problems are best characterised as strategy implementation issues.

The Balanced Scorecard model

Firms that invest significant resources in ongoing research and development can benefit from the key concepts of the BSC, which uses an integrated

230 R&D Management 34, 3, 2004

performance measurement system to implement strategy. A firm can develop a seemingly brilliant R&D strategy designed to achieve competitive advantage and grow the firm, but implementing strategy is the management challenge. The BSC strategic management system developed by Ka- plan and Norton (1992, 1993, 1996a, 2001a) requires organizations to translate strategic goals into relevant measures of performance. Financial and nonfinancial measures are indicators of the extent that strategies are successfully being im- plemented throughout the organization, and whether strategic goals are being achieved. There are five basic principles for a strategy- focused organization using the BSC (Kaplan and Norton, 2001b), which can be summarized as follows: (1) translate the strategy into operational terms using balanced scorecards and strategy maps; (2) align the organization to the strategy by cascading the highest-level scorecard to stra- tegic business units, support departments, and external partners; (3) make strategy everyone’s job with initiatives to create strategic awareness and by using personal scorecards with related incentives; (4) make strategy a continual process by linking budgets to strategy, implementing a process for learning and adapting firm strategy; and (5) mobilize leadership for change to a strategic management system. The highest-level scorecard is ideally at the corporate level, but the BSC may be implemented at the division or department level. The BSC framework is used to implement strategy from four perspectives (Kaplan and Norton, 1996b):

customers, internal business processes, learning and growth and financial performance. The cus- tomer perspective addresses the question, ‘To achieve our vision, how should we appear to our customers?’ The internal business process perspective addresses the question, ‘To satisfy our shareholders and customers, what business processes must we excel at?’ The learning and growth perspective addresses the question, ‘To achieve our vision, how will we sustain our ability to change and improve?’ The financial perspective addresses the question, ‘To succeed financially, how should we appear to our shareholders?’ Together, these questions provide the basis to link strategy with planning and accountability. The BSC is a management system designed to link and align the organization with its strategy at all levels. After the balanced scorecard is formu- lated at the corporate level of the organization, it is cascaded downward to strategic business units and support departments. These units develop

r Blackwell Publishing Ltd. 2004

scorecards to implement the strategy communi- cated by the corporate scorecard. These score- cards are in turn cascaded downward. A full implementation of the BSC model requires cas- cading down to the individual level. This provides for each person having a perspective of his or her role in strategy implementation. For each mea- sure in the personal scorecard, strategy imple- mentation goals are set. Incentives such as stock options and merit pay increases are linked to their performance in implementing strategy. Measure- ments are used throughout the organization to implement strategy and achieve synergies. Cascading corporate BSC to the R&D function and the R&D department aims to achieve inte- gration of technology planning with business strategy. Kerssens-van Drongelen and Bilderbeek (1999) present a model of the differences and overlap in the responsibilities of the R&D func- tion and the R&D department. They used the BSC framework to model survey and interview data on R&D performance metrics. However, they did not report on whether any of the firms surveyed used a balanced scorecard integrated management system. An integrated performance measurement sys- tem aligns R&D, production, marketing and other traditional functional areas with corporate strategy using both performance drivers (leading indicators) and outcome measures (lagging indi- cators). Pearson et al (2000) review the R&D PM literature and report on the trend towards decen- tralized R&D profit-centers. They call for research that investigates the applicability of expanding R&D performance measurement from a tradi- tional cost focus to incorporate strategic and profitability objectives. The primary challenge facing R&D performance measurement stems from integrating past-oriented cost data with prospective long-term strategic and financial ob- jectives. This tension suggests a logical applica- tion of the key BSC concepts.

Cause and effect relationships

Leading indicators are a key BSC concept because they are performance driver-oriented metrics. A strategy encompasses a set of hypothesized cause and effect relationships. If the firm does certain things (cause) a value creating result will occur (effect). A strategy map can be used to show the cause and effect relationships, (Kaplan and Nor- ton, 2001a). For example, a firm may hypothesize a value proposition that reducing average new

r Blackwell Publishing Ltd. 2004

Utilizing the balanced scorecard

product development cycle time will increase preferred customer retention rate. Since the firm

defines the most profitable customers as the pre- ferred customers, the expected result is higher sales and net income. Average new product devel- opment cycle time would be a leading indicator on the balanced scorecard, which would also include an outcome measure of preferred custo- mer retention. The scorecard would also include a financial outcome-based measure such as return

on investment or economic value added (EVA). If

average new product development cycle time shows a favorable increase for several months or quarters, we would expect subsequent improve- ment in preferred customer retention and the financial outcome-based measure. If we do not see the expected subsequent improvement, the set of hypothesized cause and effect relationships associated with the strategy must be seriously questioned. By implementing a process for learn- ing and adapting firm strategy, the firm goes beyond the traditional budget oriented manage- ment control loop and uses a strategic learning loop to test hypothesized strategies and update strategies. Adding the strategic learning loop

should provide the impetus for change to a new strategic management system. Many authors have contributed to the devel- opment of the BSC model (e.g., Hoffecker and Goldenberg, 1994; Clinton and Hsu, 1997; Chow et al., 1997; Epstein and Manzoni, 1997; Kaplan and Norton, 1997; Meyer and Markiewicz, 1997).

A study by the US-based Institute of Manage-

ment Accountants Cost Management Group re- ported that 40% of the firms surveyed planned to use a scorecard measurement system within the next two years (Frigo and Krumwiede, 2000). Companies are using the balanced scorecard and nonfinancial measures performance, and inves- tors are using available nonfinancial information. While a firm may not choose to adopt a formal BSC management system, it can learn and use the key concepts. The BSC helps managers to imple- ment strategy through the development of an integrated set of relevant financial and nonfinan- cial measures. The nonfinancial measures, if prop- erly selected, should be drivers of sustained profitability. According to a report titled Mea- sures That Matter from Ernst & Young’s (1997) Center for Business Innovation, investors give nonfinancial measures, on average, a one-third weight in decisions to buy or sell any given stock. The study reported a statistical correlation be- tween investors’ use of such information and the accuracy of their earnings forecasts. R&D

R&D Management 34, 3, 2004

231

Wayne G. Bremser and Noah P. Barsky

presents a context where past financial results and future expectations must considered concurrently

in managing progress towards strategic goals.

2. R&D and shareholder value creation

Measuring the value created by R&D efforts is a challenge. One approach to valuation of R&D efforts analyzes expenditures (e.g., Chan et al., 1990; Doukas and Switzer, 1992; Woolridge and Snow, 1992), as opposed to project value creation. Kelm et al. (1995) examined the impact of an- nouncements about R&D projects on the market value of firms’ stock. The study classified projects as being in the innovation or commercialization stages of the R&D process, and technology- and market-related variables were tested as predictors of the wealth changes of R&D announcements. Their study of how stock market prices reacted to the disclosure of information about firms’ R&D accomplishments indicated that the stage of the R&D process moderates the relationship between the wealth effects and technology and market variables. Technology variables were most impor- tant in the innovation stage, and both are im- portant during commercialization. They also observed that investors respond positively to R&D project announcements from small firms, innovation stage R&D announcements from tech- nology leaders, and new product introductions from firms in concentrated less technology-inten- sive industries.

The Stage-Gate approach

A

popular technique to manage the R&D pipeline

is

the Stage-Gate approach. Cooper (1993) de-

fines the product development process in terms of five stages and five gates from innovation to commercialization. Successful commercialization drives revenue generation – a critical component

of a firm’s equity valuation. Stages are defined as

a distinct portion of the product development

process where, research, marketing, sales, and other activities occur. The first five stages are (1) Initial screen, (2) Develop the business case, (3) Development, (4) Test and Validation and (5) Production and full launch. Gates are points where a decision is made to pass the project into the next stage, end the project, or send it back to the previous stage. Table 1 portrays important activities and mile- stones for the Stage-Gate method. The sixth stage

232 R&D Management 34, 3, 2004

Table 1. The Stage-Gate framework for new product development (adapted from Cooper, 1993)

Stage 1 – Idea Evaluation Gate 1 – Decision to Develop Business Plan Stage 2 – Develop the Preliminary Business Plan Gate 2 – Decision to Develop Detailed Plan, Investigate, and Develop Stage 3 – Detail Planning, Investigation, and Development Gate 3 – Viable to Test and Validate? Stage 4 – Testing and Validation Gate 4 – Final approval for Production and Launch Stage 5 – Product Production and Launch Gate 5 – Decision to Continue Production Stage 6 – Product Support and Program Review

(product support and program review) would include reviewing market conditions, updating market plan, developing continuous improvement plans, updating key technical and commercial assumptions, monitoring costs and revenues, and making appropriate price/cost adjustments. Since R&D is viewed as a platform investment with follow-on investment opportunities, the sixth stage includes identifying promising opportu- nities. We view the sixth as a refinement that facilitates integration of the Stage-Gate metho- dology with the BSC framework. This stage contains some important customer-focused steps to enhance product commercial success and con- tribute to organizational learning and growth. The four stages prior to new product launch are innovation stages, and the product launch marks the commercialization stage of an R&D project. Stage-Gate provides a mechanism to connect technology development with sales, marketing, and, ultimately, the customer. In this process, research and marketing efforts are performed concurrently, with an emphasis on early efforts to define and measure customer needs and mar- ketplace conditions. With integrated customer need assessment and market-focused research and development efforts, the result is a stream of products reaching the market faster and fo- cused on customer needs.

R&D metrics

When a firm recognizes that it needs an integrated performance measurement system to support evaluation decisions at each stage-gate, it usually places the responsibility with the accounting or finance function. It is important for these profes- sionals to realize that an array of metrics to measure R&D performance is available in the

r Blackwell Publishing Ltd. 2004

R&D management literature (Foster et al., 1985; Moser, 1985; Brown and Svenson, 1988; Griffin and Page, 1993; Schumann et al.,1995; Chiesa et al., 1996). Werner and Souder (1997) reviewed the literature from 1956 to 1995 on techniques for measuring R&D performance. They concluded that integrated metrics that combine several types of quantitative and qualitative measures, which are the most complex and costly to develop and use, are the most effective. They viewed the choice of R&D measurement metric to be based on needs for comprehensiveness of measurement, the type of R&D being measured, life stage of an R&D effort, the available data, and the perceived information cost/benefit. Schumann et al. (1995) proposed a quality-based approach to R&D performance measurement that viewed R&D as a process. Their framework encompassed people, process, outputs, and consequences linked to a market-driven objective. The Technology Value Pyramid (TVP) Model (Tipping et al., 1995) was developed to represent a hierarchy of managerial factors relating to R&D management. The TVP model provides a top- down output-oriented perspective. The TVP model views value creation as the prime business driver, and value is derived from technology- based new products/processes. TVP metrics that track value are predictors of business growth and are critical inputs for strategic business reviews. These metrics are used to guide decisions on spending the right amount on R&D and judging returns on R&D. The TVP model provides a menu of metrics to customize for a firm. The Industrial Research Institute, a nonprofit organi- zation of over 260 leading global industrial com- panies offers a Technology Value Program (see website at http://www.iriinc.org/tvp.html). In Table 2, the survey results of the most fre- quently used metrics to measure R&D perform- ance are presented (Donnelly, 2000). The impor- tant question is how well are these monitored and linked to strategy? While firms use R&D metrics, Donnelly (2000) observes that roughly 40% of new products do not achieve desired returns. Table 2 includes measures that account for output (volume and dollars) that firms compare to budget allocations. Many of these items can be characterized as outcome measures. The measures are consistent with the findings in the R&D management literature, but the link to strategic success is unclear. While Donnelly (2000) docu- ments the most popular measures, Kerssens-van Drongelen et al. (2000) suggest that at integrated frameworks are needed to integrate performance

r Blackwell Publishing Ltd. 2004

Utilizing the balanced scorecard

Table 2. Most frequently used R&D metrics (adapted from Donnelly, 2000)

1. R&D Spending as percentage of sales

2. New products approved/released

3. Number of approved projects ongoing

4. Total active projects supported

5. Total patents filed/pending/awarded

6. Current percentage of sales of new products

7. Percentage of budget resources dedicated to R&D

8. Change in R&D headcount

9. Percentage of resources dedicated to sustaining existing products

10. Average development cost per product

measurements. One such model with great pro- mise, according to Neufeld et al. (2001) is the BSC. Its specific relevance and value to R&D is discussed next.

3. The role of the Balanced Scorecard

The BSC is a performance measurement system (PMS) for implementing strategy. A PMS can be used in many ways to achieve organizational goals. Kerssens-van Drongelen (1999) identified seven possible measurement system functions for

a PMS, which are listed in Table 3. In a review of performance measurement in industrial R&D, Kerssens-van Dronglen et al. (2000) observe that ‘few authors actually discuss for which functions the measurement approaches they present have been found useful, or are expected to be useful.’

In Table 3, we present how the BSC model fulfills

the seven functions when fully implemented. Thus, the BSC model’s potential to be very useful is rooted in the process of cascading objectives across organizational levels to promote integration and alignment. The strategic vision

and measures designed for the top level are cas- caded down through divisions and departments

to

the individual level. The basic value of the BSC

is

that it links measures to strategy in a clear

fashion. The traditional budget oriented manage- ment control loop is improved because budgets are linked to strategy. A strategic learning loop is used to test hypothesized strategies and update strategies. The BSC is a model that can be used effectively by professionals in all functional areas.

Putting the tools together: R&D and the BSC

A firm using the BSC framework to implement

strategy would place most nonfinancial metrics directly or indirectly related to R&D in the

R&D Management 34, 3, 2004

233

Wayne G. Bremser and Noah P. Barsky

Table 3. Performance measurement system (PMS) functions and the Balanced Scorecard

Performance Measurement System (PMS) functions (per Kerssens-van Dronglen et al., 2000)

How the Balanced Scorecard is useful (per Kaplan and Norton 2001a)

The BSC utilizes causal sets of performance measures to monitor results. Variance analysis of metrics provides insight into deviation from objectives.

Provide insight into deviations of actual performance from objectives, in order to support the management in diagnosing whether, and if so which, steering measures should be applied Fuel learning as to how the system that has to be controlled works (in other words, improving the conceptual model of this systems’ functioning), which enables better planning and control in the future

The primary purpose of the BSC is to highlight strategy and its impact on operating decisions. Utilizing the BSC over multiple periods provides the basis for feedback (strategic learning loop and management control loop) and planning.

Facilitate alignment and communication of objectives The BSC provides a common framework and reference point for employees across levels and functions. The

cascading process provides for alignment. Most BSC organizations link objectives to personal rewards to guide employee decision making. In fact, Mercer & Company (1999) report that 88% of BSC companies link performance to rewards. The requirement to use causal linkages throughout the BSC forces employee to analyze performance deviations and to identify, assess and manage drivers of outcomes and results. BSC objectives guides employee decision making and provides a common framework to evaluate decision

Support decision making about performance based rewards

Provide insight into deviation of actual performance from objectives, in order to support the staff themselves in diagnosing whether, and if so which, steering measures should be applied Provide inputs for justification of the existence, decisions and performance

alternatives. Support motivating of people through feedback The BSC requires frequent monitoring and routine

feedback of operating measures to employees across organization levels. Target setting and budget goals are intended to provide motivation for employee actions.

internal business process perspective section at the corporate level. Being efficient, effective, and timely in the innovation process is a key to strategy implementation. For firms with long de- sign and development cycles, the innovation cycle is more important than operating cycles. The innovation process is the long wave of value creation where new markets and new customers and needs are identified (Kaplan and Norton, 1996b). Strategies are formulated to profit from these opportunities. The R&D process is critical to implementing these strategies. The critical implication of using the BSC for R&D is the idea of measuring performance using a ba- lanced mix of strategic and financial indicators over time.

Cascading metrics

In Table 4, we present an example of specific R&D metrics in a BSC framework. The four perspectives of the BSC provide a context for the measures. The literature cited above suggests many possible measures. The BSC implementa- tion process includes careful selection of measures

234 R&D Management 34, 3, 2004

to implement strategy. Measures will change over time due to the strategic learning loop. If firms want to achieve their stated innovative vision, it is important that employees see how their responsi- bilities contribute to strategic success. Our exam- ple shows strategic indicators at the firm level and measurements at the R&D Department level from the cascading down process. We recommend a participative cascading ap- proach, which calls for consensus agreement between managers at upper and lower levels. The process starts with a statement of strategic indicators at the firm level. These measurements and supporting documentation on how they re- late to strategy implementation are communi- cated downward to strategic business units, divisions or departments, depending on the orga- nizational structure. If the next level is the divi- sion in the organizational structure, the division would prepare a balanced scorecard and cascade it down to the departments below. The various departments at the next level would review possi- ble metrics for their balanced scorecard that linked to the cascaded down measures. For our example, assume that the R&D depart- ment is the next level below the firm level. The

r Blackwell Publishing Ltd. 2004

department would set strategic goals that are aligned with the firm’s goals. In selecting metrics for the department’s strategic goals, the depart- ment would review the various metrics currently used and select the ones that closely link to the strategic goals. Typically, two to six measures are adequate, except for the internal business process perspective, which usually has the most metrics. The balance scorecard should focus on the most important measures for strategy implementation. The department often finds that new metrics are needed to promote alignment. The basic align- ment question is how does improving our perfor- mance measured by this metric impact the metric at the higher level? If it has a positive impact, then the metric is a promising candidate. The thinking underlying the metrics selected would be docu- mented and sent up to the next level for discus- sion. In the quest to achieve consensus agreement, changes are possible in the metrics at the upper and lower levels. After consensus agreement, the R&D department’s scorecard in our example would be cascaded down to the organizational units at the next level, which may be teams, so

Utilizing the balanced scorecard

that they can prepare balanced scorecards in a similar fashion. The illustrated measures for the learning and growth perspective are performance drivers that provide for motivated and prepared profes- sionals. In selecting learning and growth, the mind set is performance drivers that provide the foundation for long-term success. The BSC model includes goals for strategic competencies, strate- gic technologies and a climate for action (Kaplan and Norton, 2001b). All measures should be in alignment with the firm’s strategic objectives, although some measures are naturally unique to R&D. As an example of cascading downward, at the firm level employee retention (Item K) is critical and is captured at the R&D department level by the strategic skill coverage ratio (Item 14) and training (Item 17). Employee development (L) also influences the selection of training (Item 17). Also, Item M (strategic skill coverage ratio by competency ratio) is cascaded down into Items 13, 14, and 15 for department skills. In our example, new patents awarded (Item 13) is shown as only being linked to Item M, but it could also

Table 4. Illustrated application of the Balanced Scorecard to the R&D department.

Strategic objectives

Strategic indicators at firm level

Sample metrics at the R&D department level*

Financial perspective

A. Return on capital employed

1.

R&D value creation at innovation

B. Customer profitability

2.

stages 1–4. (A, B, C) R&D value creation at commerc-

C. Revenue growth rate

ialization stages 5 & 6. (A, B, C)

Customer perspective

D. Customer retention rate

3.

Percentage of sales from new products (D, E)

E. Market share

4.

Product market life cycle. (D, E, F).

F. Customer acquisition (number and quality)

5.

Customer satisfaction with new products. (D, E).

Internal business process perspective

G. New product profitability

6.

Number of new products approved for stage 5 (H)

H. R&D efficiency (time to market)

I. Percentage of resources to sustain existing products

J. Other metrics not related to R&D

7. Average development cycle time stages 1–4 (H)

8. Average development cost per product stages 1–4 (G, H)

9. Percentage of product ideas appro- ved for stage 4 (H)

 

10.

Pricing and profit planning accuracy

 

(G)

 

11.

New product acceptance rate (G)

12.

Safety incidents (H)

Learning and growth

K. Employee retention

13.

Number of patents awarded (M)

perspective

L. Employee development

14.

Strategic skill coverage ratio by competency category (K, M).

M. Strategic skill coverage ratio by competency category

15.

R&D competency vs. competitors (innovation level) (M).

N. Employee survey measures

16.

Employee survey measures (N, O).

O. Innovative culture surveys

17.

Employee training (hours) (K, L).

*The letter(s) in parentheses indicate cascading linkages to the firm-level measures.

r Blackwell Publishing Ltd. 2004

R&D Management 34, 3, 2004

235

Wayne G. Bremser and Noah P. Barsky

be linked to market share (Item E) in some firms. The cascading process is aimed at achieving as much alignment as possible. The relationships and underlying thinking must be documented to promote a better understanding by all parties of strategic factors that drive performance. This documentation of relationships is important for the strategic learning loop, which is used to test hypothesized strategies. The BSC internal process measures relate to four high-level processes – innovation, customer management, operations and logistics, and regu- latory and environmental. Our illustration shows how the stage-gate metrics might be used on the scorecard. For example, firms frequently focus on product profitability (Item G) and time to market (Item H). Such strategic initiatives cascade down the R&D department level through measurements of number of new products reaching various milestones in the Stage-Gate process. For re- search intensive firms (i.e. pharmaceuticals, tech- nology, etc.), R&D is central to the internal process dimension. From the customer perspective, the BSC model considers operational excellence, customer inti- macy, and product differentiators. Other depart- ments, such as sales and marketing, can impact the cause and effect linkages. R&D can impact these directly or there can be indirect second or third order effects through measures such as supporting product life cycle (Item 4) and new product development (Items 3 and 5). In turn, the customer responses provide R&D with insights into ongoing and new product initiatives. For the financial perspective, we suggest firm measures for revenue growth and productivity. The outcomes in terms of financial measures reflect value creation driven by success in the customer, internal and learning and growth per- spectives. At the R&D department level, R&D value creation at innovation stages 1–4 and R&D value creation at commercialization stages 5 & 6. The value created will result in future revenues and profits. The firm’s overall financial objectives (Items A-C) cascade down to R&D value creation measures (Items 1 and 2) throughout the Stage- Gate process. Measuring value creation is a challenge. Tradi- tional cash flow models are being replaced by models using ‘real options’ methods because research has shown that traditional methods tend to undervalue potential investments because flexibility is not given realistic consideration. In R&D, there are options to exit at various stages. In many situations, R&D is viewed as a platform

236 R&D Management 34, 3, 2004

investment with follow-on investment opportu- nities. Real options techniques apply financial options concept to business situations (Faulkner, 1996). Boer (2000) emphasizes the importance of separating market risk from risk that is unique to the project. By organizing measures around the BSC framework, firms can more easily see the purpose/use of resources. Further, considering that R&D is a multi-stage process, the BSC provides a common basis to make the Stage- Gate decisions in terms of both financial (option value) and strategic outcomes. It is important to note that the BSC provides a well-recognized, tangible example of how firms can overcome the hurdles to measuring and managing the R&D process. While it may not be ideal across industries, the model’s central concepts and functions fulfill the functional per- formance measurement expectations set forth in Kerssens-van Drongelen et al., (2000). They called for research that utilizes explores how the Balanced Scorecard (BSC) framework can be used for R&D performance measurement. Con- sistent with Neufeld et al., (2001), we provide insight into the application of the BSC to help research organizations measure performance and achieve operational excellence. The power of the model is its adaptability across industries, orga- nizational levels, and operating environments. The general model set forth in this article de- scribes its applicability to R&D across industries. It may be adapted to fit firm-specific needs.

4. Conclusions

In today’s economy, technology is very impor- tant, but is not easily measured by traditional financial metrics. For example, many firms ex- plicitly state that their competitive advantage stems from commitments to ongoing R&D. In this changing environment, implementing man- agement strategies requires integrated perfor- mance measurement systems that capture changes in financial and nonfinancial measures. While financial and nonfinancial measures are important, the BSC provides the basis to link these measures to strategy. From a management controls perspective, these differences can be characterized as the importance of incorporating strategic fit into the measurement process. Further, integrated performance measurement is an essential element of effectively measuring and managing R&D processes. This paper draws upon the literature about the wide array of

r Blackwell Publishing Ltd. 2004

metrics to measure R&D performance (Foster et al., 1985; Moser, 1985; Brown and Svenson, 1988; Griffin and Page, 1993; Schumann et al., 1995; Chiesa et al., 1996). Werner and Souder (1997) concluded that integrated metrics that combine several types of quantitative and quali- tative measures which best demonstrate the perceived cost/benefit of each alternative. The Stage-Gate approach (Cooper, 1993) reflects this approach and the BSC closely links shareholder value to these decisions. In this paper, we consider how firms can respond to limitation cited in the extant R&D literature about capital market demands for mea- suring and managing value creation by demon- strating the value of the BSC as an integrated performance measurement system. Specifically, we extend Kerssens-van Drongelen and Bilder- beek (1999) and Pearson et al. (2000) by integrat- ing the Stage-Gate approach with the BSC to present a framework to show how firms can link resource commitments to these activities and the firm’s strategic objectives. This integrated ap- proach ties measures of the firm’s competencies to traditional financial return measures (i.e. ROE) and value-based management metrics. We extend Kerssens-van Dronglen et al. (2000) by discussing how the BSC is useful for seven performance measurement functions as they relate to R&D. Future research inquiries can extend this inte- gration by considering issues related to employees incentives, compensation and long-term planning. Shareholder value creation implications should also be considered as they relate to measuring the effectiveness of balancing strategic and financial objectives.

Acknowledgments

The authors thank the participants at the 2000 European Accounting Association Annual Meet- ing, the journal editors, and two anonymous reviewers for comments on earlier drafts of this paper.

References

Blake, G. (1999) Ten ‘biggest’ problems technology leaders face. Research Technology Management, 42, 6, November–December, 13–14. Boer, F.P. (2000) Valuation of technology using ‘real options’. Research Technology Management, 43, 4, July–August, 20–30.

r Blackwell Publishing Ltd. 2004

Utilizing the balanced scorecard

Brown, M.G. and Svenson, R.A. (1988) Measuring R&D productivity. Research Technology Manage- ment, 41, 6, November–December, 30–35. Chan, S.H., Martin, J. and Kensinger, J. (1990) Corpo- rate research and development expenditures and share value. Journal of Financial Economics, August,

255–277.

Chiesa, V., Coughlan, P. and Voss, C.A. (1996) Devel- opment of a technical innovation audit. Journal of Product Innovation Management, 13, 2, 105–136. Chow, C.W., Haddad, K.M. and Williamson, J.E. (1997) Applying the balanced scorecard to small companies. Management Accounting, August, 21–27. Clinton, B. and Hsu, K. (1997) JIT and the balanced scorecard: linking manufacturing control to manage- ment control. Management Accounting, September,

18–24.

Cooper, R.G. (1993) Winning at New Products: Accel- erating the Process from Idea to Launch. Reading, MA: Addison-Wesley. Donnelly, G. (2000) A P&L for R&D. CFO Magazine, February, 44–50. Doukas, J. and Switzer, L. (1992) The stock market’s valuation of R&D spending and market concen- tration. Journal of Economics and Business, 44, 2,

95–114.

Epstein, J. and Manzoni, J. (1997) The balanced scorecard and tableau de board: translating strategy into action. Management Accounting, August, 28–36. Ernst and Young (1997) Measures that Matter. New York, NY. Faulkner, T.W. (1996) Applying ‘options thinking’ to R&D valuation. Research-Technology Management, 39, 3, May–June, 50–56. Foster, R.N., Linden, L.H., Whitely, R.L and Kan- trow, A.M. (1985) Improving the return on R&D-I. Research-Technology Management, January–Feb- ruary. Frigo, M. and Krumwiede, K. (2000) The balanced scorecard: a winning performance measurement sys- tem. Management Accounting, January, 50–54. Griffin, A. and Page, A.L. (1993) An interim report on measuring product development successes and fail- ure. Journal of Product Innovation Management, 10, 4, 291–308. Hoffecker, J. and Goldenberg, C. (1994) Using the ba- lanced scorecard to develop company wide perform- ance measures. Journal of Cost Management, 8, 3, 5–17. Industrial Research Institute, http://www.iriinc.org/ tvp.html Kaplan, R.S. and Norton, D.P. (1992) The balanced scorecard – measures that drive performance. Har- vard Business Review, 70, January–February, 71–79. Kaplan, R.S. and Norton, D.P. (1993) Putting the balanced scorecard to work. Harvard Business Re- view, 71, September–October, 134–147. Kaplan, R.S. and Norton, D.P. (1996a) Using the balanced scorecard as a strategic management sys-

R&D Management 34, 3, 2004

237

Wayne G. Bremser and Noah P. Barsky

tem. Harvard Business Review, 74, January–Febru- ary, 75–85. Kaplan, R.S. and Norton, D.P. (1996b) The Balanced Scorecard. Boston MA: Harvard Business School Press. Kaplan, R.S. and Norton, D.P. (1997) Why does business need a balanced scorecard? Journal of Cost Management, 11, May–June, 5–11. Kaplan, R.S. and Norton, D.P. (2001a) The Strategy Focused Organization. Boston MA: Harvard Busi- ness School Press. Kaplan, R.S. and Norton, D.P. (2001b) Transforming the balanced scorecard from performance measure- ment to strategic management: part I. Accounting Horizons, 15, March, 87–104. Kelm, K., Narayanan, V. and Pinches, G. (1995) Shareholder value creation during R&D innovation and commercialization stages. Academy of Manage- ment Journal, 38, 3, June, 770–783. Kerssens-van Drongelen, I.C. (1999) Systematic Design of R&D Performance Measurement Systems. Thesis, University of Twente, Enschede, The Netherlands. Kerssens-van Drongelen, I.C. and Bilderbeek, J. (1999) R&D performance measurement: more than choos- ing a set of metrics. R&D Management, 29, 1, 35–46. Kerssens-van Drongelen, I.C., Nixon, B. and Pearson, A. (2000) Performance measurement in industrial R&D. International Journal of Management Reviews, 2, 2, 111–143. Klein, D.A. (1998) The Strategic Management of In- tellectual Capital. Boston MA: Buttersworth. Mercer, William & Company (1999) Rewarding Em- ployees: Balanced Scorecard Fax-back Survey Re- sults. May 20. London, UK. Meyer, D.W. and Markiewicz, M.A. (1997) Developing a balanced scorecard at Wachovia corporation. Bank Accounting and Finance, 11, 1, Fall, 13–20.

238 R&D Management 34, 3, 2004

Moser, M.R. (1985) Measuring performance in R&D settings. Research and Technology Management, 28, 5, 31–34. Neufeld, G.A., Semeoni, P.A. and Taylor, M.A. (2001) High performance research organizations. Research Technology Management, November–December,

42–52.

Pearson, A.W., Nixon, W.A. and Kerssens-van Dron- gelen, I.C. (2000) R& D as a business – what are the implications for performance measurement? R&D Management, 30, 4, October, 355–366. Roberts, E.B. (1988) Managing invention and innova- tion: what we’ve learned. Research-Technology Man- agement, 31, January–February. Rogers, D.M.A. (1996) The challenge of fifth-genera- tion R&D. Research-Technology Management, 39, 4, July–August, 33–41. Roussel, P.A., Saad, K.N. and Erickson, T.J. (1991) Third Generation R&D: Managing the Link to Cor- porate Strategy. Boston MA: Harvard Business School Press. Schumann, P., Ransley, D. and Prestwood, D. (1995) Measuring R&D performance. Research Technology Management, 38, 3, May–June. Tipping, J.W., Zeffren, E. and Fusfeld, A.R. (1995) Assessing the value of your technology. Research Technology Management, 38, 5, 22–39. Werner, B.M. and Souder, W.E. (1997) Measuring R&D performance – state of the art. Research- Technology Management, l. 40, 2, March–April,

34–42.

Wernerfelt, B. (1984) A resource-based view of the firm. Strategic Management Journal, 5, 171–180. Woolridge, J.R. and Snow, C.W. (1992) Stock market reaction to strategic investment decisions. Strategic Management Journal, 11, 353–363.

r Blackwell Publishing Ltd. 2004