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. [email protected] and [email protected]

R&D programs are critical for many rms 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 nancial and nonnancial performance. We integrate the Stage-Gate approach to R&D management with the Balanced Scorecard to present a framework to show how rms can link resource commitments to these activities and the rms strategic objectives. In this paper, we provide specic examples of how rms can apply this integrated performance measurement system to the R&D function.

he resource-based theory of the rm suggests that a rms long-term competitive advantage 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 rms are becoming more reliant on resources that are not easily measured by traditional nancial metrics. For example, many rms explicitly state that their long-term competitive advantage stems from commitments to ongoing research and development and these rms have used various methods to measure performance (Brown and Svenson, 1988; Kerssens-van Drongelen and Bilderbeek, 1999; Kerssens-van Drongelen et al., 2000; Pearson et al., 2000; Tipping et al., 1995; Werner and Souder, 1997). In todays changing environment, implementing management strategies requires integrated performance measurement (PM) systems that capture changes in nancial and nonnancial measures. Integrated PM systems strive to align the organizations processes (i.e. R&D, production, marketing and other traditional functional areas) with corporate strategy using both performance 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 component 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 prot centers. The primary challenge facing R&D performance measurement stems from integrating past-oriented cost data with prospective longterm strategic and nancial objectives. Kerssensvan Drongelen and Bilderbeek (1999) and Kerssens-van Drongelen et al., (2000) cite limitations in the extant R&D literature of utilizing popular existing corporate strategic planning and performance measurement tools and suggest that the Balanced Scorecard (BSC) framework can be used as an integrated performance measurement 229

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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 organizations measure performance and achieve operational excellence. We specically extend Kerssens-van Drongelen et al. (1999) and Pearson et al. (2000) by integrating a popular R&D management framework, the Stage-Gate approach (Cooper, 1993), with the BSC (Kaplan and Norton, 1996a). The underlying premise is measuring nancial 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 nancial objectives. We cite the Stage-Gate approach to evaluating and controlling R&D investment to demonstrate the applicability and relevance of the BSC framework. This paper responds to Kerssens-van Drongelen and Bilderbeek (1999)s call for research that draws on business and performance management literatures. This paper has four main sections. Section 1 discusses the importance of the strategic integration of performance measurement. Section 2 describes the strategic importance of R&D activities. Section 3 outlines the usefulness of the BSC to R&D managers, and Section 4 provides conclusions. performance measurement system to implement strategy. A rm can develop a seemingly brilliant R&D strategy designed to achieve competitive advantage and grow the rm, but implementing strategy is the management challenge. The BSC strategic management system developed by Kaplan and Norton (1992, 1993, 1996a, 2001a) requires organizations to translate strategic goals into relevant measures of performance. Financial and nonnancial measures are indicators of the extent that strategies are successfully being implemented throughout the organization, and whether strategic goals are being achieved. There are ve basic principles for a strategyfocused 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 strategic business units, support departments, and external partners; (3) make strategy everyones 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 rm 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 nancial performance. The customer 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 nancial perspective addresses the question, To succeed nancially, 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 formulated at the corporate level of the organization, it is cascaded downward to strategic business units and support departments. These units develop
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1. Strategic integration of performance measurement

Managers often have a keen awareness of R&Ds strategic impact. At rms reliant on innovation strategies, research and development is the most critical determinant of strategic success. In a spring 1999 survey, 230 Industrial Research Institute 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 signicant resources in ongoing research and development can benet from the key concepts of the BSC, which uses an integrated 230
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Utilizing the balanced scorecard scorecards to implement the strategy communicated by the corporate scorecard. These scorecards are in turn cascaded downward. A full implementation of the BSC model requires cascading down to the individual level. This provides for each person having a perspective of his or her role in strategy implementation. For each measure in the personal scorecard, strategy implementation goals are set. Incentives such as stock options and merit pay increases are linked to their performance in implementing strategy. Measurements 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 integration 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 function 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 rms surveyed used a balanced scorecard integrated management system. An integrated performance measurement system aligns R&D, production, marketing and other traditional functional areas with corporate strategy using both performance drivers (leading indicators) and outcome measures (lagging indicators). Pearson et al (2000) review the R&D PM literature and report on the trend towards decentralized R&D prot-centers. They call for research that investigates the applicability of expanding R&D performance measurement from a traditional cost focus to incorporate strategic and protability objectives. The primary challenge facing R&D performance measurement stems from integrating past-oriented cost data with prospective long-term strategic and nancial objectives. This tension suggests a logical application of the key BSC concepts. product development cycle time will increase preferred customer retention rate. Since the rm denes the most protable customers as the preferred customers, the expected result is higher sales and net income. Average new product development cycle time would be a leading indicator on the balanced scorecard, which would also include an outcome measure of preferred customer retention. The scorecard would also include a nancial 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 improvement in preferred customer retention and the nancial 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 learning and adapting rm strategy, the rm goes beyond the traditional budget oriented management 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 development 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 Management Accountants Cost Management Group reported that 40% of the rms surveyed planned to use a scorecard measurement system within the next two years (Frigo and Krumwiede, 2000). Companies are using the balanced scorecard and nonnancial measures performance, and investors are using available nonnancial information. While a rm may not choose to adopt a formal BSC management system, it can learn and use the key concepts. The BSC helps managers to implement strategy through the development of an integrated set of relevant nancial and nonnancial measures. The nonnancial measures, if properly selected, should be drivers of sustained protability. According to a report titled Measures That Matter from Ernst & Youngs (1997) Center for Business Innovation, investors give nonnancial measures, on average, a one-third weight in decisions to buy or sell any given stock. The study reported a statistical correlation between investors use of such information and the accuracy of their earnings forecasts. R&D
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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 rm 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 Norton, 2001a). For example, a rm may hypothesize a value proposition that reducing average new
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Wayne G. Bremser and Noah P. Barsky presents a context where past nancial results and future expectations must considered concurrently in managing progress towards strategic goals.
Table 1. The Stage-Gate framework for new product development (adapted from Cooper, 1993) Stage 1 Gate 1 Stage 2 Gate 2 Stage 3 Idea Evaluation Decision to Develop Business Plan Develop the Preliminary Business Plan Decision to Develop Detailed Plan, Investigate, and Develop Detail Planning, Investigation, and Development Viable to Test and Validate? Testing and Validation Final approval for Production and Launch Product Production and Launch Decision to Continue Production Product Support and Program Review

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 announcements about R&D projects on the market value of rms stock. The study classied 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 rms 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 important in the innovation stage, and both are important during commercialization. They also observed that investors respond positively to R&D project announcements from small rms, innovation stage R&D announcements from technology leaders, and new product introductions from rms in concentrated less technology-intensive industries.

Gate 3 Stage 4 Gate 4 Stage 5 Gate 5 Stage 6

The Stage-Gate approach

A popular technique to manage the R&D pipeline is the Stage-Gate approach. Cooper (1993) denes the product development process in terms of ve stages and ve gates from innovation to commercialization. Successful commercialization drives revenue generation a critical component of a rms equity valuation. Stages are dened as a distinct portion of the product development process where, research, marketing, sales, and other activities occur. The rst ve 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 milestones for the Stage-Gate method. The sixth stage 232
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(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 opportunities. We view the sixth as a renement that facilitates integration of the Stage-Gate methodology with the BSC framework. This stage contains some important customer-focused steps to enhance product commercial success and contribute 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 dene and measure customer needs and marketplace 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 focused on customer needs.

R&D metrics
When a rm 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 nance function. It is important for these professionals to realize that an array of metrics to measure R&D performance is available in the
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Utilizing the balanced scorecard R&D management literature (Foster et al., 1985; Moser, 1985; Brown and Svenson, 1988; Grifn 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/benet. 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 topdown output-oriented perspective. The TVP model views value creation as the prime business driver, and value is derived from technologybased 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 rm. The Industrial Research Institute, a nonprot organization of over 260 leading global industrial companies offers a Technology Value Program (see website at http://www.iriinc.org/tvp.html). In Table 2, the survey results of the most frequently used metrics to measure R&D performance are presented (Donnelly, 2000). The important question is how well are these monitored and linked to strategy? While rms 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 rms compare to budget allocations. Many of these items can be characterized as outcome measures. The measures are consistent with the ndings in the R&D management literature, but the link to strategic success is unclear. While Donnelly (2000) documents the most popular measures, Kerssens-van Drongelen et al. (2000) suggest that at integrated frameworks are needed to integrate performance
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Table 2. Most frequently used R&D metrics (adapted from Donnelly, 2000) R&D Spending as percentage of sales New products approved/released Number of approved projects ongoing Total active projects supported Total patents led/pending/awarded Current percentage of sales of new products Percentage of budget resources dedicated to R&D Change in R&D headcount Percentage of resources dedicated to sustaining existing products 10. Average development cost per product 1. 2. 3. 4. 5. 6. 7. 8. 9.

measurements. One such model with great promise, according to Neufeld et al. (2001) is the BSC. Its specic 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) identied 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 fullls the seven functions when fully implemented. Thus, the BSC models 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 cascaded 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 management 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 rm using the BSC framework to implement strategy would place most nonnancial metrics directly or indirectly related to R&D in the
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Table 3. Performance measurement system (PMS) functions and the Balanced Scorecard Performance Measurement System (PMS) functions (per Kerssens-van Dronglen et al., 2000) 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 Facilitate alignment and communication of objectives 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 justication of the existence, decisions and performance Support motivating of people through feedback 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. 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. 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 alternatives. 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 efcient, effective, and timely in the innovation process is a key to strategy implementation. For rms with long design 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 identied (Kaplan and Norton, 1996b). Strategies are formulated to prot 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 balanced mix of strategic and nancial indicators over time.

Cascading metrics
In Table 4, we present an example of specic 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 implementation process includes careful selection of measures 234
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to implement strategy. Measures will change over time due to the strategic learning loop. If rms want to achieve their stated innovative vision, it is important that employees see how their responsibilities contribute to strategic success. Our example shows strategic indicators at the rm level and measurements at the R&D Department level from the cascading down process. We recommend a participative cascading approach, which calls for consensus agreement between managers at upper and lower levels. The process starts with a statement of strategic indicators at the rm level. These measurements and supporting documentation on how they relate to strategy implementation are communicated downward to strategic business units, divisions or departments, depending on the organizational structure. If the next level is the division 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 possible metrics for their balanced scorecard that linked to the cascaded down measures. For our example, assume that the R&D department is the next level below the rm level. The
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Utilizing the balanced scorecard department would set strategic goals that are aligned with the rms goals. In selecting metrics for the departments strategic goals, the department 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 nds that new metrics are needed to promote alignment. The basic alignment question is how does improving our performance 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 documented and sent up to the next level for discussion. 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 departments scorecard in our example would be cascaded down to the organizational units at the next level, which may be teams, so 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 professionals. 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, strategic technologies and a climate for action (Kaplan and Norton, 2001b). All measures should be in alignment with the rms strategic objectives, although some measures are naturally unique to R&D. As an example of cascading downward, at the rm 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 inuences 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 Financial perspective Strategic indicators at rm level A. Return on capital employed B. Customer protability C. Revenue growth rate D. Customer retention rate E. Market share F. Customer acquisition (number and quality) G. New product protability H. R&D efciency (time to market) I. Percentage of resources to sustain existing products J. Other metrics not related to R&D Sample metrics at the R&D department level* 1. R&D value creation at innovation stages 14. (A, B, C) 2. R&D value creation at commercialization stages 5 & 6. (A, B, C) 3. Percentage of sales from new products (D, E) 4. Product market life cycle. (D, E, F). 5. Customer satisfaction with new products. (D, E). 6. Number of new products approved for stage 5 (H) 7. Average development cycle time stages 14 (H) 8. Average development cost per product stages 14 (G, H) 9. Percentage of product ideas approved for stage 4 (H) 10. Pricing and prot planning accuracy (G) 11. New product acceptance rate (G) 12. Safety incidents (H) 13. Number of patents awarded (M) 14. Strategic skill coverage ratio by competency category (K, M). 15. R&D competency vs. competitors (innovation level) (M). 16. Employee survey measures (N, O). 17. Employee training (hours) (K, L).

Customer perspective

Internal business process perspective

Learning and growth perspective

K. Employee retention L. Employee development M. Strategic skill coverage ratio by competency category N. Employee survey measures O. Innovative culture surveys

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

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Wayne G. Bremser and Noah P. Barsky be linked to market share (Item E) in some rms. 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 regulatory and environmental. Our illustration shows how the stage-gate metrics might be used on the scorecard. For example, rms frequently focus on product protability (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 research intensive rms (i.e. pharmaceuticals, technology, etc.), R&D is central to the internal process dimension. From the customer perspective, the BSC model considers operational excellence, customer intimacy, and product differentiators. Other departments, 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 nancial perspective, we suggest rm measures for revenue growth and productivity. The outcomes in terms of nancial measures reect value creation driven by success in the customer, internal and learning and growth perspectives. At the R&D department level, R&D value creation at innovation stages 14 and R&D value creation at commercialization stages 5 & 6. The value created will result in future revenues and prots. The rms overall nancial objectives (Items A-C) cascade down to R&D value creation measures (Items 1 and 2) throughout the StageGate process. Measuring value creation is a challenge. Traditional cash ow models are being replaced by models using real options methods because research has shown that traditional methods tend to undervalue potential investments because exibility 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
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investment with follow-on investment opportunities. Real options techniques apply nancial 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, rms 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 StageGate decisions in terms of both nancial (option value) and strategic outcomes. It is important to note that the BSC provides a well-recognized, tangible example of how rms can overcome the hurdles to measuring and managing the R&D process. While it may not be ideal across industries, the models central concepts and functions fulll the functional performance 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. Consistent 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, organizational levels, and operating environments. The general model set forth in this article describes its applicability to R&D across industries. It may be adapted to t rm-specic needs.

4. Conclusions
In todays economy, technology is very important, but is not easily measured by traditional nancial metrics. For example, many rms explicitly state that their competitive advantage stems from commitments to ongoing R&D. In this changing environment, implementing management strategies requires integrated performance measurement systems that capture changes in nancial and nonnancial measures. While nancial and nonnancial 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 t 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
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Utilizing the balanced scorecard metrics to measure R&D performance (Foster et al., 1985; Moser, 1985; Brown and Svenson, 1988; Grifn 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 qualitative measures which best demonstrate the perceived cost/benet of each alternative. The Stage-Gate approach (Cooper, 1993) reects this approach and the BSC closely links shareholder value to these decisions. In this paper, we consider how rms can respond to limitation cited in the extant R&D literature about capital market demands for measuring and managing value creation by demonstrating the value of the BSC as an integrated performance measurement system. Specically, we extend Kerssens-van Drongelen and Bilderbeek (1999) and Pearson et al. (2000) by integrating the Stage-Gate approach with the BSC to present a framework to show how rms can link resource commitments to these activities and the rms strategic objectives. This integrated approach ties measures of the rms competencies to traditional nancial 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 integration 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 nancial objectives.
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Acknowledgments
The authors thank the participants at the 2000 European Accounting Association Annual Meeting, the journal editors, and two anonymous reviewers for comments on earlier drafts of this paper.

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