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Strategic Performance Measurement: Benefits, Limitations and Paradoxes
Long Range Planning 43 (2010) 465e476
http://www.elsevier.com/locate/lrp
Strategic Performance Measurement: Benefits, Limitations and Paradoxes Pietro Micheli and Jean-Francois Manzoni
Strategic Performance Measurement (SPM) can be both functional and dysfunctional for organisations. SPM can help organisations define and achieve their strategic objectives, align behaviours and attitudes and, ultimately, have a positive impact on organisational performance. However, SPM has also been criticised for several reasons, such as encouraging perverse behaviours, stifling innovation and learning, and having little effect on decision-making processes. If both perspectives are valid, how can organisations make SPM more of an asset and less of a liability? In this article, we argue that the design of an SPM system (SPMS) and the definition of its roles are fundamental factors determining its success and impact on business performance. Indeed, only by carefully considering characteristics and roles will managers reap the full benefits, and SPMSs make a substantial contribution to the achievement of organisations’ strategic goals. Building on the papers selected for this Special Issue, we draw conclusions that are relevant for both the theory and the practice of SPM. First, the benefits and limits of SPM depend on the very definition of what SPM should be, and on whether the measurement of performance is linked to both formulation and implementation of strategy. Secondly, the types of behaviour promoted by the SPMS are determined primarily by the uses of the system, particularly whether it is adopted for control or learning purposes. Thirdly, organisations should regard their SPMS as a means of fostering alignment to an existing strategy, but also of supporting empowerment and the continuous adaptation of strategy and tactics. Finally, in order for SPM to support
The design of an SPM system and the definition of its roles are fundamental factors determining its success 0024-6301/$ - see front matter Ó 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.lrp.2009.12.004
decision-making processes and positively impact on organisational performance, targets and indicators have to be linked to strategy and considered in strategic reviews. Following an introductory section on the theme of SPM, we examine the benefits, limits and paradoxes of SPM. We conclude by arguing for intelligent and purposeful designs of performance measurement systems, and for research that breaks the barriers of academic silos and puts an end to sterile contrapositions between advocates and critics of SPM. Ó 2009 Elsevier Ltd. All rights reserved.
Introduction Since the early 1990s, organisations have invested increasing amounts of money and resources in measuring their performance. Recent reports suggest that an average company with $1 billion sales spends over 25,000 person-days per year planning and measuring performance.1 In the public sector, following the recent introduction of ‘New Public Management’ reforms in a number of OECD countries, considerable attention has been paid to strategic performance measurement by governments. UK government departments recently estimated they spend over £150 million per year solely to monitor progress on national targets. This excludes the cost of front-line organisations gathering, analysing and providing data.2 A number of studies have found SPM generally productive and helpful in improving organisational performance.3 Specifically, research has shown that, through appropriate measurement and management of performance, organisations can benefit in the following areas: Formulation, implementation and review of organisational strategy4 Communication of results achieved to stakeholders, thus strengthening corporate brand and reputation5 Motivation of employees at all levels, promotion of a performance improvement culture, and fostering of organisational learning6 Other studies, however, show that despite the substantial resources invested by organisations, SPMrelated initiatives such as the implementation of scorecards can often fail to bring the intended benefits. Worse, if done poorly, they can be very expensive, and not only ineffective but harmful and indeed destructive.7 Therefore, if organisations are to realise value and become more sustainable in the longer term, it is crucial to understand how appropriate SPM practices deliver improved performance.
If organisations are to realise value and become more sustainable, it is crucial to understand how appropriate SPM practices deliver improved performance In spite of decades of research in this area, evidence on the benefits and limits of SPM is still inconclusive. Indeed, authors from areas as diverse as strategy management, human resources, management accounting and control, operations management, public administration, organisational behaviour, information systems and marketing have paid considerable attention to strategic performance measurement. However, lack of cross-disciplinary studies has resulted in the fragmentation of this field e as well as the polarisation of the debate e among advocates of specific tools and techniques, and critical investigators of behavioural and cultural implications. Conflicting research findings and lack of agreement over the benefits and limits of SPM prompted the development of a call for papers on the theme of SPM. The purpose of this Special Issue was to examine the state of the art and identify directions for the development of SPM as a field of research. 466
Strategic Performance Measurement: Benefits, Limitations and Paradoxes
Therefore, we invited cross-disciplinary submissions that could bring together different approaches and make substantial intellectual and practical contributions. The call for papers attracted 77 extended abstracts; the main academic fields to be represented were strategy, management accounting and control, and operations. Following the review of the abstracts, we asked for 25 full papers. Of these, eight were subsequently selected and presented in a workshop organised at IMD, Lausanne on 24/25 January 2008.8 After a further three rounds of review, four papers were selected for publication. The next section provides an overview of these papers, outlining the main themes they investigate and the contributions they make to theory and practice. Subsequently, we discuss a number of emerging themes. In particular, several benefits, limits and (apparent) paradoxes of SPM are examined. We conclude with final remarks and implications for practice and academic research.
Overview of the Special Issue The relationship between performance measurement and strategy has been the subject of several studies. However, the vast majority of scholars have looked at performance measurement systems purely as a means for strategy implementation. In doing so, they have not addressed a fundamental question: are performance measurement systems mere tools to implement strategy, or could they play an active role also in strategy reviews? In other words, is strategy driving the design and use of measurement systems, or is there a mutual relationship between the two? The opening paper, by Gimbert, Bisbe and Mendoza, considers the role of performance measurement systems in strategy re-formulation processes. To do so, the authors differentiate between performance measurement systems (PMSs) and strategic performance measurement systems (SPMSs), the latter being a subset of the former and characterised by four main attributes: integration of long-term strategy and operational goals, presence of multi-perspective indicators, inclusion of cause-effect linkages, and presence of a sequence of goals-targets-action plans. Building on a survey of 349 CEOs of medium and large Spanish companies, the authors find a positive association between the use of SPMSs and both the number and variety of decisions taken in each strategic review. While this result confirms the potential impact of performance measurement on reviews of strategy, it also highlights the fundamental difference between PMSs and SPMSs. Indeed, no difference was found between firms that use measurement systems which do not qualify as strategic, and firms that do not have any PMS at all. This finding is fundamental for both the theory and practice of strategic performance measurement: while many organisations have invested considerable resources to implement strategy and inform strategic reviews by means of measuring performance, they have effectively failed to do so, because of the inappropriate design of their measurement systems. Unless specific attributes are included, these systems will remain merely operational and will fail to inform strategic decisions.
Are performance measurement systems mere tools to implement strategy, or could they play an active role also in strategy reviews? The second paper, by Dossi and Patelli, examines the inclusion of non-financial indicators in PMSs used in relationships between headquarters and subsidiaries. The distinction e and, often, contraposition e between financial and non-financial indicators has already been studied by a number of scholars. However, the authors consider performance measurement as a means of establishing a dialogue between headquarters and subsidiaries, looking at the changes in emphasis placed by headquarters on financial indicators to control subsidiaries, depending on subsidiaries’ performance. After analysing the results of a survey conducted among the Italian subsidiaries of foreign companies, Dossi and Patelli conclude that, for headquarters, non-financial indicators have incremental but not superior information content to financial indicators. Nevertheless, the inclusion of non-financial indicators is positively associated with subsidiary profitability, subsidiary participation in the design of PMSs and their interactive use. Importantly, Long Range Planning, vol 43
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the authors find that headquarters emphasise the financial indicators of performance in negative financial situations. The rationale provided by the study’s respondents is not unreasonable, as the priority for failing subsidiaries is indeed to turn the situation around. At the same time this is potentially dangerous, as that turnaround could be achieved through actions that will significantly hurt the subsidiary’s long-term success. In that sense, using a more diverse set of indicators could help headquarters and subsidiaries to understand better the causes of poor performance and identify appropriate courses of action, while not focusing solely on short-term results. Finally, the authors argue that, through an enhanced use of non-financial indicators, PMSs could contribute more effectively to strategic alignment, organisational learning and diffusion of knowledge throughout organisations. The implications of these findings are substantial: while decisions over the inclusion of financial and non-financial indicators in the design of PMSs are certainly important, changes in emphasis with regard to specific indicators are equally relevant. If measurement systems are to be an effective means of communication between headquarters and subsidiaries, or between different functions, organisations must resist the temptation of focussing on purely financial aspects when they are faced with negative financial results. This would be detrimental, as it would make information flows less effective, stifle learning and encourage dysfunctional behaviours.
Through an enhanced use of non-financial indicators, SPMSs could contribute more effectively to strategic alignment and organisational learning Following two prevalently quantitative pieces of research, the third and fourth paper report the analyses of two in-depth case studies. In ‘Dynamic strategic performance measurement systems: balancing empowerment and alignment’, Kolehmainen discusses how dynamism can be built into SPMSs and how such systems can be used for strategy development/revision and implementation. While building on and contributing to the literature on SPMSs as a means of promoting strategy alignment, the author stresses the importance of locating focal responsibility for performance indicators at the individual manager’s level. She concludes that it is possible to develop flexible SPMSs suitable, and often necessary, for multinational companies and organisations that operate in dynamic environments. These systems can allow the organisation simultaneously to achieve high empowerment (necessary to adapt to rapidly changing circumstances) and high alignment (necessary to make sure the various parts of the complex organisation work effectively together). These findings have important implications for both the design and the use of SPMSs. Although scholars have put increasing emphasis on organisational alignment, it is important to recognise that, especially in dynamic environments, measurement systems have to be flexible, as they might otherwise hinder change and inhibit organisational transformations. Systems which combine alignment and empowerment, and make appropriate use of performance targets and indicators over time, could prove an effective means of implementing changes in strategy and promoting intended behaviours. The fourth paper, by Melnyk, Hanson and Calantone, investigates the links between SPM, process management and innovation. To do so, the authors look at the case of a large multinational home supplies firm trying, like many others, to change its strategic focus from cost leadership to market differentiation through radical innovation initiatives. Although the firm had achieved operational excellence through process management and the use of an SPMS in the past, these very aspects inhibited it from making a profound shift in its strategy. Effectively, the SPMS served to operationalise and crystallise a specific paradigm, and to create capabilities needed for incremental innovation. However, such capabilities turned out to be unsuitable for radical innovation. In agreement with the literature on organisational ambidexterity, the organisation’s SPMS was found to 468
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play an important role in encouraging a culture of process improvement, but, at the same time, helped create a core rigidity. This, in turn, made the organisation incapable of moving from a culture that promoted operational excellence and incremental innovation to one that rewarded creativity and radical innovation. This paper is particularly interesting, as it shows how measurement systems can promote and sustain the adoption of a particular paradigm. Clearly, this is advantageous when an SPMS is introduced in line with the specific culture the organisation is aiming to create. However, during processes of strategic change, if the existing measurement system is not radically modified and its role rethought, it will work as a spring, pulling the organisation back to where it started. The themes examined in the selected papers give us the opportunity to discuss several benefits, limits and paradoxes in the field of SPM. In particular, a number of questions emerge as fundamental if we want to advance the theory and practice of SPM: what are the roles of SPM in organisations? Which factors should be considered while designing and using SPMSs? Is SPM necessarily wedded to a specific paradigm and, thus, a potential inhibitor of changes in strategy? Moreover, can SPM only be aimed at promoting strategic alignment, or could it play an active role in shaping strategy and supporting empowerment and continuous adaptation?
Can SPM only be aimed at promoting strategic alignment, or could it play an active role in shaping strategy and supporting empowerment and continuous adaptation? Discussion Strategic performance measurement Our understanding of the benefits and limitations of SPM depends on the very definition of what SPM is. The results of the study conducted by Gimbert et al., and their operational definitions of strategic performance measurement systems (SPMS) and PMS, are in line with recent contributions in this area,9 showing how crucial it is to differentiate between strategic and operational PMSs. Far from being solely a difference in terminology, the strategic connotation of certain PMSs has fundamental implications for their use at different organisational levels and their impact on strategy. In particular, the inclusion of multi-perspective indicators and cause-effect linkages in the design of the SPMS are factors of primary importance, if we focus on the links between performance measurement and strategy reviews. This conclusion also has relevant implications on future studies in the field of SPM. In order to have comparability and generalisability of research findings, authors will have to clarify what type of PMS they are considering, rather than examining ‘generic’ performance measurement systems. The different roles of SPM Authors of the selected papers considered SPM as a means to: implement and reformulate strategy; communicate key objectives and corporate priorities; provide strategic alignment; support process improvement; and encourage incremental innovation. Previous studies have looked at other roles of SPM, such as: promoting specific behaviours and attitudes at different organisational levels; responding to rules and regulations; providing greater accountability within and between organisations; communicating financial and non-financial results to key stakeholders, etc. Building on Simons’ work on control systems,10 it is possible to define four key roles of SPM. The ‘diagnostic’ use of SPMS relates mainly to the implementation of strategy; the ‘interactive’ role is linked to the concept of organisational alignment and regards the SPMS as a means of communication within the organisation and between the organisation and its external stakeholders, and as support to the emergence of new strategies. Additionally, performance indicators can be seen as communication tools when they are introduced to communicate core values such as mission statements, credos Long Range Planning, vol 43
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and vision statements, or to drive desired behaviours. In this sense SPM is linked to the firm’s ‘belief system’. Finally, indicators can be used to set ‘boundary systems’ designed to restrain employee behaviour and define limits of freedom within the organisational context. Currently, organisations introduce performance indicators for ‘diagnostic’ reasons, in order to monitor performance; however, SPMSs should be considered also as effective means of establishing common rules and boundaries for action. Furthermore, SPM can contribute to the identification of new opportunities and to stimulate organisational learning.11 For instance, as the authors of the selected papers emphasise, balancing financial and non-financial indicators e or lagging and leading indicators e can generate both feedback and feedforward loops. In so doing, SPM can be used to gather data about past performance, but also to implement strategic objectives. This plurality of roles is not necessarily positive or negative, but rather emphasises how different SPMSs fulfil different needs and how there is no ‘one-size-fits-all’ measurement system. As a consequence, the drivers and purposes of every performance indicator and of the whole SPMS should be explicitly defined in the process of design, and communicated during implementation. This is particularly important, as the benefits of the measurement system strongly depend on both its characteristics and its intended roles.
SPM can be used to gather data about past performance, but also to implement strategic objectives SPMS can be used in relationships between headquarters and subsidiaries, and between corporate and business unit levels. In their study of Italian subsidiaries of foreign multinationals, Dossi and Patelli show how non-financial indicators are still treated as complementary and not substitute measures of performance. Although increasing emphasis has been placed on the importance of using non-financial indicators, this is not necessarily a negative finding. As previous studies demonstrate, it is fundamental for organisations to decide which type of SPMS to introduce, in line with their approach to strategic control.12 Indeed, if the headquarters of a multinational company wants to exert financial control over its subsidiaries and keep the learning generated within those subsidiaries, the inclusion of predominantly financial indicators would be appropriate. However, if headquarters want to stimulate knowledge flows and the diffusion of good practices across subsidiaries, then mere financial control would be insufficient. SPM is a means by which to establish a dialogue between different functions within an organisation; between headquarters and subsidiaries; and between an organisation and its environment. In the context of multinationals, the participation of subsidiaries in designing an SPMS is likely to result in the inclusion of a higher number of non-financial indicators. Therefore, headquarters seeking dialogue with local managers should design measurement systems that are not there solely for ‘diagnostic’ purposes, but also include more ‘interactive’, non-financial indicators. Moreover, although the ‘diagnostic’ use of SPMSs could work against deploying certain capabilities, it would not necessarily have a negative impact on performance. In fact, it could make a positive contribution by monitoring performance against goals, providing boundaries for action, restricting risktaking, and monitoring the efficiency and effectiveness of processes and activities.13 It is the lack of clarity over these issues and inconsistencies (e.g., efforts to promote communication and diffuse good practices across a group of firms using mostly financial indicators) that create considerable problems and may eventually lead to the failure of the whole SPMS.
Headquarters seeking dialogue with local managers should design measurement systems that include more ’interactive’, non-financial indicators 470
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Finally, it is interesting to notice the shift in emphasis over elements of the SPMS. Surely, the importance attributed to certain performance indicators should change over time, depending on the how the organisation is performing and where it wants to be. A typical example would be the choice made by GE to modify its SPMS several times in a relatively short period, depending on which type of strategy it wanted to implement.14 However, Dossi and Patelli find that shifts in the emphasis on specific elements of the SPMS depend on changes in the performance of subsidiaries and the environment in which they operate. Although headquarters often adopt multiple perspectives in order to more comprehensively assess and evaluate performance, they tend to restrict their focus to financial indicators in the presence of poor financial results. This is particularly dysfunctional as the noise and volatility of traditional financial indicators can limit their use as a performance evaluation tool for the relationship between headquarters and subsidiaries. Also, non-financial indicators would be more suitable to identify the very reasons for those unsatisfactory results. SPMS: static systems for dynamic environments? Thanks to data collection automation and improvements in data analysis, organisations have introduced increasing numbers of performance indicators. The inclusion of more performance indicators could be welcome. Indeed, research in cognitive and social psychology shows that an SPMS can help frame managers’ mental representations of the business, due to the system’s informational effects. As Gimbert et al. notice, SPMSs encourage extensive scanning behaviour and help produce more informed assessments than mono-dimensional non-causal PMSs do. Furthermore, comprehensive SPMSs can increase managers’ goal clarity and process clarity in business units and subsidiaries. Performance information also affects intrinsic motivation and empowerment, since ‘a more comprehensive PMS can make business unit managers believe their jobs are more meaningful by helping them to determine how their work fits within the broader scope of the organisation’.15 These aspects, in turn, have been found to have a positive impact on organisational performance. On the other hand, several studies have criticised SPM as it can promote organisational inertia and create ‘ossification’, i.e. organisational paralysis caused by an excessively rigid SPMS.16 Particularly when a system is pervasive and consists of large number of indicators, organisational inertia and ossification may arise. This may not be a major problem for organisations competing in relatively stable markets, but it could become a serious issue for firms operating in very dynamic environments. Authors have remarked how in dynamic environments only a few indicators and rules should be introduced, and those mostly to set boundaries.17 However, Kolehmainen, in her study of a leading telecommunications company, also argues for the possibility of embedding dynamism in SPMSs. To do so, an organisation has to adopt an empowering and flexible approach to the design and use of such systems. While alignment processes are needed to ensure that performance indicators and behaviours are in line with the organisation’s strategic priorities, empowerment at the individual managers’ level is needed to build sufficient dynamism into the SPMS. In other words, empowerment and HR management can promote dynamism and responsiveness, by building flexibility into the system in order to allow for local adaptation of the indicators.
Several studies have criticised SPM as it can create ’ossification’ organisational paralysis caused by an excessively rigid SPMS The introduction of new performance targets and indicators can kick-start the implementation of new strategic objectives and promote different ways of working. Therefore, the introduction of a new SPMS, or the review of an existing one, can support and enable change management initiatives. A good example of the introduction of new performance indicators to support a corporate turnaround within an organisation is the case of Continental Airlines in the mid 1990s.18 Long Range Planning, vol 43
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Essentially, Continental’s new management team promoted a radical change in strategy and values through SPM, by linking a limited number of key performance indicators to the company’s mission and making the whole organisation accountable for them. Although SPM has been successfully used in conjunction with change management initiatives, several studies have remarked how SPM can actually act as an obstacle to change. Certainly, the latter happens when the SPMS is too pervasive, rarely reviewed or not subdivided in levels of importance, and when responsibilities are not delegated. Nonetheless, even when an SPMS is reviewed and redesigned to support a change in strategy, it can push the organisation in a direction opposite to the one intended.
Even when an SPMS is reviewed and redesigned to support a change in strategy, it can push the organisation in a direction opposite to the one intended The paper by Melnyk et al. sheds light on this apparent contradiction. In the organisation considered, the authors find that SPM supported the development of particular capabilities and the crystallisation of a specific organisational culture, linked to process improvement driven by a cost leadership strategy. When the organisation tried to change its strategic focus to differentiation through radical innovation, the capabilities that SPM had contributed to create became core rigidities and the SPMS subverted this movement into a shift to incremental innovation. Other studies have also emphasised how measurement systems, particularly if used for ‘diagnostic’ purposes, could have a negative effect on innovation and the capacity of the organisation to transform itself.13 On the other hand, the ‘interactive’ use of SPMSs could foster capabilities of entrepreneurship, market orientation, organisational learning and innovation. As Dossi and Patelli suggest, they could be used as a means to generate and disseminate new strategic objectives and knowledge across the organisation. Therefore, as previously remarked, the different roles of SPM should be considered, especially when organisations are involved in processes of substantial transformation. SPMS: a powerful tool or a tool for power? The previous discussion shows how powerful SPM systems can be as a management tool. However, SPM could also be regarded as a ‘tool for power’. Indeed, SPM is often used as a way to introduce a rational discourse in complex situations. According to a rational paradigm, performance information is communicated with the aim of demonstrating results within the organisation or to key external stakeholders. Consequently, if performance information is related to the strategic objectives of the organisation, it is used to show that progress is being made against these objectives. On the other hand, performance indicators are often utilised for symbolic purposes; in this case, their aim is to increase the relative power of a business unit or department within an organisation, or to (apparently) satisfy the demands of external stakeholders.19 This is evident if we consider how a number of functions within organisations have tried to acquire greater legitimacy and power by relying on the measurement of their performance. This is the case with R&D departments and functions involved in new product development and marketing, for example, as they have invested substantial resources to ‘demonstrate’ their value through the introduction of increasingly sophisticated performance indicators.20 However, particularly in periods of recession, budgets allocated to these functions tend to be cut first. As the paper by Gimbert et al. shows, the reason is that it is not so much the accuracy of data that counts, but the level at which that data is considered. If performance indicators pertinent to product design or marketing are utilised at an operational level, they are not likely to influence the strategy and the strategic 472
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decisions of the organisation. Therefore, in order for performance measurement to be used as an effective ‘tool for power’, it is important that performance indicators are linked with strategy and that they are considered in strategic reviews.
For performance measurement to be used as an effective ’tool for power’, it is important that performance indicators are linked with strategy Conclusions In spite of decades of practical experience and academic research, strategic performance measurement is still under scrutiny and little consensus has been reached over its benefits and limitations. In this paper we have shown how the design and purposes of an SPMS are fundamental aspects to be considered if we want SPM to effectively contribute to organisational performance. Also, clarity over the nature and aims of an SPMS is fundamental if we want to resolve a number of apparent paradoxes. First, organisations should explicitly decide whether their measurement system is strategic or solely operational. This choice is likely to determine the link between strategy and performance measurement, and the relevance of the PMS within the organisation. Second, the design of the SPMS should depend on the roles the organisation assigns to the SPM. These roles should therefore inform decisions over the types of performance indicators to introduce (financial and non-financial; leading and lagging) and the use of performance information as a means to generate single and double learning loops. Third, the balance between ‘diagnostic’ and ‘interactive’ uses of SPM has relevant consequences on the possibility of SPM playing an active role in the introduction of change initiatives and innovation strategies. SPM can also contribute to the creation of capabilities and the establishment of an organisational culture. Therefore, in case of substantial transformations, the organisation should reflect on the role played by the SPMS and not only redefine the targets and indicators, but also rethink the balance between alignment and empowerment. Only by doing so will the organisation make the system flexible and use it as a lever for change. Finally, although SPMSs are certainly powerful tools, in isolation they cannot guarantee business performance. They should be seen as part of a wider whole, and be used in conjunction with other mechanisms including, for example, rituals and routines, reward and recognition systems, and training programmes.21 A purposeful design The design of an SPMS is fraught with difficulties and, to date, many measurement initiatives can be considered outright failures.22 This paper shows not only how performance measurement systems can differ from each other in nature, but also how they can be developed for different purposes. The plurality of roles of SPM indicates the importance of defining from the outset the roles of every performance indicator and the SPMS as a whole. In this sense, we could argue that the design of such systems should be an intelligent and purposeful creation. Key questions managers should ask themselves include:
The plurality of roles of SPM indicates the importance of defining from the outset the roles of every performance indicator and the SPMS as a whole Long Range Planning, vol 43
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Why is the organisation introducing (or reviewing) an SPMS? Which roles do we want it to play? Will its characteristics be consistent with its aims? Answers to these questions should then determine the number and kind of performance indicators, the type of reviews that will be conducted, and the main features of the SPMS as a whole. In particular, the organisation will have to decide the degree of flexibility it wants to embed in the system, according to its envisaged use in both the short and the long term. The balance between alignment and empowerment, and the frequency of reviews and audits will determine the dynamism of the system. Also, the design of the SPMS will have to depend on the environment in which the organisation operates, its strategy, its links with key stakeholders, and the implications the measurement system may have in maintaining the current, or shaping the future, organisational culture. Indeed, in a world where the pace of change has increased markedly over the last few years, firms will increasingly need their SPMS not only to help get alignment to an existing strategy, but also to support the empowerment and continuous adaptation of strategy and tactics. And this will be valid not only for successful subsidiaries and operations, but for all operations, particularly for less wellperforming ones. We believe that the papers presented in this Special Issue offer some very helpful suggestions on how to achieve this, and how to embed a strategic performance measurement system in organisations. Academic research in SPM: perpetuating the past or looking at the future? Over several decades, academics from a wide range of areas have researched the field of strategic performance measurement. Although the use of different perspectives, theories and paradigms has contributed to the development of the field, the lack of cross-disciplinary studies has also helped to determine its fragmentation. Furthermore, scholars have tended to polarise the discussion around either practical or theoretical aspects of SPM. Some have studied the tools and techniques of SPM; others have focused on behavioural and cultural determinants and implications. Both are critical, and this Special Issue attempts to look at SPM in a more holistic and comprehensive way. The selected papers build on research conducted in various fields such as strategy, management accounting and control, international business and operations. Moreover, the authors adopt both qualitative and quantitative methodologies. We believe that for SPM to move forward as a field of research, methodological and paradigmatic differences should be regarded as resources, rather than barriers. Furthermore, if we want to ensure comparability and generalisability of findings, future studies will have to provide a clear definition of both key features and teleological aspects of the PMS (or SPMS) under consideration.
Acknowledgements Our thanks and appreciation go to Professor Charles Baden-Fuller, Editor-in-Chief of Long Range Planning, for his kind invitation to be Guest Editors of this Special Issue and his support and encouragement during the process. Special thanks also to all authors, reviewers and colleagues at Cranfield’s Centre for Business Performance for making this publication possible.
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The workshop held at IMD was organised in conjunction with the Performance Measurement Association Symposium and served three main purposes. First, the authors received feedback from a wide audience of senior academics and practitioners interested in SPM. Second, in opposition to the typical fragmentation of SPM as a field of research, it was possible to exchange ideas and comments that, in line with Long Range Planning’s editorial policy, cut across disciplines and aimed at bridging the gap between theory and practice. Third, the authors were encouraged to develop their contributions consistently within the scope of the Special Issue. 9. M. Franco-Santos, M. Kennerley, P. Micheli, V. Martinez, S. Mason, B. Marr, D. Gray and A. Neely, Towards a definition of a business performance measurement system, International Journal of Operations and Production Management 27(8), 784e801 (2007); M. Hall, The effect of comprehensive performance measurement systems on role clarity, psychological empowerment and managerial performance, Accounting, Organizations and Society 33, 141e163 (2008). 10. R. Simons, Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal, Harvard Business School Press, Boston (1995). 11. J.-F. Henri, Management control systems and strategy: a resource-based perspective, Accounting, Organizations and Society 31, 529e558 (2006); S. Miller, D. Hickson and D. Wilson, From strategy to action: involvement and influence in top level decisions, Long Range Planning 41(6), 606e628 (2008); W. Ocasio and J. Joseph, Rise and fall - or transformation?: the evolution of strategic planning at the General Electric Company, 1940e2006, Long Range Planning 41(3), 248e272 (2008); J. Woiceshyn, Lessons from ‘‘good minds’’: how CEOs use intuition, analysis and guiding principles to make strategic decisions, Long Range Planning 42(3), 298e319 (2009). 12. S. Bungay and M. Goold, Creating a strategic control system, Long Range Planning 24(3), 32e39 (1991); M. Goold and A. Campbell, Managing the diversified corporation: the tensions facing the chief executive, Long Range Planning 21(4), 12e24 (1988); M. Goold, A. Campbell and K. Luchs, Strategies and styles revisited: ‘Strategic control’ - is it tenable? Long Range Planning 26(5), 54e61 (1993); L. G. Love, R. L. Priem Long Range Planning, vol 43
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13. 14. 15. 16.
17. 18. 19. 20. 21.
22.
and G. T. Lumpkin, Explicitly articulated strategy and firm performance under alternative levels of centralization, Journal of Management 28(5), 611e627 (2002). J.-F. Henri, (2006) op. cit. at Ref. 11. J. Magretta, What management is e and why it’s everyone’s business, HarperCollins Business, London (2002). M. Hall, (2008) op. cit. at Ref. 9. P. Smith, On the unintended consequences of publishing performance data in the public sector, International Journal of Public Administration 18(2e3), 277e310 (1995); B. Townley, D. J. Cooper and L. Oakes, Performance measures and the rationalization of organizations, Organization Studies 24(7), 1045e1071 (2003). K. N. Eisenhardt and D. N. Sull, Strategy as simple rules, Harvard Business Review 79(1), 106e116 (2001). J. Magretta, (2002) op. cit. at Ref. 14. M. Chwastiak, Rationality, performance measures and representations of reality: planning, programming and budgeting and the Vietnam war, Critical Perspectives on Accounting 17, 29e55 (2006). D. O’Sullivan and A. V. Abela, Marketing performance measurement ability and firm performance, Journal of Marketing 71(2), 79e93 (2007). G. Johnson, Managing strategic change strategy, culture and action, Long Range Planning 25(1), 28e36 (1992); P. Micheli, A. Pavlov, Promoting a culture of performance management in public sector organisations. In: KPMG, CAPAM, IPAC, IPAA (eds.), Holy grail or achievable quest? International perspectives on public sector performance management (2008). A. Neely and M. Bourne, Why measurement initiatives fail, Measuring Business Excellence 4(4), 3e7 (2000).
Biographies Pietro Micheli is a Lecturer at Cranfield School of Management’s Centre for Business Performance, and Fellow of the Advanced Institute of Management, UK. His research and consulting interests focus on organisational performance, particularly in the areas of strategic performance measurement and continuous improvement. He has carried out extensive research on the design, use and impact of performance measurement systems, and on the introduction of performance improvement initiatives in both private and public sector organisations. As a founding member of the Evidence-Based Management collaborative and an organiser of events that bring together academics and practitioners, he is a keen advocate of original research that influences management practice. Jean-Francois Manzoni is Professor of Leadership and Organisational Development at IMD (Lausanne, Switzerland). His research, consulting and teaching activities are focused on the management of change at the individual and organisational level. At the organisational level, he studies the content of change (including the use of levers such as strategy, structure and systems), the management of the change process and the role of leaders therein. At the inter-personal level, he focuses on helping management teams to improve their effectiveness and performance. His work in these areas has appeared in a number of articles, cases and books.
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http://www.elsevier.com/locate/lrp
Strategic Performance Measurement: Benefits, Limitations and Paradoxes Pietro Micheli and Jean-Francois Manzoni
Strategic Performance Measurement (SPM) can be both functional and dysfunctional for organisations. SPM can help organisations define and achieve their strategic objectives, align behaviours and attitudes and, ultimately, have a positive impact on organisational performance. However, SPM has also been criticised for several reasons, such as encouraging perverse behaviours, stifling innovation and learning, and having little effect on decision-making processes. If both perspectives are valid, how can organisations make SPM more of an asset and less of a liability? In this article, we argue that the design of an SPM system (SPMS) and the definition of its roles are fundamental factors determining its success and impact on business performance. Indeed, only by carefully considering characteristics and roles will managers reap the full benefits, and SPMSs make a substantial contribution to the achievement of organisations’ strategic goals. Building on the papers selected for this Special Issue, we draw conclusions that are relevant for both the theory and the practice of SPM. First, the benefits and limits of SPM depend on the very definition of what SPM should be, and on whether the measurement of performance is linked to both formulation and implementation of strategy. Secondly, the types of behaviour promoted by the SPMS are determined primarily by the uses of the system, particularly whether it is adopted for control or learning purposes. Thirdly, organisations should regard their SPMS as a means of fostering alignment to an existing strategy, but also of supporting empowerment and the continuous adaptation of strategy and tactics. Finally, in order for SPM to support
The design of an SPM system and the definition of its roles are fundamental factors determining its success 0024-6301/$ - see front matter Ó 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.lrp.2009.12.004
decision-making processes and positively impact on organisational performance, targets and indicators have to be linked to strategy and considered in strategic reviews. Following an introductory section on the theme of SPM, we examine the benefits, limits and paradoxes of SPM. We conclude by arguing for intelligent and purposeful designs of performance measurement systems, and for research that breaks the barriers of academic silos and puts an end to sterile contrapositions between advocates and critics of SPM. Ó 2009 Elsevier Ltd. All rights reserved.
Introduction Since the early 1990s, organisations have invested increasing amounts of money and resources in measuring their performance. Recent reports suggest that an average company with $1 billion sales spends over 25,000 person-days per year planning and measuring performance.1 In the public sector, following the recent introduction of ‘New Public Management’ reforms in a number of OECD countries, considerable attention has been paid to strategic performance measurement by governments. UK government departments recently estimated they spend over £150 million per year solely to monitor progress on national targets. This excludes the cost of front-line organisations gathering, analysing and providing data.2 A number of studies have found SPM generally productive and helpful in improving organisational performance.3 Specifically, research has shown that, through appropriate measurement and management of performance, organisations can benefit in the following areas: Formulation, implementation and review of organisational strategy4 Communication of results achieved to stakeholders, thus strengthening corporate brand and reputation5 Motivation of employees at all levels, promotion of a performance improvement culture, and fostering of organisational learning6 Other studies, however, show that despite the substantial resources invested by organisations, SPMrelated initiatives such as the implementation of scorecards can often fail to bring the intended benefits. Worse, if done poorly, they can be very expensive, and not only ineffective but harmful and indeed destructive.7 Therefore, if organisations are to realise value and become more sustainable in the longer term, it is crucial to understand how appropriate SPM practices deliver improved performance.
If organisations are to realise value and become more sustainable, it is crucial to understand how appropriate SPM practices deliver improved performance In spite of decades of research in this area, evidence on the benefits and limits of SPM is still inconclusive. Indeed, authors from areas as diverse as strategy management, human resources, management accounting and control, operations management, public administration, organisational behaviour, information systems and marketing have paid considerable attention to strategic performance measurement. However, lack of cross-disciplinary studies has resulted in the fragmentation of this field e as well as the polarisation of the debate e among advocates of specific tools and techniques, and critical investigators of behavioural and cultural implications. Conflicting research findings and lack of agreement over the benefits and limits of SPM prompted the development of a call for papers on the theme of SPM. The purpose of this Special Issue was to examine the state of the art and identify directions for the development of SPM as a field of research. 466
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Therefore, we invited cross-disciplinary submissions that could bring together different approaches and make substantial intellectual and practical contributions. The call for papers attracted 77 extended abstracts; the main academic fields to be represented were strategy, management accounting and control, and operations. Following the review of the abstracts, we asked for 25 full papers. Of these, eight were subsequently selected and presented in a workshop organised at IMD, Lausanne on 24/25 January 2008.8 After a further three rounds of review, four papers were selected for publication. The next section provides an overview of these papers, outlining the main themes they investigate and the contributions they make to theory and practice. Subsequently, we discuss a number of emerging themes. In particular, several benefits, limits and (apparent) paradoxes of SPM are examined. We conclude with final remarks and implications for practice and academic research.
Overview of the Special Issue The relationship between performance measurement and strategy has been the subject of several studies. However, the vast majority of scholars have looked at performance measurement systems purely as a means for strategy implementation. In doing so, they have not addressed a fundamental question: are performance measurement systems mere tools to implement strategy, or could they play an active role also in strategy reviews? In other words, is strategy driving the design and use of measurement systems, or is there a mutual relationship between the two? The opening paper, by Gimbert, Bisbe and Mendoza, considers the role of performance measurement systems in strategy re-formulation processes. To do so, the authors differentiate between performance measurement systems (PMSs) and strategic performance measurement systems (SPMSs), the latter being a subset of the former and characterised by four main attributes: integration of long-term strategy and operational goals, presence of multi-perspective indicators, inclusion of cause-effect linkages, and presence of a sequence of goals-targets-action plans. Building on a survey of 349 CEOs of medium and large Spanish companies, the authors find a positive association between the use of SPMSs and both the number and variety of decisions taken in each strategic review. While this result confirms the potential impact of performance measurement on reviews of strategy, it also highlights the fundamental difference between PMSs and SPMSs. Indeed, no difference was found between firms that use measurement systems which do not qualify as strategic, and firms that do not have any PMS at all. This finding is fundamental for both the theory and practice of strategic performance measurement: while many organisations have invested considerable resources to implement strategy and inform strategic reviews by means of measuring performance, they have effectively failed to do so, because of the inappropriate design of their measurement systems. Unless specific attributes are included, these systems will remain merely operational and will fail to inform strategic decisions.
Are performance measurement systems mere tools to implement strategy, or could they play an active role also in strategy reviews? The second paper, by Dossi and Patelli, examines the inclusion of non-financial indicators in PMSs used in relationships between headquarters and subsidiaries. The distinction e and, often, contraposition e between financial and non-financial indicators has already been studied by a number of scholars. However, the authors consider performance measurement as a means of establishing a dialogue between headquarters and subsidiaries, looking at the changes in emphasis placed by headquarters on financial indicators to control subsidiaries, depending on subsidiaries’ performance. After analysing the results of a survey conducted among the Italian subsidiaries of foreign companies, Dossi and Patelli conclude that, for headquarters, non-financial indicators have incremental but not superior information content to financial indicators. Nevertheless, the inclusion of non-financial indicators is positively associated with subsidiary profitability, subsidiary participation in the design of PMSs and their interactive use. Importantly, Long Range Planning, vol 43
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the authors find that headquarters emphasise the financial indicators of performance in negative financial situations. The rationale provided by the study’s respondents is not unreasonable, as the priority for failing subsidiaries is indeed to turn the situation around. At the same time this is potentially dangerous, as that turnaround could be achieved through actions that will significantly hurt the subsidiary’s long-term success. In that sense, using a more diverse set of indicators could help headquarters and subsidiaries to understand better the causes of poor performance and identify appropriate courses of action, while not focusing solely on short-term results. Finally, the authors argue that, through an enhanced use of non-financial indicators, PMSs could contribute more effectively to strategic alignment, organisational learning and diffusion of knowledge throughout organisations. The implications of these findings are substantial: while decisions over the inclusion of financial and non-financial indicators in the design of PMSs are certainly important, changes in emphasis with regard to specific indicators are equally relevant. If measurement systems are to be an effective means of communication between headquarters and subsidiaries, or between different functions, organisations must resist the temptation of focussing on purely financial aspects when they are faced with negative financial results. This would be detrimental, as it would make information flows less effective, stifle learning and encourage dysfunctional behaviours.
Through an enhanced use of non-financial indicators, SPMSs could contribute more effectively to strategic alignment and organisational learning Following two prevalently quantitative pieces of research, the third and fourth paper report the analyses of two in-depth case studies. In ‘Dynamic strategic performance measurement systems: balancing empowerment and alignment’, Kolehmainen discusses how dynamism can be built into SPMSs and how such systems can be used for strategy development/revision and implementation. While building on and contributing to the literature on SPMSs as a means of promoting strategy alignment, the author stresses the importance of locating focal responsibility for performance indicators at the individual manager’s level. She concludes that it is possible to develop flexible SPMSs suitable, and often necessary, for multinational companies and organisations that operate in dynamic environments. These systems can allow the organisation simultaneously to achieve high empowerment (necessary to adapt to rapidly changing circumstances) and high alignment (necessary to make sure the various parts of the complex organisation work effectively together). These findings have important implications for both the design and the use of SPMSs. Although scholars have put increasing emphasis on organisational alignment, it is important to recognise that, especially in dynamic environments, measurement systems have to be flexible, as they might otherwise hinder change and inhibit organisational transformations. Systems which combine alignment and empowerment, and make appropriate use of performance targets and indicators over time, could prove an effective means of implementing changes in strategy and promoting intended behaviours. The fourth paper, by Melnyk, Hanson and Calantone, investigates the links between SPM, process management and innovation. To do so, the authors look at the case of a large multinational home supplies firm trying, like many others, to change its strategic focus from cost leadership to market differentiation through radical innovation initiatives. Although the firm had achieved operational excellence through process management and the use of an SPMS in the past, these very aspects inhibited it from making a profound shift in its strategy. Effectively, the SPMS served to operationalise and crystallise a specific paradigm, and to create capabilities needed for incremental innovation. However, such capabilities turned out to be unsuitable for radical innovation. In agreement with the literature on organisational ambidexterity, the organisation’s SPMS was found to 468
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play an important role in encouraging a culture of process improvement, but, at the same time, helped create a core rigidity. This, in turn, made the organisation incapable of moving from a culture that promoted operational excellence and incremental innovation to one that rewarded creativity and radical innovation. This paper is particularly interesting, as it shows how measurement systems can promote and sustain the adoption of a particular paradigm. Clearly, this is advantageous when an SPMS is introduced in line with the specific culture the organisation is aiming to create. However, during processes of strategic change, if the existing measurement system is not radically modified and its role rethought, it will work as a spring, pulling the organisation back to where it started. The themes examined in the selected papers give us the opportunity to discuss several benefits, limits and paradoxes in the field of SPM. In particular, a number of questions emerge as fundamental if we want to advance the theory and practice of SPM: what are the roles of SPM in organisations? Which factors should be considered while designing and using SPMSs? Is SPM necessarily wedded to a specific paradigm and, thus, a potential inhibitor of changes in strategy? Moreover, can SPM only be aimed at promoting strategic alignment, or could it play an active role in shaping strategy and supporting empowerment and continuous adaptation?
Can SPM only be aimed at promoting strategic alignment, or could it play an active role in shaping strategy and supporting empowerment and continuous adaptation? Discussion Strategic performance measurement Our understanding of the benefits and limitations of SPM depends on the very definition of what SPM is. The results of the study conducted by Gimbert et al., and their operational definitions of strategic performance measurement systems (SPMS) and PMS, are in line with recent contributions in this area,9 showing how crucial it is to differentiate between strategic and operational PMSs. Far from being solely a difference in terminology, the strategic connotation of certain PMSs has fundamental implications for their use at different organisational levels and their impact on strategy. In particular, the inclusion of multi-perspective indicators and cause-effect linkages in the design of the SPMS are factors of primary importance, if we focus on the links between performance measurement and strategy reviews. This conclusion also has relevant implications on future studies in the field of SPM. In order to have comparability and generalisability of research findings, authors will have to clarify what type of PMS they are considering, rather than examining ‘generic’ performance measurement systems. The different roles of SPM Authors of the selected papers considered SPM as a means to: implement and reformulate strategy; communicate key objectives and corporate priorities; provide strategic alignment; support process improvement; and encourage incremental innovation. Previous studies have looked at other roles of SPM, such as: promoting specific behaviours and attitudes at different organisational levels; responding to rules and regulations; providing greater accountability within and between organisations; communicating financial and non-financial results to key stakeholders, etc. Building on Simons’ work on control systems,10 it is possible to define four key roles of SPM. The ‘diagnostic’ use of SPMS relates mainly to the implementation of strategy; the ‘interactive’ role is linked to the concept of organisational alignment and regards the SPMS as a means of communication within the organisation and between the organisation and its external stakeholders, and as support to the emergence of new strategies. Additionally, performance indicators can be seen as communication tools when they are introduced to communicate core values such as mission statements, credos Long Range Planning, vol 43
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and vision statements, or to drive desired behaviours. In this sense SPM is linked to the firm’s ‘belief system’. Finally, indicators can be used to set ‘boundary systems’ designed to restrain employee behaviour and define limits of freedom within the organisational context. Currently, organisations introduce performance indicators for ‘diagnostic’ reasons, in order to monitor performance; however, SPMSs should be considered also as effective means of establishing common rules and boundaries for action. Furthermore, SPM can contribute to the identification of new opportunities and to stimulate organisational learning.11 For instance, as the authors of the selected papers emphasise, balancing financial and non-financial indicators e or lagging and leading indicators e can generate both feedback and feedforward loops. In so doing, SPM can be used to gather data about past performance, but also to implement strategic objectives. This plurality of roles is not necessarily positive or negative, but rather emphasises how different SPMSs fulfil different needs and how there is no ‘one-size-fits-all’ measurement system. As a consequence, the drivers and purposes of every performance indicator and of the whole SPMS should be explicitly defined in the process of design, and communicated during implementation. This is particularly important, as the benefits of the measurement system strongly depend on both its characteristics and its intended roles.
SPM can be used to gather data about past performance, but also to implement strategic objectives SPMS can be used in relationships between headquarters and subsidiaries, and between corporate and business unit levels. In their study of Italian subsidiaries of foreign multinationals, Dossi and Patelli show how non-financial indicators are still treated as complementary and not substitute measures of performance. Although increasing emphasis has been placed on the importance of using non-financial indicators, this is not necessarily a negative finding. As previous studies demonstrate, it is fundamental for organisations to decide which type of SPMS to introduce, in line with their approach to strategic control.12 Indeed, if the headquarters of a multinational company wants to exert financial control over its subsidiaries and keep the learning generated within those subsidiaries, the inclusion of predominantly financial indicators would be appropriate. However, if headquarters want to stimulate knowledge flows and the diffusion of good practices across subsidiaries, then mere financial control would be insufficient. SPM is a means by which to establish a dialogue between different functions within an organisation; between headquarters and subsidiaries; and between an organisation and its environment. In the context of multinationals, the participation of subsidiaries in designing an SPMS is likely to result in the inclusion of a higher number of non-financial indicators. Therefore, headquarters seeking dialogue with local managers should design measurement systems that are not there solely for ‘diagnostic’ purposes, but also include more ‘interactive’, non-financial indicators. Moreover, although the ‘diagnostic’ use of SPMSs could work against deploying certain capabilities, it would not necessarily have a negative impact on performance. In fact, it could make a positive contribution by monitoring performance against goals, providing boundaries for action, restricting risktaking, and monitoring the efficiency and effectiveness of processes and activities.13 It is the lack of clarity over these issues and inconsistencies (e.g., efforts to promote communication and diffuse good practices across a group of firms using mostly financial indicators) that create considerable problems and may eventually lead to the failure of the whole SPMS.
Headquarters seeking dialogue with local managers should design measurement systems that include more ’interactive’, non-financial indicators 470
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Finally, it is interesting to notice the shift in emphasis over elements of the SPMS. Surely, the importance attributed to certain performance indicators should change over time, depending on the how the organisation is performing and where it wants to be. A typical example would be the choice made by GE to modify its SPMS several times in a relatively short period, depending on which type of strategy it wanted to implement.14 However, Dossi and Patelli find that shifts in the emphasis on specific elements of the SPMS depend on changes in the performance of subsidiaries and the environment in which they operate. Although headquarters often adopt multiple perspectives in order to more comprehensively assess and evaluate performance, they tend to restrict their focus to financial indicators in the presence of poor financial results. This is particularly dysfunctional as the noise and volatility of traditional financial indicators can limit their use as a performance evaluation tool for the relationship between headquarters and subsidiaries. Also, non-financial indicators would be more suitable to identify the very reasons for those unsatisfactory results. SPMS: static systems for dynamic environments? Thanks to data collection automation and improvements in data analysis, organisations have introduced increasing numbers of performance indicators. The inclusion of more performance indicators could be welcome. Indeed, research in cognitive and social psychology shows that an SPMS can help frame managers’ mental representations of the business, due to the system’s informational effects. As Gimbert et al. notice, SPMSs encourage extensive scanning behaviour and help produce more informed assessments than mono-dimensional non-causal PMSs do. Furthermore, comprehensive SPMSs can increase managers’ goal clarity and process clarity in business units and subsidiaries. Performance information also affects intrinsic motivation and empowerment, since ‘a more comprehensive PMS can make business unit managers believe their jobs are more meaningful by helping them to determine how their work fits within the broader scope of the organisation’.15 These aspects, in turn, have been found to have a positive impact on organisational performance. On the other hand, several studies have criticised SPM as it can promote organisational inertia and create ‘ossification’, i.e. organisational paralysis caused by an excessively rigid SPMS.16 Particularly when a system is pervasive and consists of large number of indicators, organisational inertia and ossification may arise. This may not be a major problem for organisations competing in relatively stable markets, but it could become a serious issue for firms operating in very dynamic environments. Authors have remarked how in dynamic environments only a few indicators and rules should be introduced, and those mostly to set boundaries.17 However, Kolehmainen, in her study of a leading telecommunications company, also argues for the possibility of embedding dynamism in SPMSs. To do so, an organisation has to adopt an empowering and flexible approach to the design and use of such systems. While alignment processes are needed to ensure that performance indicators and behaviours are in line with the organisation’s strategic priorities, empowerment at the individual managers’ level is needed to build sufficient dynamism into the SPMS. In other words, empowerment and HR management can promote dynamism and responsiveness, by building flexibility into the system in order to allow for local adaptation of the indicators.
Several studies have criticised SPM as it can create ’ossification’ organisational paralysis caused by an excessively rigid SPMS The introduction of new performance targets and indicators can kick-start the implementation of new strategic objectives and promote different ways of working. Therefore, the introduction of a new SPMS, or the review of an existing one, can support and enable change management initiatives. A good example of the introduction of new performance indicators to support a corporate turnaround within an organisation is the case of Continental Airlines in the mid 1990s.18 Long Range Planning, vol 43
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Essentially, Continental’s new management team promoted a radical change in strategy and values through SPM, by linking a limited number of key performance indicators to the company’s mission and making the whole organisation accountable for them. Although SPM has been successfully used in conjunction with change management initiatives, several studies have remarked how SPM can actually act as an obstacle to change. Certainly, the latter happens when the SPMS is too pervasive, rarely reviewed or not subdivided in levels of importance, and when responsibilities are not delegated. Nonetheless, even when an SPMS is reviewed and redesigned to support a change in strategy, it can push the organisation in a direction opposite to the one intended.
Even when an SPMS is reviewed and redesigned to support a change in strategy, it can push the organisation in a direction opposite to the one intended The paper by Melnyk et al. sheds light on this apparent contradiction. In the organisation considered, the authors find that SPM supported the development of particular capabilities and the crystallisation of a specific organisational culture, linked to process improvement driven by a cost leadership strategy. When the organisation tried to change its strategic focus to differentiation through radical innovation, the capabilities that SPM had contributed to create became core rigidities and the SPMS subverted this movement into a shift to incremental innovation. Other studies have also emphasised how measurement systems, particularly if used for ‘diagnostic’ purposes, could have a negative effect on innovation and the capacity of the organisation to transform itself.13 On the other hand, the ‘interactive’ use of SPMSs could foster capabilities of entrepreneurship, market orientation, organisational learning and innovation. As Dossi and Patelli suggest, they could be used as a means to generate and disseminate new strategic objectives and knowledge across the organisation. Therefore, as previously remarked, the different roles of SPM should be considered, especially when organisations are involved in processes of substantial transformation. SPMS: a powerful tool or a tool for power? The previous discussion shows how powerful SPM systems can be as a management tool. However, SPM could also be regarded as a ‘tool for power’. Indeed, SPM is often used as a way to introduce a rational discourse in complex situations. According to a rational paradigm, performance information is communicated with the aim of demonstrating results within the organisation or to key external stakeholders. Consequently, if performance information is related to the strategic objectives of the organisation, it is used to show that progress is being made against these objectives. On the other hand, performance indicators are often utilised for symbolic purposes; in this case, their aim is to increase the relative power of a business unit or department within an organisation, or to (apparently) satisfy the demands of external stakeholders.19 This is evident if we consider how a number of functions within organisations have tried to acquire greater legitimacy and power by relying on the measurement of their performance. This is the case with R&D departments and functions involved in new product development and marketing, for example, as they have invested substantial resources to ‘demonstrate’ their value through the introduction of increasingly sophisticated performance indicators.20 However, particularly in periods of recession, budgets allocated to these functions tend to be cut first. As the paper by Gimbert et al. shows, the reason is that it is not so much the accuracy of data that counts, but the level at which that data is considered. If performance indicators pertinent to product design or marketing are utilised at an operational level, they are not likely to influence the strategy and the strategic 472
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decisions of the organisation. Therefore, in order for performance measurement to be used as an effective ‘tool for power’, it is important that performance indicators are linked with strategy and that they are considered in strategic reviews.
For performance measurement to be used as an effective ’tool for power’, it is important that performance indicators are linked with strategy Conclusions In spite of decades of practical experience and academic research, strategic performance measurement is still under scrutiny and little consensus has been reached over its benefits and limitations. In this paper we have shown how the design and purposes of an SPMS are fundamental aspects to be considered if we want SPM to effectively contribute to organisational performance. Also, clarity over the nature and aims of an SPMS is fundamental if we want to resolve a number of apparent paradoxes. First, organisations should explicitly decide whether their measurement system is strategic or solely operational. This choice is likely to determine the link between strategy and performance measurement, and the relevance of the PMS within the organisation. Second, the design of the SPMS should depend on the roles the organisation assigns to the SPM. These roles should therefore inform decisions over the types of performance indicators to introduce (financial and non-financial; leading and lagging) and the use of performance information as a means to generate single and double learning loops. Third, the balance between ‘diagnostic’ and ‘interactive’ uses of SPM has relevant consequences on the possibility of SPM playing an active role in the introduction of change initiatives and innovation strategies. SPM can also contribute to the creation of capabilities and the establishment of an organisational culture. Therefore, in case of substantial transformations, the organisation should reflect on the role played by the SPMS and not only redefine the targets and indicators, but also rethink the balance between alignment and empowerment. Only by doing so will the organisation make the system flexible and use it as a lever for change. Finally, although SPMSs are certainly powerful tools, in isolation they cannot guarantee business performance. They should be seen as part of a wider whole, and be used in conjunction with other mechanisms including, for example, rituals and routines, reward and recognition systems, and training programmes.21 A purposeful design The design of an SPMS is fraught with difficulties and, to date, many measurement initiatives can be considered outright failures.22 This paper shows not only how performance measurement systems can differ from each other in nature, but also how they can be developed for different purposes. The plurality of roles of SPM indicates the importance of defining from the outset the roles of every performance indicator and the SPMS as a whole. In this sense, we could argue that the design of such systems should be an intelligent and purposeful creation. Key questions managers should ask themselves include:
The plurality of roles of SPM indicates the importance of defining from the outset the roles of every performance indicator and the SPMS as a whole Long Range Planning, vol 43
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Why is the organisation introducing (or reviewing) an SPMS? Which roles do we want it to play? Will its characteristics be consistent with its aims? Answers to these questions should then determine the number and kind of performance indicators, the type of reviews that will be conducted, and the main features of the SPMS as a whole. In particular, the organisation will have to decide the degree of flexibility it wants to embed in the system, according to its envisaged use in both the short and the long term. The balance between alignment and empowerment, and the frequency of reviews and audits will determine the dynamism of the system. Also, the design of the SPMS will have to depend on the environment in which the organisation operates, its strategy, its links with key stakeholders, and the implications the measurement system may have in maintaining the current, or shaping the future, organisational culture. Indeed, in a world where the pace of change has increased markedly over the last few years, firms will increasingly need their SPMS not only to help get alignment to an existing strategy, but also to support the empowerment and continuous adaptation of strategy and tactics. And this will be valid not only for successful subsidiaries and operations, but for all operations, particularly for less wellperforming ones. We believe that the papers presented in this Special Issue offer some very helpful suggestions on how to achieve this, and how to embed a strategic performance measurement system in organisations. Academic research in SPM: perpetuating the past or looking at the future? Over several decades, academics from a wide range of areas have researched the field of strategic performance measurement. Although the use of different perspectives, theories and paradigms has contributed to the development of the field, the lack of cross-disciplinary studies has also helped to determine its fragmentation. Furthermore, scholars have tended to polarise the discussion around either practical or theoretical aspects of SPM. Some have studied the tools and techniques of SPM; others have focused on behavioural and cultural determinants and implications. Both are critical, and this Special Issue attempts to look at SPM in a more holistic and comprehensive way. The selected papers build on research conducted in various fields such as strategy, management accounting and control, international business and operations. Moreover, the authors adopt both qualitative and quantitative methodologies. We believe that for SPM to move forward as a field of research, methodological and paradigmatic differences should be regarded as resources, rather than barriers. Furthermore, if we want to ensure comparability and generalisability of findings, future studies will have to provide a clear definition of both key features and teleological aspects of the PMS (or SPMS) under consideration.
Acknowledgements Our thanks and appreciation go to Professor Charles Baden-Fuller, Editor-in-Chief of Long Range Planning, for his kind invitation to be Guest Editors of this Special Issue and his support and encouragement during the process. Special thanks also to all authors, reviewers and colleagues at Cranfield’s Centre for Business Performance for making this publication possible.
References 1. A. Neely, M. Bourne, Y. Jarrar, M. Kennerley, B. Marr, G. Schiuma, A. Walters, M. Sutcliff, H. Heyns, S. Reilly and S. Smythe, Delivering value through strategic planning and budgeting, Report by Accenture and Cranfield School of Management, London (2001); see also A. Papalexandris, G. Ioannou and G. P. Prastacos, Implementing the Balanced Scorecard in Greece: a software firm’s experience, Long Range Planning 37(4), 351e366 (2004). 2. A. Neely, P. Micheli, and V. Martinez, Acting on information: lessons from theory and practice, Report prepared for the National Audit Office. Publication sponsored by the Advanced Institute of Management (2006). 474
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3. K. S. Cavalluzzo and C. D. Ittner, Implementing performance measurement innovations: evidence from government, Accounting, Organizations and Society 29(3e4), 243e267 (2004); S. Davis and T. Albright, An investigation of the effect of Balanced Scorecard implementation on financial performance, Management Accounting Research 15(2), 135e153 (2004); G. J. M. Braam and E. J. Nijssen, Performance effects of using the Balanced Scorecard: a note on the Dutch experience, Long Range Planning 37(4), 335e349 (2004); M. A. Malina and F. H. Selto, Communicating and controlling strategy: an empirical study of the effectiveness of the Balanced Scorecard, Journal of Management Accounting Research 13(1), 47e90 (2002). 4. H. Ahn, Applying the Balanced Scorecard concept: an experience report, Long Range Planning 34(4), 441e461 (2001); A. Butler, S. R. Letza and B. Neale, Linking the Balanced Scorecard to strategy, Long Range Planning 30(2), 242e253 (1997); D. Campbell, S. Datar, S. Kulp, V. G. Narayanan, Using the Balanced Scorecard as a control system for monitoring and revising corporate strategy (unpublished working paper), Harvard University (2002); R. Veliyath, Strategic planning - balancing short-run performance and longer term prospects, Long Range Planning 25(3), 86e97 (1992); G. S. Yip, T. M. Devinney and G. Johnson, Measuring long term superior performance: the UK’s long-term superior performers 1984e2003, Long Range Planning 42(3), 390e413 (2009). 5. A. A. Atkinson, J. H. Waterhouse and R. B. Wells, A stakeholder approach to strategic performance measurement, Sloan Management Review 38(3), 25e37 (1997); D. McKevitt and A. Lawton, The manager, the citizen, the politician and performance measures, Public Money & Management 16(3), 49e54 (1996); P. Smith, Performance indicators and outcome in the public sector, Public Money & Management 15(4), 13e16 (1995). 6. J. H. Gittell, Paradox of coordination and control, California Management Review 42(3), 101e117 (2000); Malina MA, Selto FH (2002) op. cit. at Ref. 3; G. Roos and J. Roos, Measuring your company’s intellectual performance, Long Range Planning 30(3), 413e426 (1997). 7. Royal Statistical Society, Performance indicators: good, bad and ugly. This document can be accessed from the Royal Statistical Society site at:http://www.rss.org.uk (2005). 8. The call for papers sought to create a shared discourse and debate amongst scholars, executives and policy-makers. In terms of methodology, we welcomed submissions in which a variety of research strategies and methods for collecting and analysing data were used. The initial call did not ask for complete papers, but for extended abstracts. The result was very encouraging, as we received 77 submissions, of which 12 were submitted by practitioners. The large majority reported research conducted in private sector organisations in Europe and North America. The workshop held at IMD was organised in conjunction with the Performance Measurement Association Symposium and served three main purposes. First, the authors received feedback from a wide audience of senior academics and practitioners interested in SPM. Second, in opposition to the typical fragmentation of SPM as a field of research, it was possible to exchange ideas and comments that, in line with Long Range Planning’s editorial policy, cut across disciplines and aimed at bridging the gap between theory and practice. Third, the authors were encouraged to develop their contributions consistently within the scope of the Special Issue. 9. M. Franco-Santos, M. Kennerley, P. Micheli, V. Martinez, S. Mason, B. Marr, D. Gray and A. Neely, Towards a definition of a business performance measurement system, International Journal of Operations and Production Management 27(8), 784e801 (2007); M. Hall, The effect of comprehensive performance measurement systems on role clarity, psychological empowerment and managerial performance, Accounting, Organizations and Society 33, 141e163 (2008). 10. R. Simons, Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal, Harvard Business School Press, Boston (1995). 11. J.-F. Henri, Management control systems and strategy: a resource-based perspective, Accounting, Organizations and Society 31, 529e558 (2006); S. Miller, D. Hickson and D. Wilson, From strategy to action: involvement and influence in top level decisions, Long Range Planning 41(6), 606e628 (2008); W. Ocasio and J. Joseph, Rise and fall - or transformation?: the evolution of strategic planning at the General Electric Company, 1940e2006, Long Range Planning 41(3), 248e272 (2008); J. 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Biographies Pietro Micheli is a Lecturer at Cranfield School of Management’s Centre for Business Performance, and Fellow of the Advanced Institute of Management, UK. His research and consulting interests focus on organisational performance, particularly in the areas of strategic performance measurement and continuous improvement. He has carried out extensive research on the design, use and impact of performance measurement systems, and on the introduction of performance improvement initiatives in both private and public sector organisations. As a founding member of the Evidence-Based Management collaborative and an organiser of events that bring together academics and practitioners, he is a keen advocate of original research that influences management practice. Jean-Francois Manzoni is Professor of Leadership and Organisational Development at IMD (Lausanne, Switzerland). His research, consulting and teaching activities are focused on the management of change at the individual and organisational level. At the organisational level, he studies the content of change (including the use of levers such as strategy, structure and systems), the management of the change process and the role of leaders therein. At the inter-personal level, he focuses on helping management teams to improve their effectiveness and performance. His work in these areas has appeared in a number of articles, cases and books.
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