TEI Larissa Project Management Department

STAFFORDSHIRE UNIVERSITY & TEI of LARISSA Master in Business Administration Intake 2010

MANAGING STRATEGY
Tutor: Dr. C. Sarmaniotis

Performance Measurement Systems & their Contribution to Strategy Formulation

Antonaki Xanthi Evangelia

Word Count: 1,159

Table of Contents
1. Introduction 2. Performance Measurement Systems & Strategy 3. Performance Measurement Systems & Strategy Formulation 4. Conclusion References 3 3 4 5
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1.

Introduction
Performance Measurement Systems (PMS) have been of interest in the academic and professional literature for quite a few decades (Langfield-Smith, 1997; Bourne et al, 2000; Gimbert et al, 2010; Tung et al, 2011; Srimai et al, 2011). The primary idea traces its roots back in 1954, when P. Drucker suggested that balanced measurement systems should be developed (Neely, 2005). Towards this direction, the first, traditional1, performance measurement systems that were formulated and implemented, measured performance in financial terms (i.e. cost, productivity, profit etc.) with no relation to business strategy (Ghalayini and Noble, 1996; Langfield-Smith, 1997; Paranjape et al, 2006; Tung et al, 2011; Srimai et al, 2011). From 1980s to date, organizations aimed at achieving and sustaining competitive advantage, market share and profits increase, and superior performance (Langfield-Smith, 1997). Under such circumstances, the introduction of non-traditional PMS based mostly on companys strategy, had been an imperative (Bourne et al, 2000; Srimai et al, 2011). These measures were more flexible and included both financial and non-financial measures aiming at continuous improvement (Ghalayini and Noble, 1996; Srimai et al, 2011).

2.

Performance Measurement Systems & Strategy

According to various studies, performance measurement systems are considered of great significance and as key factors in warranting the successful implementation of a companys strategy as well as its long-term success (Hussain, 2005). Several scholars argue that PMS should be linked to strategy (Ghalayini and Noble, 1996; LangfieldSmith, 1997; Fleming et al, 2009; Srimai et al, 2011; Micheli et al, 2011) while others stress the importance of strategy-aligned PMS as they can facilitate and support strategy implementation (Bourne et al, 2000; Paranjape et al, 2006; Franco-Santos et al, 2007; Pongatichat and Johnston, 2008; Tung et al, 2011). In particular, it has been remarked that although formulating and implementing an explicit strategy is rather necessary for business performance, a firms success seems to depend mostly on strategy implementation rather than on its formulation (Fleming et al, 2009, Gimbert et al, 2010; Micheli et al, 2011). In accordance with this view, PMS could be introduced in order to perform a dual role: firstly, the measurement of the success of strategy implementation and secondly, the challenge of the assumptions and the assessment of the validity of the strategy implemented by the use of the information and feedback from PMS (Bourne et al, 2000; Franco-Santos et al, 2007). Beyond the aforementioned, PMS seem to contribute to the translation of organizational strategy into the desired objectives, goals and behaviours, and facilitate the communication of strategic priorities and progress monitoring. Furthermore, they promote the establishment of a shared understanding, the alignment of short-term
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Contemporary literature regarding PMS has divided PMSs literature in two phases: a) until 1980s: traditional PMS and b) from 1980s to date: nontraditional (emerging) PMS (Ghalayini and Noble, 1996; Bourne et al, 2000; Srimai et al, 2011). However, there is a wide range of PMS types: timebased, strategic, integrated, dynamic, balanced, multi-dimensional, business vs organizational, internal or external, short or long term, ex post or ex ante etc (Ghalayini and Noble, 1996; Bourne et al, 2000; Henri, 2006; Paranjape et al, 2006; Franco-Santos et al, 2007; Fleming et al, 2009).

actions with long-term strategy, the consistency between behavior and strategy, and organizational learning. Lastly, they explicitly define the links between performance of individuals and sub-units, and sub-units and overall organizational performance, and employees get motivated through rewards based on their performance (LangfieldSmith, 1997; Neely et al, 2005; Franco-Santos et al, 2007; Pongatichat and Johnston, 2008; Fleming et al, 2009; Tung et al, 2011; Micheli et al, 2011). Notwithstanding, management has to continuously review measurements against the strategy and if necessary change them so as to ensure that PMS are aligned to strategy (Bourne et al, 2000; Pongatichat and Johnston, 2008). According to Bourne et al (2000) continuous measurement updating and refining are vital for organizational performance. Among PMS, the tools and frameworks that help management understand the linkage between PMS and strategy, are (Pongatichat and Johnston, 2008, p. 209): The BCS (Kaplan and Norton, 1992) The results and determinants framework (Fitzgerald et al, 1991) The Performance Pyramid (Kennerley and Neely, 2003; Neely et al, 2001) Strategy maps and the third generation balanced scorecards (Kaplan and Norton; 2000, 2004; Cobbold et al, 2004).

3. Performance Measurement Systems & Strategy Formulation

It is argued that PMS constitute formal management control mechanisms linked to strategy formulation and implementation (Micheli et al, 2011). More specifically, strategic PMSs (SPMS) initial utility lied mainly upon strategy implementation. However, research has shown that they influence specific attributes of strategy formulation processes as well (Franco-Santos et al, 2007) and that there are differences in strategy formulation between companies that may or may not use SPMS. (Gimbert et al, 2010). Gimbert et al (2010, p. 479) define strategy formulation as: [] the process through which a firm defines its overall long-term direction and scope. It involves establishing the way a company creates value through the configuration of its activities and resources in the markets in which it operates. Strategy formulation is a purposeful, deliberate exercise to develop a companys competitive advantage and thus enhance its performance. whereas strategy implementation has been defined as: the process of turning strategy into action and monitoring and assessing the results. As described above, strategy formulation and implementation seems to be the outcome of deliberate series of decisions; however, this is not always the case: organizations formally develop strategies which are the intended ones but may not be always realized due to internal or external in relation to organization factors (i.e. unrealistic expectations, economic crisis, changes in the market etc.) (Langfield-Smith, 1997). As a consequence, performed strategies may develop from the intended ones or may emerge incrementally (Langfield-Smith, 1997). In highly dynamic environments, organizations are forced to continuously change their strategies in order to remain competitive (Srimai et al, 2011). Therefore, their performance measures should be rapidly adjusted to the new deliberate or emergent strategies (Pongatichat and Johnston, 2008). Langfield-Smith (1997), through his

critical review, acknowledges the fact that most researchers have focused on intended business strategy and in particular Porters three generic strategies (cost leadership, differentiation and focus) examining their interaction with performance measurement and other strategy variables such as strategic typologies and/or mission. Langfield-Smith (1997) claims that most research linking business strategy and management control systems (MCS) has been made regarding the senior management level of the organization, laying emphasis on how managements perceptions influenced strategy formulation, implementation and change along with performance measures orientation. Regarding SPMS, top management teams that use them seem to get involved in a greater number and wider variety of strategic decisions in each strategy (re)formulation process in contrast to those in firms not using SPMS. Hence, the former produce more comprehensive strategic agendas. (Gimbert, p. 492).

4. Conclusion
Significant controversy has been raised regarding PMS effectiveness (Paranjape et al, 2006; Tung et al, 2011). Tung et al (2011) claim that the majority of previous research has only tested PMS effectiveness based on overall organizational performance. Furthermore, the relationship between PMS, strategy formulation, implementation and alignment has also been questioned (Micheli et al, 2011). Thus, a contingency approach should be adopted and several factors should be taken into account such as the elimination of inappropriate or excessive measures, inefficient implementation and delay in feedback as well as identification of the business sector the organization operates in, relative business risks, companys knowledge and experience in these sectors (Paranjape et al, 2006; Tung et al, 2011; Micheli et al, 2011).

References
Bourne, M., Mills, J., Wilcox, M., Neely, A. and Platts, K. (2000) Designing, implementing and updating performance measurement systems. International Journal of Operations and Production Management, 20 (7), pp. 754 771.

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