1

. . . . . . . . .

C O M M U N I C A T I N G A N D C O N T R O L L I N G S T R A T E G Y :

A N E M P I R I C A L S T U D Y O F T H E E F F E C T I V E N E S S O F

T H E B A L A N C E D S C O R E C A R D

Mary A. Malina University of Melbourne

and Frank H. Selto

University of Colorado at Boulder

University of Melbourne

A P P E A R S I N J O U R N A L O F M A N A G E M E N T A C C O U N T I N G R E S E A R C H , V . 1 3 , 2 0 0 1

We gratefully acknowledge helpful comments from Luke George, David Guenther, Marlys Lipe,

Peter Luckett, Bill Maguire, Axel Schulz, Phil Shane, Naomi Soderstrom, and Wim Van Der Stede,

workshop participants at the University of Colorado, University of Melbourne, AAANZ 2000 and

AAA 2000, and, in particular, the two anonymous reviewers who gave consistently insightful and

constructive comments. This research was supported by a Hart Doctoral Fellowship from the

University of Colorado at Boulder and by data generously provided by the anonymous host

company.

1

C O M M U N I C A T I N G A N D C O N T R O L L I N G S T R A T E G Y : A N E M P I R I C A L S T U D Y O F T H E E F F E C T I V E N E S S O F

T H E B A L A N C E D S C O R E C A R D A B S T R A C T

This paper reports evidence on the effectiveness of the Balanced Scorecard (BSC) as a strategy

communication and management-control device. This study first reviews communication and management

control literatures that identify attributes of effective communication and control of strategy. Second, the

study offers a model of communication and control applicable to the BSC. The study then analyzes empirical

interview and archival data to model the use and assess the communication and control effectiveness of the

BSC. The study includes data from multiple divisions of a large, international manufacturing company. Data

are from BSC designers, administrators, and North American managers whose divisions are objects of the

BSC. The study accumulates evidence regarding the challenges of designing and implementing the BSC faced

by even a large, well-funded company. These findings may be generalizable to other companies adopting or

considering adopting the BSC as a strategic and management control device.

Data indicate that this specific BSC, as designed and implemented, is an effective device for controlling

corporate strategy. Results also indicate disagreement and tension between top and middle management

regarding the appropriateness of specific aspects of the BSC as a communication, control and evaluation

mechanism. Specific results include evidence of causal relations between effective management control,

motivation, strategic alignment and beneficial effects of the BSC. These beneficial effects include changes in

processes and improvements in both the BSC and customer-oriented services. In contrast, ineffective

communication and management control cause poor motivation and conflict over the use of the BSC as an

evaluation device.

Data availability: Use of all data collected for this study is regulated by a strict non-disclosure agreement,

which requires the researchers to protect the company’s identity and its proprietary information.

2

C O M M U N I C A T I N G A N D C O N T R O L L I N G S T R A T E G Y : A N E M P I R I C A L S T U D Y O F T H E E F F E C T I V E N E S S O F

T H E B A L A N C E D S C O R E C A R D

INTRODUCTION

The professional and academic strategy literatures claim that many organizations have found traditional

performance measures (e.g., ex post costs, profits, and return on investment) to be insufficient guides for

decision making in today’s rapidly changing, hyper-competitive environment. Sole reliance on current,

financial measures of performance arguably does not reflect the importance of current resource decisions for

future financial performance [e.g., Dearden, 1969]. Though some firms recognized the importance of non-

financial measures of performance many years ago (e.g., General Electric in the 1950s), growing international

competition and the rise of the TQM movement have widened the appeal of non-financial performance

measures. Since the 1980s, authors have filled the professional and academic literature with recommendations

to rely more on non-financial measures for both managing and evaluating organizations [e.g., Johnson and

Kaplan, 1987; Berliner and Brimson, 1988; Nanni et al., 1988; Dixon et al., 1990; Rappaport, 1999].

In addition to normative arguments, empirical research can help to establish the roles and effectiveness

of non-financial performance measurement. A number of studies have sought to link specific non-financial

measures to financial performance (e.g., Banker et al., 2000; Behn and Riley, 1999; Foster and Gupta, 1999;

Ittner and Larcker, 1998a).1 Evidence in the human resources literature shows that systems of non-financial

measures, not individual measures themselves, appear to be more reliable determinants of firm performance.

(e.g., Becker and Huselid, 1998; Huselid, 1995, 1997). The objective of this study is to examine the process

and impact of managing an organization with non-financial performance measures, specifically in the context

of the balanced scorecard (BSC), which is a comprehensive system of performance measurement.

The BSC, popularized by Kaplan and Norton [1992, 1993, 1996a, b, c] and adopted widely around the

world, has been offered as a superior combination of non-financial and financial measures of performance.2

Because the BSC explicitly focuses on links among business decisions and outcomes, it is intended to guide

strategy development, implementation, and communication. Furthermore, a properly constructed BSC could

provide reliable feedback for management control and performance evaluation.

Atkinson et al. [1997] regard the BSC as one of the most significant developments in management

accounting, deserving intense research attention. Silk [1998] estimated that 60 percent of the U.S. FORTUNE

500 companies have implemented or are experimenting with a BSC. Given its high profile, surprisingly little

academic research has focused on either the claims or outcomes of the BSC [Ittner and Larcker, 1998b]. A

natural question is: does the BSC’s content, format, implementation, or use have discernable effects on

3

business decisions and outcomes that could not be attained with existing measures, alone or in combination?

In the first study of its kind, Lipe and Salterio [2000] identify decision effects associated with the format of

the BSC. The arrangement of performance measures into four related categories appears to convey decision-

relevant information to subjects performing a laboratory evaluation task. Most other current BSC studies,

however, are relatively uncritical descriptions of BSC adoptions.

Kaplan and Norton [1996] argue that the BSC is not primarily an evaluation method, but is a strategic

planning and communication device to (1) provide strategic guidance to divisional managers and (2) describe

links among lagging and leading measures of financial and non-financial performance. The BSC purports to

describe the steps necessary to reach financial success; for example, invest in specific types of knowledge to

improve processes. If the links are valid reflections of a company’s administrative and productive processes

and economic opportunities, the BSC embodies and can communicate the company’s operational strategy.

Furthermore, effectively communicating these links throughout the organization can be crucial to

implementing that strategy successfully [Tucker et al, 1996; West and Meyer, 1997]. Organizations also might

use non-financial measures as the basis of performance evaluation. Alternatively, they might improve

performance by using the BSC as a guide to financial success and by also judicially using financial

performance measures for evaluation purposes [e.g., Rappaport; 1999].

The present study investigates the communication and management-control attributes and the

effectiveness of a large, successful, international company’s BSC model. The study includes archival and

qualitative data from interviews with the BSC’s designers, managers, and users to (1) assess the perceived

attributes of the BSC as both a strategic communication and control device and (2) find evidence of the

BSC’s decision impacts. The current study does not test whether the company’s BSC is a statistically valid

model of the company’s activities and performance. This feature of the BSC will be tested in subsequent

research [Malina, 2001].

The company introduced the BSC to advance its strategy. The scorecard has greatly affected the outlook

and actions of users, both beneficially and adversely. When elements of the BSC are well designed and

effectively communicated (according to criteria described in the study), the BSC appears to motivate and

influence lower-level managers to conform their actions to company strategy. Furthermore, managers believe

that these changes result in improved sub-unit performance. However, there also is consistent evidence that

flaws in the BSC design and shortcomings in strategic communication have adversely affected relations

between some top and middle managers. The tension exists because the BSC design exacerbates strong

differences between their views of future opportunities. Shortcomings in communication generate mistrust

and unwillingness to change. While the specific flaws and shortcomings may be unique to the studied

company, these findings appear to reflect generally on issues of BSC design and uses.

4

The second section of this paper develops a research question from a review of the communication

literature regarding characteristics of effective communication of strategy. The third section develops a

second research question through an overview of attributes of management control devices that effectively

control strategy. The fourth section describes the research site and the company’s BSC. The fifth section

describes procedures used to obtain and analyze the archival and qualitative interview data. This section also

presents a theoretical model to describe BSC effectiveness. The sixth section addresses the research questions

and derives an empirical model of BSC effectiveness. The final section summarizes conclusions and offers

recommendations for future research.

THE BSC AND COMMUNI CATION OF STRATEGY

Kaplan and Norton [1996c] state that, “by articulating the outcomes the organization desires as well as

the drivers of those outcomes (by using the BSC), senior executives can channel the energies, the abilities, and

the specific knowledge held by people throughout the organization towards achieving the business’s long-

term goals.” Thus, Kaplan and Norton assert that not only does the BSC embody or help create

organizational strategy and knowledge, but also the BSC itself effectively communicates strategy and

knowledge. Merchant [1989] argues that communication failure is an important cause of poor organizational

performance. Because no organization’s knowledge or strategy exists apart from or succeeds without its key

human actors, the ability to effectively communicate may be itself a source of competitive advantage [Tucker

et al., 1996; Daft and Lewin, 1993; Grant, 1991; Schulze, 1992; Amit and Shoemaker, 1990]. If the BSC does

articulate organizational knowledge and strategy in a superior manner, then it may be a source of competitive

advantage, at least until all competitors use it equally well. The organizational communication literature,

however, identifies a complex set of characteristics that affect the quality or effectiveness of communication

in organizations.

Based on a review of the literature, an organizational communication device or system may be

characterized by the attributes of its (1) processes and messages, (2) support of organizational culture, and (3)

creation and exchange of knowledge. Brief reviews of these communication characteristics follow.

Communication Processes and Messages

Individuals use and rely on communication if its processes and messages are perceived as understandable

and trustworthy. Other characteristics of effective organizational communication processes are routineness,

predictability, reliability, and completeness [Barker and Camarata, 1998; Goodman, 1998; Tucker, et al., 1996].

Communication also is more effective if it uses concise messages and clearly defined terms [Goodman, 1998].

Furthermore, an effective communication system precludes suppression of truth or misstatement of

performance. There should be no ambiguity regarding the differences between truthfulness and “looking

good” or integrity with winning. The effective communication system and its users will be intolerant of “spin,

5

deniability, and truth by assertion” [Goodman, 1998]. Therefore, organizational communication will be

effective if processes and messages are valid representations of performance. Effective communication and

effective performance measurement conceptually overlap, as was discussed previously.

Support of Culture, Values, and Beliefs

The traditional view of effective organizational communication is that it supports organizational culture

and individual interest by reinforcing desired patterns of behavior, shared values, and beliefs. Effective

communication demonstrates that the organization does what it says and that individual or group rewards are

predicated on their actions [Tucker, et al, 1996; Goodman, 1998]. Communication by leaders that consistently

articulates shared goals, values and beliefs [Tucker, et al, 1996; Goodman, 1998] also is effective in reinforcing

culture and directing behavior. Furthermore, effective communication must encourage behavior consistent

with organizational goals, values, and beliefs [Goodman, 1998].

Proponents of the BSC [e.g., Kaplan and Norton, 2000] argue that it also can be an instrument of cultural

and strategic change. Consistent with Kotter’s [1995] observations of change processes, the BSC may

facilitate change by effectively creating and communicating a credible vision of and method for achieving

change.

Creation and Exchange of Knowledge

Knowledge, which may be objective or tacit, is the basis of strategy formulation and implementation. 3

Therefore, an effective communication system supports an organization’s strategy by nurturing both objective

and tacit knowledge. The effective communication system exchanges objective (observable) knowledge

among key individuals so that all are aware of the organization’s current status. Organizations create objective

knowledge from the development and integration of new knowledge by individual specialists. Objective

knowledge usually derives from the refining and sharing of individuals’ tacit knowledge, which is understood

but not yet articulated or usable by the organization. Therefore, an effective communication system

encourages and enables the sharing of individuals’ experiences and collects those shared experiences. This

may be best accomplished by intense and frequent sharing, and by dialogue rather than one-directional

reporting. Perhaps importantly for the effectiveness of the BSC, de Haas and Kleingeld [1999] argue further

that participation in the design of performance measurement systems is an important determinant of effective

communication of strategy.

In summary, effective organizational communication devices should possess the observable attributes of

• Valid messages – reliable, understandable, trustworthy

• Support of organizational culture – existing or changing

• Knowledge-sharing – including dialogue and participation

6

The organizational communication literature predicts that a BSC, which has these attributes, will create

strategic alignment, positive motivation, and positive organizational outcomes. The first research question is:

1. Is the BSC an (in)effective communication device, creating strategic (non)alignment,

(in)effective motivation, and (negative)positive organizational outcomes?

THE BSC AND MANAGEMENT CONTROL OF STRATE GY

A common criticism of managing organizations based on financial measures of performance is that these

measures induce managers to make myopic, short-run decisions. Financial measures tend to focus on the

current impacts of decisions without a clear link between short-run actions and long-run strategy [recent

criticisms include McKenzie and Schilling, 1998; Luft & Shields, 1999]. Furthermore, traditional financial

measures of performance can work against knowledge-based strategies by treating the enhancement of

resources such as human capital, which may be critical to implementing strategy, as current expenses [e.g.,

Johnson, 1992]. Dixon et al. [1990] argue that traditional financial measures, by expensing costs of many

improvements, also work against strategies based on quality, flexibility, and minimization of manufacturing

time. For many lower-level employees, most financial performance measures are too aggregated and too far

removed from their actions to provide useful guidance or feedback on their decisions. They might need

measures that more directly and accurately relate to outcomes that they can influence [McKenzie and

Schilling, 1998]. A number of studies have found evidence that traditional, financial measures of performance

are most useful in conditions of relative certainty and low complexity – not the conditions faced by many

organizations today [e.g., Gordon and Naranyan, 1984; Govindarajan, 1984; Govindarajan and Gupta, 1985;

Abernethy and Brownell, 1997].

Lynch and Cross [1995] argue that performance measures should motivate behavior leading to

continuous improvement in key areas of competition, such as customer satisfaction, flexibility, and

productivity. That is, they should reflect cause and effect between operational behavior and strategic

outcomes [Keegan et al, 1989; Ittner and Larcker, 1998a].4 Furthermore, as an organization identifies new

strategic objectives, it also may realize a need for new performance measures that encourage and monitor new

actions [Dixon et al., 1990]. Thus, organizations sensibly and perhaps optimally may use a diverse set of

performance measures to reflect the diversity of management decisions and efforts [e.g., Holmstrom, 1979;

Banker and Datar, 1989; Feltham and Xie, 1994; Ittner and Larcker, 1998b]. Empirical support for these

propositions is limited but growing. 5

The Management-Control Case for the Balanced Scorecard

Kaplan and Norton [1996b] have arranged multiple performance measures into the Balanced Scorecard,

which is a logical expression of most models of western business management.6 Indeed, the BSC may have

7

spread widely throughout the world on the strength of its intuition and internal logic. Kaplan and Norton

claim that the BSC offers two significant improvements over traditional financial or even non-financial

measures of performance.

First, the BSC identifies four related areas of activity that may be critical to nearly all organizations and all

levels within organizations:

• Investing in learning and growth capabilities

• Improving efficiency of internal processes

• Providing customer value

• Increasing financial success

Following the logic of the BSC and ignoring cost-benefit considerations, most organizations could use

measures in all four areas to encourage and monitor actions appropriate to organizational strategy. In its most

basic use, a properly configured BSC could provide a comprehensive picture of the state of the organization,

much as an automobile’s dashboard shows fuel level, oil pressure, coolant temperature, engine RPM, and

velocity. Thus, the BSC might promote positive organizational outcomes such as improvements in all four

areas of organizational activity, which include administrative activities and the BSC itself. Assessing this first

level of effectiveness is the objective of this research.

Furthermore, the BSC seeks to link these measures into a model that accurately reflects cause and effect

relations among categories and individual measures. Using the automobile analogy, the BSC simulates a

change in a car’s performance (e.g., velocity) given a planned increase in fuel consumption and engine RPM

(and perhaps other factors). Such a model might support operational decisions, make predictions of

outcomes given decisions and environmental conditions, and provide reliable feedback for learning and

performance evaluation. 7

The Role of the BSC for Strategy Implementation and Performance Measurement

Proponents of the BSC stress its alignment of critical measures with strategy and links of the measures to

valued outcomes. In addition, the management control literature identifies other characteristics of control

systems that may be critical to the successful implementation of strategy and should apply to the BSC.8 To be

effective, BSC measures should be accurate, objective, and verifiable. Otherwise, measures will not reflect

performance and may be manipulated, or managers could in good faith achieve good measured performance

but cause the organization harm. If managers can achieve good measured performance by cheating, the

system quickly will lose credibility and desired motivational effect. Furthermore, the set of BSC measures

should completely describe the organization’s critical performance variables, but should be limited in number

to keep the measurement system cognitively and administratively simple. An exhaustive set of performance

measures may accurately reflect the complexity of the organization’s tasks, but too many measures may be

8

distracting, confusing, and costly to administer. However, Lipe and Salterio [2000] did not find evidence of

information overload from multiple measures in their experimental study of the BSC.

Positive motivational impact induces managers to exert effort to achieve organizational goals. While

informative but not controllable performance measures may be important, positive motivation requires that

at least some of the BSC measures should reflect managers’ actions. For example, relative performance

evaluation (e.g., across similar business units), which can identify “influenceable” but not completely

controllable outcomes, may be an important component of the BSC [e.g., Antle and Demski, 1988], but it

may not be sufficient by itself. Extensive goal-setting literature confirms that performance should be keyed to

challenging but attainable targets [e.g., Locke and Latham, 1990]. Without such explicit BSC targets,

performance likely would be lower than could be reasonably achieved. Finally to build goal commitment, the

BSC should be linked with prompt and well-understood rewards and penalties. Rewards that are delayed,

uncertain, or ambiguous may be ineffective motivational devices.

Therefore, even though an organization’s BSC reflects its critical performance variables and links to

valued outcomes, it may fail as an effective management control device if it lacks other attributes. For

example, Ittner et al. [2000] found that subjectivity in a bank’s BSC led to both its having little beneficial

impact and the bank’s reversion to short-term financial measures of performance. To summarize, an effective

management control device, which is capable of promoting desired organizational outcomes, should have the

following, observable management control attributes to, first, attain strategic alignment:

• A comprehensive but parsimonious set of measures of critical performance variables, linked with

strategy

• Critical performance measures causally linked to valued organizational outcomes

• Effective – accurate, objective, and verifiable – performance measures

Second, to further promote positive motivation, an effective management control device should have

attributes of:

• Performance measures that reflect managers’ controllable actions and/or influenceable actions, e.g.,

measured by absolute and/or relative performance

• Performance targets or appropriate benchmarks that are challenging but attainable

• Performance measures that are related to meaningful rewards

Management control theory predicts that, if the BSC has these attributes, it is likely that the BSC will promote

strategic alignment and positive motivation and outcomes. Therefore, the second research question, which

parallels the first, is:

2. Is the BSC an (in)effective management control device, creating strategic (non)alignment,

(in)effective motivation, and (negative)positive organizational outcomes?

9

Subsequent discussions elaborate the details of a model that reflects the two research questions. This

model, based on the literature review, shows that the BSC’s management control and communication

characteristics generate outcomes by creating strategic alignment and motivation (or not). This study also

describes efforts to collect data on an implemented BSC’s management control and organizational

communication attributes, as well as evidence on the BSC’s effects on strategic alignment, motivation, and

organizational outcomes. It is bold to judge the effectiveness of the BSC against evidence from a single, non-

experimental BSC implementation. However, a thorough examination of a critical case can be instructive and

generalizable to theory [i.e., analytical generalization, Yin, 1994: 30-32], which in this case is that the BSC can

be an effective strategy communication and management control device.

RESEARCH SITE AND BS C CHARACTERISTICS

Overview of the Research Site

The research site is a U.S. FORTUNE 500 company with more than 25,000 employees and $6 billion

sales of durable products and post-sale services. The company is regarded as a long-term, well-managed

company. It is succeeding in highly competitive domestic and foreign markets, characterized by competition

among relatively few, very large, international companies. The company recently adopted a customer- and

quality-driven strategy to improve its competitiveness, and consequently perceived a need to expand its

management controls and performance management beyond traditional, financial measures. The company

began changing its performance measurement systems with a BSC that focuses on a very important part of

the company. One and a half years before the start of this study, the company began its implementation of a

Distributor-BSC (DBSC), for its 31 North American distributorships, which are responsible for a large share

of the company’s sales. The company has sufficient resources to assign BSC responsibilities to key staff that

are championing its continued development and implementation. These staff members have had formal BSC

training and are not using services of outside consultants. The DBSC was developed centrally and imposed

on the distribution channel, with little initial input from distributors themselves.

The company’s distributors in North America have primary responsibility for retail sales and service of

company products. Distributorships are organized by geographical area and may not sell other companies’

competing products. Although they are independently owned, individuals with employment experience in the

company currently lead 30 of the 31 distributorships. Distributors operate under renewable three-year

contracts with the company, which are based on realized and expected future performance.9

The authors gained access to this company because of a family relationship between one of the authors

and executives of the company.10 In this sense the field study is serendipitous, but the site is attractive on a

priori, objective grounds, and would have been a top candidate in a purposive sampling approach.11

1 0

To summarize, the company has a long history of effective management control, extensive resources, and

a commitment to communicate its strategy to its distributors. Furthermore, early in the investigation

researchers perceived considerable tension and possible resistance to change among parties affected by the

DBSC, which, as Ahrens and Dent [1998] counsel, usually makes for an engaging study. Thus, the company

and its DBSC project are ideal for field study research on the balanced scorecard.

Overview of the DBSC

Purpose of the DBSC

In line with its new customer-driven strategy, the company recently changed its distribution strategy from

one of operational efficiency to managing long-term customer relations. Until the DBSC, the company had

evaluated formal distributor performance solely on financial performance and market share. Company

documents and literature show that staff personnel designed the DBSC, top-down without input from

distributors, to communicate the company’s new retail distribution strategy to its distributors. Company

documents state the purposes of the DBSC are to:

• Highlight areas …

Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.