...scorecard in its articulation of the linkage between performance measures and business strategy. This study conducts an experiment to assess how individuals' evaluations of the performance of business unit managers depend on strategically linked performance measures of balanced scorecard. Statistical test results indicate that performance evaluations are influenced by strategically linked measures more than non-linked measures only when evaluators are provided detailed information about business unit strategies. The results also confirm Lipe and Salterio's (2000) finding that evaluators rely more on common measures than on unique measures. Evaluators rely more on strategically linked measures than on common measures when they are provided information on strategic linkages, but the reverse relation holds when they are not.

Keywords: balanced scorecard; performance measures; strategic linkages; performance evaluation; business strategy.

Data Availability: Data are available from the authors upon request.

I. INTRODUCTION

The balanced scorecard (BSC) was introduced in 1992 to provide a framework for selecting multiple performance measures focused on critical aspects of business. The BSC also provides a tool for organizing strategic objectives into customer, internal process, and learning and growth perspectives, to augment the traditional financial perspective. By integrating the four perspectives, the BSC is expected to help managers understand cross-functional relationships that can ultimately lead to improved problem solving and decision making (Kaplan and Norton 1992). While the BSC was originally designed for multidimensional performance measurement, the concept has now evolved into an organizing framework for a strategic management system (Kaplan and Norton 1996).

An essential aspect of the BSC is the articulation of linkages between performance measures and strategic objectives (Banker et al. 2001). Once linkages are understood, strategic objectives can be further translated into actionable measures to help organizations improve performance (Kaplan and Norton 2000). In the accounting literature, several recent studies have followed this line of inquiry. For instance, Ittner and Larcker (1998a) describe trends in linking strategy to performance measurement; Banker et al. (2000) and Ittner and Larcker (1998b) provide empirical evidence for strategic linkages between financial and nonfinancial measures; and Krumwiede et al. (2000) provide experimental evidence on individuals' responses to BSCs developed for business units with different strategies. However, the issue of whether evaluators rely more on strategically linked measures than non-linked measures has not yet been examined.

In a recent study of the BSC, Lipe and Salterio (2000) designed an experiment to examine judgmental effects of common and unique measures on superiors' evaluation of business unit managers' performance. They found that evaluations are based only on BSC measures that are common across different business units; measures that are unique to individual business units are ignored. This result may be interpreted as undermining the BSC's major espoused benefit of uniquely capturing business strategy. However, while some of the common measures they examine are linked to a business unit's strategic objectives, some are not. This is also true of their unique measures. Since Lipe and Salterio (2000) did not categorize measures in terms of strategic linkages, their findings do not provide evidence on whether evaluators would rely on unique measures that are linked to a business unit's strategy.

To examine whether managers rely on strategically linked measures more than non-linked or common measures, we designed an experiment based on a case study of a clothing retailer operating several independent retail chains. Each chain is organized as a separate strategic business unit (SBU) with a distinct image and target market. We assigned M.B.A. students to evaluate the performance of two specific SBU managers, based on data presented in separate balanced scorecards for the two SBUs. We manipulated the reported performance of the two SBUs measured as actual relative to targets for linked, non-linked, common, and unique measures in a fully crossed design. Thus, one SBU may outperform the other SBU on common measures, unique measures, linked measures, non-linked measures, or a combination of them.

Since understanding of the SBU strategy is an essential precursor to reliance on strategically linked performance measures, we also manipulated the amount of strategic information available to experiment participants. We manipulated the detailed SBU strategy information at two levels: (1) no detailed SBU-specific information (benchmark treatment), and (2) narrative and graphical representations of SBU-specific strategies (strategy information treatment); expecting to find greater reliance on strategically linked measures in the latter case. (1)

Our statistical test results support these expectations. Consistent with Lipe and Salterio (2000), ceteris paribus, when asked to compare the performance of two SBUs, experiment participants rely significantly more on common measures. However, the availability of strategy information impacts participants' reliance on various measure types. In particular, when participants are provided with additional information on SBU strategies, strategically linked measures have a significantly greater impact on evaluations than non-linked measures. In this case, strategically linked unique measures also have a significantly greater impact on evaluations than common non-linked measures. Taken together, these findings suggest that when managers have an understanding of SBU strategy, linked measures dominate common measures in decision making; otherwise, common measures dominate linked measures.

We have organized this paper as follows. In Section II, we review related literature to motivate our research hypotheses. In Section III, we describe the design of our experiment. We present and discuss the results in Section IV. Finally, we discuss the implications of our findings in Section V.

II. DEVELOPMENT OF RESEARCH HYPOTHESES

Balanced Scorecard

Kaplan and Norton (1992) developed the BSC to supplement traditional financial measures with operating measures oriented toward customers, internal processes, and learning and growth activities. Financial measures, such as return on investment and return on sales, are used to indicate whether the company's strategy implementation and execution are contributing to improvements in the bottom line. Customer measures, such as customer satisfaction, are intended to measure the company's performance from the customer's perspective. Internal process measures, such as time to process customer returns in retail stores, are employed to identify core competencies, recognize strengths and shortcomings, and make improvements. Since the path to success for any business changes with time, a company's ability to innovate new products and new processes is critical in achieving excellence. Learning and growth measures, such as employee skills and computerization, focus on factors that facilitate continuous improvement.

Proponents of the BSC consider it imperative that measures used to evaluate performance be linked to the business strategy, regardless of whether they are measures common to all business units or unique to a particular unit (Kaplan and Norton 2000). The concept of strategically linked measures also underlies the growing emphasis on nonfinancial, forward-looking performance measures and value drivers in the performance measurement literature (Ittner and Larcker 1998b). Several contend that performance measurement systems, regardless of whether they use the BSC framework, should be designed to make cause-effect relations between managers' actions and results more explicit (e.g., Eccles 1991; Copeland et al. 1996; Young and O'Byrne 2001). Such systems enable employees at various levels of the organization to understand how their actions and performance measures translate into firm-wide performance. Strategic linkages also connect immediate measures, such as customer satisfaction, with long-term, lagging measures of performance like return on investment. Although the evidence is mixed, several empirical studies find positive relations between strategically linked performance measures and firm-wide, long-term financial performance (Anderson et al. 1994; Anderson et al. 1997; Banker et al. 1993; Banker et al. 2000; Ittner and Larcker 1996, 1998b).

While research on the performance effects of strategically linked measures supports their use, it does not directly address how managers' understanding of strategy influences the extent to which strategically linked performance measures impact managers' decisions. Kaplan and Norton (2000) emphasize that employees' understanding of strategy is critical to the success of the BSC. The better employees understand firm strategy, the better they will be able to use strategically linked performance measures to guide their decisions and actions. Krumwiede et al. (2000) examine this issue in an experiment designed to measure the impact of strategic linkages on managers' use of nonfinancial and financial performance measures. They find some evidence that managers rely more on nonfinancial measures that are linked to a firm's strategy; however, their results are not statistically robust.

Research Hypotheses

In order for managers to incorporate strategic linkages into performance evaluation, managers must understand SBU strategy. Implementations of the balanced scorecard now include graphical communication of the business strategy in the form of "strategy maps" that emphasize the linkages between various activities and performance measures (Kaplan and Norton 2000). Oliva et al. (1987) contend that strategy maps are instrumental in capturing the simultaneous, multidimensional, and interrelated nature of business strategy. Research on cognition suggests graphical representation makes it easier for individuals to identify relations among data, and instruction that combines verbal and graphical representation of concepts produces greater comprehension (Glenberg and Langston 1992; Kourilsky and Wittrock 1987; Wittrock 1974). Accordingly, we expect the perceived relevance of strategically linked measures, and consequently their use in performance evaluation, to be greater when managers are provided both verbal and graphical representation of SBU strategy (i.e., detailed strategy information) as compared to when managers are not provided such information. Furthermore, managers who have detailed strategy information will also recognize that non-linked measures are of little value and, therefore, they will rely less on them in evaluating performance than those who do not have detailed strategy information. This suggests the following hypothesis:

H1: In evaluating performance, managers who have detailed strategy information will place greater (less) weight on strategically linked (non-linked) measures than those who have no detailed strategy information.

If managers do not have the detailed information necessary to understand business unit strategy, then we do not expect them to be predisposed to favoring either the strategically linked or non-linked measures. A consequence of H1 then is that managers will perceive the strategically linked performance measures to be more useful for performance evaluation than non-linked measures only when they have detailed strategy information. Therefore, we predict:

H2: When managers have detailed strategy information, they will place more weight on strategically linked measures than they will on non-linked measures in evaluating performance. When managers do not have detailed strategy information, there will be no difference in the weights placed upon linked and non-linked measures....

NOTE: All illustrations and photos have been removed from this article.



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