For example, Kaplan and McMillan (2021) have reimagined the balanced scorecard to incorporate a more holistic view of performance. The challenge however with multiple dimensions of performance is that they can lead to trade-offs, and it becomes difficult to attend to all dimensions of performance. For example, a medical device firm may have objectives to reduce product cost and increase on-time delivery. Scheduling of production to increase on-time deliveries and avoid order backlog may require employee overtime which results in higher labour costs with consequently higher overall product costs.

Tools such as the Balanced Scorecard and Performance Prism stress the importance of interlinkages between whatever measures of success are considered critical and advocate the use of an integrated set of key performance indicators (KPIs). Performance measures that are more integrated enable an understanding of how activities link to each other and impact on strategy. In the above example, increasing on-time delivery may be important for ensuring a good firm reputation which in turn will impact on the volume of business and profits. If, however, on-time delivery is not valued by customers and has no impact on firm reputation, then this may not be an area to invest additional resources. For other firms, employee absenteeism may be a critical success factor as reducing absenteeism may impact positively on efficiency, product quality, and employee health and wellbeing, which in turn will improve profitability and ESG performance.

The integration of performance measures relates to the logic underlying their interlinkage. There are many reported benefits of integrative performance measures for individual decision-makers including better evaluation of the impact of decisions on performance outcomes and a better understanding of how activities are related to firm value.

But what about the use of integrated measures for group decision-making? Group decision making differs from individual decision-making as it involves making a decision following social interaction between individuals that may be from different functional backgrounds and with different perspectives.

Strategic decisions are typically made by a senior management group; thus, group decision-making is very relevant for organisations. It is important we gain insight into whether the use of integrated performance measures by groups is beneficial for different aspects of performance such as profitability, innovation, and stability.

At a group level, a concern is that highly integrated performance measures may restrict the capacity of a senior management group to benefit from diversity and differences of opinion within the group. This is because a particular set of assumptions underlie the integration of the performance measures (e.g., reduced employee absenteeism results in higher profits) and this may constrain the group discussion. Recent research (published in Management Accounting Research) I conducted in collaboration with Professor David Bedford, University of Technology Sydney and Professor Josep Bisbe, Esade Business School, highlights this concern showing that the use of a more integrated set of performance measures by a senior management team may not be beneficial when it comes to innovation. We focused specifically on innovation ambidexterity.

What is innovation ambidexterity? Innovation can be divided into two types: radical and incremental. Incremental innovation typically refers to small improvements or extensions to existing products or services, while radical innovation refers to completely new products or services. Innovation ambidexterity occurs when firms produce both radical and incremental outputs at the same time. This is needed in many firms and has been found to be critical for long term performance, as it balances short-term and long-term success. Incremental innovations exploit the current capabilities of the firm and radical innovations result from exploring new knowledge and developing new capabilities.

For example, in the bedding products industry, innovation such as heat management and automatic adjustment of firmness in mattresses are considered radical innovations (Wunker, 2021). Many bedding product firms have both radical innovation products such as these and incremental innovation products (for example, incorporating innovations relating to textures of materials). For firms in this industry, by simultaneously offering a suite of radical and incremental products, they focus on both short-term and long-term success. While the heat management technology they incorporate into their bedding products is rarely new to the world (for example in the case of NorviGroup A/S heat controlled duvets, the technology was invented by NASA for spacesuits), it is new to their industry at the point the radical product was developed. Heat control in bedding products is now the focus of much incremental innovation following the initial radical innovation.

However, not all firms that attempt to be ambidextrous are successful, and simultaneously producing both forms of innovation is considered to be one of the toughest managerial challenges. The two forms of innovation compete for scarce resources, and managers are naturally inclined to make decisions that favour less risky shorter-term incremental innovations over radical innovations. The result is that blue skies novel type thinking frequently gets crowded out. In my previous research paper, Bedford, Bisbe and Sweeney (2019) (summarised in Sweeney (2018)), we found that task (work-related) conflict among the senior management team is important for ambidexterity. Conflict relates to a clash between different ideas. In a work context, task conflict relates to differences of opinion among members of the senior management team and can occur over interpretation of facts, distribution of scarce resources, implementation of policies and strategies etc. In that study, we found that face-to-face opportunities to debate key performance indicators (KPIs) combined with a balanced set of KPIs was important for generating conflict.

Following on from this, our 2022 research paper examines the use of integrated performance measures by senior management. Based on survey responses of 90 senior managers in innovative industries in Ireland, we find that when more integrated performance measures are combined with lower task conflict among senior management, firms report lower innovation ambidexterity. We explain this as follows: by using integrated performance measures, it is more likely that senior management teams focus their attention on options that are consistent with the assumed links in the performance measures. As a result, they are less likely to discuss diverging viewpoints. This reduces the capacity of the team to benefit from new and diverging ideas and translate them into higher innovation ambidexterity.

What we do find beneficial for innovation ambidexterity is the use of broad scope performance measures combined with task conflict. Broad scope performance measures include externally-focused, non-financial, long-run, and future-oriented information. For example, the number of new products expected in the next three years compared to competitors would constitute a broad scope measure. Broad-scope measures present a more complete picture of the performance of an organisation and the range of information in the metrics provides greater opportunities for senior management team members to understand and engage with divergent points of view.

Overall, our findings provide practical insights for managers in creating a supportive environment for innovation ambidexterity. Firms need to be conscious that highly integrated performance measures may reduce the attention given to diverse ideas as the focus may be more on consistency with existing assumptions. Encouragement to regularly question the assumptions underlying the integration of measures and the creation of face-to-face opportunities for the discussion would reduce the likelihood of this occurring. Further, the use of broad scope performance measures is likely to create more opportunities to engage with divergent points of view. For more information, please refer to Bedford, Bisbe and Sweeney (2022) published in Management Accounting Research.

The study was funded by Irish Accountancy Educational Trust and Irish Research Council New Foundations award 2013 and supported by IBEC.

References

Bedford, D., Bisbe, J. and Sweeney, B. (2022) The joint effects of performance measurement system design and TMT cognitive conflict on innovation ambidexterity. Management Accounting Research. https://doi.org/10.1016/j.mar.2022.100805

Bedford, D., Bisbe, J. and Sweeney, B. (2019) Performance measurement systems as generators of cognitive conflict in ambidextrous firms. Accounting, Organizations and Society  
https://doi.org/10.1016/j.aos.2018.05.010

Kaplan, R. and McMillan, D. (2021) Reimagining the balanced scorecard for the ESG era. 3 February. Harvard Business Review online.
https://hbr.org/2021/02/reimagining-the-balanced-scorecard-for-the-esg-era

Sweeney, B. (2018) Ambidextrous companies gain upper hand at innovation’ 3 August. Irish Times

Wunker, S. (2021) Innovation in the sleep industry. Forbes CMO Network, 1 September, https://www.forbes.com/sites/stephenwunker/2021/09/01/innovation—in-sleep/