Strategy Communication and Measurement Systems

Abstract

Organizations often face the challenge of communicating their strategies to local decision makers. The difficulty presents itself in finding a way to measure performance which meaningfully conveys how to implement the organization's strategy at local levels. I show that organizations solve this communication problem by combining performance measures in such a way that performance gains come closest to mimicking value-added as defined by the organization's strategy. I further show how organizations rebalance performance measures in response to changes in their strategies. Applications to the design of performance metrics, gaming, and divisional performance evaluation are considered. The paper also suggests several empirical ways to evaluate the practical importance of the communication role of measurement systems.

JEL Classification: L21, D21