| Abstract: | Many firms are undertaking a strategic shift from cost leadership (through process management) to differentiation based on radical product innovation. Success in such transitions has been mixed, as have findings on the role of performance measurement and management in the process. This study explores the challenges of managing this transition, with specific focus on the role of performance metrics. Conventional wisdom indicates that top management can use metrics - measures, standards and rewards - to communicate new directions and priorities. Based on findings reported in this paper, this approach is found to be potentially fatally flawed when applied to a situation where both the corporate goals and the means of achieving these goals have changed. Using detailed data drawn from a multi-level analysis of a major international corporation undertaking such a strategic shift, this study explores the process by which metrics are formed and deployed, and the impact of this process on the ability of the firm to successfully achieve the change. Using measures such as the percentage of sales from new products, top management in the case study had the impression that the strategy was being successfully carried out by the various operating divisions. However, radical innovation (the desired result) had been replaced by incremental innovation. This study identifies the reasons for this situation. A major finding is that the performance measurement and management system can both allow and conceal this failure. Firms trying to significantly change their strategic directions must change their selection of performance metrics to focus less on the intended outcomes and more on the means by which these outcomes are to be achieved. |
