Improving Managerial Judgments of Information Relevance and Strategy Appropriateness Using the BSC and the Strategy Map

Abstract

The balanced scorecard (BSC) framework is designed to facilitate a shared understanding of a firm's 'theory of business' among its employees (Kaplan and Norton 1996). While prior literature has examined extensively the use of the BSC as a performance evaluation tool, few studies have focused on its broader decision-facilitating role as a result of the shared understanding it develops. In this study, we examine the effect of the two key elements of the BSC framework, the strategy map and the BSC, in improving managers' ability to interpret the strategic relevance of external information, and the strategy evaluation judgments they make in light of this information. We hypothesize that these two elements, which correspond to the two components of integrative strategic performance measurement systems (Chenhall 2005a), allow managers to construct cognitive representations of their firm's strategy, and therefore improve their ability to use external information relating to their firm's business environment to make strategy evaluation judgments. We conducted a laboratory experiment to test our research propositions. Our results show that presenting a set of strategic objectives as a strategy map enhanced managers' ability to distinguish between relevant and irrelevant external information, and improved their ability to use the relevant information to make strategy evaluation judgments. In contrast, the presentation of a set of performance measures as a BSC only had a positive effect on managers' strategy evaluation judgments, but not their ability to recognize the strategic relevance of external information. Further, we show that because the strategy map is more effective than the BSC in improving managers' strategy evaluation judgments, the BSC acts as a partial substitute to the strategy map, such that the BSC only improved managers' strategy evaluation judgment in the absence of a strategy map. Our study contributes to the literature by providing evidence that the BSC framework serves a critical decision-facilitating role in improving managerial judgments. The findings also have implications on how strategic performance measurement systems can aid managers in scanning and evaluating external environmental signals - a key challenge faced by managers in the contemporary business environment.