Accounting, Organizations and Society 35 (2010) 689–706

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Accounting, Organizations and Society

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The role of performance measurement and evaluation in building

organizational capabilities and performance
Jennifer Grafton a,1, Anne M. Lillis a,⇑, Sally K. Widener b,2
a
Department of Accounting and BIS, The University of Melbourne, Victoria 3010, Australia
b
Jones Graduate School of Business, Rice University, Houston, TX 77005-1892, USA

a r t i c l e i n f o a b s t r a c t

This study examines the processes through which the availability of broad-based strategi-
cally relevant performance information impacts on the performance outcomes of organi-
zations. We explore the role of evaluation mechanisms in influencing managers’ use of
broad-based performance measurement information for feedback and feed-forward con-
trol. We hypothesize that these resultant decision-making patterns impact the exploita-
tion and identification of strategic capabilities within an organization and in turn
organizational performance. Using a structural equation model, we find support for a
model in which the degree of commonality between measures identified as decision-facil-
itating and decision-influencing is significantly associated with the use of decision-facili-
tating measures for both feedback and feed-forward control. In turn, the extent to
which decision-facilitating measures are actually used by strategic business unit managers
impacts on the strategic capabilities of the organization and subsequently its performance.
Overall the results suggest that to encourage managers to use the multiple financial and
non-financial performance indicators increasingly incorporated in contemporary perfor-
mance measurement systems it is imperative that performance evaluation schemes are
also designed to reflect these measures. To the extent performance evaluation schemes
do not reflect such decision-facilitating measures it is less likely managers will use these
indicators to effectively manage performance. The resultant performance implications for
the organization arise from the impact of these decision effects on the exploitation of
existing capabilities and the search for and identification of new strategic opportunities.
Ó 2010 Elsevier Ltd. All rights reserved.

Introduction outcomes by enhancing the decision-relevant informa-

Contemporary thinking with respect to the design of
performance measurement systems promotes the capture
of multiple financial and non-financial performance indi-
cators that reflect the key value-adding activities of an
organization (Kaplan & Norton, 1992, 1996). The
provision of broad-based, strategically-aligned perfor-
mance indicators is expected to improve organizational
⇑ Corresponding author. Tel.: +61 3 8344 5351; fax: +61 3 9349 2397.
E-mail addresses: j.grafton@unimelb.edu.au (J. Grafton), alillis@
unimelb.edu.au (A.M. Lillis), widener@rice.edu (S.K. Widener).
1 organizational outcomes (Chenhall & Langfield-Smith,
Tel.: +61 3 8344 7662; fax: +61 3 9349 2397.
2
Tel.: +1 71 3348 3596.
tion available to managers thereby facilitating strategy-
consistent decision making. Much of the rhetoric
accompanying contemporary performance measurement
innovations emphasizes the role of performance mea-
sures in directing managers’ attention to the longer-term
consequences of their actions, by encouraging managers
to track effective strategy implementation, and informing
the assessment and development of organizational capa-
bilities (Chenhall, 2005; Kaplan & Norton, 1996; Simons,
2000). While empirical evidence demonstrates that the
introduction of contemporary broad-based performance
measurement systems can result in a range of improved
1998; Davis & Albright, 2004; De Geuser, Mooraj, &

0361-3682/$ - see front matter Ó 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2010.07.004
690 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706
Oyon, 2009; Lingle & Schiemann, 1996; Malina & Selto,
2001; Scott & Tiessen, 1999) the results are by no means
unequivocal (Ittner, Larcker, & Randall, 2003) and the ex-
tant literature offers only limited insights into the means
through which these improvements are achieved (De
Geuser et al., 2009).
In this paper we explicitly examine the processes
through which the availability of broad-based performance
measurement information impacts on the performance
outcomes of organizations. We do so by developing and
testing a model that is reflected in Fig. 1. Specifically, we
argue that the extent to which decision-facilitating perfor-
mance measures are perceived to be captured in evalua-
tion influences the extent to which managers will use
those measures. The decision-facilitating role refers to
the provision of information to decision makers ex ante
to decision making, in order to help resolve uncertainties
in decision problems (Demski & Feltham, 1976; Narayanan
& Davila, 1998). In contrast, the decision-influencing role
refers to the use of information by higher-level manage-
ment to evaluate the performance of subordinate manag-
ers. By forming perceptions about which performance
measures will be used by higher-level management to
evaluate their performance, subordinate managers are
influenced to make decisions that improve performance
on those measures (Demski & Feltham, 1976; Narayanan
& Davila, 1998). While originating in the economics litera-
ture these notions of decision-facilitating and decision-
influencing roles of performance measurement remain
important in behavioral studies of the impact of perfor-
mance measurement system design on managerial deci-
sion making (Sprinkle, 2003). ‘‘Managers tend to be most
affected by areas that senior managers signal as important,
with success in these areas potentially determining status
and progression in the organization” (Ferreira & Otley,
2009, p. 272). Thus we argue that the more perceived
importance given decision-facilitating measures in the
evaluation process, the more likely the manager will use
those measures for feedback and feed-forward control.
These two control uses capture the assessment of actual
outcomes, and the formulation and use of predictive infor-
mation respectively (Emmanuel & Otley, 1985).
Following the resource-based view of the firm, which
emphasizes the management of strategic capabilities for
Use of Decision-
Facilitating Measures
Decision-Facilitating
Performance Measures
Feedback
Control Use
H1
Commonality
(Overlap)
Feed-Forward
Control Use
Decision-Influencing
Performance Measures
Fig. 1. Hypothesized structural model.
sustained competitive advantage, we argue in turn that
the use of performance measurement information for feed-
back and feed-forward control influences the extent to
which an organization is able to exploit and identify its
strategic capabilities, respectively. In the current globally
competitive, turbulent business environment it is critical
to develop our understanding of the ways in which con-
temporary performance measurement aids or impedes
the exploitation of existing capabilities and identification
of new strategic capabilities. We model organizational per-
formance as an outcome of the effective exploitation of
strategic capabilities. Thus, modelling the exploitation of
capabilities as a mediating variable allows us to explore
the processes by which performance measurement sys-
tems enhance organizational outcomes.
We test our model using a survey of the contemporary
performance measurement practices of strategic business
units from a broad range of manufacturing and service
organizations. We find empirical support for our model
in that strategic business unit managers’ use of measures
for both feedback and feed-forward control is influenced
by their perception of the extent to which the measures
are used in the evaluation of their performance. In turn,
the extent to which decision-facilitating performance mea-
sures are actually used by strategic business unit managers
for feedback and feed-forward control is demonstrated to
impact the ability of the unit to exploit its existing capabil-
ities and identify new capabilities, respectively, and ulti-
mately on the performance of the strategic business unit.
Consistent with Henri (2006) these findings suggest that
the effect of contemporary performance measurement sys-
tems on organizational performance is in fact indirect via
both the decision-making patterns resulting from the use
of these performance measures and the subsequent impact
of this managerial focus on the exploitation of an organiza-
tion’s strategic capabilities.
This study contributes to the literature by building in-
sights into the link between control systems and perfor-
mance in two ways. First, in common with recent studies
such as Henri (2006) and Widener (2007), we explore the
process by which performance measurement impacts on
the way managers mobilize resources to achieve competi-
tive advantage, and thus, contribute indirectly to perfor-
mance outcomes. The paucity of studies exploring the
H2a
Existing Capabilities
H3
Current SBU-Level
H2c Performance
New Capabilities
H2b
 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706
process by which control system attributes influence out-
comes at an organizational level is noted in the literature
(Bisbe & Otley, 2004; Chenhall, 2003; De Geuser et al.,
2009; Hall, 2008). Both Henri (2006) and Widener (2007)
suggest that a more detailed understanding of the role of
management control systems as an antecedent to the
development of organizational capabilities may help to re-
solve some of the ambiguous findings from literature that
attempts to relate performance measurement innovation
and organizational performance.
Second, we build on literature that links performance
measurement system innovation with organizational per-
formance by introducing evaluation mechanisms as poten-
tially impacting the way broad-based decision-facilitating
measures are utilized. Inferences derived from studies of
single, typically financial, performance measures have
established a common understanding that performance
measurement information impacts managerial actions
through inclusion in evaluation mechanisms (Sprinkle,
2003). This strand of established research demonstrates
that managers devote effort to performance measures
linked to evaluation and incentives (Demski & Feltham,
1978; Feltham & Xie, 1994; Gibbs, Merchant, Van der
Stede, & Vargus, 2004; Holmstrom & Milgrom, 1991; Kerr,
1975). While contemporary performance measurement
systems are designed and adopted primarily to facilitate
strategy-consistent decision making, rather than for evalu-
ation purposes (Kaplan & Norton, 1996), it is problematic
to consider the way performance information is used by
decision makers without also considering its use by supe-
riors in evaluation processes (Dossi & Patelli, 2008; Ferreira
& Otley, 2009; Kelly, 2007; Ullrich & Tuttle, 2004; van
Veen-Dirks, 2010).
In the next section we develop the theoretical founda-
tions of this study and develop a path model to test the
hypothesized relations suggested in Fig. 1.
Theoretical model development
The theoretical foundations of this study reflect two
bodies of literature. To theorize the first stage of our model
(H1) we draw on the literature relating to the decision-
facilitating and influencing roles of performance measure-
ment. We examine the joint impact of these two roles on
the use of performance measures. The second stage of
our model (H2 and H3) focuses on the processes by which
the decision-facilitating use of performance measures
translates into organizational outcomes. We theorize this
process by drawing on literature linking performance mea-
surement, the identification and exploitation of strategic
capabilities and organizational performance outcomes.
Hypothesis one – the influence of evaluation on use of
decision-facilitating performance measures
Our first hypothesis links the degree of commonality
between decision-facilitating and decision-influencing
measures with the extent to which managers use deci-
sion-facilitating measures in feedback and feed-forward
control. In order to develop the theory underlying this
691
hypothesis, we first discuss the interplay between the
two roles of performance measurement and the impact
of this interplay on the use of decision-facilitating perfor-
mance measures. We then draw on literature relating to
uses of performance measures to conceptualize the feed-
back and feed-forward performance measurement uses in
our model.
The decision-facilitating and decision-influencing roles of
performance measurement
The literature on strategic performance measurement is
founded on the premise that performance measurement
innovation benefits organizations through the provision
of diverse, strategically-aligned metrics that facilitate
managerial decision making (Chenhall, 2005; Ittner,
Larcker, & Randall, 2003; Kaplan & Norton, 1996; Simons,
2000). It is further argued that offering managers an array
of decision-facilitating measures and then using these
multiple measures in the evaluation process will reinforce
the importance of these measures and thus enhance their
efficacy. However there is limited empirical evidence on
this and the risks of using multiple broad-based measures
in the decision-influencing role are also acknowledged (Itt-
ner, Larcker, & Meyer, 2003; Narayanan & Davila, 1998; Ot-
ley, 1999). On the one hand, a broad-based set of measures
is generally needed to capture an underlying business
model and value drivers (Kaplan & Norton, 1996). Impacts
on performance occur as a result of the influence these
measures have on managerial decision making. Yet we
know that decision making is also significantly influenced
by evaluation mechanisms and the literature is equivocal
on the extent to which broad-based sets of decision-facili-
tating measures should be captured in evaluation.
Both economic and behavioral research recognizes the
potential for variation in decision-facilitating and deci-
sion-influencing measures. The economics literature treats
variation between decision-facilitating and decision-influ-
encing measures as being driven by different risk prefer-
ences, contracting difficulties, and the possession of
private information (Datar, Kulp, & Lambert, 2001; Gjesdal,
1982; Ittner, Larcker, & Meyer, 2003). In the behavioral lit-
erature explanations for divergence in decision-facilitating
and decision-influencing measures include cognitive limi-
tations, evaluation time frames, measurement cost consid-
erations, the importance of comparability of measures, and
objectivity (Banker, Chang, & Pizzini, 2004; Ittner, Larcker,
& Meyer, 2003; Lipe & Salterio, 2000; Malina & Selto,
2004). For example, Ittner, Larcker, and Meyer (2003)
found empirically that the weights placed on non-financial
measures in compensation plans (a decision-influencing
role) had little to do with their ability to predict future
financial performance (a decision-facilitating role). Fur-
thermore, superiors used their subjective judgment to
override the system. The contemporary performance mea-
surement system was ultimately discarded in favour of a
less complicated single performance measure evaluation
system. Lipe and Salterio (2000, 2002) found that top man-
agement may collect multiple performance measures but
adopt simplifying strategies in determining which infor-
mation is used in evaluation and how that information is
weighted. Malina and Selto (2004) document a reluctance
692 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706
to persist with ‘soft’ Balanced Scorecard measures for the
purposes of evaluation and a reversion to simple financial
measures. This stream of literature suggests that using a
contemporary performance measurement system in evalu-
ation may add stress to the evaluation system, and that
over time evaluation mechanisms may be simplified and
disengaged from the broad-based measures relevant for
decision facilitation. However, this literature does not
examine the impact of divergence between decision-facil-
itating and decision-influencing measures on decision
making.
While the extant literature typically studies the deci-
sion-facilitating and decision-influencing roles of perfor-
mance measurement systems independently (Kelly, 2007;
Sprinkle, 2003), there is some evidence of tensions and
decision impacts associated with the interplay between
these roles when they are examined jointly. For example,
Magee and Dickhaut (1978) find that decision-influencing
compensation plans condition information selection for
problem solving; Sprinkle (2000) finds that decision-facil-
itating information enables learning to occur, but the mag-
nitude of learning is responsive to measures used in
evaluation and incentives; and Abernethy and Bouwens
(2005) identify the tension between decision-influencing
and decision-facilitating roles of information as an influ-
ence on resistance to change in the context of activity-
based costing. These studies provide empirical evidence
of the joint influence of decision-facilitating and decision-
influencing roles of performance metrics in specific deci-
sion contexts.
There is a long history of studies in the accounting
literature that inform our understanding of the impact
of disengaging evaluation from decision-facilitating
information. A key example is the reduced use of deci-
sion-facilitating project-life metrics such as net present
value in long-term project decisions where annual
return-on-assets is used as a managerial performance eval-
uation metric (Solomons, 1965). In more contemporary
performance management settings recent experimental
evidence suggests that managers will shift their attention
from measures that are not monitored or rewarded to
areas that are (Ullrich & Tuttle, 2004) and are encouraged
to incorporate a broader set of performance measures into
their decision processes when incentives are added to
those measures (Kelly, 2007). Also consistent with this lit-
erature, Lipe and Salterio’s (2000) concern about the dom-
inance of common measures in evaluation arises from
empirical evidence that measures excluded from ex post
performance evaluation are unlikely to be used in ex ante
decision making (Holmstrom & Milgrom, 1991). Overall,
this literature, in conjunction with contracting theory
regarding effort allocation, suggests that use of decision-
facilitating information may vary depending on the mea-
sures used in evaluation.
Feedback and feed-forward uses of decision-facilitating
performance information
Performance measurement information is a significant
input into an array of managerial decisions and uses. It is
a catalyst to problem identification and remedial action,
a means of focusing attention on critical processes, a
valuable source of information for organizational learn-
ing, and a basis for revising plans and strategies
(Chenhall, 2005; Kaplan & Norton, 1996; Sim & Killough,
1998; Simons, 2000). Several classifications of the ways
in which managers utilize performance measures are evi-
dent in the literature in different eras. Important classifi-
cations include scorekeeping, problem solving and
attention-directing (Simon, Guetzkow, Kozmetsky, &
Tyndall, 1954), answer, dialogue or debate, learning and
idea generation (Earl & Hopwood, 1979), feedback and
feed-forward control (Emmanuel & Otley, 1985; Preble,
1992) and interactive and diagnostic uses (Simons,
1990). Simons’ (1990) classification of interactive and
diagnostic control use is the dominant framework in re-
cent literature. For example, Widener (2007) investigates
both antecedents and consequences of the interactive
and diagnostic uses of performance measures. Henri
(2006) examines the impact of diagnostic and interactive
uses and the tensions between them on organizational
capabilities. However, both the conceptualization and
operationalization of interactive use remain problematic
(Bisbe, Batista-Foguet, & Chenhall, 2007).3 Furthermore,
interactive use, as described by Simons, refers to a use
of performance measures by senior management in a
way which is both context- and time-dependent. That is,
control system elements are selected for high-level inter-
active attention at particular times because of their rele-
vance to specific contemporaneous strategic uncertainties
(Simons, 1990; Simons, 1995). These context- and time-
dependent attributes of interactive use render the diag-
nostic/interactive distinction problematic in modelling uni-
versal distinctions in use of performance measures. In this
study we conceptualize the use of performance measures
in a feedback/feed-forward dichotomy. As a result of some
degree of conceptual overlap, we are able to situate our
results within extant literature that uses a range of control
system frameworks. However, adopting the feedback/feed-
forward distinction allows us to focus on distinctive uses
of performance measures by subunit managers and the
impact of these measures on individual decision making
without reference to engagement by superiors or to vary-
ing levels of attention to specific measures at different
points in time.
Both feedback and feed-forward performance measures
are part of a cybernetic control system. The primary differ-
ence between them is that feedback control focuses on the
assessment of actual outcomes while feed-forward control
focuses on the formulation and use of predictions
(Emmanuel & Otley, 1985). In using measures for feedback
control, managers examine variances between actual and
expected outcomes, and then work to determine the cause
of the variance (Emmanuel, Otley, & Merchant, 1990;
Preble, 1992). Thus the use of performance information
3
Interactive control use is a difficult construct to measure and theorize
given, as Bisbe et al. (2007) point out, it consists of five dimensions. The
instability of interactive control systems (particularly based on exploratory
factor analysis) is evident in a comparison of Bisbe and Otley (2004),
Widener (2007), Abernethy and Brownell (1999), and Henri (2006). For
example, Widener (2007) separated interactive from diagnostic use based
on the extent of top/operating manager involvement while Henri (2006)
separated interactive from diagnostic use based on the use of measures.
 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706
as a feedback control mechanism provides managers with
information on outcomes that are not meeting expecta-
tions; acting as a catalyst for problem identification. It
stimulates problem solving, the need for correction action,
and organizational learning, all within the domain of exist-
ing activity (Emmanuel et al., 1990; Ferreira & Otley,
2009); thereby, focusing managers on the achievement of
current goals (Emmanuel & Otley, 1985; Nørreklit, 2000;
Simons, 2000).
However, while the use of performance measures as
feedback control enhances the ability of the firm to meet
current performance expectations (Emmanuel et al.,
1990; Simons, 2000) and assists managers in understand-
ing the impact of past decisions, it does little to enhance
alertness to the future (Nørreklit, 2000). Moreover, wait-
ing for outcomes to be realized for use in feedback con-
trol may generate a lengthy time delay that is
unacceptable to making effective decisions (Emmanuel
et al., 1990; Preble, 1992). Thus managers must supple-
ment feedback control with feed-forward control in
which performance measurement information is used to
facilitate goal setting and the development of action
plans (Emmanuel et al., 1990; Nørreklit, 2000). In using
measures for feed-forward control, managers examine
variances between predicted and desired outcomes, and
work to minimize the variance (Emmanuel et al., 1990).
As Emmanuel et al. (1990) note, planning is a prime
example of feed-forward control and ‘‘a major purpose
of preparing plans is to communicate intended strate-
gies” (Simons, 2000, p. 32). These plans help guide the
successful implementation of an organization’s intended
strategy. Consensus on the organization’s intended strat-
egy positions the organization to effectively recognize
strategic opportunities as they arise and successfully seek
any new capabilities necessary to capture these opportu-
nities. In contemporary performance measurement
settings, current performance information captures per-
formance drivers that predict impacts on future perfor-
mance outcomes (Kaplan & Norton, 1996; Nørreklit,
2000). Preble (1992) refers to feed-forward controls as
‘‘steering controls” where current performance is exam-
ined along with external information to predict and as-
sess likely outcomes arising from current courses of
action. Thus the use of performance measures as a means
of signalling future outcomes, communicating strategy
and goals and as a catalyst to planning and goal-setting
enhances the firm’s future performance (Bisbe & Otley,
2004; Emmanuel et al., 1990; Kaplan & Norton, 1996).
Our first hypothesis draws together the literature which
examines the impact of evaluation on the extent to which
managers use decision-facilitating performance informa-
tion and the literature which explicates the key uses of
performance information for feedback and feed-forward
purposes. We propose that the extent to which managers
use decision-facilitating measures in both feedback and
feed-forward uses will be influenced by the extent to
which they perceive the decision-facilitating measures to
be captured in evaluation. Such a proposition is consistent
with both the contracting and behavioral management
control literatures that establish the link between evalua-
tion and effort allocation (Demski & Feltham, 1978;
693
Ferreira & Otley, 2009; Gibbs et al., 2004; Kaplan & Norton,
2001; Kerr, 1975; Otley, 1999; Sim & Killough, 1998).
H1. The greater the commonality between decision-
facilitating measures and those perceived to be used in
evaluation, the greater the use of decision-facilitating
measures for feedback and feed-forward control.
Hypothesis two – the impact of performance measure use on
strategic capabilities
In order to capture the process by which effective use of
decision-facilitating performance measures translates into
organizational outcomes, we draw on resource-based the-
ory. Studies adopting a resource-based perspective suggest
that performance measurement systems indirectly influ-
ence organizational performance via their impact on the
strategic capabilities of an organization (Henri, 2006;
Teece, Pisano, & Shuen, 1997; Widener, 2007). The re-
source-based perspective on strategy stresses the pivotal
importance of ‘capabilities’ in providing the organizational
means to mobilize resources to achieve competitive advan-
tage (Barney, 1991; Day, 1994; Grant, 1991; Kogut & Zan-
der, 1992). Capabilities are defined as a firm’s strengths
based on a combination of resources working together
(Grant, 1991). They are the difficult-to-imitate managerial,
organizational, functional and technological skills that
generate entrepreneurial rents (Teece et al., 1997).
To provide a source of competitive advantage capabili-
ties must be embedded in organizational routines (Grant,
1991) or ‘‘patterns of current practice and learning” (Teece
et al., 1997, p. 578). Teece et al. (1997) draw attention to
the value of coherence in co-ordinative and integrative
management routines such as control systems in facilitat-
ing the development of capabilities. Performance measures
are key organizational routines which act as an antecedent
to organizational capabilities (Henri, 2006).
The accounting literature has begun to explore the role
of performance measurement and control systems in en-
abling firms to exploit these fundamental drivers of perfor-
mance (Henri, 2006; Widener, 2007). This literature
explores the attributes of control systems that both enable
and constrain the effective exploitation of strategic capa-
bilities. For example, Henri (2006) investigates the role of
interactive and diagnostic uses of performance measures
in enabling and constraining the exploitation of a range
of future-oriented capabilities. We adopt a similar perspec-
tive and model an indirect relationship between perfor-
mance measurement and organizational performance via
the impact of performance measurement on decision mak-
ing and strategic capabilities. However, in addition to mod-
eling the impact of performance measure use on future
capabilities we also recognize the use of performance mea-
surement in managing current capabilities. This is critical
as firms seek both stability and dynamism.
The management accounting literature relating to con-
temporary performance measurement expresses similar
themes to the resource-based theory literature in suggest-
ing that well-designed performance measurement systems
can encourage a medium to long-term focus, investment in
694 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706
intangible sources of future growth, as well as the constant
reassessment and development of business unit capabili-
ties (Kaplan & Norton, 1996; Kaplan & Norton, 2001;
Nørreklit, 2000). Drawing on Kaplan and Norton (1996),
Chenhall (2005, p. 400) argues that strategic performance
measurement systems ‘‘assist in assessing the effective-
ness of existing strategies and provide a basis for learning
related to effecting successful strategies”. Provision of rou-
tine performance information is one of the most critical
organizational activities that affects managerial decision
making and influences perceptions of the positioning of
the organization in its competitive environment (Simons,
2000).
The feedback use of performance information facilitates
the exploitation of existing capabilities (Maritan, 2001).
Feedback on actual performance reports on the outcomes
of applying existing capabilities in existing strategic and
competitive settings. Feedback on variances between ac-
tual and expected outcomes aims to keep performance
on track, monitor for exceptions, and allow the organiza-
tion to learn how to best use its existing capabilities within
its existing operating paradigm (Preble, 1992; Stalk, Evans,
& Shulman, 1992). However, current performance is built
on existing strengths that can decay or erode over time
due to mismanagement of activities (Größler, 2007),
changes in the environment (Simons, 2000), or other fac-
tors. Thus, the resource-based perspective holds that in
addition to exploiting existing capabilities, firms must also
be committed to searching for new capabilities and being
alert to the need for strategic change in order to provide
direction for future competitive advantage (Grant, 1991;
Maritan, 2001; Teece et al., 1997). The use of performance
information for feed-forward control will help facilitate
this outcome since new opportunities may come to light
during the planning process (Barney, 1991). Rather than
monitoring for exceptions and forcing the organization to
perform to existing plans, the feed-forward use of perfor-
mance information focuses on strategic dialogue and
informing planning and goal setting.
Capabilities are also important to their own renewal
and growth. The dynamic capabilities literature suggests
that capabilities are an important cog in a system critical
to sustaining competitive advantage, that capabilities can
both develop and erode over time, and finally, that they
‘‘depend on each other” (Größler, 2007, p. 251). Strategy
development results from the understanding of how cur-
rent resources and capabilities can be applied in the face
of changing environmental conditions to enhance the cur-
rent strategic stock, and/or identify new stocks, of strategic
resources and capabilities. (Größler, 2007). That is, the
search for new capabilities is path dependent such that
responsiveness to threats and opportunities is in part a
function of the firm’s ability to leverage its existing inter-
nal and external capabilities to address changing environ-
ments (Teece et al., 1997). Gathering performance
information in relation to existing capabilities also con-
strains excessive change and enhances learning efficiency
and effectiveness (Teece et al., 1997). New capabilities
are identified in the synthesis and application of current
capabilities (Kogut & Zander, 1992) and promoted through
the deployment and reconfiguration of existing capabilities
in ways that address shifts in strategic needs (Eisenhardt &
Martin, 2000). Thus, we expect the firm’s capacity to ex-
ploit existing capabilities will directly inform management
of changes in the strategic environment that stimulate the
need to search and identify new opportunities.
To summarize, we hypothesize that the use of decision-
facilitating measures will influence the ability of an SBU to
exploit its current capabilities and identify new capabili-
ties that underlie its competitive advantage (Chenhall,
2005; Kaplan & Norton, 1996; Simons, 2000). We draw
on the strategic capabilities literature to argue that firms
seek both stability and adaptability, and that performance
measurement both reinforces existing capabilities and sig-
nals the need to challenge the status quo. We model both
the exploitation of existing capabilities and the search
and identification of new capabilities, which allows us to
provide clear insights regarding how the feedback and
feed-forward uses of performance measures differentially
affect both current and future capabilities. Thus, our sec-
ond hypothesis predicts differential outcomes based on
different uses. The feedback use of performance informa-
tion focuses on current positioning and facilitates the
firm’s ability to exploit existing capabilities. In contrast,
the feed-forward use of performance information focuses
on future positioning and acts as a catalyst to the search
for new opportunities. Consistent with Teece et al. (1997)
the search is expected to be facilitated further by the firm’s
ability to exploit its existing capabilities.
H2a. The greater the extent to which decision-facilitating
measures are used by SBU-level managers for feedback
control, the greater the capacity of the SBU to exploit
existing capabilities.
H2b. The greater the extent to which decision-facilitating
measures are used by SBU-level managers for feed-forward
control, the greater the capacity of the SBU to search for
and identify new capabilities.
H2c. The greater the capacity of the SBU to exploit existing
capabilities, the greater the capacity of the SBU to search
for and identify new capabilities.
Hypothesis three – the impact of exploitation of strategic
capabilities on performance
Consistent with contemporary performance measure-
ment literature and the resource-based perspective, we
view performance as a function of a business unit’s ability
to exploit its existing capabilities in pursuit of its current
strategy as well as its potential to adapt to emerging
opportunities and threats (Barney, 1991; Grant, 1991;
Simons, 1990). Exploiting current capabilities and being
poised to take advantage of new capabilities positions
the firm to establish a competitive advantage that is re-
quired to sustain both current and future performance
(Grant, 1991). In a cross-sectional study we are unable to
track or anticipate the future performance consequences
associated with current investments in new capabilities.
 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706
In effect, the development of new capabilities is in itself a
current outcome. We do, however, model the impact of
exploiting existing capabilities on current performance.
H3. The greater the capacity of the SBU to exploit existing
capabilities, the higher is current SBU-level performance.
Study design and method
Sampling frame
We used a mail survey to collect data from strategic
business unit (SBU) managers from a cross section of firms
in the manufacturing and service sector in Australia. We
identified 794 respondent business unit managers (from
715 unique firms) using the Kompass Company Directory.
We required that the company employ more than 200
individuals, a restriction designed to ensure the firm is suf-
ficiently large to structure according to SBUs and imple-
ment a formal performance measurement system. We
offered each respondent a $10 charitable donation on his
or her behalf to complete the survey. Survey administra-
tion took place over the course of six weeks and consisted
of the initial survey mail out, a follow up reminder post-
card and a final reminder letter and replacement survey
to non-respondents (Dillman, 2000). A total of 188 com-
pleted surveys (representing 180 unique firms) were re-
turned for a response rate of 24.58% (adjusted for
undeliverable mail). Of these 188 returned surveys we
use 183 complete surveys (from 178 unique firms) in the
analyses that follow.4 Although we generally include sur-
veys that may inadvertently miss an answer to one or more
of the survey questions, we do not use surveys if respon-
dents fail to indicate the performance measures and/or the
weighting on those measures needed to assess the common-
ality between decision-facilitating measures and those used
in evaluation.
Respondent demographics
Our respondents have worked for their current employ-
er for an average of 12 years (median = 10 years), have on
average 7.48 years of experience (median = 5.00 years) in
their current SBU and have on average held the position
as head of this unit for 4.17 years (median = 3.00 years).
The mean age of respondents is between 40 and 49 years
of age and the mean experience of the SBU managers is
on average the same as that of their superior (ranging from
a minimum of 20 years less experience to a maximum of
24 years more experience). Further, the survey asked
respondents to indicate their level of responsibility within
the firm using a generic organizational chart. Ninety-eight
percent of respondents indicated a position consistent
with managing a SBU. The descriptive statistics reported
4
Since there is some risk of non-independence we remove the five
observations that we receive from SBUs within a repeated firm and rerun
the SEM model on the reduced sample of 178 unique observations. The
statistical inferences are unchanged.
695
are consistent with respondents occupying the hierarchical
position we require to address our research questions.
Non-response bias
Of the 183 useable surveys we identify 29 early and 32
late respondents according to the return date of their sur-
vey (approximately 17.5% per group) and investigate non-
response bias by comparing the two groups across both the
demographic variables and the variables used in the mod-
el. The results are presented in Appendix A. We find no sta-
tistically significant differences between early and late
respondents for any of the demographic variables (e.g.
years of experience, years worked for current employer,
etc.) or for the variables of interest used in the model.
We conclude that the tests support the absence of signifi-
cant non-response bias.
Variable measurement
To the extent possible existing survey instruments are
used or refined to capture the variables of interest in this
study. The nature of our research questions requires that
a number of instruments also be purpose developed. All
instruments included in the final survey were evaluated
for content validity by a seven-member panel of academ-
ics. Instruments were refined until consensus was reached
that the survey items captured the theoretical construct of
interest. The survey was also reviewed for undue complex-
ity, ambiguity and clarity by three financial/accounting
managers.
We establish construct validity by further assessing
content validity, along with criterion and convergent/dis-
criminant validity (Bollen, 1989; Kline, 1998). We assess
content validity by specifying an appropriate domain of
observables based on extant literature and through the
use of validated measures where possible; criterion valid-
ity through correlation analyses which demonstrate that
the constructs are behaving in a plausible manner; and
convergent/discriminant validity through the use of factor
analyses which support the uni-dimensionality of con-
structs (Nunnally, 1978), a multitrait matrix (Churchill,
1979), and lack of significant cross-loadings in support of
discriminant validity.5 We assess internal reliability
through computation of Cronbach’s Alphas which provide
an empirical measure of the internal consistency of each
construct. To assist in establishing construct validity we first
employ factor analyses. To test our hypotheses, we then
jointly estimate a structural equation model, which consists
of a measurement model and a structural model. In this joint
model we confirm the initial measurement of our latent con-
structs. To assess the extent of common method bias, we run
a Harman’s one-factor test on the 14 survey questions that
form the constructs in the base model (i.e. use of perfor-
mance measures, strategic capabilities, and performance).
5
The diagonal of the multimatrix contains the Cronbach’s Alpha for each
latent construct, while the remainder of the table presents the bi-variate
correlation coefficients. Demonstrating that the internal reliability is
greater than the bi-variate correlation coefficients is an indicator of
discriminant validity (Churchill, 1979).
696 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706

The factor solution yields six factors with eigenvalues great- Table 2
er than one. The first factor explains 24% of the total vari- Multitrait matrix.

ance. Overall, the results support the absence of significant FEED-FWD FEEDBACK CAP_N CAP_E PERF
single-source bias (Podsakoff & Organ, 1986). Descriptive FEED-FWD 0.770
statistics for the multi-item variables are reported in Table 1 FEEDBACK 0.549*** 0.720
and the multitrait matrix is reported in Table 2. Abbreviated CAP_N 0.293*** 0.213*** 0.670
survey questions are included in Appendix A. CAP_E 0.197** 0.178** 0.270*** 0.670
PERF 0.116 0.073 0.157* 0.277** 0.520

FEED-FWD: use of performance information for feed-forward control.

Performance measurement information (commonality)
We asked respondents to list up to five measures con-
sidered most informative in managing their business unit
and to weight the relative informativeness of each of
these measures. We also asked respondents to identify
up to five measures they perceive their superiors use to
evaluate their performance and to similarly weight the
relative importance of these measures in the evaluation
process. From these responses we construct a measure
of weighted overlap (LAP_W), to capture the extent to
which decision-facilitating measures are also used in
evaluation.
In determining the extent of commonality between the
two sets of measures, the question arises as to whether
decision-facilitating measures are ‘captured in evaluation’
to the extent that they are identical to those perceived to
be used to evaluate the manager using them in decision
making, or whether some level of conceptual consistency
between the two sets of measures is sufficient. Thus for
example, revenue growth and cost reduction through qual-
ity improvement may both be important decision-facilitat-
ing measures. The use of a profit measure in evaluation is
to some extent conceptually consistent with these mea-
sures in that the use of revenue growth and quality metrics
to facilitate decisions should improve profit. Similarly,
profit may be a key decision-facilitating measure that
could be considered conceptually consistent with the use
of return-on-assets (ROA) in evaluation. Profit improve-
ment should feed through to ROA improvement. In both
of these cases the measures are arguably consistent in that
FEEDBACK: use of performance information for feedback control.
CAP_N: new capabilities.
CAP_E: existing capabilities.
PERF: business unit performance.
*
Significant at p-value <0.10 (two-tailed).
**
Significant at p-value <0.05 (two-tailed).
***
Significant at p-value <0.01 (two-tailed).
there is potential for them to achieve the same decision
outcome. However, in both cases the measures do not
‘‘match” as the broader performance measures used in
evaluation offer SBU managers more degrees of freedom
as to how decision outcomes are achieved. The manager
evaluated on profit might ignore quality metrics and reve-
nue growth and find other means of increasing profit. If
revenue growth and quality metrics are key drivers of
long-term business unit performance, then the alternative
actions chosen may compromise the fundamental compet-
itive capabilities of the business unit while delivering prof-
it. Similarly the manager evaluated on ROA may delay or
restrict new investment rather than improve profit in or-
der to increase ROA. Alternatively, reliance on ‘‘matched”
measures for evaluation and decision facilitation offers
subunit managers minimal degrees of freedom to achieve
desired outcomes. To avoid making any subjective judge-
ments about the level of conceptual consistency between
decision-facilitating and decision-influencing measures,
we examine the implications of variation in the extent to
which measures are identical across the two sets.
Construction of the weighted overlap measure involves
the manual matching of the decision-facilitating measures

Table 1
Descriptive statistics for survey items.

N Min Mean Med. Max Std. dev. Skewness Kurtosis

Feed-forward control use
Set performance goals 183 3 6.37 7 7 0.840 1.621 3.240
Guide strategy implementation 183 1 5.74 6 7 1.155 1.040 1.098
Develop action plans 183 3 6.04 6 7 0.951 0.890 0.476
Communicate aspects of strategy 183 2 5.91 6 7 1.045 1.052 1.392
Feedback control use
Promote organizational learning 182 2 4.91 5 7 1.209 0.076 0.439
Analyze the impact of past decisions 183 1 4.93 5 7 1.359 0.508 0.104
Prompt re-examination of strategies and targets 183 2 5.47 6 7 1.058 0.413 0.169
Identify need for corrective actions 183 3 6.09 6 7 0.875 0.779 0.180
New capabilities
Able to sense the need for strategic change 181 2 5.17 5 7 1.210 0.505 0.140
Able to seek new capabilities 181 1 4.79 5 7 1.325 0.534 0.043
Existing capabilities
Able to exploit its current capabilities 182 2 5.29 5 7 1.085 0.485 0.348
Able to renew its current capabilities 173 2 4.81 5 7 1.231 0.462 0.034
Performance
Overall financial performance relative to competitors (reverse coded) 176 1 3.06 3 7 1.218 0.294 0.581
Overall performance of business unit relative to expectations 180 2 4.78 5 7 1.194 0.478 0.082
 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706
and decision-influencing measures lists provided by each
respondent. Consensus on this ‘matching’ process was
reached between the three researchers. We summed the
weights on the identified measures to form LAP_W.6
LAP_W ranges from 0 to 100, with a mean of 62.5 (med-
ian = 65).7 We admitted limited discretion in this matching
process, treating all dissimilar measures as non-overlapping.
The limited discretion we used related only to very minor
changes in terminology between the two lists (e.g. ‘cost con-
trol’ in the decision-facilitating list and ‘expense control’ in
the same manager’s decision-influencing list were consid-
ered a match).8
The calculation of LAP_W, necessary to make the data
tractable for use in hypothesis testing, results in the loss
of rich information as to the nature of performance mea-
sures reported by respondents. As such we explore the nat-
ure of the reported performance measures in the results
section and provide descriptive information to assist the
reader in contextualizing the results.
Use of performance measurement information
We measure feedback and feed-forward use of perfor-
mance measurement information using eight questions
based on extant literature (Bisbe & Otley, 2004; Chenhall,
2005; Emmanuel et al., 1990; Ittner, Larcker, & Randall,
2003; Kaplan & Norton, 1996; Simons, 2000; Sprinkle,
2003). Respondents were asked to rate the extent to which
they actually use the decision-facilitating measures to: (a)
set performance goals for the business unit and/or business
unit employees; (b) guide strategy implementation; (c)
promote organizational learning; (d) analyze the impact
of past decisions; (e) prompt re-examination of strategies
and targets; (f) develop action plans; (g) communicate
important aspects of the business unit’s strategy; and (h)
identify the need for corrective actions. Items a, b, f and g
load on factor 1, which we label feed-forward control
(FEED-FWD) while items c–e, and h load on factor 2, which
we label feedback control (FEEDBACK). Our feed-forward
use construct captures the use of performance measures
as a means to alert managers to the future through the
communication of strategy and development of goals and
action plans (Emmanuel et al., 1990). This factor contains
items consistent with the theoretical attributes of feed-for-
ward control identified by Nørreklit (2000), which includes
6
To illustrate the calculation of LAP_W consider the following: Respon-
dent A reports that sales, customer satisfaction, staff satisfaction, budget/
expenses, and business improvement are the five measures considered
most informative for managing their operations while their superior
evaluates them on sales, profit, customer satisfaction, safety, and business
improvement. The measures that match are sales, customer satisfaction,
and business improvement. The respondent assigned these three measures
weights of 30%, 20%, and 15%, respectively, in their decision-facilitating
role. Thus LAP_W is 65%, which represents the sum of the weights on the
decision-facilitating measures that are also used in evaluation. We also test
our model using an ‘‘unweighted” overlap variable and find that the
statistical inferences are unchanged.
7
Sixteen firms report that there is no overlap in the use of DI and DF
performance measures.
8
Some confidence as to the reliability of the matching process is
provided by the high consensus among the three authors when indepen-
dently completing this task. We differed in the coding of 13 out of a total
884 reported measures across all surveys for an agreement rate of 98.53%.
697
clarifying and communicating strategy and planning and
target setting. Our feedback use construct captures the var-
iance between actual outcomes and stated objectives as
well as the learning generated by these variances
(Emmanuel et al., 1990). This construct is aligned with
the attributes of feedback control discussed by Nørreklit
(2000) which include supplying strategic feedback, strat-
egy review and learning. Both the feed-forward and feed-
back constructs are uni-dimensional. The constructs
capture 59% of the explained variance, and the Cronbach’s
Alphas are 0.77 and 0.72, respectively.
Strategic capabilities
We draw on the principles of resource-based theory
and the dynamic capabilities literatures to purpose devel-
op a measure of the firm’s ability to exploit and renew
distinctive firm competencies (Day, 1994; Teece et al.,
1997). We asked respondents to rate the extent to which
their business unit is able to: (a) exploit current capabil-
ities; (b) renew current capabilities; (c) sense the need
for strategic change; (d) seek new capabilities in light
of the need for strategic change; and (e) take advantage
of new opportunities as they arise. A factor analysis of
these five items reveals that items c and d load on factor
1, which we call ‘‘new capabilities” (CAP_N) while items a
and b load on factor 2, which we call ‘‘existing capabili-
ties” (CAP_E). We exclude item e as it fails to load on
either factor. Overall, the constructs capture 69% of the
explained variance and the Cronbach’s Alphas are 0.67
and 0.67, respectively. CAP_N and CAP_E are positively
correlated 0.376 (p < 0.01) and 0.352 (p < 0.01), respec-
tively, to questions that measure the extent the SBU
can respond quickly to changes in the external environ-
ment. CAP_N and CAP_E are also positively correlated
0.212 (p < 0.01) and 0.275 (p < 0.01), respectively, with
the extent the SBU’s available performance information
enhances its ability to respond to changes in the external
environment. These correlations help demonstrate crite-
rion validity.
Performance
We capture current business unit performance by ask-
ing respondents to rate their performance over the past
year relative to competitors (reverse scored where
1 = 20% better than competitors, 7 = 20% worse than com-
petitors); and overall performance of the business unit rel-
ative to expectations (where 1 = poor, 7 = outstanding). We
use a relative measure of performance as absolute perfor-
mance is not meaningfully comparable across cases and
over time (Andrews, Carpenter, & Gowen, 2001). Our rela-
tive performance measure is consistent with the literature
that commonly measures performance relative to compet-
itors and/or expectations (Chapman & Kihn, 2009; Henri,
2006; Pizzini, 2006; Widener, 2007).
A factor analysis on the two items reveals one factor
which we label ‘‘performance” (PERF). The construct cap-
tures 67% of the explained variance and the Cronbach’s Al-
pha is 0.52. We validate the use of performance by
establishing convergent validity with an alternative mea-
sure of performance. We find that PERF is significantly cor-
related (r = 0.276, p < 0.01) with a measure capturing the
698 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706
respondents’ performance relative to its competitors with
respect to: (a) market share; (b) profit; and (c) rate of sales
growth, which demonstrates criterion validity.9 We also
test the sensitivity of our results to alternative measures of
performance (see next section).
Results
Decision-facilitating and decision-influencing performance
measures
We begin by providing a brief descriptive analysis of the
nature of performance measures reported by respondents
as decision-facilitating and decision-influencing to assist
in contextualizing the findings of this study.
Respondents provided 884 informative performance
measures. All respondents listed at least two measures
and 87.98% of respondents listed five measures. They pro-
vided 832 decision-influencing measures. All respondents
listed at least two measures and 72.68% listed five mea-
sures. To make tractable the range of reported measures
it is necessary to adopt a form of classification. We devised
a coding schema that distinguishes five key types of perfor-
mance measures: aggregate financial (e.g. profit); disag-
gregate financial (e.g. variances); customer-focused (e.g.
customer satisfaction); internal process (e.g. quality); and
people, learning and growth (e.g. employee satisfaction).
These categories are broadly consistent with those used
in the Balanced Scorecard literature and are described
more fully in Appendix C.
We find that the types of measures identified by
respondents as decision-facilitating and decision-influ-
encing are reflective of the use of broad-based
performance measurement systems. The lists of deci-
sion-facilitating performance measures include at least
three or more types of performance measures in 66.12%
of cases and the lists of performance measures used in
evaluation include three or more types of performance
measures in 67.76% of cases. Examining the composition
of performance measures used in decision-facilitating
versus decision-influencing roles (see Appendix C) re-
veals that aggregated financial (AF) and people, learning
and growth (PLG) measures are used more extensively
in the decision-influencing role than the decision-facili-
tating role, while disaggregate financial (DAF) and cus-
tomer-focused (CF) measures are used more in the
decision-facilitating role than the decision-influencing
role (all means significantly different at p < 0.00). Only
the mean difference for internal process (IP) measures
between the decision-facilitating and decision-influenc-
ing roles is insignificant (p = 0.202). These performance
measurement patterns are consistent with those ob-
served by Ittner, Larcker, and Randall (2003). While
Ittner, Larcker, and Randall (2003) use different catego-
ries of measures and restrict their sample to financial
services firms, they also document the use of a broad
9
This is a uni-dimensional variable with explained variance of 58% and a
standardized Cronbach’s Alpha of 64%.
set of financial and non-financial measures for both
problem identification (decision facilitation) and perfor-
mance evaluation (decision influence). Similar to our
findings, they find a heavy weight on short-term finan-
cial measures for evaluation and note that these mea-
sures are significantly less important than customer-
focused and operational measures in capturing value
drivers of the business. They also document both similar-
ities and differences in the extent of use of particular
categories of performance measures between their prob-
lem identification and evaluation roles.10
To test whether these patterns are similar across
instances where decision-facilitating and decision-influenc-
ing measures reported by respondents vary in commonality
(i.e. situations of high and low weighted overlap) we split
the sample at the mean weighted overlap and repeat the
above analysis (see Appendix D).11 We find similar patterns
in relative weight on decision-facilitating and decision-influ-
encing uses across the range of categories of measures in con-
ditions of both high and low commonality. We also examine
the similarity of the composition of decision-influencing mea-
sures and decision-facilitating measures, separately, in high
and low levels of weighted overlap. These tests reveal two sig-
nificant differences. First, where overlap is high the list of
decision-facilitating measures reported by respondents in-
cludes significantly more AF measures than where overlap is
low (t = 2.726, p = 0.007). Second, where overlap is low the list
of decision-influencing measures reported by respondents in-
clude significantly more PLG measures than where overlap is
high (t = 2.068, p = 0.040).
The above analyses suggest important performance
measurement system implications that inform the con-
text of the model testing that follows. First, respondents
typically report the use of broad-based performance mea-
surement systems that reflect an array of financial and
non-financial measures.12 In this sample AF measures are
more important in the decision-influencing role than the
decision-facilitating role. Conversely, DAF and CF measures
are more evident in the decision-facilitating role than the
decision-influencing role. These results are not unexpected.
Both results are consistent with AF measures being
weighted highly in evaluation, possibly due to their scope
in capturing outcomes of a range of decisions. Nonetheless,
both SBU managers and their superiors use a range of mea-
sures from all categories such that aggregate financial mea-
sures are common, but do not dominate either role. It is
also evident that when AF measures are considered deci-
sion-facilitating, the overlap between decision-facilitating
and decision-influencing measures tends to be higher. As
we have identified a potential confounding effect of the ex-
tent of reliance on AF measures in our model, we examine
10
Ittner, Larcker, and Randall (2003) appear to observe more consistency
than we do between measures across roles, which is perhaps not surprising
given their single-industry focus.
11
The mean weighted overlap value (62.5%) is consistent with the median
weighted overlap value of 65%.
12
Note that the number of measures that overlap between the DI and DF
roles is significantly and positively correlated with LAP_W (r = 0.867,
p < 0.01), thus indicating that higher overlap cases are drawing on a range
of measures in both DF and DI roles and that overlap is not driven by cases
with one or two measures in both categories which happen to overlap.
 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706 699

H2a (0.270**)

Feedback
Existing Capabilities
H1 (0.197**) Control Use H3 (0.454***)
Decision-Facilitating
Performance Measures

Commonality Current SBU-Level

H2c (0.360**)
(Overlap) Performance

Decision-Influencing
Performance Measures
H1 (0.256***) Feed-Forward
New Capabilities
Control Use
H2b (0.340***)

*** **
Fig. 2. Depiction of significant results – structural (base) model, showing standardized coefficients. , p-values significant at p < 0.01, 0.05 respectively
(two-tailed).

the robustness of our results after controlling for this Table 3

effect.13 Measurement model.

Unstandardized Standardized
loading loading
Feed-forward control use
Hypothesis testing
Set performance goals 0.544*** 0.593
Guide strategy implementation 1.000 0.792
We use the AMOS 5.0 software program, with maxi- Develop action plans 0.708*** 0.681
mum likelihood estimation technique, to estimate the base Communicate aspects of strategy 0.743*** 0.651
model illustrated in Fig. 1. We use structural equation Feedback control use
modelling (SEM) since it allows us to explicitly model mea- Promote organizational learning 0.620*** 0.501
surement error of the latent dependent and independent Analyze the impact of past 1.000 0.716
decisions
variables and model multiple latent dependent variables.
Prompt re-examination of 0.768*** 0.707
Our sample is 183 observations14 and we estimate 35 strategies and targets
parameters, resulting in a subjects-to-parameter ratio of Identify need for corrective 0.536*** 0.597
5.23, which exceeds the rule of thumb of 5:1 (Hair, Anderson actions
New capabilities
(Jr.), Tatham, & Black, 1995).15 We show significant results in
Able to sense the need for 0.924*** 0.702
Fig. 2 and report the results of the measurement model in strategic change
Table 3 and the structural model in Table 4.16 Able to seek new capabilities 1.000 0.694
Existing capabilities
13
We control for the weighted overlap of aggregate financial measures Able to exploit its current 0.935*** 0.719
(LAP_W_AF). We implement this control by including paths from capabilities
LAP_W_AF to each of the performance measure uses. We find that the Able to renew its current 1.000 0.695
statistical inferences are unchanged when controlling for LAP_W_AF and capabilities
the paths for the base model as presented in Fig. 2 remain qualitatively Performance
unchanged. This provides assurance that the weight placed on aggregate Overall financial perf. relative to 0.594** 0.453
financial measures is not driving the results of our model. competitors (reverse coded)
14
Boomsma and Hoogland (2001) suggest a sample size ±200 is sufficient Overall performance of business 1.000 0.770
for adequate maximum likelihood estimation. unit relative to expectations
15
To determine the extent to which our results are sensitive to potential
***
issues related to sample size we treat our constructs as manifest variables p-value significant at p < 0.01.
**
using factor scores created using SPSS and run only the structural model in p-value significant at p < 0.05.
AMOS. This results in an estimation of 13 parameters and a subjects-to-
parameter ratio of 14.1. The statistical inferences are unchanged. We also
bootstrap the results (200 samples with replacement), which does not Measurement model and assessment of model fit
assume multivariate normality (nor does it rely on asymptotic distribution
theory) to estimate p-values (Kline, 1998). We find that the results are We assign (i.e. identify) each latent variable a scale by
qualitatively unchanged. Thus we conclude that our results are not
setting the loading of one item to 1.0 since the latent vari-
sensitive to issues of sample size and normality.
16
The Mahalanobis D2 scores indicate that one observation may exert ables are not directly measured (Kline, 1998). In Table 3 we
undue influence on the determination of model parameters. We exclude report the results of the measurement model. This confir-
this observation, rerun the base model, and conclude that statistical matory analysis yields standardized loadings greater than
inferences are not changed. We note that our data do not differ strongly 0.50 (with the exception of one performance item that is
from univariate normality; the maximum absolute values for skewness and
kurtosis are 1.621 and 3.240, respectively, well within suggested ranges
0.453), all of which are significant (p-value <0.05), which
(Kline, 1998). The bi-variate correlation coefficients reported in Table 2 provides evidence of convergent validity (Hair et al.,
show that multi-collinearity is not likely. 1995). In Table 4, we report the results of the structural
700 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706

Table 4 for both feedback (p < 0.05) and feed-forward (p < 0.01)
Base structural model. This table presents the results of a structural control. This finding is consistent with literature suggest-
equation model based on the theoretical model depicted in Fig. 1. The
standardized coefficients are presented.
ing that the tendency to only partially capture decision-
facilitating performance measurement information in
Independent Dependent Direction Coefficient evaluation mechanisms potentially distorts decision mak-
variable variable
ing by increasing the salience of those decision-facilitating
LAP_W FEEDBACK + 0.197** measures that are incorporated in evaluation relative to
LAP_W FEED-FWD + 0.256***
FEEDBACK CAP_E + 0.270**
those that are not. While the role of evaluation mecha-
FEED-FWD CAP_N + 0.340*** nisms in directing effort is widely acknowledged, this
CAP_E CAP_N + 0.360** study isolates the specific impact of evaluation on the ex-
CAP_E PERF + 0.454*** tent of use of measures designed for decision facilitation.
Model fit Thus, evaluation is an important link in the control struc-
X2 186.709 ture of organizations (Ferreira & Otley, 2009) and this find-
p-value 0.000 ing reinforces the need for consistency between the
DF 85 decision-facilitating performance system and those perfor-
CMINDF 2.197
mance measures used by superiors in the evaluation
RMSEA 0.081
GFI 0.892
process.
CFI 0.831 In turn the increased use of decision-facilitating mea-
sures for feedback control is shown to be positively associ-
LAP_W: extent of commonality (weighted) between decision-facilitating
measures and decision-influencing measures.
ated with the firm’s ability to exploit existing strategic
FEED-FWD: use of performance information for feed-forward control. capabilities (p < 0.05), while correspondingly the increased
FEEDBACK: use of performance information for feedback control. use of such measures for feed-forward control is positively
CAP_N: new capabilities. associated with the firm’s capacity to identify and develop
CAP_E: existing capabilities.
new strategic capabilities (p < 0.01). These two results pro-
PERF: business unit performance.
***
Significant at p-value < 0.01 (two-tailed). vide support for H2a and H2b respectively. As the firm’s
**
Significant at p-value < 0.05 (two-tailed). capacity to exploit existing capabilities increases so too
does its ability to pursue new capabilities providing sup-
port for H2c (p < 0.05). These findings suggest that encour-
model. In sum, the standard measures of model fit support aging managers to incorporate performance measures
the hypothesis that the relationships suggested by the considered useful for managing their business into their
measurement and structural equation model are accept- decision making processes is important in directing their
able.17 We perform an additional robustness test for alterna- attention toward improving not only the mobilization of
tive models and model fit later in this section. resources for immediate results, but also toward the iden-
In general, we conclude that the extent to which man- tification and development of longer-term sources of com-
agers perceive decision-facilitating measures are used in petitive advantage.
their evaluation is positively associated with the use of Finally, we find support for H3 (p < 0.01) in that there is
those performance measures for both feedback and feed- a propensity for greater current performance outcomes in
forward control purposes. Feed-forward control use is pos- firms better able to exploit their existing capabilities.18
itively associated with the firm’s ability to identify new Overall these results suggest that higher levels of common-
strategic capabilities while the use of performance mea- ality between decision-facilitating and decision-influencing
sures for feedback control purposes is positively associated sets of measures is associated with greater use of
with the firm’s ability to exploit its existing capabilities. performance measurement information, the development
Existing capabilities also influence the firm’s new capabil- of strategic capabilities and higher subunit performance
ities as well as drive its current performance. We now turn outcomes. Taken together these results provide cross-
to a discussion of the specific hypotheses. sectional evidence indicating several implications of varia-
tion between decision-facilitating and decision-influencing
performance metrics.
Discussion of hypotheses and path coefficients

Table 4 reports the path coefficients for each of our
hypotheses of interest and provides evidence broadly con-
sistent with our proposed model. First, the results indicate
that greater commonality between decision-facilitating
and decision-influencing performance measures encour-
ages managers to use decision-facilitating measures more
Additional analyses – base model
We perform a number of additional analyses in order to
ensure the robustness of the results of our base model. In
hypotheses one through three we model the impact of
commonality between decision-facilitating measures and

17
An insignificant Chi-square (Joreskog, 1969), a CMINDF ratio less than 5
(Wheaton, Muthen, Alwin, & Summers, 1977), a CFI and GFI close to 1 (Hu &
Bentler, 1999), and an RMSEA of less than 0.08 (Browne & Cudeck, 1993)
indicates good fit. Although we report the Chi-square test statistic, recent
evidence shows that the Chi-square test statistic is sensitive to sample size
and may be misleading (Byrne, 2001).
18
To test the robustness of our model to variations in the performance
variable, we also run the model with performance measured as the change in
performance over the past year with respect to market share, profit and
return on investment; and a second time for performance relative to
competitors for profitability, rate of sales growth, and market share. We find
that our statistical inferences are qualitatively unchanged.
 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706
those used in evaluation on performance outcomes via
their increased use in decision making, impacting in turn
on the capacity of the SBU to exploit current and future
capabilities. An alternative perspective on the impact of
commonality between decision-facilitating measures and
those used in evaluation is that commonality directly influ-
ences measured performance outcomes. The use of mea-
sures in evaluation provides SBU-level managers with a
direct incentive to improve their reported performance
on these metrics (Ittner, Larcker, & Meyer, 2003). The
mechanisms used to improve reported performance may
include the decision responses that we have hypothesized.
Alternatively, they may also include manipulation, gaming
or simple heuristic responses to a performance metric per-
ceived to be ‘‘off target”. If the measures used in evaluation
are also decision-facilitating, then such actions may coinci-
dentally produce desired performance outcomes. To cap-
ture the potential for managers to influence performance
outcomes by using mechanisms other than those we cap-
ture in our measure of the range of decision options, we
test the direct link between the extent of commonality be-
tween decision-facilitating measures and those used in
evaluation and performance outcomes. There is no support
for this relation. That is, there is no evidence of a direct im-
pact of incorporating decision-facilitating measures in
evaluation on performance outcomes. The impact on per-
formance is indirect via the impact of performance mea-
sures on decision making and the impact of decision
making on the ability to exploit current capabilities.
We also perform an additional (more complete) test of
alternate models and model fit by estimating a ‘‘least con-
strained” structural model. The least constrained model is
a structural model in which all unidirectional paths are
estimated (Anderson & Gerbing, 1988). We then estimate
a series of nested models by constraining one path coeffi-
cient in each subsequent model by setting the path coeffi-
cient equal to zero. We choose the least significant path in
the structural model to constrain in each subsequent mod-
el. Since the models are nested, we use the Chi-square dif-
ference test to determine which model is most appropriate
(Anderson & Gerbing, 1988; Kline, 1998). An insignificant
Chi-square indicates that the model has not been overly
trimmed and the more parsimonious model (i.e. the model
with the constrained path) is better-fitting. This approach
is suggested in the psychology literature (see for example
Anderson & Gerbing, 1988) and has been used previously
in the accounting literature (Abernethy & Lillis, 2001).
One advantage to this method is that it allows alternative
models to be tested against the preferred theoretical model
(Anderson & Gerbing, 1988; Kline, 1998). The parsimoni-
ous model arrived at through this estimation technique is
well-fitting with a GFI = 0.910, a CFI = 0.930, and an
RMSEA = 0.052, and substantiates the base model shown
in Fig. 2. It also reveals the existence of a relationship
between the use of decision-facilitating performance mea-
sures for feedback control and the use of those perfor-
mance measures for feed-forward control (p < 0.01).
While adopting different ‘use’ constructs this additional re-
sult is consistent with Widener (2007), who found that the
interactive use of performance measures influences the
diagnostic use of performance measures. Moreover, it is
701
consistent with Henri (2006) who found empirical
evidence of the dynamic tensions between interactive
and diagnostic uses of performance measures theorized
by Simons (2000).
Finally, as subjectivity, decision rights and information
asymmetry are shown often to influence the use of per-
formance measures in evaluation (Baiman & Demski,
1980; Baiman & Rajan, 1993) we check for moderating ef-
fects of these variables on the extent to which decision-
facilitating measures used in the evaluation process affect
the use of those measures.19 We do not find effects strong
enough to conclude that decision rights, information asym-
metry, or subjectivity is a moderating variable in this rela-
tion.20 Alternatively, to the extent that a principal
determines the set of decision-facilitating measures to be
used by subordinate managers based on their decision
rights, the extent of information asymmetry, and the level
of subjectivity to be employed in evaluation, as well as
determining the measures to be used in evaluation, then
the extent of overlap between the two sets of measures
may be co-determined by the principal’s decisions (Baiman
& Demski, 1980; Bouwens & van Lent, 2007). Thus, we test
for the impact of decision rights, information asymmetry,
and subjectivity on the level of commonality or overlap.
None of these variables are found to significantly explain
the extent of overlap between decision-facilitating and
decision-influencing measures.
Conclusions
In this study we investigate two means by which con-
temporary performance measurement systems may be ex-
pected to impact firm performance. First, we investigate
the way in which the interplay between performance mea-
surement and evaluation impacts on managerial use of
performance measurement information. There is relatively
little empirical evidence to determine whether such sys-
tems will achieve their intended objectives if they are
not reflected in evaluation and reward schemes (Kelly,
2007; Ullrich & Tuttle, 2004). We hypothesize that the ex-
tent to which decision-facilitating measures are captured
in evaluation mechanisms will influence the use of those
measures and in turn affect organizational outcomes. Sec-
ond, we consider the implications of the decision making
use of contemporary performance measurement systems
19
We measure subjectivity using three questions that ask the extent to
which performance is evaluated on performance measures (reverse coded),
a subjective evaluation, and effort (Cronbach’s Alpha = 0.65); information
asymmetry using a six-item instrument developed by Dunk (1993)
(Cronbach’s Alpha = 0.78); and decision rights using a five-item instrument
developed by Gordon and Narayanan (1984) and adapted by Abernethy,
Bouwens, and van Lent (2004) (Cronbach’s Alpha = 0.74).
20
We find that when decision rights and information asymmetry are high
the relation between LAP_W and FEEDBACK is positive and significant
(p < 0.10) but when decision rights or information asymmetry are low then
the relation between LAP_W and FEEDBACK is not significant. We also see
that when subjectivity is low the relation between LAP_W and FEEDBACK is
positive and significant (p < 0.05) but when subjectivity is high the relation
between LAP_W and FEEDBACK is not significant. However, these effects
are not strong enough to make the model better fitting when either path is
allowed to vary, thus we cannot conclude that decision rights, information
asymmetry, or subjectivity is a moderating variable.
702 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706
for exploiting and developing strategic capabilities for
sustained competitive advantage. Consistent with studies
that adopt a resource-based perspective we hypothesize
that the impact of contemporary performance measure-
ment systems on organizational performance will be in
fact be indirect via the effective management of strategic
capabilities. The data collected for this study support a
structural model in which the extent to which decision-
facilitating measures are captured in evaluation mecha-
nisms influences the use of those measures, which in turn
impacts on the strategic capabilities and performance of
the business unit, thus providing preliminary evidence
on the processes through which contemporary perfor-
mance measurement systems can influence performance
outcomes.
The findings of this study are consistent with persistent
themes in the strategic performance measurement litera-
ture that it is important to broaden evaluation protocols
in line with the increasing use of broad-based decision-
facilitating performance measurement systems. The
inclusion of decision-facilitating measures in evaluation
validates the importance of those measures and ensures
their use in decision making. These results would caution
against empirically documented tendencies to either focus
evaluation on financial outcome measures, or to narrow
the set of measures used in evaluation in response to con-
cerns regarding comparability, validity and objectivity of
many strategic performance measures (Banker et al.,
2004; Lipe & Salterio, 2000; Malina & Selto, 2004). These
concerns, in combination with the cognitive limitations
of evaluators, may systematically reduce the comprehen-
siveness of measures used in evaluation (Lipe & Salterio,
2000). Our findings suggest that such tendencies may sig-
nificantly compromise the effectiveness of strategic perfor-
mance measurement systems in practice.
This study also demonstrates the important implica-
tions of using performance measures for both feedback
and feed-forward uses. By modelling both the exploitation
of current capabilities and the search for new capabilities
as theorized in the dynamic capabilities literature, we are
able to clearly see that the two uses of performance mea-
sures serve two distinctly different purposes in supporting
strategy implementation and development. The feedback
use of performance measures significantly supports the
exploitation of current capabilities, while the feed-forward
use of performance measures supports the search for and
identification of new capabilities. This finding comple-
ments well the findings of Henri (2006). Henri (2006) doc-
uments the potential adverse impact of diagnostic control
on the development of new capabilities but does not doc-
ument the positive impact of feedback control that we
identify in relation to the exploitation of existing capabili-
ties. This provides an alternative perspective on the
dynamic tension that exists in both performance measure-
ment (diagnostic/interactive; feedback/feed-forward) and
in the management of capabilities (current and new).
Moreover, in a supplemental analysis, we find that feed-
back and feed-forward uses of performance measures are
related, consistent with the findings of Widener (2007)
who finds a relation between diagnostic and interactive
uses. Taken together these studies reflect the importance
of striking a balance in the use of performance measure-
ment to support both current and future capabilities as a
means of securing competitive advantage in a changing
competitive environment.
Our findings are of course subject to several limitations.
First, while we took great care to validate our survey
instrument, we acknowledge the difficulty of obtaining
reliable data relating to the influence of information on
decision making through the use of a mail survey. In addi-
tion, some of our key measures were purpose developed
and thus may benefit from further validation in future
studies. Other limitations commonly associated with sur-
vey research relate to the potential for non-response and
common-rater bias. However, we have sought to minimize
these effects through both careful instrument design and
administration, and through the assessment of evidence
of bias in the data collected. Finally we test for a limited
range of performance measures and uses across a broad
range of industry and organizational settings. Due to sam-
ple size limitations, we are unable to fully test the sensitiv-
ity of the model to industry and other contextual effects.
The identification in this study of significant joint ef-
fects between decision-facilitating and decision-influenc-
ing roles of performance measures, suggest the need for
further research seeking to understand more of the ways
these roles of information impact on decision making,
especially in situations where the roles are potentially con-
flicting rather than mutually reinforcing. It would be inter-
esting to examine in greater depth the interaction among
performance measurement roles in the context of specific
performance measurement protocols focused more or less
intensely on financial measures, as well as the impact of
the interaction on specific individual decision uses such
as learning or plan revision, rather than overall use
patterns.
Finally, this study adds to the literature which explores
the process by which performance measurement systems
influence organizational outcomes. The incorporation of
strategic capabilities as a mediator in this relationship is
emerging as an important development in the literature
(Henri, 2006; Widener, 2007). Our study highlights the
importance of current capabilities in enhancing firms’ stra-
tegic readiness but does not explore the process by which
management control systems inform the further develop-
ment of new strategic opportunities into sustainable com-
petitive advantage.
Acknowledgments
We are grateful to Margaret Abernethy, Shannon
Anderson, Henri Dekker, Frank Moers, Julia Mundy, Martyn
Shoute, the two reviewers, and seminar participants at the
University of Arizona, Erasmus University, Michigan State
University, the University of Melbourne, Monash Univer-
sity, the University of New South Wales, the University of
Technology – Sydney, Amsterdam Vrije Universitiet, the
2007 AAA Annual Meeting (Chicago), and the 2007 EAA
Congress (Lisbon) for helpful comments; and to Andrew
Leslie for invaluable research assistance. This research is
supported by a University of Melbourne, Faculty of Busi-
ness and Economics research grant.
 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706 703

Appendix A c. Develop action plans

d. Communicate important aspects of the business
Test of non-response bias (using late respondents) of the business unit’s strategy
Variable Early Late Feedback use of performance measurement information
respondents respondents 4. Please rate the extent to which you actually use the
(n = 29) (n = 32) business unit performance measures identified
Descriptive variables above to (scale of 1 = not at all, 4 = to some extent,
Years experience in 20.34 18.38 7 = to a great extent):
industry a. Promote organizational learning
Years worked for current 12.31 11.50 b. Analyze the impact of past decisions
employer c. Prompt re-examination of strategies and targets
Years worked in current 8.03 6.88 d. Identify the need for corrective actions
SBU
New strategic capabilities
Years held current 5.14 3.88
5. Please rate the extent to which your business unit is
position
(1 = not at all, 4 = to some extent, 7 = to a great
Approx. number of full- 459.10 499.10
extent):
time employees in
a. Able to sense the need for strategic change
SBU
b. Able to seek new capabilities in light of the need
Constructs of interest for strategic change
Weighted overlap 70.34 61.25
Existing strategic capabilities
Feed-forward control use 6.27 5.98
6.Please rate the extent to which your business unit is
Feedback control use 5.24 5.32
(1 = not at all, 4 = to some extent, 7 = to a great
Capabilities new 5.21 5.13
extent):
Capabilities current 5.33 5.03
a. Able to exploit its current capabilities
Performance 5.02 4.66
b. Able to renew its current capabilities
** *
, Means are significantly different at p-value <0.05, 0.10, respectively.
+
Means are significantly different at p-value = 0.103. Performance
7. How would you rate your overall financial
performance relative to your competitors over the
past year? (reverse scale of better than competitors
Appendix B by 1 = more than 20%, 2 = 11–20%, 3 = less than 11%,
4 = relatively constant, and worse than competitors
Abbreviated survey questions.21 by 5 = less than 11%, 6 = 11–20%, and 7 = more than
Performance measurement information (commonality) 20%).
1. Identify the five (5) performance measures that are 8. How would you rate the overall performance of
most informative to you in managing your business your business unit relative to expectations? (scale
unit. Please weight the measures according to their of 1 = poor, 4 = about average, 7 = outstanding)
relative informativeness.
2. Identity the five (5) performance measures that are
used by your superior to evaluate your
performance. These measures may or may not Appendix C
overlap with those identified earlier as being as
informative for managing your business unit. Please Distribution of weighted performance measures by type
weight the measures according to their relative
importance in evaluation. Aggregate financial measures (AF) are those that capture
Feed-forward use of performance measurement financial ‘outcomes’ such as measures of net profit, profit-
information ability and return on funds employed. Disaggregate financial
3. Please rate the extent to which you actually use the measures (DAF) are financial measures that are not neces-
business unit performance measures identified sarily ‘outcomes’ and measures such as dollar measures of
above in Q1 to (scale of 1 = not at all, 4 = to some efficiency (e.g. variances) and employee productivity (e.g.
extent, 7 = to a great extent): sales dollars per employee). Thus, DAF measures are some-
a. Set performance goals for the business unit and/or what similar to internal process measures, except they are
business unit employee specified in financial terms. Non-financial measures that
b. Guide strategy implementation monitor key aspects of internal functioning are coded as
internal process (IP) measures and include measures of effi-
ciency, productivity, quality, safety, lead times, inventory,
innovation and new product development. Customer-fo-
21
Survey questions are shown in factor structure rather than original cused (CF) measures are those focused on assessing the
questionnaire sequence. way the business unit appears to customers, for example
704 J. Grafton et al. / Accounting, Organizations and Society 35 (2010) 689–706

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Appendix D

Distribution of weighted performance measures across decision-facilitating and decision-influencing roles in cases of high and low
weighted overlap
Decision-facilitating measures Decision-influencing measures
Type Percentage Mean Mean diff. Type Percentage Mean
Panel A – high weighted overlap (mean > 62.502), n = 96
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IP 22.51 22.78 0.326 IP 22.99 23.34
CF 9.06 9.01 1.368* CF 7.78 7.74
PLG 8.21 7.94 1.947** PLG 9.98++ 9.76
UN 1.96 UN 1.50
Totals 100.00 100.00

Panel B – low weighted overlap (mean < 62.502)

AF 18.89+++ 18.87 10.904*** AF 29.76 29.76
DAF 31.47 31.43 9.337*** DAF 21.99 21.99
IP 28.07 28.04 4.843 IP 23.53 23.53
CF 9.74 9.73 3.765** CF 5.90 5.90
PLG 10.28 10.27 3.886* PLG 13.98++ 13.98
UN 1.55 UN
Totals 100.00 100.00
AF: aggregate financial measures.
DAF: disaggregate financial measures.
IP: internal process measures.
CF: customer-focused measures.
PLG: people, learning and growth measures.
UN: unidentified measures.
*
Means are significantly different at p-value <0.10.
**
Means are significantly different at p-value <0.05.
***
Means are significantly different at p-value <0.01.
++
Percentage of type of measures between panels is significantly different at p-value <0.05.
+++
Percentage of type of measures between panels is significantly different at p-value <0.01.
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