Study On Strategy-based Performance Evaluation Of Business Units

Since the 80s of the 20th Century, major changes have occurred in enterprise business environment and management manners, which make increasingly apparent the limitation of the traditional performance measurement system based on financial measures. For this reason, many academics and practitioners made great efforts to develop new performance evaluating measures. There are two main ideas on the exploration of improving the performance evaluation since the 90s of the 20th Century. The first way is to use new financial measures such as EVA reflecting economics income, and the other way is adding nonfinancial measures being forward-looking and reflecting companies'core competence to financial measures. EVA can reveal enterprises'capability creating the value added and stockholder wealth, but still can't overcome the inherent defects of the financial indicators. The Balanced Scorecard (BSC) put forward by Kaplan and Norton in 1992 advocates the combination of nonfinancial measures and financial measures and the use of multiple performance measures, evaluating companies'business performance in the round from four different and interrelated aspects including financial, customer, internal process, learning and development dimensions, thus overcoming effectively the shortcoming of the traditional performance evaluation. Meanwhile, the BSC translates the strategic goals into a series of specific performance evaluation measures, helping all departments and employee understand and complement the business strategy better. Hence, not only is BSC an all-sided performance evaluation system, but also an effective strategy complementation tool. Since its creation, BSC has been widely used in more and more companies.After World Warâ…¡, enterprises around the world expanded their scale rapidly and formed a lot of diversified and multinational large companies or enterprise groups. In this case, decentralized management based on the division structure became the main form of diversified companies to manage their internal organizations. Decentralized management authorizes each business unit manager the right of decision making according to its product and marker features. Doing this can improve largely the marker responding speed and decision-making effectiveness, and fully mobilize the enthusiasm and creativity of business unit managers. On the other side, decentralized management aggravates the extent of information asymmetry between upper and lower managers, making the principle-agent problem more prominent. Evaluating the operating performance of business units is an important means to promote business unit managers adopting decisions and behaviors in line with company entire interests and lower agency costs.Current academic research on performance evaluation is basically related to company as a whole and individual employee, neglecting performance evaluation for business units. It is not enough to achieve strategic goals and improve business performance that only evaluate the performance of the whole company without assessing achievements and problems of business units in complementing business strategies; Similarly, only when the performance evaluation for individual employee is combined with business unit performance evaluation, can it make all of employees understand clearly strategic goals and requirements of the company and its business units, taking actions consistent with the interests of the company as a whole. Therefore, it is of great significance for the diversified company to evaluate the performance of its business units, which serves as a bridge between the performance measurement of the whole company and individual employees.A diversified company is composed of a number of different business units, which operate different products and services, compete in different industries and marker areas, and face with different market opportunities and risks, so they need to develop their own business strategies within the framework of the overall company strategy. Accordingly, when evaluating the performance of its business units, not only should company management consider the strategic collaboration between the company and business units, but also combine performance assessment with the specific strategies of business units. BSC acts as a basic., framework of business unit performance evaluation. Therefore, in addition to developing a set of BSC at company level, each business unit must develop its own BSC adapting to its unique condition. In recent years, researchers in our country have conducted numerous studies on performance evaluation theory and methods for enterprises as a whole, but these studies are seldom involved in the business unit performance evaluation oriented by strategy, and even less studies are related to the application of multiple performance measures and provide empirical evidences. These important issues relevant to the application of multiple performance measures include:the design and choice of performance measures in business unit performance evaluation based on strategy; the impact of business unit strategy on the use of performance measures in its performance assessment, and the impact of the use of performance measures on business unit performance; the value relevance of nonfinancial measures and future financial performance, and the moderating role that contextual factors play in these relationships; the cognitive biases and its solutions when company executives evaluate the performance of business units. Empirical studies addressed on above issues have become research highlights of management accounting in many countries, and have obtained abundant research achievements. However, their research conclusions are not consistent because of their differences in research perspectives, methods and objects. Furthermore, almost all of these studies were addressed under the background of western countries, and there are very few relevant studies aimed at Chinese enterprises, so it has yet to be verified if these study findings are applicable to Chinese enterprises. Just based on this consideration, this article uses a variety of research methods and data sources, and carries out an in-depth analysis and research for above-mentioned questions relating to the application of multiple performance measures in business unit performance evaluation based on strategy, and provides corresponding empirical evidences. This study has strong theoretical and practical significance.This article is composed of seven chapters. Additional to the introduction in chapter 1, chapter 2 and chapter 3 are aimed at forming the research theme of this article-- strategy-based business unit performance evaluation. From the perspective of the use of multiple performance measures, subsequent four chapters of this article conduct a study on four issues relevant to the application of multiple performance measures with BSC as framework in strategy-based performance evaluation of business units. The main content of each chapter are as follows:Chapter 1 is the introduction of this article. This chapter presents four parts of content:the first part tells research background and significance of this article; the second part describes research content and their structural arrangement; the third part talks about research methods employed by this article; the fourth one is to summarize the points of research innovation.Chapter 2 discusses changes in enterprise business environment and the improvement in performance evaluation. This chapter at first illustrates the basic meaning, functions and theoretical basis of business performance evaluation. On the basis of the analysis of changes in business environment and management mode, and the features and disadvantages of the traditional performance evaluation system, this chapter summarizes improvement ideas and innovation achievements on performance evaluation, and then sets forth the basic theory, advantages and disadvantages of the BSC.Chapter 3 addresses diversification, decentralized management and business unit performance evaluation. This chapter describes business diversification and the organizational structure of decentralized management, the principle-agent problem caused by decentralized management and the role that performance evaluation plays in lowering agent costs, the hierarchy of business performance evaluation and the establishment of multilevel performance evaluation in decentralized companies, the current situation and significance of business unit performance evaluation, the shortcoming of the traditional mode business unit performance evaluation, and the establishment of strategy-based business unit performance evaluation.Chapter 4 discusses the design of performance measures in strategy-based business unit performance evaluation. This chapter talks about the design of performance measures based on strategy, the classification of business unit strategy, and discusses how to design and choose strategic performance evaluating measures of business units, and other contingent factors affecting the use of business unit performance measures.Chapter 5 talks about the empirical study on the relationship between business unit strategy, the use of performance measures and financial performance. This chapter aims at investigating the impact of the competing strategy of business units on the use of performance evaluation, and whether the diversification of performance measures or the match between the use of performance measures and strategy leads to higher financial performance. Using survey data from 93 Chinese manufacturing firms, we find that:the strategic types of business units and its emphasis degree have no significant impact on the use of financial measures; the emphasis degree of differentiation and cost leadership strategy is positively related to the extent of use of nonfinancial and cost-efficiency measures respectively; the extent of use of financial measures does not affect financial performance significantly; business units with greater diversification of performance measure have significantly higher financial performance; the match between the use of cost-efficiency measures and the cost leadership strategy or between the use of nonfinancial measures and differentiation strategy has positive impact on the financial performance of business units.Chapter 6 discusses the study on the relationship between customer satisfactory and financial performance-- the moderating effect of product competition. This chapter wants to test if there is a positive relationship between product customer satisfactory and future financial performance, and if product competition exerts a moderating effect on this relationship. This study employs Chinese Customer Satisfactory Index (SSCI) as independent variable and six financial measures as dependent variables. This study suggests that the business units (or companies) with higher product SSCI have significantly higher future financial performance, and for business units (or companies) with higher product competition, there is a stronger positive relevance between CCSI and financial performance.Chapter 7 discusses the study on the cognitive bias of company executives in the performance evaluation for multiple business units--evidences'from a BSC experimental study. Prior studies found that there is a problem of common measure bias when senior executives evaluate the performance of business units, which impairs greatly the application value of the BSC. This study proposes two methods of alleviating the cognitive bias on the basis of analysis for causes of common measure bias and existing researches, i.e., improving strategy description to enhance evaluators'understanding of the strategy of business units and unique measures, and adopting a disaggregated evaluating pattern with requirement to justify performance evaluation so as to stimulate evaluators'cognitive effort. Results of the experimental study confirm the existence of the common measures bias among Chinese managers, and suggest that either of two measures proposed increases significantly the weight evaluators assign to unique measures, and lighten the degree of the cognitive bias.The innovation.points of this article are mainly embodied in following aspects:Firstly, this article illustrates in detailed the hierarchy of business performance evaluation, the role that performance evaluation plays in solving the agent problem, the significance and current situation of business unit performance evaluation, and then develops a strategy-based business unit performance evaluation system. Furthermore, this article conducts an in-depth investigation for the problem of the design and choice of performance measures in strategy-based business unit performance evaluation.Secondly, as for the empirical study on the relationship between the competitive strategy of business units, the use of performance measures and financial performance, this article uses survey to obtain data of Chinese manufacturing firms, and provides empirical evidences on this kind of research. This study takes single-business firms and business units of diversified companies as research samples, and on the basis of measurement of the strategy types of cost leadership or differentiation and their emphasis degree, investigating the relationship between the strategy choice of business units, the use of performance measures and their financial performance.Thirdly, as for the study on the relationship between customer satisfactory and future financial performance, this article provides Chinese background evidences about this research theme, and utilizes CCSI for the first time in China to examine the value relevance between nonfinancial and financial measures. This article uses six financial measures to reflect the financial performance of business units and diversified companies, and introduces product competition as moderating variable to examine its impact on the satisfactory-performance relationship.Fourthly, as for the study on the cognitive bias of company executives in the performance evaluation for multiple business units, this article conducts an experimental study and conforms that there is also common measure bias among Chinese managers, and proposes two feasible measures of alleviating the cognitive bias and finds that either of them has obvious effect. The study in this chapter has strong theoretical and practical significance for exerting fully the function of BSC in all-sided performance evaluation and strategy management.