Management Accounting Section Midyear Meeting

Performance Metrics and Innovation Dependency

• In Event: Performance Measurement I

Abstract

Drawing on data from a sample of 290 small- to medium-sized enterprises (SMEs), we provide empirical evidence on the relationship between metric intensity (i.e., the quantity and frequency with which performance metrics are tracked and used in an organization) and innovation. We hypothesize and find that firms that rely more on incremental innovation have greater metric intensity, while those that rely more on radical innovation have lower metric intensity. These relationships are mediated by how much benefit (relative to harm) managers perceive from using performance metrics. Controlling for the type of innovation dependency, we find that the proportion of financial metrics and the extent to which metrics are used for incentive purposes are associated with lower metric intensity, while the strength of organizational culture and culture with a high emphasis on accountability are associated with higher metric intensity. Consistent with prior research on the fit between control systems and organizational context, we find a positive and significant interaction effect between incremental innovation and metric intensity on organizational performance (profitability and growth rate). That is, metric intensity is associated with better organizational outcomes when the organization depends more on incremental innovation. This association is moderated by the strength and importance of organizational culture, which provides some evidence for the complementarity between formal and informal controls. Our findings have important implications for evaluating and designing control systems in the context of managing innovation.

Authors

• Xin Li, University of Southern California

• Kenneth A Merchant, University of Southern California

• Fiona Wang, University of Southern California