Performance Measurement Systems for Managing Exploration/Exploitation Tensions within and between Organizational Levels

Recent studies on performance measurement systems (PMS) have addressed how managers deal with two competing demands such as efficiency and flexibility, creativity and control, and exploration and exploitation. This paper adopt March’s (1991) suggestion on the tension between exploration and exploitation. Organizational ambidexterity literature suggests that exploration/exploitation tensions could transpire at multiple levels in the organizations simultaneously. However, little empirical work illustrates how these dual competing demands relate to multiple organizational levels. This study explores three questions: how PMS supports to build internal alignments within exploratory and exploitative subunits (at the strategic planning level); how PMS supports to make integration mechanisms function between exploratory and exploitative subunits (at the operational level); and, how managers use PMS to manage tensions between the strategic planning level and operational level. We draw on a case study of one organization. We can summarize our findings as follows. First, we focus on structural differentiation at the strategic planning level. We identify two separated subunits: sales department and production department. The middle range plan includes exploratory and exploitative strategic goals. However, not only exploratory goals but also exploitative goals are cascaded down to both the subunits. The selection of performance measures and their linkages with initiatives are different between subunits. The targets are set at the stretched level in both the subunits. Second, we investigate targeted integration mechanisms at the operational level. The monthly sales-production meetings are used as a integration mechanism. Operational managers take part in the meeting and are allowed to modify production plans. While fix cost targets must not be changed, the priority specs created at the meeting can incorporate a certain degree of flexibility into production capacity. Although the resource reconfiguration through the formal planning and budgeting process is not responsive, the targeted integration mechanism with daily measurement and monitoring of capacity utilization is useful. Finally, we identify managerial capabilities to balance tensions between the above two levels. Manager’s understanding of production capacity is critical to successfully adjust production schedules without fixed cost overrun. His understanding comes from doing budgeting tasks every year. The budgeting process provides a training field for his subordinate. But another manager has difficulty because cost information is not supplied in a timely manner.