Ebook Performance measurement and management control: Superior organizational performance Part 1

Part 1 of ebook Performance measurement and management control: Superior organizational performance provides readers with contents including: improving organizational performance; the drivers and measures of success in high performance organizations; drivers of superior financial performance; determinants of performance measurement system design and corporate financial performance;... Đề tài Hoàn thiện công tác quản trị nhân sự tại Công ty TNHH Mộc Khải Tuyên được nghiên cứu nhằm giúp công ty TNHH Mộc Khải Tuyên làm rõ được thực trạng công tác quản trị nhân sự trong công ty như thế nào từ đó đề ra các giải pháp giúp công ty hoàn thiện công tác quản trị nhân sự tốt hơn trong thời gian tới.

VOLUME 14

PERFORMANCE MEASUREMENT AND MANAGEMENT CONTROL:

SUPERIOR ORGANIZATIONAL

PERFORMANCE

EDITED BY

MARC J EPSTEIN

Jesse H Jones Graduate School of Management,

Rice University, Texas, USA

INSEAD, Fontainebleau, France

2004

Amsterdam – Boston – Heidelberg – London – New York – OxfordParis – San Diego – San Francisco – Singapore – Sydney – Tokyo

PERFORMANCE MEASUREMENT AND

MANAGEMENT CONTROL: SUPERIOR ORGANIZATIONAL PERFORMANCE

STUDIES IN MANAGERIAL AND FINANCIAL ACCOUNTING

Series Editor: Marc J Epstein

Volume 1: Setting the Standard for the New Auditors Report: An Analysis of

Attempts to Influence the Auditing Standards BoardVolume 2: The Shareholders Use of Corporate Annual ReportsVolume 3: Applications of Fuzzy Logic and the Theory of Evidence to

AccountingVolume 4: The Usefulness of Corporate Annual reports to Shareholders in

Australia, New Zealand, and the United States: An InternationalComparison

Applications to Management Control SystemsVolume 6: Throughput Modeling: Financial Information Used by Decision

MakersVolume 7: Applications of Fuzzy Sets and the Theory of Evidence to

Accounting IIVolume 8: Corporate Governance, Accountability, and Pressures to Perform:

An International StudyVolume 9: The January Effect and Other Seasonal Anomalies: A Common

Theoretical FrameworkVolume 10: Organizational Change and Development in Managerial Control

Systems: Process Innovation for Internal Auditing andManagement Accounting

Volume 11: U.S Individual Federal Income Taxation: Historical,

Contemporary and Prospective Policy IssuesVolume 12: Performance Measurement and Management Control: A

Compendium of ResearchVolume 13: Information Asymmetry: A Unifying Concept for Financial and

Managerial Accounting Theories

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First edition 2004 British Library Cataloguing in Publication Data

A catalogue record is available from the British Library.

ISBN: 0-7623-1122-3 ISSN: 1479-3512 (Series)

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FROM HIGH PERFORMANCE ORGANIZATIONS TO AN

ORGANIZATIONAL EXCELLENCE FRAMEWORK

PART II: DRIVERS OF SUPERIOR FINANCIAL

PERFORMANCE

DETERMINANTS OF PERFORMANCE MEASUREMENT

SYSTEM DESIGN AND CORPORATE FINANCIAL

PERFORMANCE

SOCIAL PRACTICES AND CORPORATE PERFORMANCE

v

COMPETITIVE STRATEGIES, SALESPEOPLE CONTROL AND SALESFORCE PERFORMANCE

STRATEGY AND INTEGRATED FINANCIAL RATIO PERFORMANCE MEASURES: EMPIRICAL EVIDENCE OF THE FINANCIAL PERFORMANCE SCORECARD AND HIGH PERFORMANCE COMPANIES

Belverd E Needles, Jr., Mark L Frigo and Marian Powers 115

PART III: DEVELOPING IMPROVED PERFORMANCE MEASURES

SUPPLY CHAIN PERFORMANCE MEASUREMENT: A TRANSACTION COST THEORY – AND VALUE-BASED APPROACH

PERFORMANCE MEASUREMENT IN FRENCH COMPANIES: AN EMPIRICAL STUDY

MULTIFACETED NEW PRODUCT DEVELOPMENT PERFORMANCE: SURVEY OF UTILIZATION OF PERFORMANCE MEASURES IN FINNISH INDUSTRY

PART IV: BALANCED SCORECARD IMPLEMENTATIONS

TECHNICAL AND ORGANIZATIONAL BARRIERS

HINDERING THE IMPLEMENTATION OF A BALANCED

SCORECARD: THE CASE OF A EUROPEAN SPACE

COMPANY

THE STRUCTURE OF BALANCED SCORECARDS:

EMPIRICAL EVIDENCE FROM NORWEGIAN

MANUFACTURING INDUSTRY

BONUS AND PENALTY CONTRACT ACCEPTANCE IN A

BALANCED SCORECARD ENVIRONMENT: A CASE STUDY

PART V: MEASURING AND IMPROVING PERFORMANCE

IN NON-PROFIT ORGANIZATIONS

PERFORMANCE MEASUREMENT IN NON-PROFIT

ORGANIZATIONS: HOW TO LINK THEORY AND REALITY?

Emanuele Lettieri, Francesca Borga, Cristina Masella

THE STAIR: A DUEL CORE MODEL FOR CHANGING

PUBLIC SECTOR PERFORMANCE

THE ADOPTION OF THE BALANCED SCORECARD IN

GOVERNMENT-OWNED CORPORATIONS

MANAGEMENT ACCOUNTING IN PUBLIC AND PRIVATE

HOSPITALS: A COMPARATIVE STUDY

LIST OF CONTRIBUTORS

Lars-G¨oran Aidemark V¨axj¨o University, V¨axj¨o, Sweden

Pierre-Laurent Bescos EDHEC Business School, France

Francesca Borga Politecnico di Milano, Milano, Italy

Werner Bruggeman Ghent University, Belgium

Christel Decock Good EDHEC Business School, Nice, France

Marc J Epstein Rice University, Houston, TX, USA

Mark L Frigo DePaul University, Chicago, IL, USA

Laurent Georges EDHEC Business School, Nice, France

P´eter Horv´ath University of Stuttgart, Stuttgart, Germany

Suresh S Kalagnanam University of Saskatchewan, Saskatoon, Sask.,

Canada

Chong M Lau University of Western Australia, Australia

Emanuele Lettieri Politecnico di Milano, Milano, Italy

Lars Lindkvist Kalmar University, Kalmar, Sweden

Jean-Fran¸cois Manzoni INSEAD, Fontainebleau, France

Cristina Masella Politecnico di Milano, Milano, Italy

Evelyne Misiaszek Group E.S.C Toulouse, Toulouse, France

Klaus Moeller University of Stuttgart, Stuttgart, Germany

Ainun Na’im Gadjah Mada University, Indonesia

Belverd E Needles Jr. DePaul University, Chicago, IL, USA

Fabienne Oriot Group E.S.C Toulouse, Toulouse, France

ix

Marian Powers Northwestern University, Evanston, IL, USA

Adriana Rejc University of Ljubljana, Ljubljana, Slovenia

Alberto Savoldelli Politecnico di Milano, Milano, Italy

Mahfud Sholihin Gadjah Mada University, Indonesia

Sergeja Slapniˇcar University of Ljubljana, Ljubljana, Slovenia

Tatiana Sotirakou National Centre of Public Administration, Athens,

Greece

Pierre-Antoine Sprimont Group E.S.C Rouen, France

Jan Ivar Stemsrudhagen Norwegian School of Economics and Business

Administration, Bergen, Norway

Petri Suomala Tampere University of Technology, Tampere,

Finland

Peter Van de Weghe Ghent University, Belgium

Mary Zeppou National Centre of Public Administration, Athens,

Greece

EDHEC was particularly honoured to organise the 2nd Workshop on Performance

Measurement and Management Control on its Nice campus in France, in

collabo-ration with the European Institute for Advanced Studies in Management (EIASM)

EDHEC is a Business School founded on research Over the last five years, theSchool has created five Research Centres of international standing:

Risk and Asset Management

New Technologies, Law and Best Practices

Transformational Change and Disruptive Strategies

Performance Measurement and Management Control

Customer Equity

The Performance Measurement and Management Control Centre was the lynchpin

of the Workshop I would like to thank Eric Cauvin and Pierre-Laurent Bescos in

particular for their enormous contribution to the project

Given the essentially international nature of research today, EDHEC would alsolike to extend its heartfelt thanks to two highly renowned professors for their

particularly active and loyal participation, Professor Marc Epstein and Professor

Jean-Franc¸ois Manzoni

Finally, we would also like to thank all those who participated in and contributed

to the success of this workshop through their research work

Bernard Fournier

Chairman – Board of Directors EDHEC Business School Lille & Nice

xi

Performance measurement and management control are critical components of

improving organizational performance But, researchers have historically had

little success in determining the specific actions that lead to superior performance

The focus of this volume is on the characteristics of superior organizational

performance and the identifiable features of management control and performance

measurement systems that drive improved performance

After several decades of research in this area, we have few clear conclusions

Empirically, we have been able to say little about the specific actions that drive

superior organizational performance Recently, researchers have provided some

clarity Managers and researchers have more carefully collected and analyzed

data to better understand the most effective management control and performance

measurement mechanisms to drive and measure organizational performance

But, far more research is needed Some of this research was reported in the

prior volume from the highly successful first Nice conference in 2001 and

published by Elsevier in 2002 Additional research is reported in this volume and

provides both results and guidance for future academic research and management

practice

What can we say regarding how to become a high performance organization?

We usually think about high performance organizations having strong financial

results, satisfied customers and employees, high levels of individual initiative,

pro-ductivity, and innovation And, we talk about how high performance is achieved –

including mission, vision, aligned performance measurement and reward systems,

and strong leadership But, we have validated very little of these propositions

We need to do far more research to advance knowledge of organizations andthe drivers and measures of success We need to contribute to building a research

base and developing a deeper understanding of the causal relationships Only in

this way can we provide guidance to managers as to what actions they should

take to lead to superior organizational performance

There is much that management control research can provide to better stand the actions that are needed to drive organizational success Careful research

under-in the role of strategy, structure, systems, people, and culture as determunder-inants

of organizational success can provide significant contributions to the academic

literature and guidance for management practice This is a challenge for all

researchers in management control and performance measurement

xiii

This book contains a compendium of some of the excellent papers presented

at a workshop on Performance Measurement and Management Control: SuperiorOrganizational Performance in September, 2003 Sponsored by the EuropeanInstitute for the Advanced Study in Management (EIASM) and held in Nice,France on the campus of EDHEC School of Management, this workshop attractedleading scholars in management control and performance measurement fromaround the world We were privileged to provide invited plenary addresses to theworkshop and were involved in the selection of the papers that were presented

at the conference The call for papers drew a response far higher than anticipatedand thus the competition to make a presentation at the conference was quite high

Further, given the space limitations in this book, another competitive selectionwas required The contents of this book represent a collection of leading research

in management control and performance measurement and provide a significantcontribution to the growing literature in the area

The primary questions relate to the specific managerial actions that can be taken

to drive superior organizational performance and what are the most appropriatemeasures of long term success in organizational performance The papers in thisvolume address these questions using a variety of research methods Experimental,analytical, empirical, and field studies are all used to explain how managementcontrol and performance measurement can aid in the implementation of strategyand the improvement of organizational performance The approaches are used inboth for-profit and not-for-profit organizations

The answers are not yet clear But it is hoped that the papers included in thisvolume contribute to this growing body of knowledge and lead us to an improvedunderstanding of how to build better organizations and evaluate and understandtheir performance

The workshop owes its success to numerous individuals and institutions

Their superb support and assistance is greatly appreciated Among those whocontributed significantly are Graciella Michelante and Gerry Van Dyck atEIASM and Pierre-Laurent Bescos, Eric Cauvin, and Olivier Oger at EDHECBusiness School We also want to thank the workshop sponsors, in particularthe INSEAD-PriceWaterhouseCoopers Research Initiative on High PerformanceOrganizations Finally, we want to thank the speakers and participants in theworkshop Their attendance and enthusiastic participation made the workshop anenjoyable learning experience We are hopeful that this book will continue thesearch for additional understanding and development in performance measure-ment and management control, and provide guidance for both academics andmanagers as they work toward improving organizational performance

Marc J Epstein and Jean-Franc¸ois Manzoni

Editors

PART I:

IMPROVING ORGANIZATIONAL

PERFORMANCE

THE DRIVERS AND MEASURES OF

SUCCESS IN HIGH PERFORMANCE

ORGANIZATIONS

Marc J Epstein

ABSTRACT

Performance measurement and management control are critical components

of improving organizational performance But, researchers have had little success in determining the specific actions that lead to superior performance.

Some researchers have proposed models and some companies and tants have implemented performance measurement systems and management control mechanisms to improve performance But, the results are unclear Sig- nificant qualitative and quantitative research is necessary to test the validity

consul-of the models being proposed and used This paper reports on a series consul-of research studies that address these issues, provide some initial results, and provide direction for much needed additional research.

INTRODUCTION

At the core of the performance measurement and management control literature

is a focus on better understanding both the drivers and measures of organizational

success Both managers and researchers attempt to identify the levers that can

be used to improve organizational performance and how the implementation of

Performance Measurement and Management Control: Superior Organizational

strategy can be more effective The focus is on the characteristics of superiororganizational performance and the identifiable features of management controland performance measurement systems that drive improved performance.

After several decades of research in this area, we have few clear conclusions

Empirically, we have been able to say little about the specific actions that drivesuperior organizational performance But, recently researchers have providedsome clarity Managers and researchers have more carefully collected andanalyzed data to better understand the most effective management control andperformance measurement mechanisms to drive and measure organizationalperformance But, far more research is needed Some of this research was reported

in the prior volume from the first Nice conference (Epstein & Manzoni, 2002)

Additional research is reported in this volume and provides both results andguidance for future academic research and management practice

There has been significant discussion in the last two years about corporateaccountability (including both corporate governance and transparency) and the

imperative to improve organizational performance In Counting What Counts:

Turning Corporate Accountability to Competitive Advantage, Epstein andBirchard (1999) explored the elements of accountability and the role of bothmanagers and accountants in making significant improvements At the core ofthe book, is the notion that corporations are increasingly being evaluated morebroadly and users of information recognize that there is a broader set of elements

of organizational performance that lead to long term success and a broader set ofmeasures of organizational success than has been previously used What are thosespecific elements and drivers that organizations have used and can use to drive longterm success?

In Built to Last: Successful Habits of Visionary Companies, Jim Collins and Jerry

Porras (1994) reported on their research that addressed some of these questionsand the distinguishing characteristics of those companies that have been successful

over a long time horizon Jim Collins, in Good to Great: Why Some Companies

Make the Leap and Others Don’t(2001), continued this research and examined thedistinguishing characteristics of those successful companies that have transitionedfrom good companies to those that have been truly outstanding over the long run

In Counting What Counts, we also developed an approach to corporate

perfor-mance that focuses on the elements that drive success – focusing particularly onthe management control and performance measurement aspects This includes thefactors that distinguish a high performance organization from those that are nothigh performance, the actions that companies can take to be more successful andaccountable, and the development of the appropriate leading and lagging indica-tors to measure success We also presented a corporate accountability cycle thatincludes four elements:

(1) Governance – including leadership by senior managers and boards of directors.

(2) Measurement – including financial, operational, and social measures

(3) Reporting – including both internal and external reporting for transparency

(4) Management systems – including all management control systems for the

implementation of strategy

Epstein and Westbrook (2001) built on that work with the development ofthe Action Profit Linkage Model that examines how to identify and measure the

payoffs of various actions to drive success (for some examples, see Epstein, 2002)

Recently, additional research has been completed that focuses on identifying the

management control actions related to superior organizational performance What

are the specific actions that managers can take to drive really distinguishing,

supe-rior performance? The work focuses on the link between actions and performance

in five areas: governance, e-commerce, innovation, mergers, and sustainability

(see Fig 1)

The objective is to better understand, drive, manage, and measure successboth in overall corporate governance and in various individual core functional

activities The models and applications are very similar among all five This

review provides an opportunity to examine both the results of the research and an

Fig 1 The Accountability Cycle Source: Epstein and Birchard (1999).

identification of numerous remaining research questions in management controland performance measurement in general and related specifically to drive superiororganizational performance.

Governance

Building on the foundation of the accountability cycle in Counting What Counts,

Epstein and Roy (2002) developed a model for a clearer articulation of the driversand measures of performance of corporate boards of directors Identifying thethree strategic objectives for boards of: (1) strategic oversight; (2) accountability;

and (3) monitoring and evaluating performance and succession planning, Fig 2describes the inputs, processes, outputs, and outcomes of board activities with fourkey inputs and six key processes that lead to success in the three core objectivesand ultimate outcome of corporate profitability

Although prior empirical research findings are not completely consistentregarding the impact of corporate governance on corporate performance (Korac-Kakabadse et al., 2001; Rhoades et al., 2000), there is evidence that good

Fig 2 Determinants of Board Performance Source: Epstein and Roy (2002).

corporate governance pays (Gompers et al., 2003; MacAvoy & Millstein, 1999;

McKinsey & Company, 2002) It is imperative then that researchers develop

a clearer understanding of the specific managerial actions that can be taken

to drive superior performance and the appropriate performance measures to

evaluate success Then, guidance can be provided to managers as to the specific

management control mechanisms that can be designed and implemented to

improve performance We need to apply the theories and empirical data that have

already been accumulated and develop additional research studies to provide this

specific guidance as to when some managerial control mechanisms work better

than others, the payoffs of management control actions, which actions drive higher

levels of performance, and the appropriate combination of multiple measures

to identify and measure success These would include both leading and lagging

indicators and evaluate inputs and processes along with outputs and outcomes

Recently Enron has been in the news and was one of the major events thatincreased the focus on corporate governance Among the many concerns about

management control at Enron was the compensation and reward systems Though

there has been much in the academic literature that has examined the benefits of

tying rewards to performance, numerous companies lacked the controls to balance

the desired empowerment For more on empowerment and control, see Simons

(1995a, b)

A compensation system’s objective is to develop, motivate, monitor, evaluate,and reward senior corporate executives Traditionally this only required a cursory

review of performance and relatively standard pay increases A decade ago, many

suggested that to better align shareholders’ and managers’ interests, companies

should adopt pay plans that pay for performance and is linked to increases in

stock price (Hall & Lieberman, 1998) However, because many of the measures

of performance were short term, executives received large bonuses as stock price

went up but were not required to repay them when stock prices ultimately fell

Further, since performance was often not benchmarked against industry averages,

a steadily rising stock market pushed many corporate share prices higher for

companies with only average performance (Murphy, 2000) Thus, many CEOs

with below industry average performance received bonuses in the tens of millions

of dollars

Numerous other issues at Enron relate to the development of managementcontrol and performance measurement systems to improve organizational perfor-

mance Enron demonstrates the importance of both culture and trust in driving

organizational performance (Currall & Epstein, 2003) Monitoring and managing

the level of organizational trust, incentive pressure, and culture and how their

fragility can impact organizational success are critical responsibilities of senior

managers and boards of directors and are central to management control

This corporate governance study also included the development of a balancedscorecard framework for corporate governance and constructing three distinctbalanced scorecards for evaluating board performance, CEO performance, and

to provide information for the board’s evaluation of corporate performance (seeEpstein & Roy, 2002, 2003a) It also includes the objectives, the causal linkagemodels, and a long list of metrics for each of the scorecards The framework hasbeen applied in some companies (for an example, see Kaplan & Nagel, 2003)

Unfortunately, presently there are few boards that systematically and prehensively evaluate their own performance or the performance of their boardmembers Recent regulatory changes also do not solve the problem They attempt

com-to regulate the inputs but do very little com-to the processes More fundamental changesare necessary if performance is to be significantly improved and researchersneed to provide better guidance on the management control and performancemeasurement mechanisms – the systems, structures, culture, and people – thatcan be used to drive superior performance

E-Commerce

Though much has been written about internet strategy and internet marketing,there is little about what managers can do to effectively implement an e-commercestrategy in large organizations and drive superior performance Effective man-agement control systems and structures and performance measurement systemsare necessary to encourage desired cannibalization and other changes within theorganization and motivate the desired changes to improve performance

Figure 3 is a model of the antecedents and consequences of e-commerce success

It describes the actions that managers can take to improve the implementation of ane-commerce strategy including both the inputs and processes and the outputs andoutcomes of successful implementations In a recent research project, Epstein in-tegrates the academic literature and twenty-five company case studies and analysis

to document the management control and performance evaluation approaches thatlead to success in the implementation of e-commerce This includes an analysis

of the successes and failures in past implementations and provides guidance formanagers and researchers as to the specific management control and performancemeasurement actions that can be taken to lead to superior e-commerce perfor-mance and the metrics to more effectively evaluate success (Epstein, 2004a) Thisresearch study specifically includes the e-commerce strategies, structures, andsystems including performance evaluation, incentives, and rewards

After the internet boom of the late 1990s, there was a dramatic drop in both thevalue of internet stocks and the perception of future internet development The

Fig 3 Antecedents and Consequences of E-Commerce Success Source: Epstein (2004a).

dot-com bust has led many companies to reexamine their e-commerce strategy It

has also caused a careful evaluation of the specific actions that will lead to increases

in value creation and the payoffs of e-commerce implementation Similar to the

deficiencies in the measurement of payoffs in other organizational functional units,

the research literature and management practice are substantially underdeveloped

There is little on how to measure the performance of either the functional units or

the managers or the evaluation of the payoffs of investments in either information

technology (IT) or e-commerce and little on what drives success We have learned

that success in IT and the measures of the payoffs are clearly not website hits! It

is the actions that will drive ultimate profitability A careful identification of the

appropriate metrics to evaluate success that includes inputs, process, and results

measures that aligns with the figure above is necessary (see Epstein, 2004a, b)

Here again the objective is to document the specific actions that will lead tosuperior performance and how companies might measure success and the payoffs

of various managerial actions to improve performance Thus, we can see what

specific inputs and processes are more likely to lead to success in both e-commerce

activities and overall corporate performance This requires a clear understanding

of the objectives, drivers and metrics for each Only then can researchers and

managers determine what resources should be expended and how these resources

should be deployed to create value and improve performance

A recent article in Harvard Business Review was titled “Does IT Matter?” (Carr,2003) Though the title was controversial, the content is not The main message

is that IT no longer creates a strong long term competitive advantage for

organi-zations IT is necessary and critical but does not differentiate So, an e-commerce

strategy is not the differentiator The road to competitive advantage in IT ande-commerce is through the execution – the implementation of strategy throughvarious management control mechanisms Our research is attempting to determineand isolate the differences between superior organizations and less superior onesrelated specifically to e-commerce performance and the factors that lead tosuccess.

Innovation

Innovation is one of the most challenging areas for both corporate managersand researchers Managers report significant difficulty in achieving the desiredamount of radical innovation and developing an organization that is creative,innovative, and flexible while still maintaining the level of desired control Simons(1995a, b) has written extensively about the tensions between empowerment andcontrol yet managers still seem to find this balance difficult Further, they find thatdriving innovation in large bureaucratic organizations to be difficult and somehave suggested that to increase innovation in large organizations companies mustmake more effective use of outsourcing (see Chesbrough, 2003; Quinn, 2000)

For researchers, innovation is challenging due to the long time horizons, the highlevels of uncertainty and risk, and the difficulty of measurement

In a three year study on innovation, Davila et al (2004) have examined theactions that managers can take to improve performance in corporate innovationand how to measure success This study includes empirical data from twoextensive surveys of corporate practices in 1997 and 2001 and extensive fieldresearch and case studies The leading global companies in innovation werestudied to determine the best practices for driving superior performance ininnovation Many of the companies studied are those with annual spending onresearch and development of one to five billion dollars and yet they report beinggenerally dissatisfied with their performance in innovation complaining thatthey cannot get the desired level of breakthroughs The study concludes with anarticulation of the management control actions and performance measures thatcan be used to drive both breakthrough and incremental innovation through thevarious phases of innovation including ideation (idea development), selection,and execution for both technological and business model innovation

Some results on the first survey have been reported in Davila et al (2003)

The results of the project are dramatic Both the specific management controlactions and the performance measures are critical in driving innovation success

Companies have found the development of effective performance measuresdifficult as they have used typically unrelated measures such as earnings as

the basis for rewards They are dissatisfied with the prospect of using results

measures that are too late and they have not developed process measures that link

to performance

As with the earlier studies reported here, the development of a clearer standing of the causal relationships is necessary to better understand the drivers of

under-performance Only then can effective performance measures be developed that link

actions to results One manager reported the use of number of projects launched as

one of the leading indicators of performance in an attempt to avoid reliance solely

on lagging indicators But, all this accomplished was to add a non-financial

indi-cator to the previous use of solely financial indiindi-cators and did not improve overall

innovation performance As might be anticipated, it drove increased performance

in incremental improvements that were quick and easy and reduced the focus on

the radical or breakthrough innovations that the company desired since they took

more time and were more difficult Our management control and performance

measurement literature would have predicted this behavior, but in most cases, even

the more progressive companies are struggling with understanding the drivers

of innovation success and developing the systems and structures to improve

performance Management control researchers can make a significant contribution

to both the academic and managerial literature by providing specific guidance

on the managerial actions that drive improved performance and the appropriate

measures of the inputs, processes, outputs, and outcomes of innovation activity

Mergers

Both academic research and managerial articles generally conclude that the

success of mergers is very small estimating that 70–80% of mergers fail Why do

they fail and what are the appropriate measures of success? What are the factors

that lead some companies to be continuously successful in mergers while most

companies destroy shareholder value when they combine? What are the specific

management control actions that companies can take to increase the likelihood of

merger success and what are the appropriate performance measures to evaluate

merger success?

An extensive review of the previous empirical research provides few answers

A recent analysis, the development of a model, and a comprehensive field study

provided some answers, guidance for future managers, and additional opportunities

for researchers There were two components of the research study: performance

measures of merger success and management control actions for success in post

merger integration The primary field work was conducted at JPMorganChase a

combination in 2001 of Chase Manhattan Bank and JP Morgan and Co

Measures of Merger Success

Current performance measures of merger success are poor Primarily, they includeonly short-term outcome measures and the ones being used do not adequatelyevaluate success But, not only are the lagging indicators insufficient, there aretypically no leading indicators Thus, there are no input or process measures thatwould provide guidance on the drivers and key factors of success

Better measures are needed that include both short term and long termindicators of merger success and the inputs and processes necessary to drivethat success Using short-term measures such as stock price to evaluate successare clearly insufficient to understand or predict long term merger success Bothfinancial and non-financial metrics related to the performance on seven factors(strategic vision, strategic fit, deal structure, due diligence, pre-merger planning,post-merger integration, and external factors) that drives to success are necessary

Researchers and managers alike need a better understanding of the managementcontrol actions and performance measures that lead to success in each ofthese key factors and the causal relationships of superior merger performance(Epstein, 2003a)

Key Success Factors in Post Merger Integration

Much of the research on mergers fails to make a critical distinction between threevery different approaches to business combinations: mergers, acquisitions, andconglomerates The management control actions for integration and performancemeasures are quite different for each This study concludes that there are fivekey success factors to the successful combination of two companies in a merger:

(1) integration strategy; (2) structure (integration team) and systems including; (3)communication; (4) speed; and (5) aligned systems (Epstein, 2003b) There havebeen numerous articles and cases on Cisco’s and GE’s approaches to integration

in acquisitions and conglomerates but there have been few articles written aboutintegration among mergers of equals (see for example Ashkenas et al., 1998;

Tempest et al., 2000)

After decades of failures, we still have not carefully delineated the differentmanagement control structures and systems – the actions to drive success – inthe merger process and the performance measures to evaluate merger success

More extensive research is necessary on both the management control actions andperformance measures to both drive and evaluate merger success and improveorganizational performance

In 2001, Epstein and Roy proposed a model to describe the drivers and measures of

corporate social, environmental, and economic performance (sustainability) The

model articulates the actions that companies can take to attain superior performance

in sustainability and the relevant performance measures By providing more

speci-ficity to the inputs, processes, outputs, and outcomes, managers can direct their

activities to those that are more likely to produce greater results Researchers can

also test this and similar models to determine which management control actions

lead to superior organizational performance (see Epstein & Roy, 2001, 2003b)

(Fig 4)

Epstein and Wisner have examined empirical data in the United States and

in Mexico to explain the antecedents and consequences of various corporate

actions to improve corporate environmental performance and to begin to answer

the questions as to the drivers of success in corporate sustainability One study

in Mexico (Wisner & Epstein, 2003) develops a management control model and

examines how strategy and various management control mechanisms impact

corporate environmental performance

Fig 4 Drivers of Sustainability Source: Epstein and Roy (2001).

In a related study and using a U.S data base, they were able to examine notonly the drivers of superior corporate environmental performance but also theimpacts of that performance on corporate financial performance (Wisner et al.,2003a) In a related paper, they have identified the specific management controlactions and mechanisms that lead to superior performance (Wisner et al., 2003b).

See Fig 5 for the model

In two papers, Epstein and Schnietz examined the impacts of sustainabilityperformance on financial performance Whereas Wisner, Epstein, and Bagozziused earnings growth and return on investment as their output measures offinancial performance, Epstein and Schnietz use an event study to examine stockmarket reaction to changes in corporate sustainability performance (Epstein

& Schneitz, 2002; Schneitz & Epstein, 2003) They find that companies withbetter reputations for sustainability were better insulated from the stock marketdeclines related to the WTO trade talk failures in 1999 and they incurred adecline on average of $378 million less in market capitalization due to theirreputation for sustainability Some of this work attempts to model the drivers andmeasures of success in corporate sustainability Some examines improvements

in sustainability performance and builds on earlier field research by Epstein(1996) Other uses survey data to test the specific management control mech-anisms to determine which ones have a greater impact on performance But,much more needs to be done to provide better guidance to both managers andresearchers as to the specific actions that can be taken to improve organizationalperformance

Fig 5. Antecedents and Consequences of Superior Environmental Performance

Source:Adapted from Wisner et al (2003a, b)

For decades, management control researchers have developed new models for

the implementation of strategy with the goal of improving organizational

perfor-mance Unfortunately, progress has been slow Most of the models have not been

adequately tested Even reasonably intuitive propositions that increased alignment

of strategy, structure, and systems will lead to improved performance have not been

proven So, we have few clear results as to what drives organizational success And,

though we have explored numerous approaches to performance measurement, we

have not been able to identify when particular performance measures are more

appropriate and whether they lead to improved performance Researchers need to

determine when specific structures and systems will lead to improved performance

and what characteristics of superior organizations are critical and can be replicated

by other companies and managers

Much of the work cited above in the five areas of inquiry is focused on thedrivers of superior organizational performance and the appropriate performance

measures of the inputs, processes, outputs, and outcomes We need to be able to

better answer the questions of how do we design organizations to become superior

performers, what are the specific actions that managers can take and systems they

can implement to drive success, and what are the appropriate measures of success

In some of the areas, new models were developed In some areas, field studies,

company cases, and surveys were conducted and empirical analysis completed

Various management control mechanisms were investigated and a variety of

performance measures used

These are complex problems that will not be answered easily But, managementcontrol researchers should not accept the models that have been developed without

further testing They should not accept the models of performance measurement

without validation And, most of the propositions have not been adequately tested

Researchers need to provide more specificity for managers as to what actionswill lead to superior organizational performance Extensive empirical and field

research is necessary Some may test whether the balanced scorecard model,

shareholder value model, levers of control model, or other current models do lead

to superior performance

What can we say regarding how to become a high performance organization?

We usually think about high performance organizations having strong financial

results, satisfied customers and employees, high levels of individual initiative,

productivity, and innovation And, we talk about how high performance is

achieved – including mission, vision, aligned performance measurement and

reward systems, and strong leadership But, we have validated very little of these

propositions

We need to do far more research to advance knowledge of organizations andthe drivers and measures of success We need to contribute to the building of aresearch base and developing a deeper understanding of the causal relationships.

Only in this way can we provide guidance to managers as to what actions theyshould take to lead to superior organizational performance

Collins and Porras (1994) and Collins (2001) are beginnings but far moreneeds to be done There is much that management control research can provide

to better understand the actions that are needed to drive organizational success

Careful research in the role of strategy, structure, systems, people, and culture asdeterminants of organizational success can provide significant contributions to theacademic literature and to guidance for management practice This is a challengefor all researchers in management control and performance measurement

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from technology Boston: Harvard Business School Press.

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of Enron Organizational Dynamics, Spring.

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competitive advantage Reading, MA: Perseus Books.

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drive strategic renewal Boston: Harvard Business School Press.

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Acquisition integration for manufacturing Harvard Business School, Case No 9-600-015.

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performance: Evidence from Mexico Working Paper, Rice University.

Wisner, P S., Epstein, M J., & Bagozzi, R (2003a) Organizational antecedents and consequences of environmental performance Working Paper, Rice University.

Wisner, P S., Epstein, M J., & Bagozzi, R (2003b) Managing what matters: Managerial control processes and actions that influence firm performance Working Paper, Rice University.

FROM HIGH PERFORMANCE

In the mid-1990s I started working with a number of organizations that could

legitimately be considered as “High Performance Organizations” (HPOs) I use the

HPO term rather subjectively; I did not compute any measure of abnormal return

or margin by which these companies outperformed their competitors over some

arbitrary time period But these organizations were clearly remarkable by any

measure Several years on, they are still largely outperforming their competitors

I was immediately struck by the atmosphere that seemed to permeate theseorganizations What Ghoshal calls “the smell of the place” (Ghoshal et al., 2000)

Performance Measurement and Management Control: Superior Organizational

was very different from what I had encountered in most of the other companies

I have worked with and/or studied over the years There was what I termed

an “intense performance culture”: A sense that anything and everything waspossible; a willingness – in fact an eagerness – to set very ambitious targets and tostrive very hard to beat them Things – computers, copiers, processes – worked

Managers and employees worked hard, but: (a) they did not seem unhappy about

it, often the reverse; and (b) their efforts seemed to bear many fruits withinrelatively short periods of time

This “atmosphere” seemed highly desirable, not just from a business tive but also from a human perspective, in light of the much lower degree ofnegative energy that I observed in these organizations As a result it seemed like

perspec-a good ideperspec-a to try to identify the cperspec-auses of these differences Could I identifysome characteristics – shared by these HPOs and not present in less successfulorganizations – that could explain how HPOs develop these capabilities and thiskind of intense performance culture, while other organizations simply do not?

Several authors had already raised this question Among the best known, Peters

and Waterman (1982) went In Search of Excellence More recently, Collins and

Porras (1995) tried to understand the characteristics of organizations that were

Built to Lastand hence achieved outstanding success over long periods of time

(see Appendix 1 for a more complete list of authors who have tried to identify thedrivers of organizational excellence) Some efforts focused on specific aspects ofthe organization’s functioning (e.g Doz et al., 2001; Treacy & Wiersema, 1995)

Some used semi-objective approaches to sample selection (e.g Collins, 2001;

Foster & Kaplan, 2001), while others relied on less systematic samples (e.g

Crawford & Mathews, 2001; Kaplan & Norton, 2001) and yet others focused onunderstanding a single, arguably remarkable organization (e.g Bunnell, 2000;

Gittell, 2003; Liker, 2003) Another take on the issue has been provided by anumber of highly successful leaders reflecting on the principles that (arguably)helped their firms become so successful (e.g Larry Bossidy, Lou Gerstner, CarlosGhosn or Jack Welch)

Aside from being a crowded field, this area is also a risky one: Yesterday’s HPOshave a bad habit of foundering in the years following their being studied and written

up as exemplars Enron is an obvious example, but even “built-to-last” tions have suffered rapid turns of fortune (e.g Boeing, Sony or Walt Disney)

organiza-This area also tends to have a bad reputation in academic circles First, there

is an aspect of “how can you be na¨ıve enough to think that excellence can betraced back to a few separable factors?” Secondly, “we all know there is no way

of studying this question with any form of rigor, hence you must be a charlatan.”

Tom Peters’s (2001) “true confessions” on the process that led to In Search Of

Excellenceare certainly not reassuring on this front

These caveats have not discouraged me I have continued to try to understandwhy some organizations end up doing much better than others and why, in many

cases, their employees also look happier To do so I started from what excellent

companies did and asked myself “how does this differ from what goes on in the

less-than-excellent companies I know?” I also proceeded in the opposite direction,

starting from the “less-than-excellent” companies and asking “how do HPOs

tackle this aspect?” Over time, I also started asking a small but systematic set of

questions about every company I was beginning to study or work with: “What

would it take to increase the value generated for customers and/or employees?

What is holding this company back? What would I add/subtract to make this

company a more effective one?”

Through this process, what started as an attempt to understand High mance Organizations developed into an evolving framework on Organizational

Perfor-Excellence My experience of organizations is that most of them sub-optimize to

some degree, often to a large degree Notwithstanding all the talk about alignment,

rationalization and optimization that I hear bandied about, I am constantly amazed

at how much value (again, both business and human value) organizations manage

to squander

Initially developed as a keynote address at the 2nd EIASM Conference onPerformance Measurement and Management Control, the framework I proposed

seemed to resonate with the conference attendees and I was persuaded to write

this chapter as a kind of progress report on my investigations in this area At

this stage, the findings are qualitative rather than quantitative and are therefore

proposed as informed insights rather than indisputable assertions I do not claim

that everything that follows is true I do hope some of it will prove interesting and

stimulating

DIAGNOSING VALUE DESTRUCTION

Organizational excellence, like performance, is a multi-dimensional continuum

where, among three organizations (e.g A, B and C), each can outperform the

other two on some dimension and lag on others There are a host of financial

and non-financial indicators one could use to compare organizations Numerous

articles and books have been written on this subject alone As a first cut, however,

I have found the following question helpful:

Overall, is the Whole more, or less than the Sum of the Parts?

At the individual level, the question was triggered in my mind by the division

general manager of a joint venture between an extremely famous US-based

international conglomerate and a French company well-known as an enginedesigner and manufacturer This manager was explaining his frustration over thefact that, individually, his French engineers were technically much stronger thanthe partner’s engineers Yet “as a group, they (the employees of the joint venturepartner) accomplish a lot more than we do.”

I have also seen this pattern at the organizational level Taken separately,

organization A’s divisions are all solid performers Yet organization A – whichshould be worth no less than the sum of its parts – is weak In many organizations

I work with, managers are very aware of this situation and rate their own divisionmuch higher than the rest, or indeed the whole of the organization There are,

of course, perceptual causes to this phenomenon I know the people around mebetter than the folks at Head Office or in other divisions, hence I understand andappreciate my folks’ behavior better than that of people far away

But if this were only a perceptual issue the phenomenon would be universal,which it is not Some companies feel like more than the sum of their parts,and managers therein experience it that way (see O’Reilly & Pfeffer, 2000, foreight case studies of such organizations) In contrast, most of the organizations Iencounter feature a large number of bright and hard working people who seem toaccomplish a lot less than they should be accomplishing

This loss of value can manifest itself along any or all of the following threedimensions:

(a) “Why is it so hard to get anything done? I feel like I’m pulling a ten ton truck”

Some organizations seem to help their employees perform, while in others,indeed in most organizations, the “system” seems to be standing in the way

Things that should be relatively easy feel very difficult and end up consuming

a lot more energy than they should

(b) If given the choice, would people rather deal inside the organization, or with

an external supplier?Williamson (e.g 1975, 1985) has discussed the role of transaction costs

in explaining when activities should be internalized and when they should

be conducted via market forces In principle, activities should only beinternalized when doing so creates value This value is clearly perceived insome organizations; people are happy to work with internal partners, whosecultural proximity and strategic alignment lead to more pleasant and effective

dealings This is not the way things work in most organizations I study, where

managers instead hope for (and in many cases lobby for) the right to conducttheir business with external partners rather than internal ones

(c) Is the organization making the most of internal ideas, or is it losing too many

good ideas?

A classic joke about consultants presents them as individuals who borrowyour watch to tell you the time while charging you large sums of money forthis service Without going that far, I have indeed noticed that consultantsoften end up proposing and developing ideas that were available internally Ifthe idea existed internally, why did the organization need to pay a consultant

to present it? This is what I call the “Not Invented Outside” syndrome,which is basically the opposite of the well known and oft discussed “Not

Invented Here” syndrome The Not Invented Outside syndrome goes like

this: “If the idea came from inside rather than from some bright externalindividual/consultant/organization, it can’t be that good.”

More generally, most organizations fail to capitalize on the ideas and possibilities

available internally and hence destroy significant value

FOCUS OF THE CHAPTER

At the Conference I sketched out the architecture of a tentative organizational

excellence conceptual framework I proposed five major headings and selected one

or two elements from each section Developing all five sections to a satisfactory

degree would require more than this modest chapter As a result I chose here to

favor depth over breadth and focus on one of the five sections.

Two years ago, in a chapter written for a similar event (Manzoni, 2002), Icontrasted two approaches to management control: The traditional approach,

largely focused on aligning incentives through numbers-driven performance

evaluation and reward systems (see Fig 1), and a potentially new approach,

which I thought I was starting to observe in some HPOs In this paradigm,

organizations would be encouraging managers to set challenging targets (rather

than trying to extract as much slack as possible) and accept to be evaluated on

factors that are less than fully controllable (rather than insisting on controllable

factors only)

I further posited that this model required the existence of a number of conditions(see Fig 2) In particular, organizations wanting to introduce some subjectivity

in the evaluation and reward system would have to prevent this subjectivity from

degenerating into complacency, hence the need for stimulation and drive.

This chapter summarizes my currents thoughts on how some organizations

go about (and most organizations do not go about) developing and, indeed,

institutionalizing, this sense of stimulation and drive

Before getting to the next section, I want to highlight an important caveat: Most

of the eight dimensions discussed below can be pushed too far There can be too

Fig 1. The Traditional Management Control Paradigm.

much of a good thing, which then becomes dysfunctional for the organization Iwant to flag this aspect early and will come back on it at the end of this chapter

INSTITUTIONALIZING DISSATISFACTION WITH THE STATUS QUO (DSQ)

The implementation of change – whether at the individual or organizational level– is greatly facilitated by the existence of significant dissatisfaction with the statusquo (Kotter, 1996) When executives fail to help the troops understand why change

is needed, these troops are much more likely to resist change.1Generating sufficient dissatisfaction with the status quo often requires sig-nificant time and attention from senior executives, especially in successfulorganizations This investment is costly at two levels: First it diverts senior man-agement attention from other pursuits In today’s hectic and highly competitiveenvironment, senior management time and attention is in heavy demand and hencecommands a high opportunity cost Secondly, the introduction of the requiredchanges is delayed: Stimulation of sufficient dissatisfaction with the status quo

Fig 2. A New, High Performance, Management Control Paradigm?

across the organization is not exactly an instantaneous process The larger the

organization and the more geographically disperse it is, the more time consuming

the process will be and, as a result, the longer the organization will have to wait

for the significant changes to be launched

This statement is less true in a few organizations that seem to have internalized,i.e that have made part of their culture, a healthy dissatisfaction with the status quo

(DSQ) Healthy DSQ does not mean a neurotic obsession or collective paranoia

While Grove (1996) argued that “Only the paranoid survive,” paranoia is a mental

illness and hence cannot be considered a satisfactory model In contrast, “healthy

DSQ” includes brief celebrations of past achievements, followed by the resetting

of sights toward the future and the need to do ever better This is precisely the

atmosphere that seems to prevail within Dell where success is greeted by a short

e-mail or a pat on the back, followed by a lengthy discussion of what could have

been done better The principle established by Michael Dell, the founder, is:

“Celebrate for a nanosecond, then move on” (Park & Burrows, 2003)

Instead, most organizations I study tend to be slowed down, sometimesdownright paralyzed, by one (or more) of three pathologies:

Arrogance – characterized by the implicit, and often explicit belief that “It isimpossible to do things better than we are doing,” or in other words, “we aregreat.”

Ignorance – reflected in a widespread belief that “It is conceivable that otherpeople might be able to do things better, but we really do not know how to do

so We are genuinely doing as well as we can.”

Denial – characterized by defensiveness at the individual and collective level,and expressed by managers as “We (or at least some of us) know there areopportunities for improvement, but discussing them is not easy and tacklingthem explicitly feels impossible.”

I would like to discuss eight avenues that I have seen companies pursue to repelthese three pathologies and institutionalize DSQ:

Maintaining a Sense of Vulnerability

There can be three sources of perceived vulnerability The first and most obvious

is competition in general or, better yet, a particularly competitor This competitor

can be selected because it is particularly successful and respected, threateningfor the organization, and/or disliked (e.g because it resorts to practices ourorganization disapproves of) Some organizations have been very successful withthe use of a “villain,” i.e a competitor that receives much attention and focus,often in very competitive, sometimes even demonizing overtones For example,when Dell was still a glorified start-up, its founder Michael Dell would fire up hisemployees by telling them that his daughter’s first words had been: “Daddy, killIBM, kill Compaq, kill Gateway” (Steil, 2002) Similarly, Scott McNealy’s scornfor Microsoft helped to build energy and focus among the Sun Microsystemsengineers And Richard Branson’s relentless jabs at British Airways had a similarmobilizing effect on the Virgin Atlantic employees

Organizations can also nurture a sense of vulnerability by communicatingheavily around the story of organizations similar to itself that were once verysuccessful but subsequently lost some or all of their advance For example, I haveseen the rise and fall of companies like IBM, ABB and Xerox used in severalorganizations as part of attempts by senior management to alert employees tothe dangers of complacency EMC’s CEO Michael Ruettgers recently provided a