RETHINKING CORPORATE PERFORMANCE:
FROM PERFORMANCE MEASUREMENT TO THE PERFORMANCE SYSTEM
Boštjan Antončič
University of Ljubljana
Vasudevan Ramanujam
Case Western Reserve University
PREMIŠLJEVANJE O POSLOVNI USPEŠNOSTI PODJETJA:
OD MERJENJA REZULTATOV DO SISTEMA REZULTATOV
Boštjan Antončič
Univerza v Ljubljani
Vasudevan Ramanujam
Univerza Case Western Reserve
Copyright © Boštjan Antončič & Vasudevan Ramanujam, 2000
POVZETEK
Članek pregleduje in kritično analizira nedavno literaturo o poslovnih rezultatih. Na podlagi
analize je ugotovljenih šest trendov in osem ključnih točk pri merjenju in nadzoru rezultatov. Šest
trendov vključuje: (a) vzpon analize delničarjeve vrednosti (shareholder value analysis), (b)
razvoj barometra potrošnikovega zadovoljstva (barometer of customer satisfaction), (c) rastoča
popularnost in sprejemanje celovitega managementa kakovosti (total quality management), (d)
neprestane potrebe po obravnavanju korporativne družbene odgovornosti (corporate social
responsibility), (e) povečano priznanje, da ugled korporacije (corporate reputation) predstavlja
osnovni vir podjetja, in (f) hiter vzpon (in razširitev v praksi) takoimenovanega uravnoteženega
točkovalnega (balanced scorecard) pristopa k merjenju rezultatov. Osem točk ovrednotenja
vključuje: (1) žarišče, (2) raven analize, (3) usmeritev, (4) primerljivost, (5) možnost dodajanja
novih kazalcev, (6) obstoj povezave med merjenjem in managementom rezultatov, (7) vloga
strategije, in (8) vključitev upoštevanja managementa sprememb. Te točke so uporabljene za
primerjavo in ovrednotenje zgoraj omenjenih trendov v raziskovanju rezultatov. Nato predlagava
model rezultatov, ki je postavljen kot sistem managementa rezultatov. Ta model omogoča široko
teoretično obravnavo rezultatov in upošteva različne kriterije. V praksi lahko uporabimo
predlagani sistem rezultatov kot podlago za stvaritev celovitih modelov rezulatatov.
Ključne besede: poslovni rezultati
2
RETHINKING CORPORATE PERFORMANCE:
FROM PERFORMANCE MEASUREMENT TO THE PERFORMANCE SYSTEM
Boštjan Antončič
Faculty of Economics
University of Ljubljana
Phone: +386 1 4892-576
Fax: +386 1 4892-698
E-mail: bxa10@po.cwru.edu
And
Vasudevan Ramanujam
Department of Marketing and Policy Studies
The Weatherhead School of Management
Case Western Reserve University
10900 Euclid Avenue
Cleveland, OH 44106-7235
Phone: (216) 368-5100
Fax: (216) 368-4785
E-mail: vxr@po.cwru.edu
Copyright © Boštjan Antončič & Vasudevan Ramanujam, 2000
Do not reprint without permission of the authors. Comments and criticism are welcome.
Names of authors appear in alphabetical order. Both authors made equal contributions.
3
RETHINKING CORPORATE PERFORMANCE:
FROM PERFORMANCE MEASUREMENT TO THE PERFORMANCE SYSTEM
ABSTRACT
In this paper, we review and critically analyze the recent literature on corporate performance.
Based on this analysis, we discern six trends and identify eight key issues pertaining to the
measurement and control of performance. The six trends include: (a) the rise of shareholder value
analysis, (b) the development of a barometer of customer satisfaction, (c) the growing popularity
and acceptance of total quality management, (d) the continuing calls to address issues of corporate
social responsibility, (e) the increasing recognition of corporate reputation as a core resource, and
(f) the rapid rise and spread among practitioners of the so-called balanced scorecard approach to
performance measurement. The eight assessment and evaluation issues include: (1) focus, (2)
level of analysis, (3) orientation, (4) comparability, (5) capacity for adding new indicators, (6)
existence of performance measurement-management link, (7) role of strategy and (8) inclusion of
the consideration of change management. We use these issues to compare and evaluate the above
mentioned trends in the study of performance. We then go on to propose a model of performance
designated as a performance management system. This model allows us to view performance
from a very broad conceptual angle and attempts to address a variety of criteria. In practice, the
performance system can serve as a philosophical foundation for building comprehensive models of
performance.
Key words: corporate performance
4
The concept of organizational performance has always had a crucial position and role in
strategic management (Venkatraman & Ramanujam, 1986). Theoretically, empirically, as well as
in terms of managerial importance, performance has been viewed as a major preoccupation of
general managers. However, even though the concept of performance of organizations is one of
the central concepts in the field of strategic management, there is still lack of a unified theory of
performance. Approaches to the study of corporate performance are variegated and fragmentary.
Fundamental questions of performance analysis remain unresolved.
Academic research on organizational performance has been noticeably rare in past decade,
because critical questions of organizational performance have been dormant (Meyer & Gupta,
1994). Previous research mostly looked at performance in outcome terms. Performance research
has shown an exclusive preoccupation with organizational success. The dominant model of
performance has been one that offers a view of performance as influenced by strategic or
discretionary factors, on the one hand, and organizational and environmental characteristics or
contextual influences on the other. In addition, in most studies, the focus has been on correlates of
performance rather than on the performance concept itself. Researchers who sought to understand
the concept of performance itself have been in the minority. These researchers have primarily
focused on performance measurement (for example, Venkatraman & Ramanujam, 1986;
Chakravarthy, 1986; Venkatraman & Ramanujam, 1987), but rarely did they build models with
performance as a focal construct or models of performance per se (Meyer & Gupta, 1994).
Fundamental questions in approaching the performance concept in strategic management are
what performance is and why it is important. The first of these questions deals with the meaning
and conceptualization of performance, i.e., is performance an outcome or effect, including goal
fulfillment (a static view), or is it an action or a set of contemplated actions accompanied by their
5
execution to implement strategies (a dynamic view)? For instance, should initiatives to undertake
total quality management efforts be viewed as falling within the conceptual domain of
performance? Should we talk about performance in terms of spatially and temporally proximate
outcomes or longer-term, spatially removed effects (Brewer, 1983)? Or, rather, should we talk
about performing and performance as a system that functions in order to achieve outcomes and
effects?
The second fundamental question is the why question. Is performance important only as an
evaluation of past actions and behavior? Is it also important as a means for assuring outcomes in
the future, and for serving as a control and motivation mechanism? In other words, can we talk
about performance as a future oriented system that helps build the organization to meet challenges
yet to come?
Our view on performance is a holistic one. While we favor the goal attainment model of
performance, we also believe that performance should be seen as a system. In our view, which
will be elaborated upon later in this paper, performance is a future oriented system that functions
in order to fulfill expectations about goals, to achieve desired outcomes and effects, and helps to
build and rebuild the organization. While multidimensional views of organizational performance
are emerging such as, for example, the balanced scorecard approach (Kaplan & Norton, 1992,
1993, 1996), they still come up short on certain of the future and change oriented dimensions that
underlie the conceptual model to be proposed in this paper.
We begin this paper with a critical appraisal of the recent literature on organizational
performance. We discern six recent trends of thought on corporate performance assessment and
evaluation. We also identify and elaborate upon eight key issues of organizational performance,
which facilitate a compare and contrast of the above six trends. From this critical assessment, we
6
develop the interpretive conceptual model that has been alluded to above. The paper concludes
with a brief examination of the implications of this model for researchers and practitioners.
RECENT TRENDS IN PERFORMANCE ASSESSMENT AND EVALUATION
We identified six streams of writings on the topic of corporate and business performance
assessment and evaluation. These include the shareholder value-centered approach, two customer
satisfaction-centered approaches (namely, customer satisfaction barometer and total quality
management), and three multidimensional approaches (namely, corporate social performance,
corporate reputation, and the balanced scorecard.) We chose to highlight these six trends because
of the existence of substantial and influential amounts of writing within each stream, although we
recognize that there may well exist other methodologies and approaches that have gained a more
limited amount of attention and practitioner following.
The Shareholder Value Approach
The first major trend is the shareholder dominance perspective that has achieved a measure of
prominence in recent years. It views the shareholder as the principal constituency to be served by
organizations. The burgeoning popularity of financial tools such as shareholder value analysis
(SVA) reflects the growing prevalence of this approach. The shareholder value approach
(Rappaport, 1986; Clarke, 1993; Brancato, 1997; Black, Wright & Bachman, 1998; Rappaport,
1998; Serven, 1998) relies on one central metric reflective of overall organizational performance.
The proponents of this approach argue that it can be used to drive behavior within the
organization. A cornerstone of this approach is its systematic unpacking of the so-called drivers
of shareholder value. These drivers of value are claimed to help focus managerial attention on the
means managers can use to create shareholder value.
It is not our aim to get into the details of the SVA methodology. However, a very brief
description may be appropriate here. Basically, the SVA methodology involves the discounting of
7
the future cash flows of a firm (or a quasi-independent entity within the firm) at a discount rate
pegged to its cost of capital. The idea is that investors have other opportunities for the use of their
capital, and if a firm can not earn a rate of return in excess of its cost of capital, it is basically
destroying the value of the firm, and thereby shareholders’ wealth as well. The focus is clearly
financial.
It is apparent that the shareholder value approach is premised on a unitary view of the ultimate
goal of management: the creation of shareholder value. There is a seeming inflexibility in the
approach, which seems to consider other management goals as secondary, tangential or even
irrelevant. If one accepts the dominance of shareholders’ interests over other stakeholders, this is
a simple and compelling idea, which probably accounts for the growing popularity of the SVA
approach.
Considering that the results obtained with the SVA approach are very sensitive to cost of
capital estimates, there may be considerable variability in the results of SVA attributable to the
nuances of determining the cost of capital, which turns out to be a non-trivial and judgmental
problem. Despite the seeming precision of a unitary metric of performance, the methodology
turns on numerous elements requiring considered judgement. Nevertheless, the contribution of the
approach lies in its lucid demonstration, often in the form of simplified schematics, of the interlinkages among a handful of value drivers and their link, in turn to management objectives and
directions. However, notions like strategy, key success factors, and competitive advantage remain
beneath the surface of such schematics.
Customer Satisfaction as a Primary Goal
The second major trend in performance assessment and evaluation derives from the customer
dominance perspective. It views the customer (in contrast to the shareholder) as the principal
constituency to be served by organizations. We noted two examples of this trend. In the Customer
8
Satisfaction Barometer (Fornell, 1995), the imperative to track measures of the quality of output,
as experienced by the buyer, is highlighted. In the total quality movement, on the other hand,
attention turns on measurement of the quality of performance across different functions. Thus, in
total quality management, a more multidimensional perspective is embodied compared to the
unitary focus on customer considerations in the Customer Satisfaction Barometer.
At the micro level, Fornell’s Customer Barometer model is proposed as a means to measure
economic performance and at the macro level, it serves as a gauge of the sources of revenue.
According to Fornell’s model, customer expectations and post-purchase perceived performance
are the predictors of customer satisfaction. Customer satisfaction together with switching barriers
and voice impacts customer loyalty. In this view, changes in satisfaction are the consequences of
past decisions and are predictors of future performance. Fornell claimed that his model could be
used for industry comparisons, comparisons of individual firms with the industry average,
comparisons over time, and predictions of long-term performance. We include a brief discussion
of the approach here since it includes a future orientation as well as a measurement focus, and
addresses several of the performance assessment issues discussed elsewhere in this paper.
The total quality management (TQM) programs, similarly, focus on improving customer
satisfaction, which is seen as the most important requirement for the long-term success of an
organization (Dean & Bowen, 1994). In addition, the focus here is also on improving operations
in terms of process efficiency and product reliability (Reed, Lemak & Montgomery, 1996).
Satisfaction of internal customers, i.e., employee fulfillment (Anderson, Rungtusanatham &
Schroeder, 1994) also receives considerable attention in this approach. To be effective at TQM,
management needs to become adept managing two somewhat opposing imperatives. Both the need
to achieve the goal of control, with its emphasis on improving current or core activities, and the
need to further the goal of learning, wherein the emphasis is on new products and process
9
innovations, become important issues (Sitkin, Sutcliffe, & Schroeder, 1994). In other words, there
should be management of the existing order and the management of change in an organization
under the TQM approach. In addition, when outcomes are not seen primarily in financial terms as
increased revenues or reduced costs (Reed, Lemak & Montgomery, 1996), performance
measurement follows the management of quality (satisfied customers, efficient processes).
In the TQM approach, performance is measured multidimensionally across different functions.
In examining the requisites of viable TQM processes, Zairi (1994) talks about performance
measurement in new product development, in the supply chain, in research and development, in
the area of customer satisfaction, and in the methods for facilitating people productivity. Two
TQM related programs, the Malcolm Baldridge National Quality Award in the U.S. and the
European Quality Award in Europe (see Bendell, Boutler & Kelly, 1993) include performance
related criteria that focus on multiple levels of performance. Similarly, benchmarking, a
managerial technique for continuous improvement (Imai, 1986) through a process of comparison
with best-of -class organizations, tries to approach performance from many different angles, that
is, externally, as well as internally (Camp, 1989; Spendolini, 1992; McNair & Leibfried, 1992;
Watson, 1993; Bendell, Boutler & Kelly, 1993; Boxwell, 1994). Even if customers are seen as the
primary constituency, the TQM approach is, basically, a multidimensional approach.
Other Multidimensional Views
The third major trend involves a perspective that takes into account global complexity and
business ethics. It can be seen as expanding the multidimensionality of business performance by
bringing in more subjective measures. Thus, some recent approaches towards organizational
performance have tried to integrate different dimensions of performance, and view performance
across many dimensions. The outlines of a holistic model of performance centered on stakeholder
needs satisfaction is beginning to emerge. This emergent model or perspective can be easily
10
recognized in several recent tendencies, including an increased focus on corporate social
performance. Measures such as community relations, employee relations, environment, product
quality, and treatment of women and minorities by a corporation are added to the repertoire of
performance indicators as these approaches are internalized in the organization. The increasing
attention devoted in recent years to the development and enhancement of corporate reputations is
also reflective of the growth of the multidisciplinary perspective. The managerial importance of
corporate performance is captured in Fortune magazine’s annual list of America’s most admired
companies. Finally, the prominence of the integrative performance measurement system known as
the balanced scorecard should also be noted in discussing multidimensional approaches.
According to the stakeholder theory (Freeman, 1984), the ultimate test of corporate
performance would be the success of satisfying multiple stakeholder interests rather than meeting
more conventional economic and financial criteria (Evan & Freeman, 1988). There has been an
increased focus on the organization's corporate social performance (Clarkson, 1995; Donaldson &
Preston, 1995; Shrivastava, 1995), even if it has been long recognized as corporate conscience
(Berle & Means, 1933) and responsibility (Heald, 1957). Turban & Greening (1996:658) noted:
"Many scholars and practitioners today are paying increasing attention to firms'
corporate social performance, a construct that emphasizes a company's
responsibilities to multiple stakeholders, such as employees and the community at
large, in addition to its traditional responsibilities to economic shareholders."
Wood (1991) considered corporate social performance as a unifying framework for the
research on social issues in management. She proposed the corporate social performance model,
as a revision of a previous model of Wartick & Cochran (1985). The model includes interaction
among principles of corporate social responsibility, processes of corporate social responsiveness,
and outcomes of corporate behavior. Swanson (1995) took Wood’s model as given, and extended
it. However, he did not discuss performance. In this view, interestingly, social performance is
11
seen as a model, incorporating principles, processes, and outcomes of social responsibility.
Performance is not equated with outcomes, but rather is seen broadly as actions and outcomes of
organizations. However, the authors did not make any distinction between performance and
responsibility. So, perhaps, it might be more appropriate to talk about the model of social
responsibility and not performance. Nevertheless, an implicit point in this work may be that
performance can not be separated from its context, that social performance can not exist without
the social responsibility and its defining elements.
Stakeholder satisfaction as a common measure and the need for balancing it across
different constituencies (Clarkson, 1995) is intuitively acceptable, but there seems to be no criteria
for assigning relative value to particular shareholder groups, or particular social responsibility
issues related to that group. In addition, such a broad conceptualization of social performance
renders it even more difficult, if not impossible, to develop instruments for its measurement.
Despite this fact, in empirical research, corporate social performance has been conceptualized and
measured in terms of community relations, employee relations, environment, product quality, and
treatment of women and minorities by a corporation (Turban & Greening, 1996). According to a
review of the empirical evidence on the effects of corporate social performance, “nearly all
empirical studies to date have concluded that firms that are perceived as having met social
responsibility criteria have either outperformed or performed as well as other firms that are not
necessarily socially responsible” (Pava & Krausz, 1995).
Corporate reputation ratings have been given increased attention because behavior of an
organization that would build its reputation has come to be seen as strategically important in
incomplete information settings (Weigelt & Camerer, 1988). Corporate reputation also holds out
the possibility for favorable consequences such as maximization of social status (Fombrun &
Shanley, 1990) and increased stock value (Vergin & Qoronfleh, 1998). The assessment of
12
corporate reputations across America’s major corporations has now become an annual exercise. In
making its assessments of corporate reputations, Fortune magazine relies on eight attributes,
namely, quality of management, quality of products and services, innovativeness, long-term
investment value, financial soundness, ability to attract, develop, and keep talented people,
responsibility to the community and the environment; and wise use of corporate assets. However,
in spite of their multi-dimensional character, the Fortune ratings tend to be biased towards harder
aspects of performance. The financial part clearly dominates the list of criteria. Fryxell and Wang
(1994) note that the usefulness of the Fortune rankings is limited as they mainly measure the
extent to which a company is perceived as striving toward financial goals. Vergin & Quoronfleh
(1998) also reach the same conclusion, after finding that financial performance is a major factor
affecting a company’s reputation. Finally, corporate reputation can be seen as an outcome that is
linked to the past, since it is “a set of attributes ascribed to a firm, inferred from the firm’s past
actions” (Weigelt & Camerer, 1988). Weigelt & Camerer (1988) also consider reputationbuilding as a strategic management activity that has implications for dealing with competitors,
customers and employees.
One of the most successful efforts to integrate multiple perspectives in performance
assessment has been that of Kaplan & Norton (1992, 1993, 1996.) Their balanced scorecard
approach incorporates four perspectives on performance:

The financial perspective (how do we look to shareholders?);

The customer perspective (how do customers see us?);

The internal business perspective (what must we excel at?);

The innovation and learning perspective (can we continue to improve and create
value?).
13
These four perspectives provide a balance between external internal measures of performance
for a company and help translate a company’s strategic objectives into a coherent set of
performance measures (Kaplan & Norton, 1993). Companies claim to have been using the
scorecard in a variety of ways, namely, to clarify and update strategy, to communicate strategy
throughout the company, to align unit and individual goals with the strategy, to link strategic
objectives to long-term targets and annual budgets, to identify and align strategic initiatives, and to
conduct periodic performance reviews to learn about and to improve strategy (Kaplan & Norton,
1996). An important apparent measurement problem, however, of the balanced scorecard is its
incomparability across firms or, as Kaplan and Norton (1993:135) noted:
“The balanced scorecard is not a template that can be applied to businesses in
general or even industry wide. Different market situations, product strategies, and
competitive environments require different scorecards. Business units devise
customized scorecards to fit their mission, strategy, technology, and culture.”
This quote underscores the fundamental purpose of the balanced scorecard. The methodology
is intended to assist companies in improving their performance measurement and performance
management processes. It is not meant to be a research aid and may not be very helpful as a tool
for comparison across firms. This methodology for performance assessment – actually,
enhancement – is a contextually bounded one.
The concept of the balanced scorecard has been stretched from being a multi-dimensional
performance measurement tool based on strategic considerations to a strategic measurement
system at a business unit level and to strategic management system foundation. The idea of
balanced measurement of performance by using financial and non-financial measures is
persuasive, but there is a problem of selection of performance measures. Even when such
measures are selected on the basis of strategic considerations, there is a problem of determining
the relative importance of selected, non-comparable measures. It seems that there is an inherent
14
arbitrariness in selecting the dimensions/measures of performance to be included within each of
the balanced scorecard perspectives.
To put strategy at the center of performance measurement is indeed important, but there
remains the question of how to translate strategy into performance measures. Even more
importantly, how to change the performance measurement in response to the inevitable changes in
strategy once such a measurement system is in place, also remains a thorny issue. The balanced
scorecard seems to lack a dynamic component. As implied earlier, there may be another problem
related to implementation, that is, the lack of comparability of this measurement system across
business units. Due to this, there is a problem of selection of benchmarks for performance
indicators. They seem to be comparable only through time in a single business unit. However,
changes in strategy may lead to changes in measurement, which mean abolishment of past
performance indicators as relative standards of comparison. Overall, then, non-comparability is
inherent in the balanced scorecard. Due to this, it is questionable if the balanced scorecard can be
used as a management system. Its value as a motivational mechanism may eventually become
limited since it does not provide comparability.
Finally, even if the balanced scorecard may be seen, philosophically, as a continuous
adjustment in the requisite variety in the firm to the variety of environmental demands, it lacks
considerations of managing these adjustments and managing change.
THE PERFORMANCE SYSTEM
From the foregoing review of recent trends, it is clear that performance assessment and
evaluation continues to be a major challenge. While different approaches are guided by different
underlying assumptions, philosophies, and purposes, there is no single overarching model of
performance. Approaches such as the SVA promise comparability and generalizability, but their
applicability may be limited to the top levels of companies. Approaches such as the customer
15
satisfaction barometer or TQM emphasize process over outcome, and take full cognizance of
contextual and discretionary influences on ultimate performance, but sacrifice comparability and
generalizability.
To capture the range of issues raised and the underlying complexity of the performance
construct, we propose a three-tiered model that we call the performance system. Basically, when
we talk about performance, we find ourselves transiting across three domains of discourse. At the
basic level, we are concerned with the measurement of performance. At the next level, our
interest shifts to the foundational assumptions, motivational effects, cognitive demands, and
implementational problems associated with different performance measures. We label this level
as the performance management level. At the final level, we recognize that performance needs to
be approached from static as well as dynamic angles. The need to maintain a capacity for and
responsiveness to change at all times cannot be overemphasized in these days of rapid
technological and socioeconomic turmoil.
Part of the problem in studying performance arises from the fact that these three levels appear
to be loosely connected in most organizations. There is a need for a mechanism to integrate the
discussion across these three levels, and in our view the organization’s strategy should be that
mechanism.
Our conceptual view of performance, then, attempts to bridge these three levels of discourse.
What we call the performance system brings together performance measurement, performance
management, and change management within a systemic framework. We will now frame a
discussion of eight key issues in the study of organizational performance in the light of our
performance system framework.
16
KEY ISSUES IN APPROACHING PERFORMANCE OF ORGANIZATIONS
In this section we consider organizational performance issues related to performance
measurement, performance management, and change management.
Performance Measurement and Management
Researchers have focused on performance measurement, because critical evaluation of
measurement approaches has been seen as a way to improve understanding of the underlying
constructs (Cameron & Whetten, 1983; Venkatraman & Ramanujam, 1986). Venkatraman &
Ramanujam (1986) viewed “business performance”, that includes financial and operational
performance and is a subset of the overall concept of organizational effectiveness, as a main
domain of the performance concept in strategic management.
Increased attention on multidimensional approaches to organizational performance, discussed
in the previous section, indicates that the domain of the concept of performance in strategic
management needs to be extended to encompass needs and influences of multiple constituencies.
This does not mean that only the checklist of performance measures should be extended, such as
in the example of the addition of financial indicators of the firm’s slack (Chakravarthy, 1986), but
rather that organizational performance should be rethought. The importance of reliability and
internal validity of performance measurement in strategic management (Venkatraman &
Ramanujam, 1986; Venkatraman & Ramanujam, 1987) remains, but conceptual and functional
validity (Singh, 1995) of the construct should not be ignored either.
An important issue in performance measurement is the focus of analysis. It is important to
determine what is of main interest in a study, primarily its domain and purpose (Cameron, 1986a).
It may be also necessary to specify whether the focal variables are those that indicate or those that
predict (Cameron, 1986b) organizational performance. On the one hand, there have been “pure”
performance studies, where the main focus of analysis is the concept of performance, where
17
emphasis has been predominantly on measurement and indicators of performance (for example:
Venkatraman & Ramanujam, 1986; Chakravarthy, 1986; Venkatraman & Ramanujam, 1987;
Meyer & Gupta, 1994). On the other hand, there have been studies that are concerned with
prediction of performance. The first group of such studies has performance as its focus, and tries
primarily to find configurations or sources that are conductive to superior organizational
performance (Peters & Waterman, 1982; Varadarajan & Ramanujam, 1990; Ketchen et al., 1997;
and others).1 These studies indicate that organizational performance can not be separated from its
context. Performance may be seen as embedded in a configuration of organizational and
environmental elements. The second group, where prediction of performance is of interest,
includes studies that are concerned with other constructs and not just performance. In such studies
performance is used mainly as a way to assess predictive validity of the focal construct. In this
paper, the focus is on the performance concept.
Furthermore, there is the issue of the level of analysis. Is the focus on the performance of a
corporation or is performance of a business unit of central interest? The issue here is not only
what level of analysis a researcher selects, but more importantly whether the two levels are
differentiated and how are they linked one to another. No matter what the unit of analysis, every
aggregate measure of performance is potentially problematic. The main reason for that is
arbitrariness, since “the determination of effective and ineffective performance, especially when
multiple measures are involved, has required the utilization of arbitrary and subjective weights to
arrive at an aggregate measure of effectiveness” (Lewin & Minton, 1986: 529). Arbitrariness is
1
It needs to be noted, however, that findings of previous research on the strategic planning-performance relationship
have been inconsistent, but we believe that there has been more evidence on the existence of the positive relationship
between strategy and performance in past research than vice versa (for more detailed explanation of this issue see
Miller & Cardinal, 1994).
18
becoming more and more an inherent characteristic of organizational performance, because of
increasing importance of multidimensional approaches to performance.
When there is arbitrariness and ambiguity that is related to selection of appropriate indicators
or measures of performance, it may be useful to circumscribe or bound the construct as suggested
by Cameron (1986a). In addition to selection of the focus (domain and purpose) and level of
analysis, four additional guidelines, in form of questions, in assessment of performance may be
considered: (1) From whose perspective is performance being judged? (2) What is the referent
against which performance is judged? (3) What time frame is employed? (4) What types of data
are sought? The first two questions may be seen as relevant for evaluation of approaches to
organizational performance, whereas the third and the fourth may have implications primarily for
the empirical assessment of performance.
Identification of key constituencies for whom performance is being assessed is at the same
time identification of key goals inherent in approaches to performance. The existence of referents
for comparison is of crucial importance, because organizational performance itself is a relative
concept – we can only say that an organization is a high or a low performer relative to other
organizations. Also, it is important to determine if an approach to performance has an orientation
to the past, close (short-term) or more distant (long-term) future. The selection of a time frame is
an empirical question based on the selection of an approach to performance. Selection of types of
data or indicators of performance is also an empirical question, where the performance construct is
operationalized on basis of the underlying approach.
From a practitioner point of view, Eccles (1991) regarded the shift from considering financial
indicators as the principal foundation for performance measurement to considering them as having
equal importance among other measures as a revolution or a new philosophy in performance
measurement. He noted that “many managers worry that income-based financial figures are better
19
at measuring the consequences of yesterday’s decisions than they are at indicating tomorrow’s
performance” (Eccles, 1991: 132). In such a future-oriented view performance measurement
becomes an ongoing, evolving process (Eccles, 1991) that is in practice formalized in a firm’s
business performance measurement model (Eccles & Pyburn, 1992) or system (Kaplan & Norton,
1993; Kaplan & Norton, 1996).
Two properties of performance measures are especially desirable for purposes of
organizational management, particularly for control and coordination. These two properties are
comparability and variability (Meyer & O’Shaughnessy, 1993; Meyer & Gupta, 1994).
Comparability refers to possibility of comparison of performance measures across business units,
whereas variability refers to the range of performance outcomes that allows for their ranking
across business units. Both are necessary in order to differentiate organizational performance
form better to worse. Meyer and associates demonstrated a peculiar property of the performance
construct, found in historically weak correlations or even orthogonality of performance measures.
“At the core of the performance paradox is the idea that many measures run down with use—they
lose variability and hence the capacity to discriminate good from bad performance. Running
down occurs for a variety of reasons, among them positive learning where genuine improvement
takes place, perverse learning where there is appearance of improvement but not actual
improvement, selection where poor performers (people or organizational units) are displaced by
better performers, and suppression where persistent differences in performance outcomes are
ignored” (Meyer & Gupta, 1994: 330). Practitioners may not need highly correlated or even
redundant indicators of performance, but rather a performance model that connects measurement
with management and accounts for comparability and tries to retain variability of performance
measures by adding new indicators. The point is that usefulness of performance measurement for
20
managers, such as control, coordination and motivation, should be accounted for, even if at the
expense of convergent validity of the performance construct.
As suggested in the above discussion, in sum, six issues are of extreme importance when
considering a particular approach to organizational performance:
1. focus in terms of key goals and constituencies
2. level of analysis, especially the existence of a link between performance at corporate
and business unit level
3.
orientation with regard to time (past, future)
4. comparability across organizations
5. capacity for adding new indicators
6. existence of links between performance measurement and management.
These issues will be used as bases for critiquing approaches to organizational performance.
Before that, we turn to two other important issues: strategy and change management.
Performance, Strategy and Change Management
Under the paradigm of strategic management, managers through formulation and
implementation of strategies do have influence on the fate of organizations. The CEO is a key
figure and his or her strategic actions are crucial for success of his or her organization. Strategy is
central and instrumental for organizational performance. Strategic planning as a surrogate for
strategy formulation has been found to have positive effects on organizational performance. This
is evident, in the research of Miller & Cardinal (1994), who conducted a meta-analysis on the
relationship between strategic planning and firm performance and concluded that strategic
planning positively influences firm performance, which in the analyzed studies was mostly
assessed as profitability and growth. Strategic planning can be seen as positively associated with
long-term total return to stockholders (Rhyne, 1986) and survival (Capon, Farley & Hulbert,
21
1994). The influence of corporate strategy on performance in terms of shareholder value has also
been noted in empirical tests (Lubatkin & Chatteryee, 1991). Strategy and performance are
causally related. Evaluation of performance without considering organizational strategy and goals
would appear to be a fruitless endeavor. In addition to the close association between performance
and strategy in strategic management, strategy can be seen as the glue that links together
performance measurement and performance management. Therefore, the role of strategy can be
seen as an important issue in considering alternative approaches to organizational performance.
In today’s increased pace of developments and changes in technology, product and market
developments, such as technological innovation, consumer requirements, and globalization, the so
called transition state (Beckhard & Harris, 1977), or the change period, has become a prevailing
“state” in which organizations are in. Change management has become one of key concerns of
today organizations, which are trying to coherently align and creatively configure their strategy,
structure, work, people, and culture to this dynamism (Nadler & Tushman, 1997.) Organizational
performance can not be built, managed or validly assessed without considering the reality of
change and its management. Thus, change management, or more precisely consideration of
change management and its link to performance, will be taken into account as an additional issue
in analyzing approaches to organizational performance.
Our view is that strategy can be seen as a centerpiece of organizational performance, whereas
performance measurement, performance management and change management are cornerstones of
the concept of organizational performance.
The Emerging Performance System
We compared the six trends or approaches on the basis of eight issues that were identified at
the beginning of this paper. To recapitulate, these issues are: (1) focus (key goal, constituencies),
(2) level of analysis, (3) orientation, (4) comparability, (5) capacity for adding new indicators, (6)
22
existence of a performance measurement-management link, (7) role of strategy, and (8) inclusion
of the consideration of change management. Results of this comparison and the properties of the
emerging organizational performance system are summarized in Table 1.
----------------------------------Insert Table 1 about here
----------------------------------First, the emerging focus of approaches to organizational performance can be seen across two
dimensions: (1) uni- vs. multi-dimensional goal (is a key goal to satisfy one or multiple
constituencies); and (2) financial vs. non-financial goal (does it include financial and/or nonfinancial considerations). On one side of a continuum are uni-dimensional approaches such as
SVA and customer satisfaction barometer, whereas on the other are multi-dimensional approaches.
Similarly, on one side of a continuum is an approach that focuses primarily on financial goals
(SVA), whereas on the other are approaches that focus exclusively on non-financial goals
(customer satisfaction barometer, corporate social responsibility). Most of the approaches tend to
incorporate both financial and non-financial goals. Therefore, the emerging approach to
performance can be seen as oriented to satisfying multiple constituencies by taking into account
both financial and non-financial considerations.
Second, the level of analysis can be primarily the corporation or the business unit. Irrespective
of which is selected as a primary level of analysis, the link between the two should be specified
and taken into consideration. Such link can be only financial (SVA), hierarchical (TQM), or
strategic (the balanced scorecard). In our view, following the balanced scorecard approach, the
link should be specified on basis of strategic considerations. Hence, the emerging approach to
performance may focus on the business unit or the corporate level, and needs to include strategybased consideration of linkage between the two levels.
23
Third, a future orientation is more and more important. In our view, following the most
recent—the balanced scorecard approach, the emerging approach to performance is primarily
future oriented, but incorporates also orientation to the past for reference purposes.
Fourth, comparability is an important but tricky issue, because development of performance
measures can be seen as paradoxical (Meyer & Gupta, 1994). The trend seems to be from highly
comparable financial measures in SVA to prevalence of non-financial measures in
multidimensional approaches or even to high customization at expense of comparability in the
balanced scorecard approach. For motivational and control purposes, comparability across
business units or firms at least at the industry level should be maintained, but because of the
increasing demand for customization and consequent combination of measures with arbitrary
weights, comparability is expected to become more and more of a challenge.
The fifth issue is the capacity for adding new indicators of performance. Most of the surveyed
approaches, with the exception of the two uni-dimensional ones, are open to inclusion of new
indicators. Following this trend, the emerging approach to organizational performance can be also
open to addition of new items or facets of performance.
Sixth, the trend in linking performance measurement to performance management tends to be
from partial or implicit recognition of the linkage to explicit consideration of inter-relatedness of
performance measurement and management in TQM and the balanced scorecard approach. This
link, even if only implicit at the time, is gaining in importance across the different approaches to
performance, because of increased recognition that performance should be seen as a model or a
system. Therefore, the emerging approach may explicitly recognize the necessity of existence of
performance measurement-management linkage and of viewing organizational performance as a
system.
24
Seventh, the importance of strategy has been recognized in most of the approaches to
performance. We think, however, that an approach to performance should not be equated to
strategy, as for example in the case of TQM, but rather seen as causally related to strategy. In our
view, as well in the balanced scorecard approach, strategy should be central to the emerging
performance approach.
The eighth issue is the inclusion of the consideration of change management in the approaches
to performance. Most of the approaches do not include this consideration. In spite of this fact, we
believe that the emergent approach should not neglect it. Change management has been
considered as implicitly relevant in the balanced scorecard approach and as an integral part of
TQM. In our view, the emerging approach to organizational performance should explicitly
include the consideration of change management and can be seen as a reflection of the continuous
organizational transformation.
Finally, in our belief, the emerging approach to organizational performance can be named the
performance system. Its functioning is based on considerations of performance measurement,
performance management, and change management, and it can not be separated from its context.
In sum, according to the eight issues, the performance system has the following characteristics:
1. It is multidimensional. Its focus is on satisfying multiple constituencies in financial
and non-financial terms.
2. Its level of analysis can be the business unit or the corporation. Link between the two
levels is recognized and is specified on basis of strategy.
3. It is primarily future oriented, but includes also orientation to the past as reference.
4. It includes multiple measures. Single measures are comparable at least at the industry
level, but their combination is rather incomparable, so the system itself is rather
inimitable.
25
5. It has capacity and is open to addition of new items or measures of performance.
6. It explicitly recognizes the crucial role of linking two key elements: performance
measurement and performance management.
7. It is centered on strategy.
8. It explicitly recognizes change management as a crucial element; it reflects
organizational transformation.
IMPLICATIONS AND CONCLUSIONS
Future of the field of strategic management depends on concepts that are central to its
existence. Organizational performance is one of such concepts. Despite this fact too little has
been done to understand the whole of this concept in last decade. In this study, in pursuit of filling
this gap, we identified the emerging approach to organizational performance—the performance
system. The performance system is a holistic approach that is, in our belief, emerging from recent
currents in approaching organizational performance (SVA, customer satisfaction barometer, TQM,
corporate social responsibility, corporate reputation, and balanced scorecard). Its uniqueness is in
integration of issues of performance measurement, performance management, strategy and change
management, that are indispensable in approaching organizational performance. We see
organizational performance as a dynamic, future oriented concept. It can be seen as a bridge
between the organization and its stakeholders, because it is based on their non-financial and
financial goals. We recognize that comparability is an important issue, because of its managerial
implications, such as control and motivation, but we also recognize that comparability becomes
limited when we go, as in real organizational life, beyond mere measurement. Organizational
performance is a complex organizational phenomenon and should be approached and studied as
such.
26
The key implication of the performance system for future research is that performance should
be seen in context. This not only means to approach it in the context of its antecedents such as
organizational and environmental configurations, but also and primarily to see it as a context, a
system in which issues of performance measurement, performance management, strategy and
change management are intertwined. Such view may help us to better understand the overall
organizational performance and may be a path to pursue in order to build a theory of performance,
rather than theories in which performance is used without complete elaboration as to what
performance really is. It may also be helpful in improving current theories in strategic
management. For example, the performance system may be incorporated in the resource-based
view of firm (Wernerfelt, 1984; Barney, 1991; Conner, 1991) as an additional highly inimitable
“resource”, it may potentially increase our understanding of the notion of strategy as a stretch
(Hamel & Prahalad, 1994), or even performance change based on the performance system could
be seen as an organizational capability.
Due to complexity of the concept, organizational performance studies may be primarily
designed as in-depth case studies. In quantitative studies, organizational performance needs to be
operationalized as a multidimensional construct, which includes financial and non-financial
aspects, and is embedded in a model. Longitudinal design may be preferred. When measuring
performance, researchers should ask key informants not only about a variety of performance
criteria, but also about the importance of those criteria for the organization, and the link between
the criteria and the organizational strategy. In addition, as organizations have been becoming
more and more boundaryless (Askenas et al., 1995), researchers may need to asses expanded
boundaries of the organization and adjust performance assessment accordingly.
Finally, for practitioners the performance system can serve as a philosophical foundation for
building a comprehensive customized organizational model of performance, not as a prescription.
27
By taking attention to eight properties of the performance system, managers are encouraged to
build their own performance models and use them as tools for managing the existing and, more
importantly, for managing change.
28
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32
Table 1
Approaches to performance
Approach
Focus (key
goal,
constituencies)
Level of
analysis
Orientation
Comparability
Capacity of
adding new
indicators
Existence of
performance
measurementmanagement
link
Role of
strategy
Inclusion of
the
consideration
of change
management
SVA
Shareholder
value
Business unit
or corporation,
link between
them primarily
financial
Past, but also
future that is
primarily
extrapolated
from past
financial
results
Comparable
across business
units and
corporations, $
as a common
denominator
Limited, only
if the drivers
can be
financially
quantified
Somewhat,
through value
drivers
Implicitly
influencing
future cash
flows
No
Customer
satisfaction
barometer
Customer
satisfaction
Implicitly
business unit
or corporation,
no link
between them
considered
Past, but also
future through
the model
Mostly
comparable
across business
units in an
industry
Limited, only
if new facets of
customer
satisfaction are
recognized
Implicit
Not considered
No
TQM
Primarily
customer
satisfaction
Business unit
or corporation,
performance
hierarchically
linked to lower
levels
(functions)
Past and future
Mostly
comparable
across business
units in an
industry
Open
Management
drives
measurement
TQM seen as
strategy
Yes
Corporate
social
responsibility
Satisfaction of
multiple
constituencies
(non-financial)
Primarily
corporation, no
link to business
unit considered
Past and future
Mostly not,
comparable
only if criteria
for weighting
constituencies
are arbitrarily
selected
Open
Implicit in the
model
Implicit,
responsibility
as a part of
strategy
No
33
Table 1
Approaches to performance - continued
Approach
Focus (key
goal,
constituencies)
Level of
analysis
Orientation
Comparability
Capacity of
adding new
indicators
Existence of
performance
measurementmanagement
link
Role of
strategy
Inclusion of
the
consideration
of change
management
Corporate
reputation
Reputation for
satisfying
multiple
constituencies
(nonfinancially and
financially)
Large
corporation, no
link to business
unit considered
Mostly past,
with
implications
for future
Comparable
primarily in
subjective
terms
Open
Only when
seen as a
model for
dealing with
constituencies
Reputationbuilding as a
strategy
No
Balanced
scorecard
Satisfying
multiple
constituencies
(nonfinancially and
financially)
Primarily
business unit,
strategy as an
implicit link to
the corporate
level
Primarily
future, but also
past as a
reference
Noncomparable,
because highly
customized
Open
Explicit, seen
as
measurement
and
management
system
Central
Implicit
Performance
system
Satisfying
multiple
constituencies
(nonfinancially and
financially)
Business unit
or corporation,
link between
them specified
on basis of
strategy
Primarily
future, but also
past as a
reference
Single
measures
comparable at
least at the
industry level,
but highly
inimitable in
combination
Open
Explicit, seen
as a system
Central
Explicit, the
system as a
reflection of
the
organizational
transformation
34