Discussion of “Managers’ Commitment to the Goals Contained in a Strategic Performance Measurement System”

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I. Introduction

• Webb (2004) argues:

causal links strong higher probability achieving fin. Goals & exert more effort toward fin. and non fin. goals lead indirectly to fin-goal achievement.

• Three questions focused in discussion:

1. Why goal commitment higher when causal model stronger? Stronger models provide managers better understanding how to reach

their fin. goals.

2. Are the social-psychology (e.g.self-efficacy) significantly different from economics (e.g.subjective probability)?

Not: straight forward to link study with economics-based research on performance measurement

Yes: explore these differences

3. Why do firms have causally weak SPMS? Costs of creating a causally strong SPMS excessively

expensive (can outweigh the benefits) Understanding costs and benefits should add to our

understanding of design and effects of SPMS in practice.

II. Why causal-model strength matters

• Webb’s experiment Managers believe they are more likely to reach difficult

fin.goal and therefore willing to devote more effort to it, when SPMS has strong cause-effect links

Argues “the process of developing and communicating the SPMS cause-effect relations can sharpen managers’ understanding of the performance drivers in their business units”.

• Experimental instrument managers do not initially have a good understanding of how to reach their fin. Goals (how to increase e-commerce revenues) Therefore probability achieving large increase is Low

• SPMS with strong cause-effect links provide credible clues what can be done to increase revenues thus increases managers’ subjective probability of achieving difficult revenue goal.

• SPMS with weak cause-effect links does not have this effect.

• Two elements of argument should be noted:

1. if it is the only reason why causal-model strength affects managers’ commitment then will not matter when managers are more expert they know how to do their jobs even in the absence of SPMS.

Luft argues that SPMS with weak cause-effect can have negative effects on goal commitment even for expert managers.

2. Experiment provides weak representation of it.

As Webb observes, field studies claim that managers’ understanding of performance drivers is improved by developing and communicating or developing and using SPMS.

Participants in Webb’s experiment do not have opportunities to develop additional understanding. They neither develop nor use SPMS.

Simply given list of measures in SPMS, they must judge, whatever understanding of business they have, whether SPMS causally strong or not.

• Causal strength is high and participants knowledgeable, they can recognize that the proposed performance drivers are plausible and provide a way of achieving difficult fin.goals.

• Causal strength is low, they can recognize that the proposed performance drivers are not plausible.

• Thus, if the value of causally strong SPMS comes solely from the understanding of performance drivers they provide, results dependent on managers’ having intermediate level of knowledge.

> Must know enough Vs Must not know enough

> Much less knowledge Vs Much more knowledge

• SPMS does more than provide an understanding of performance drivers even for managers with an excellent understanding.

• For expert managers, weak cause-effect links can reduce the likelihood of reaching fin. Goals, 3 reasons:

1. Know how to reach, but weak SPMS will not track data needed for decision making (decision-facilitating information)

2. Know how to reach and know that achieving non fin.goals in weak system will not lead to achievement fin. goals. Spending time and resources on nonfin.goals reduces resources to achieve fin.goals reduces probabilty of reaching these goals.

3. Know how to reach and know embodied in SPMS will not

work. Poorly chosen strategy lower quality decision making by top management lower probability of reaching difficult fin. goals.

• Reason 1 important

• Reason 2 important

• Reason 3 important

III. Social Psychology and Economics

• Social-Psychology language:

goal commitment higher self-efficacy higher goal attractiveness higher

• Economics language:

more effort toward a goal probability higher utility higher

IV. Why do causally weak SPMS Exist?

1. The processes and identification of indicators are uncertain and not well understood cost of analysis that support better understanding is excessively high

2. Different individuals have conflicting and partial understanding of the processes SPMS result of political compromise rather than evidence-based determination of actual drivers

3. Different individuals have conflicting interests using nonfin. measures that make them look best rather than that contribute most to firm value. Because of information asymmetries , too costly to eliminate all effects of conflicts of interest

Different reasons can influence the nature and effects of the weakness

V. Summary

• Experimental evidence Webb is consistent with a claim that successful causal modeling can influence the value of performance-measurement systems in firms

• Results provide complement to study by Ittner et.al 2003 the use of causal business modeling significantly positively associated with ROA, while use od BSC not.