Monitoring Business Performance

Models, Methods, and Tools

Per Lind

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781135044961
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

The idea of using models to inform business practice seems appealing, as it suggests the abstraction and control of a large, complex subject by means of a smaller, easily manipulated mechanism. In reality, however, many models prove inadequate when translated into business methods. Monitoring Business Performance – Models, Methods and Tools elucidates how the assumptions and perceptions that guide performance assessment are often based on models that are poor interpretations and descriptions of reality.

In this book, the author scrutinizes the models underlying a number of well-known business methods and tools, and sheds light on the assumptions and subjective perceptions that undermine their effectiveness. In doing so, he offers a unique criticism of accepting business models without questioning their relevance and applicability, and highlights the need to treat models as hypotheses, rather than as certainties.

Part I
Models and Theories

Scholars in the empirical sciences have views about theories and models and tend to have a never-ending discussion about their sequence—whether a theory leads to a model or whether model and theory are interacting and inseparable. The view in this book is that a model is a picture created from assumptions about facts, and a theory is a form of insight facilitated by the model, a way of looking at the world rather than firm knowledge of how the world is.

A model is a reduction of reality in the sense that a phenomenon is explained by a limited number of facts that have been considered relevant and representative for the phenomenon. Reduction thus means that certain facts of reality have been deliberately omitted and the fundamental model problem concerns those facts: Would they have augmented the explanation power of the model if included? Or alternatively, are there facts that are characteristic for the phenomenon but not recognized by the observer and, therefore, not included in the model?

Reduction makes the model an incomplete and fragmented picture of reality and, therefore, also reduces the ability of the model to describe, to explain, to understand, to predict, to change, to prescribe, or to organise completely. The reduction means that a picture of the phenomenon is created but the reduction is not reciprocal—the model does not lead back to the reality it maps simply because we do not know about those facts that may have been omitted through the mapping process.

Ludwig Wittgenstein, the language philosopher, formulated the concept of a model as follows:

We make to ourselves pictures of facts—the picture is a model of reality.

In order to discover whether the picture is true or false we must compare it with reality.

It cannot be discovered from the picture alone whether it is true or false.

There is no picture which is a priori true (1922, 38–43).

The purpose of the model is to explain, to describe how something is; the purpose of prediction is to prescribe and to intervene. The metaphor is another kind of reduction that does not predict but describes, not by mapping but by comparing with something that is well known. While the metaphor does not have predicting power, the model can both describe—a model of—and predict—a model for. This dual meaning of the word model sometimes has a confusing effect because the distinction is not always obvious, depending on the language. A model of something corresponds to what in the German language is described by the word Abbildung. A model for something may depict something that is worth copying. A school or a hospital showing exceptionally good results may be referred to as a model school or hospital for other similar institutions. For this, the German language has the word Vorbild. Confusion in the English language with implication for how the model concept is treated is bound up with the lack of distinction between these two meanings of model. For students with academic textbooks in English, the lack of distinction does not stimulate critical thinking about models and their applicability in social science.

In this volume, Chapter 1 introduces the concepts of monitoring and performance in organisations (with specific focus on business organisations), and Chapters 2 through 5 have their foci on models from other realms.

Chapter 2 has a detailed discussion about models as descriptions of reality with limits in eternity that no model can grasp. A small model with few parameters may be capable of mapping a small part of reality, while a model with more (relevant) parameters may be capable of mapping a bigger part. The more a model encompasses, the more parameters and boundary conditions must be known and understood while, at the same time, the model becomes complex and less reliable.

In Chapter 3, models in social and natural science are compared. Model design starts with the identification of parameters that describe the problem and highlight the cause-effect relations. The primary question is how to identify the parameters, how to measure, how to discover relations and how to interpret the findings. Even if problem definition is similar in natural and social sciences, the identification of parameters may turn out to be most different, which is an important observation because natural science has been ‘a model’ for model building in social science. The chapter illustrates the difference between these models with an example.

In Chapter 4, the question is raised whether models and theories are transferable between different contexts. For natural science, the answer is yes, at least in general. In social sciences, such as in organisation and management theories, the answer is more doubtful, as illustrated by several studies of cultural impact on organisational behaviour that show that values, traditions and social patterns are sufficiently different in different parts of the world to not justify the adoption of one uniform organisational theory.

In Chapter 5, models are discussed from a broader perspective with linkages to knowledge development and the theory of ideas.

Reference

Wittgenstein, L. (1922) Tractatus Logico-Philosophicus. London, Routledge & Kegan Paul.

1
Monitoring Business Performance

Introduction

When a well-known international company in the mining business a few years ago announced that one thousand one hundred and fifty employees had been discharged worldwide because of decreasing demand, the company shares soared on the international stock markets. Financial journalists reported that the financial market jumped with joy and predicted a prosperous fortune for the company, at least within a short time frame, owing to lower operating costs. Shareholders were certainly among those who cheered at the prospect of promising dividends, as did other stakeholders, such as equipment suppliers to the company who would benefit by the prospect of increased sales as reduced labour costs would boost up the need for additional equipment and machinery.

A group with less reason for enthusiasm was probably those employees who were laid off and their families. The loss of jobs was certainly a setback also in those places where the company had offices or factories and where new job opportunities were scarce. Business performance is thus a relative concept because of different perspectives, and different stakeholders can be identified: Shareholders are happy when financial returns are satisfactory and owners are happy when their company expands and grows. Customers appreciate good supplier performance when the company delivers products and services at compatible price and quality levels.

Employees are happy when the company provides safe job opportunities and competitive benefits with career opportunities. Governments are happy about tax incomes from profitable companies and managers are happy when the business is performing well and results are improving. Researchers and consultants are happy when performance improvements can be related to research and consulting activities. Each of these stakeholder categories thus has its own views and criteria when judging a company’s performance. There is also a wider aspect of business performance that goes beyond the firm itself and its closest stakeholders, referred to as Corporate Social Responsibility. CSR emphasises that companies should have responsibility not only for business development but also for the firm in its relation to environmental factors, to gender equality and to ethical and moral issues. Monitoring the company’s performance from a CSR perspective requires a broader set of measures than what is provided through the accounting system. Ethical and moral aspects are generally not features of the average company’s performance measures, but they belong to the CSR concept.

BOX 1.1 Mini-Encyclopaedia: Corporate Social Responsibility (CSR)

For a number of years, management theorists and corporate strategists have been addressing the question of what should be the company’s role in society. While most now agree that its role extends beyond the purely economic dimension, there is much debate on the extent of this expanded social role and how social performance can be measured. Adding complexity to the discussion is the reality of global companies that operate in a number of different societies. Theories that attempt to define the company’s responsibility to society are generally grouped together as theories of corporate social responsibility (CSR).

A strong strategic approach to CSR is found in the work of Carroll (1991), who has devised a model of CSR that takes into account economic, legal, ethical and philanthropic dimensions. The model places the economic obligations of the company at its base, recognizing that the business must be economically profitable in order to survive. Above economic activities are legal responsibilities. Legal obligations cover many areas, including employment law, environmental law and health and safety regulations. Of course, the law sets minimum standards, which may differ from country to country. A firm with a strong CSR policy will aim to go beyond minimum legal standards. Carroll’s model sees this exceedance of minimal legal requirements as an aspect of ethical responsibility, along with respect for ethical norms in the society in which the firm operates. The last element is philanthropy, such as charitable giving, which, while desirable, is less important than the other three—the icing on the cake. Carroll stresses that the model does not posit an inherent conflict between making profits and being socially responsible: For the manager, all four dimensions of the firm’s responsibility should be central to corporate strategy (Morrison, 2006).

Corporate social responsibility has recently developed into a widespread and important concept that calls attention to the fact that small enterprises share responsibility with the rest of society for social fairness and human rights, similar to the recognition of shared responsibility for environmental concerns, which has nowadays turned into a business asset. Social entrepreneurship is developing in a similar way.

The concept of social entrepreneurship gained international recognition when the Nobel Peace Prize was awarded to the Grameen Bank and its founder, Muhammad Yunus, in 2006. The bank is a lender of small loans as start-up capital to poor individuals and communities in Bangladesh for entrepreneurial activities in the rural areas. The Grameen Bank started in 1976 as a social entrepreneurship with the objective to facilitate the capacity for poor villagers to invest in a cow or a hand loom and thereby generate an income. Preference was given to women as loan takers, and, of the total number of eight million loan takers, about ninety-seven per cent are women.

A variety of social entrepreneurship schemes has emerged in different countries since 1980; the concept was first coined in 1981 when Ashoka, a global association of the world’s leading social entrepreneurs with the aim of addressing the world’s most urgent social problems by using market driven business models, was founded.

Monitoring and Performance

Monitoring and performance are associated with assessment and evaluation and are two sides of the same coin: Monitoring is a process taking place while things happen; performance cannot be determined until things have happened and results are being evaluated. Monitoring is the supervision of an ongoing task to determine whether progress seems likely to meet the objectives that have been set in accordance with pre-formulated targets. Performance shows to what extent the task has been accomplished measured against the same pre-set target. What to be monitored, how to monitor and when to monitor therefore depends on the kind and nature of the task and the parameters that have been defined to characterise the task. Monitoring customer service can hardly be accomplished unless customer service has been defined and characterised with the help of suitable parameters that have been identified and constitute a model for customer service. In the same way, performance of customer service cannot be determined unless parameters and perspectives have been established and agreed upon as a standard.

While stakeholder perspectives determine what criteria are to be applied for selecting a monitoring model and performance references, the established standards are determined by the prevailing epistemological view (or Zeitgeist in German) that dominates for a time period by highlighting specific aspects of reality. The common designation for this Zeitgeist in social science is the paradigm concept, defined by Kuhn (1962) as a universally recognized scientific approach that for a period brings together a community of researchers by addressing problems and solutions with a joint attitude, such as what is to be observed and scrutinized, what kind of questions are supposed to be asked and probed for answers in relation to this subject, and how these questions are to be structured. Management and organisation theory refers to five paradigmatic periods in the last hundred years. In the following chapters, the five paradigms will be discussed in some detail. The present period is referred to as the current paradigm.

The view about performance is linked to theories and norms that have been developed within different economic and political models. In plan economic models, performance has been measured by how well production meets the production plans, while market economic models set their focus on the market and its actors, such as customers. The view of the customer is important as a measure of good or bad performance. Shareholders and owners measure performance and performance changes with the help of financial instruments that have been designed to work on accumulated company data and to present various scenarios as the basis for decisions about investments and strategies. Employees seldom have access to the same measuring instruments as shareholders and owners, and their assessments about how the company performs must therefore be based on more general or subjective measures. In both situations, the underlying models for measu...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• List of Tables
• List of Figures
• List of Boxes
• Preface
• PART I Models and Theories
• PART II Methods and Tools
• Index