Choice and Change of Measures in Performance Measurement Models

Abstract

This paper uses management control, resource-based systems-based and contingency-based strategy theories to describe a large U.S. manufacturing company's efforts to improve profitability by designing and using a performance measurement model (PMM). This PMM includes multiple performance measures relevant to its distribution channel for products, repair parts and maintenance services. The PMM is intended to reflect the company's understanding of performance relations among strategic resources, operational capabilities, and desired financial outcomes. The PMM also reflects its intended distribution strategy, the types of performance necessary to achieve that strategy by its distributors, and its desired financial outcomes. Furthermore, the company uses the model to evaluate its North American distributors and intends to use these evaluations as a partial basis for annual and long-term rewards. Thus, the PMM embodies the measurable portion of the firm's management control system of its distribution channel.

The study addresses four research questions: (1) Are measure attributes important considerations for performance measure choice? (2) Does the importance of attributes differ according to firm strategy? (3) Does the importance of attributes for design and use differ according to firm strategy? (4) Does a company trade-off some individual attributes for others? The questions are investigated using qualitative and quantitative analyses of archival documents and interviews with top managers and distributors. Principal findings are that measure attributes are important considerations for choice and change of performance measures, design attributes are more important than use attributes, the importance of attributes does not appear to differ according to strategy, and some individual attributes are traded-off for other attributes.

Keywords: Performance measurement model, management control, non-financial performance measures

JEL Classification: M40, M46