Strategy Mapping: An Interventionist Examination of a Homebuilder's Performance Measurement and Incentive Systems

Kenneth Merchant, Clara Xiaoling Chen

• Publisher: CIMA Publishing
• Year: 2010
• Print ISBN: 9780080965949
• eBook ISBN: 9780080965956
• Topic: Business
• Subtopic: Accounting
• Index: Business

What part does customer and employee satisfaction play in overall business success? Management Accountants developing business models must consider this question, especially if they are taking the popular "balanced scorecard" or "strategy mapping" approaches to performance measurement. When doing so, stating cause-and-effect relationships between measurable factors like satisfaction and profitability is common practice. However, few companies test their own hypotheses. If the links are incorrect, these models can actually guide the firm down a path to failure. Strategy Mapping: An Interventionist Examination of a Homebuilder's Performance Measurement and Incentive Systems reveals the findings of state-of-the-art interventionist research on a major US homebuilder. The core claims of this company's business model were positive effects in the future due to improvements in customer and employee satisfaction. Tests were made on the validity of these claims to discover how much we can rely on these factors to improve performance. This report also examines how effective various measurement alternatives are through analysis of data compiled by different consulting companies. The results reveal that the links between satisfaction and performance is less strong and more complex than the company had assumed: these measures cannot be relied upon to guarantee increased performance. Managers must have a sophisticated understanding of performance measurement systems and to test their strategy maps empirically, rather than relying on their intuitions. This report demonstrates how you can achieve both. - State-of-the-art interventionist research: new method in which researchers interact with the subject of the research, monitoring the effects of their input - Helps managers protect their businesses from bad business models through sophisticated understanding of likely causes of success - Shows managers how to analyse data in balanced scorecards and strategy maps to draw reliable conclusions to make the best decisions for their business

Chapter 1 Introduction

1. Research Problem

We adopted an interventionist approach to explore the development, implementation and evaluation of a major company’s strategy map.

The research site, with which the researchers have well-established relationships, is a major U.S. homebuilder. This firm has designed a performance measurement and incentive compensation system around an assumed strategy map. Included in this map are various measures of customer and employee satisfaction, and both financial and non-financial outcome measures. However, as is true in most companies, managers at this research site had not tested either the validity of the assumptions underlying their strategy map or the effectiveness of the incentive contracts built around the strategy map. Conducting these tests and suggesting changes were the purposes of this study.

The study involved four identifiable phases:

1. Understand the current strategy map and compensation system designed by management.
2. Test the assumptions underlying the current strategy map and compensation system.
3. Propose and help management implement changes to the current strategy map and compensation system.
4. Re-evaluate the new strategy map and the compensation system.

The second phase was the core of the proposed study. We examined the validity of each link in the company’s assumed strategy map in order to answer the following questions with empirical analysis:

• Are customer satisfaction and employee satisfaction both reliable leading indicators of future performance, both financial and non-financial (e.g. customer referrals and employee turnover)?
• Measures of customer satisfaction and employee satisfaction can vary both in content and in the timing of measurement (e.g. how soon after home purchase). Which measures provide the ‘best’ predictions of future performance?
• How are customer and employee satisfaction related?
• What are the drivers of customer and employee satisfaction?
• Does the predictive value of the measures vary across settings (e.g. division) or across time (e.g. boom vs. recessionary period)?

2. Research Objectives

We wanted to contribute knowledge that is useful to both academics and practitioners, including managers at the research site. The study benefited from the experiences and perceptions of those who are intimately concerned with the development and implementation of the performance measurement system. It also benefited from insights from ‘outsiders’ who have a detailed knowledge of the research literature and the ability to conduct sophisticated empirical analyses of the data. As ‘outsiders’, we made recommendations to management at the research site and provided value to the company. We worked closely with the managers at the research site to gain in-depth understanding of the development, implementation and performance measurement and incentive systems. By combining the ‘emic’ perspective and the ‘etic’ perspectives (Pike, 1954), we hope to gain a comprehensive understanding of the process of designing, evaluating and revising strategy maps and incentive compensation systems based on these maps.

3. Research Methodology

The following is a summary of the methods we used for our research:

• Synthesis of existing literature on the performance effects of non-financial performance measures, with an emphasis on customer satisfaction, employee satisfaction and the interaction between the two.
• Interviews with management at the research site to understand the managers' rationale behind the initial design of their performance measurement system and incentive system.
• Analysis of company-specific documents and datasets from the research site using statistical methods such as regressions and structural equation modelling. The datasets included four main sets of proprietary data: financial data, customer satisfaction data provided by two different customer sentiment assessment companies and employee satisfaction data.
• Presentations made to company management to summarise research findings and propose changes to the strategy map and the compensation system. An important purpose of these meetings was to listen to the managers' reactions to our findings and suggestions so that we could refine them as necessary.
• Evaluation of the new strategy map and compensation system through both empirical analysis and interviews with managers at the research site.

4. Research Findings

First, we analysed the customer and employee satisfaction data to see whether customer satisfaction and employee satisfaction are unidimensional or multi-dimensional constructs. The results are more consistent with both customer and employee satisfaction being multi-dimensional constructs in our research setting.

Second, we ran multiple regression analysis to test the relationship between customer satisfaction measures and outcome variables including referrals, warranty costs and financial performance. We found that the measures of customer satisfaction were not equally informative. For example, we found that the BF measurement dimension that we labelled ‘move-in satisfaction with sales, construction and customer service’ and the BF dimension labelled ‘mid-year satisfaction’ were positively associated with one-year-ahead revenue and profit. However, the NF satisfaction measures as well as the other dimensions of BF were not significantly related to on one-year-ahead revenues and profits. Our findings suggest that the timing of measurement of customer satisfaction matters. We find that the BF measures, which were gather on a more timely basis than were the NF measures, were more useful predictors of future financial performance and other outcome variables.

Third, we find that there are diminishing returns to the improvements in customer satisfaction. This suggests that ‘moderate’ homebuyer satisfaction may be optimal.

Finally, we found a weak positive association between employee satisfaction and customer satisfaction. We found that the relationship between employee satisfaction and customer satisfaction becomes stronger when there are more interactions between the employees and the customers.

5. Implications of Findings

This study makes the following contributions to the academic literature. First, it contributes to the non-financial performance measurement literature by testing a business model with multiple non-financial performance measures instead of focusing on one non-financial performance measure. Second, it adds to the customer satisfaction literature by ‘running a horse race’ between two different customer satisfaction measurement methodologies and examining the effect of measurement alternatives on the forward-looking properties of customer satisfaction measures. Finally, it contributes to the stream of field-based literature on the development and implementation of strategy-specific business models and incentive systems.

This study also has the important managerial implications regarding the management of firms' performance measurement and incentive compensation systems. Our results suggest that managers need to be more sophisticated in their management of performance measurement and incentive systems. They need to learn where it is important to pay attention to customer satisfaction measures, rather than other performance factors. If customer satisfaction is important, they need to learn how, when and where to best measure it. They need to assess both the benefits and costs of improving customer satisfaction ratings so that they can determine whether further improvements are cost-beneficial. Our study also illustrates the importance of continuously validating firm-specific strategy maps rather than relying on intuitions.

Our study also documents the difficulties and obstacles in the process of testing, revising and re-evaluating the strategy map and the incentive system. This should provide a ‘reality check’ for companies who attempt to test their strategy maps. The outputs of the project provide a faithful portrait of the costs and benefits of constantly validating and revising firms' strategy maps and incentive systems.

6. Outline of the Report

The report consists of five chapters.

Chapter 1 provides an identification of the research problem, research objectives, research methodology, research findings and a brief summary of the implications of the findings.

In Chapter 2 the background literatures relating to the measurement and use of customer satisfaction measures, employee satisfaction measures and strategy maps are described. This chapter also discusses the limitations of the previous literatures and how we address those limitations.

Chapter 3 describes the research methodology. Since we follow an interventionist approach, this chapter also provides a brief summary of the interventionist research methodology. This chapter also describes the research site in more detail.

Chapter 4 presents the research findings. In addition to data analysis, this chapter also describes the data collection process, organisational interventions and challenges to interventionist research.

Finally Chapter 5 discusses the research findings, limitations of the research and suggestions for future research.

Chapter 2 Background

1. Introduction

A growing body of research has documented significant positive associations between some non-financial performance measures, such as quality and customer satisfaction with future financial performance (e.g., Amir and Lev, 1996;, Ittner and Larcker, 1998a;, Banker et al., 2000;, Nagar and Rajan, 2001). These non-financial measures are interpreted to be ‘performance drivers.’ Incorporating these performance drivers into firms' performance measurement systems can help managers look beyond short-term financial performance to focus at least some attention on longer-term aspects of their businesses (e.g. Kaplan and Norton, 1992, 1996:, Hemmer, 1996; Ittner and Larcker, 1998a, 1998b, 2001, 2003;, Banker et al., 2000). Customer satisfaction has attracted significant attention from practitioners. For example, senior executives from 148 financial services firms ranked customer relations as the most important driver of firm’s long-term organisational success (Ittner and Larcker, 2001). In comparison, short-term financial performance ranked only the fifth most important.

However, as, Ittner and Larcker (2001) point out, studies on non-financial performance measures tend to examine only one of many potential non-financial measures and ignore interactions with other potential non-financial measures. They caution that these limitations can result in misleading inferences if non-financial measures are highly correlated, or if different non-financial measures are complements or substitutes.

Advocates of a ‘strategy mapping’ approach to performance measurement propose formulating performance measurement systems around a diverse set of financial and...

Table of contents

• Cover
• Title Page
• Copyright
• Table of Contents
• Executive Summary
• Chapter 1: Introduction
• Chapter 2: Background
• Chapter 3: Research Methodology
• Chapter 4: Results
• Chapter 5: Conclusions and Recommendations
• Appendix A: Examples of Incentive Calculation
• Appendix B: Descriptions of NF Survey Instrument
• Appendix C: Descriptions of the BF Survey Instrument
• Appendix D: Descriptions of Employee Satisfaction Survey Instrument
• References
• Index