Fundamentals of management control : techniques and principles (2022)

Chapter 2

Defining overall performance

Introduction
This chapter addresses the issue of an organisational entity’s overall performance. This may correspond
to an organisation taken as a whole or, in a more limited way, to a responsibility centre.1 Performance
is understood qualitatively, i.e., upstream of the measurement systems that aim to transcribe it into a
more quantified form.
Defining performance is not an easy exercise. On the one hand, from a conceptual point of view, the
notion needs to be clarified. In Chapter 1, we saw that it could be financial and/or non-financial in nature,
have several dimensions, and could be viewed in a partial or inadequate manner. On the other hand,
performance cannot be defined in the same way in all organisations KM 2.1, it requires clarification and
positioning by the organisation’s leaders. This is an essential step in making management decisions and
steering an organisation. Defining performance helps us to know where we want to go, to define how to
get there, and to control what we do along the way. Comparing achievements with objectives also
provides an opportunity to learn about the way performance is shaped and thus how to improve it.
Section 1 provides some conceptual clarification and highlights the close link between the notion of
performance and the organisation's goals on the one hand, and its lines of action on the other. Sections
2 and 3 then explore each of these links in more detail.

Section 1. What is organisational performance?

Organisational performance has been defined in numerous ways, as in Lorino (2003, p. 9), for example:
“performance in a company is anything that contributes to improving the value-cost ratio (...) [or]
contributes to achieving strategic objectives.”
The notion of "strategic objectives" has several limitations. First, it contains an implicit confusion
between 'strategic' and 'long term', which reflects the confusion between objectives (type of performance
aimed at) and targets (level of performance aimed at and corresponding time horizon) mentioned in
Chapter 1. It is thus the source of not one, but two problems: the search for consistency between the
nature of objectives and strategic choices on the one hand (cf. Section 3), and the search for consistency
between short-term actions and long-term targets on the other (cf. Chapter 10). It is important to
distinguish between these two issues.
The expression "strategic objectives" also indicates that performance is geared towards achieving
"something" but does not sufficiently specify what. It only takes on substance if we clarify the nature of
this "something", which refers first and foremost to the organisation’s goals, i.e., the missions that
leaders seek to achieve KM 2.2. Goals are more general than objectives since objectives translate
organisational goals into operational terms in the form of a result to be achieved (see Chapter 8 for more
on objectives) 2.

1
To simplify the reading, we mainly use the term 'organisational performance', which evokes the idea of the whole
organisation’s performance. However, readers are aware that this can be extended to any entity within the organisation, as long
as the organisation is considered as a whole.
2
Targeted objectives, i.e., results to be achieved, can also be defined for dimensions of performance other than goals (see
below for the notion of lines of actions and the interest in including them as dimensions of performance in their own right. The
lines of action themselves can give rise to the setting of objectives).

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Finally, the expression "strategic objectives" sometimes refers to objectives defined at the highest level
of the company, as the main strategic policies are generally decided at this level of the hierarchy. It
implicitly implies that these objectives constitute a common frame of reference to which all the players
in the organisation must adhere, like a common compass. The expression thus relates to another issue,
that of strategic alignment within an organisation, which we will see is more complex than a simple
'roll-out' from the top of the organisation to the bottom.
The term 'strategic objective' therefore seems to us to be both insufficient, due to a lack of content, and
ambiguous, due to the various ideas it conveys which would benefit from being characterized in more
specific terms. For these reasons, it is preferable to define organisational performance by referring to
the organisation’s goals.
Below are some examples to illustrate these different concepts.
- For a higher education institution, the goals are to contribute to the development and
dissemination of knowledge through research and teaching activities. For private sector
businesses, goals are often expressed in both financial and non-financial terms: to make a profit
or create shareholder value, to grow responsibly, to improve health (which is one of the four
social and environmental objectives enshrined in Danone's legal statutes for example), etc.
- For higher education institutions, objectives may be expressed in terms of growth in the number
of graduate students or research agreements signed with other public or private bodies. The role
of planning involves setting timeframes and numerical targets for each of these objectives. For
a private sector company, objectives may be expressed in terms of growth in turnover, for
instance, efficiency or operational profitability, or in terms of reduction in CO2 emissions, with
the need to set targets (timeframes and levels of results sought).
The definition of performance presented at the beginning of this section extends the definition of pursuit
of strategic objectives by also describing it as "improvement in the value-cost ratio". At first sight, this
complementary definition introduces the idea that performance cannot be reduced to the economic and
social value targeted by the activity (the goals the company sets itself), and that it also covers the
consumption of resources (the cost of this activity) KM 2.6. The notion of performance also differs from
the notion of activity, in which only the volumes attained matter, independent of the resources used.
This notion of performance that combines value and cost has now spread gainfully to many sectors
where it had long been absent. It differs, for example, from a narrow budgetary logic in which the
organisation's objective is not to consume more than its budgeted costs, or to consume at all costs
regardless of its real needs and the activities actually carried out.3 The budgetary logic focuses on the
cost dimension without taking the value dimension into account. The notion of performance implies that
cost and value are taken into account together.
The reference to costs introduces another interesting, albeit biased, idea about the notion of performance.
Indeed, costs are not only 'derived' consumption for the performance of the activity but are also the
means through which an organisation can decide to act to produce value. For example, to attract
customers by offering low prices, organisations will try to limit their costs. However, when seeking to
define the dimensions of an organisation's performance, we need to go beyond its goals alone, and to
also include its main lines of action for pursuing these goals KM 2.7. This is where the reference to costs
is misleading, as there are many ways to create value other than cost control, and in some cases, it may
even be a secondary line of action. In our example of a higher education institution, performance is
better associated with lines of action such as quality of teaching, the relevance of research, the
development of partnerships, etc., which sometimes imply significant costs.
To summarise, organisational performance covers two aspects: the goals (where we want to go) and the
lines of action (what we do to get there), the latter of which may be of a varied nature and not limited to
cost control alone. With this definition in mind, we look at each of these two aspects in more detail.

3
In part 2, we present far less simplistic issues regarding the budgetary process, focusing notably on the management control
and learning processes.

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Section 2. Performance and goals: stakeholders’ expectations

Organisational performance is defined in relation to the expectations of the organisation’s stakeholders.
The notion of stakeholders is often based on the now classic definition proposed by R. Freeman (1984)
that we have rephrased slightly: a stakeholder is an individual or a group liable to affect or to be affected
by achievement of the organisation's goals.4 In other words, they are the parties for whom the
organisation's leaders seek to create performance. Defining the purpose of an organisation thus implies
taking the expectations of the stakeholders as previously defined into account. For example, given their
activities in the organisation and the way they perform them, a company’s employees have an impact
on whether the organisation's goals are met. The behaviour and skills of salespeople have an impact on
customer satisfaction and sales. As workers, they are likely to be impacted by the pursuit of the
organisation's goals. For example, the organisation’s goals may imply that these workers acquire new
language skills, master new technologies, or travel further and further away from their social and family
environment. Suppliers can also contribute to achieving the organisation's goals through compliance
with price, quality, supply reliability, and innovation criteria. They may be affected if achieving their
clients’ goals means that they have to reduce costs significantly and be more responsive, or if they have
to relocate part of their activities to follow the relocation policy of their important client.
Not all stakeholders in the organisation are equally important. Some have critical resources which
managers5 must take into account; for others, it is their capacity to influence managers or other
stakeholders that determines their value. For example, in professional football clubs, fans have a great
deal of influence on managers’ decisions: when the team they support plays badly, they can express their
dissatisfaction very explicitly during matches and in front of the media. Given their capacity to act, their
influence as stakeholders is often greater than that of the players themselves.6

2.1 Managing the balance between stakeholders

Which stakeholders are important depends on the sector in which the organisation operates, the balance
between all the stakeholders at any given moment, and therefore on the general institutional context in
which companies operate, but also on managerial choices KM 2.5. Identifying stakeholders and
assessing their relative importance is not always easy: stakeholders can be highly diverse in nature, in
their expectations and objectives, and in the relationships they have (or may have) with the company or
organisation.
It is thus up to the organisation's leaders to manage a balance between stakeholders, based on their
analysis of the relative importance of each, the potential to reconcile priorities, if any, and the
organisation’s interests. Managing this balance is difficult at times when some expectations are hard to
reconcile, or when they seem unclear or ambiguous. Finally, the balance found is likely to be called into
question if the company's environment, and therefore the relative importance of the stakeholders,
changes (see box). Managers must then adopt a dynamic approach to manage this balance KM 2.4.

4
"[A stakeholder is] any group or individual who can affect or is affected by the achievement of the organisation's objectives"
(Freeman, 1984, p.46). For the sake of consistency, we have used the notion of goals instead of the notion of objectives in the
original definition.
5 Managers have an ambiguous status. From an individual point of view, they constitute one of the stakeholders, like the
employees of the organisation: indeed, they have private interests (and therefore expectations) that may differ from those of
the organisation they lead. On the other hand, it does not seem relevant to consider them as stakeholders in their organisational
role. Managers then represent the organisation, they are not a third party.
6 For an analysis of this example, see Senaux (2008).

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General shift in power relations between stakeholders: the case of large companies in the United
States

Since the beginning of the 20th century, the stakeholder balance of large companies in the US has
undergone many changes.

Big companies were formed in the United States in the late 19th and early 20th centuries as a result of
large-scale mergers between initially smaller companies. In these newly created organisations, certain
groups or coalitions of shareholders became the dominant stakeholders. A managerial hierarchy with
specific skills designed to manage large companies was developed in response to concerns that these
new groups be organised in the best interests of investors. The financial dominance of management tools
originates from this historical context.

From the post-World War II period until the 1970s, the dominant stakeholders in large companies were
the company managers and the employees. The company managers belonged to what could be
characterised as a class of professional managers. For institutional reasons (separation of ownership and
management, fragmentation of company ownership), shareholders had little influence over managers,
who were, at the same time, opposed by highly unionised employees. Employees’ pay conditions and
the increase in their purchasing power was a key management issue for large companies. Throughout
this period, financial measurement systems remained dominant in large companies.

The late 1970s and 1980s were marked by US industry difficulties, particularly in the face of the
booming Japanese consumer goods and household equipment industry. Customers then became priority
stakeholders for companies seeking to restore their competitiveness. Firms engaged in total quality
approaches, customer value development, and innovation. This period saw the development of more
varied measurement systems that were closer to operational processes (see the work of the Consortium
for Advanced Management - International (CAM-I) based on activity-related accounting, or the
development at the end of this period of the Balanced Scorecard (BSC) created by R. Kaplan and D.
Norton7).

During the 1990s, the institutional environment of large American businesses was marked by the rise of
investment funds, in other words, pension funds and mutual funds. The development of this financial
asset management industry led company managers to take the expectations (expressed in terms of
shareholder value creation) of these minority shareholders, who had become influential interlocutors in
the context of globalisation and financialisation of the economy, into account. Financial measurement
systems, based in particular on the notion of shareholder value creation, spread to large companies.8

Other changes occurred at the end of the first decade of the 21st century. With the development of the
notion of corporate social responsibility (CSR), companies were encouraged to consider the impact of
their activities on their natural, social, and societal environment, in addition to and beyond exclusively
economic and financial considerations. This movement reveals the growing importance of new
stakeholders: local authorities, citizens' associations organised as pressure groups, international
governmental and non-governmental organisations. The measurement systems introduced in companies
gradually integrated these new non-financial performance dimensions.

The financial and economic crisis of 2008-2009 further transformed the balance between stakeholders,
with increased government intervention in regulating economic activity and governance of large
companies. Since then, in a climate that remains marked by considerable uncertainty and growing
awareness of climate issues, these institutional changes remain unstable. In such a context, large

7
We introduce BSC in Chapter 8; see also Chapter 4 for an overview of changes in management accounting.
8
We present the main indicators of value creation and the conditions for their implementation in Chapter 3.

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companies could be called upon to re-examine earlier performance models, or to take other new
performance dimensions into account that are more geared towards sustainable development.

2.2 Managing multidimensional performance

An organisation’s performance is multidimensional: 'like organisational goals; it is subjective and
depends on the chosen references (goals, targets)' (Bourguignon, 1997: 3) KM 2.3. Thus, its performance
is expressed in different ways depending on the stakeholders involved.
For example:
- For company shareholders, performance is expressed in financial terms.
- For customers, it concerns the respect for and reduction in delivery times for goods or services,
the perceived quality/price ratio, and sales-related services (financing, warranties, training, etc.).
- For employees, performance concerns job satisfaction, career opportunities and/or skills
development, and pay.
- For society, other dimensions of performance such as respect for the environment, employment,
and integration are given priority.
Stakeholders' views of an organisation may conflict, in whole or in part, when they talk about inherently
divergent dimensions of performance (see Example 2.2). Favouring one viewpoint then leads to the
prioritisation of one dimension of organisational performance to the detriment of others.
Performance dimensions may be conflicting or multiple, even for a same stakeholder. For example, at
times, a private company’s management may need to combine profitability, growth, and debt reduction,
areas that are of interest to all shareholders but that may be difficult to accommodate.
If we take the example of a large railway company division, for instance, that is responsible for the
railway network’s maintenance, the rail network itself does not belong to the railway company. It carries
out the maintenance work on behalf of the network owner, a public company owned by the state. Three
performance dimensions have been identified in this division: safety, punctuality, and cost.
Safety concerns the safety of passengers and on-board staff, as well as the staff carrying out maintenance
work on the tracks. Work on the network used by trains exposes site personnel to a risk of accident that
is essential to control. Safety is therefore crucial for this division. The stakeholders involved are the
company's employees (on board staff, maintenance staff) and passengers.
Punctuality refers to respect for transport schedules and times. Good network maintenance is a
prerequisite for the regular flow of traffic. It reduces the likelihood of certain breakdowns or incidents
(broken rails, the cable network, etc.) and should enable trains to run at optimum speed across the
network. Guaranteeing regular schedules is essential for rail company customer satisfaction (passenger
and freight transport).
The costs involve those of the maintenance work: the cost of monitoring the network, and maintaining
or replacing rails, sleepers, electrical equipment, etc. This economic performance aspect is essential to
the division’s balanced management and its continued operation with the public company that owns the
network, which could otherwise turn to other suppliers. In this case, the stakeholders are thus the
company's employees who are interested in the company's activities continuing, the public company that
owns the network and acts as a client for the maintenance activities, and the railway company
shareholders.
The diversity of stakeholders makes it hard to define the organisation’s performance precisely.
Designing the performance model is even more complex as the goals and lines of action conflict to some
extent. For example, for safety reasons, traffic must be interrupted on the tracks to carry out some
maintenance work. To maintain the schedule and a regular service, maintenance operations may be
scheduled at night when the tracks are not in use. This in turn increases the cost of maintenance
operations: the work must be staggered, which again lengthens the time needed to complete the work
and increases personnel costs, which are also higher for night-time work. Jointly optimising the
objectives of punctuality and cost reduction is intrinsically impossible and hard choices need to be made
between these two performance factors.
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Conflict between performance dimensions can also arise from differences in the timeframe used to
assess performance. The challenge is thus for the organisation's leaders to avoid compromising long-
term performance by making choices that focus on achieving short-term performance.
For example, for a large listed car manufacturer, performance will be defined differently depending on
whether the timeframe considered is the long, medium or short term, and the stakeholders involved are
also different.
In the long term, performance for a large, listed company involves creating sustainable value for
shareholders.
In the medium term, performance consists of satisfying the company's customers by offering innovative
products or products that are optimally positioned in terms of the perceived quality/sales price ratio of
the vehicles and associated services.
In the short term, particularly in 2008-2009 with the onset of the financial and economic crisis,
performance consisted of consolidating the company's cash flow to avoid a liquidity crisis. Many
stakeholders are interested in achieving this short-term performance: the company's employees in the
first instance, but also the state and local authorities concerned that a major employer pursues its
activities and, to a lesser degree, the manufacturer's former customers benefiting from warranty contracts
on the vehicles purchased.
The challenge for the firm's managers is to ensure that the company gets through the liquidity crisis,
while maintaining and even developing its innovation capacities and know-how so as to be able to renew
its model portfolio and consolidate its position on the automobile market. Finally, it has to convince
investors and long-term shareholders that the actions implemented in the short and medium term will
help to create shareholder value. The need to manage these different timeframes simultaneously leads
to conflict situations between the different performance dimensions, requiring mediation by the
company managers.

Section 3. Performance and lines of action: performance modelling

We have seen that performance models not only cover the goals, but also the main lines of action for
achieving them. Identifying these lines of action can be tricky, however, as the range of possible options
means that choices have to be made and thus prioritised. Since some of the choices may not be very
judicious, it is crucial to be vigilant about the system’s overall coherence.
To this end, we underscore the importance of a performance modelling approach in order to ensure good
coordination between the lines of actions and the goals (§3.1). We also highlight the central role of
strategy in selecting lines of action (§3.2).

3.1 Performance modelling

3.1.1 The organisation's performance model

A model is a schematic representation of the cause-and-effect ties between different aggregates. It lists
and defines the concepts and variables assumed to be involved in the way a process functions. It is often
based on a mathematical formalism (quantitative model based on equations), but there are also
qualitative models (based on diagrams).
Modelling is used in many disciplines, such as in economics to study a company’s profitability or to
control the money supply in a given economic area. It may also be used in cybernetics to represent the
control and communication processes in living beings and machines. Business management fields also
use models extensively. For example, marketers develop models that attempt to trace the link between
marketing actions and a company's cash flow, or to demonstrate the impact of a marketing action on an
intermediate performance variable.

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In management control, models are also widely used to produce simulations or forecasts, particularly
for budget construction or investment decisions. In addition to these quantitative models, management
control also relies on qualitative performance models, which serve purposes other than simulation.
Explaining an organisation’s performance model consists of clarifying what can and should be done to
achieve the organisation's goals. This leads to identification of the chosen lines of action, as well as the
causal links between them, and the organisation's goals.
An organisation's performance model is not a given but is a construct. It reflects managers'
representations of priorities for action and the causal links between the priorities and the goals. It thus
contains a degree of subjectivity. An organisation’s managers may neglect this aspect and 'buy' a
'standardised' performance model (e.g., a strategy map, an ERP module, or a cost calculation model)
from external service providers, without going through the clarification phase of their organisation's
performance dimensions. However, a performance model needs to be worked on, and this requires
choices and positioning on the part of managers.
While it may not be formally communicated to stakeholders, the performance model is reflected in
institutional communications such as annual reports or institutional websites. Below, we attempt to
explain an organisation's performance model from the information found on its corporate website.

Example: The Pôle Emploi performance model

Pôle Emploi was created in 2008 from a merger between two public bodies responsible for handling unemployment
in France (i.e., the Agence Nationale Pour l'Emploi and ASSEDIC, the body responsible for managing
unemployment benefits and collecting unemployment insurance contributions).
Pôle Emploi was established to contribute to the smooth running of the labour market and so to deal with
unemployment. The organisation’s website presents Pôle Emploi as "the main player in the return to employment."9
The same site presents Pôle Emploi’s main services, which help to clarify the aims of the organisation:
* The reception and registration of job seekers,
* The payment of benefits to eligible jobseekers,
* Supporting job seekers in their search for work until placement,
* Prospecting the labour market by reaching out to companies,
* Helping companies to recruit,
* Labour market analysis.
Finally, the website reports on the development of a new service offer which can be viewed as the lines of action
identified to meet Pôle Emploi’s goals:
* Tailor the service for jobseekers,
* Simplify procedures for job seekers,
* Develop business services,
* Work in collaboration with local actors and partners.
It is possible to identify cause and effect relationships between the aims and the lines of action selected. For
example, simplifying procedures for jobseekers through the introduction of a single appointment to register and
claim benefits, launching a website, and having a single call number helps to enhance information, administrative
follow-up, and support for jobseekers. In particular, setting up different channels of communication helps to
optimise interactions between Pôle Emploi advisers and jobseekers.
Similarly, developing services for companies through a needs analysis process, pre-selecting candidates, and
arranging job forums, helps to prospect the labour market and to assist business organisations.

Modelling performance therefore serves first and foremost to clarify the policies that guide any
managerial actions.
It also serves to structure the management tools. In Chapter 8, we shall see that dashboards operationalise
these performance models. They are presented in various forms: diagrams, graphs, and indicators, but

9
[Link] accessed in December 2010.

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not in the form of equations. We present two methods for modelling performance more precisely: the
Balanced Scorecard method, in which the performance model takes the form of a strategy map, and the
OVAR method, in which it is represented in the shape of an Objectives / Critical Performance Variables
framework.

3.1.2 The contributions of performance modelling

Explaining an organisation’s performance model is a very useful approach for managers.
Indeed, since performance models include an element of subjectivity, there is a risk that different
managers have divergent representations of the model. Performance modelling is thus a process that
aims to draw the various representations towards a common representation. The model therefore needs
to be discussed, co-constructed, and adapted by managers and executives on a number of occasions
(performance reviews, budget meetings, strategic planning, etc.) KM 2.8.
First, this involves strengthening the strategic alignment, i.e., vertical coordination within the
organisation: modelling an organisation's performance should include discussion and representation of
the assumed ties between local lines of action and objectives and the organisation's goals. This will
largely depend on how performance modelling is conducted and facilitated within the organisation.
Clarification of an organisation's performance model should also improve horizontal coordination
between sub-divisions. Indeed, as we pointed out above, this involves an exercise in co-construction
between managers. The goals and lines of action are discussed during meetings that bring together
managers from various sub-divisions (e.g., executive committee meetings). An organisation’s
performance model makes it possible to understand and visualise the links between the actions of
different entities regarding the organisation’s performance and thus promotes consistency between these
actions, i.e., coordination. For example, if the model shows that one priority is to develop perceived
product quality, it is possible to check that the different entities that contribute to this perception (design,
production, after-sales service, marketing) have taken this priority into account in their own objectives.
Finally, modelling an organisation's performance offers a potential learning medium. It can even be
assumed that it is a condition for learning since learning is based on the validation or invalidation of
hypotheses. The performance model is an expression of hypotheses about causal relations between
actions and the goals underlying the strategy. They can therefore be validated or invalidated by analysing
the results finally obtained following implementation of selected actions. For quantified models,
learning can be achieved through the statistical testing of hypotheses. In the case of the performance
model, which is qualitative, it serves as a heuristic in the learning process. Again, this depends on the
quality of the reflections conducted within the organisation regarding the performance model. Indeed,
to support learning, the model should not be considered as a stabilised and definitive element: the
learning loop that we defined in Chapter 1 requires frequent discussion of the implicit assumptions that
underlie it: following an analysis of the results, it is possible to adjust the assumptions expressed in the
model, and subsequently the strategy.

3.1.3 Limitations of performance modelling

As noted above, modelling an organisation’s performance has considerable potential virtues. However,
there are certain biases and risks linked to its use that are important for managers to bear in mind in
order to avoid irrelevant analyses and inconsistent decisions, in other words, to guard against
organisational myopia.
First, it is important to remember that a model cannot encompass all the dimensions of an organisation's
performance. It is inevitably informed by a simplification of reality KM 2.9. In fact, for economists, a
model’s primary quality is not to be realistic: "Only when a simplifying assumption results in a model
that provides incorrect answers to the questions it is supposed to answer can its lack of realism be
considered an imperfection. […] Otherwise, the lack of realism [of a model] is a virtue. In this case, the
simplifying assumption makes it possible to isolate certain effects and facilitate their understanding"
(Romer, 1997). This is not a problem as long as managers and stakeholders in organisations do not
attribute the quality of realism or completeness to models which they do not have. However, it is often
the case that choices made in performance modelling are no longer visible when the model is used to
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make decisions. Managerial decision-making (e.g., the allocation of resources or the choice of action
plans for an entity) is therefore sometimes disconnected from the initial parameters that condition it.
When the model’s basic assumptions are no longer verified (e.g., in the case of imperfect information
or when applied to different products or by different entities), the conclusions of a quantitative
simulation model will be distorted, just as the representations of a qualitative model may prove
irrelevant.
Another risk of models is the ambiguity between the representational and predictive forces that
characterise them. A model does not simply reflect certain performance dimensions. It guides behaviour
to the point of sometimes creating the reality it is supposed to reflect. This is what is known as the
performativity of models KM 2.10.
The performativity of models has been strongly criticised by the media, civil society, and some academic
circles (especially heterodox economists) as it 'causes' or creates an economy with deleterious effects
(Muniesa, 2014). For example, financial rating agencies use models to assign a rating corresponding to
the repayment prospects of a state's or company's debts to its creditors. This rating has a crucial influence
on the latter’s financial solvency. The estimation of financial risk becomes a self-fulfilling prophecy that
can lead a country or a company into a difficult-to-counter downward spiral. Downgrading a rating leads
to far more draconian credit conditions that can ultimately further deteriorate the financial situation of
the country or company in question. The performative bias of models also concerns the management
control models used within companies. For example, the application of a costing model can lead to an
ill-advised decision to discontinue products with too high a unit cost, ultimately eroding the profitability
of the entire company. This is because the non-avoidable fixed costs that are shifted to the other products
in the portfolio then dilute the unit costs of the latter, making them appear less profitable.
Qualitative models such as the organisational performance model discussed in this chapter are not
immune to performative bias. For example, by arbitrating between the expectations of certain
stakeholders, company managers may end up neglecting the expectations of stakeholders considered to
be of little importance to the organisation. However, in so doing, such stakeholders are absent from the
performance representations used in the organisation and managers are never encouraged to take their
practices and thinking into account. This can create a significant blind spot and lack of agility as we
have seen that the balance between stakeholders is dynamic over time.
The performativity bias of models goes hand in hand with another of their limitations: models tend to
capture legitimacy in organisations. Thus, what is not easily modelled is often seen as having little
legitimacy. In the case of organisational performance modelling, potentially important but difficult to
quantify goals (e.g., product or market diversification, change in governance, etc.), or goals for which
the lines of action are difficult to determine, will often be discarded by decision-makers because they
do not fit easily into the model.

3.2 The key role of strategy and priorities in performance modelling

Not all lines of action are of equal importance: choices have to be made, priorities drawn, hierarchies
established. The purpose of the strategy is to clarify the broad lines of these organisational choices.
The performance model must therefore be consistent with the strategy. While this may seem like a matter
of common sense, reality belies the apparent simplicity of the statement. The literature on management
tools thus points to the difficulty of aligning indicators with strategy and the importance of modelling
work in this respect (Ittner & Larcker, 2003) KM 2.12.
Furthermore, what the notion of strategy covers also needs to be clarified. We consider that it covers
two dimensions: the sector’s key success factors and the chosen positioning.
In selecting the main lines of action, it is also important to consider the short-term priorities.

3.2.1 The sector’s key success factors

In any given business, key industry factors correspond to the generic aspects of performance which are
‘strategic’ in this type of activity. For instance, maximising occupancy is a key success factor in the

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hotel industry. This performance dimension is linked to the amount of fixed costs in the sector, which
must be effectively managed for both luxury and budget hotels.
These key success factors may already be established, but some players may also seek to gain a foothold
in a sector by switching the performance dimensions: e.g., internet platform strategies in the service
sector (accommodation, transport) or in the distribution industry, etc.

3.2.2 The chosen positioning

Generic strategies are an example of positioning: cost leadership, differentiation, or typical strategies
defined by Kaplan and Norton (see appendix to Chapter 8) such as customer intimacy, operational
excellence, and product superiority. An organisation’s strategic positioning guides the choice of priority
lines of action and determines their relative importance. Thus, cost control is a more important line of
action in a low-cost strategy than in a strategy of differentiation through innovation.
Different strategic positions may exist for a same activity within a same company, including within a
Strategic Business Unit (SBU). For example, the strategic positioning of various geographical entities
may differ to some extent to take a specific competitive environment or customer expectations into
account when these diverge in different countries. Key success factors and strategic positioning help to
define the entity's business model. The business model expresses the medium and long-term goals
pursued by the entity in qualitative terms and the main lines of action chosen.

3.2.3 Cyclical priorities

The business model has a certain degree of longevity. It is true that a strategy can change, but its purpose
is to guarantee a form of consistency in the actions taken over time in a relatively stable trajectory.
However, certain lines of action may also prove to be priorities, but in a more cyclical manner.
These may be related to:
- changes in the company's business model (changes in strategic positioning, changes in the
sector's key success factors following an innovation, or identification of new lines of action):
the company then momentarily focuses on a successful transition.
- specific cyclical elements: e.g., following a change in interest rates and the macroeconomic
context, reducing the debt of a highly leveraged company may become a priority.
- specific internal difficulties: e.g., if a drop in quality is observed, the organisation may want
to focus on improving it.
- particularly strong ambitions regarding certain objectives: it is the target and not the nature
of the goal that gives the priority a cyclical character: e.g., reducing time-to-market for new
products may be a recurrent priority linked to the chosen strategic positioning, but if the
target is to halve this time and said target is deemed particularly ambitious, it may become
a cyclical priority.
These two aspects of strategy and cyclical priorities will be used in the performance modelling methods
that we explain in Chapter 8 (OVAR and BSC).

Conclusion
Managing the activities of any organisation requires defining its performance. This chapter showed that
defining organisational performance is not an easy exercise.
First, we need to clarify the notion of organisational performance itself. We decided to define it in
relation to organisational goals and lines of action.
Explaining the goals of a given organisation involves identifying its main stakeholders. These
stakeholders can be extremely diverse. The configuration of the institutional environment, the sector in
which it operates, as well as the choices made by the company or organisation’s leaders, define the
stakeholder balance for the organisation. Institutional changes alter the terms of this balance, which thus
needs to be regularly reviewed and proactively managed by the organisation's leaders.

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Les fondamentaux du contrôle de gestion : principes et outils (2022)

Each stakeholder has a specific perspective of the organisation's performance, which is expressed in
several dimensions and timeframes that the firm’s leaders must try to reconcile.
Defining the lines of action that will serve the organisation's goals involves modelling its performance.
The model specifies its goals, the lines of action defined to meet them, and the cause-and-effect relations
between the lines of action and the goals. We noted that performance modelling is useful for learning,
for strategic alignment, and for horizontal coordination, especially if it is the result of managerial co-
construction. We also noted the potential biases of performance modelling which essentially lie in
blindly using the model for decision-making, whether through ignorance of the model's initial
hypotheses, neglect of its performative effects, or lack of attention to everything that cannot easily be
modelled.
This clarification of the different aspects of an entity's performance allows us to construct systems to
measure the overall performance of the entity in question (see Chapters 3 and 8, depending on whether
these systems are financial or extended to non-financial indicators). It also serves as a starting point for
a more analytical approach to performance measurement (see Chapters 4 to 7).

Bibliography
BOURGUIGNON A. (1997), “The various functions of Accounting Language: An Example of
Performance”, Accounting Auditing Control, Vol. 3, Issue 1, pp. 89-101.
FREEMAN, R. E. (1984), Strategic management: a stakeholder approach, Pitman, Boston,
Massachusetts.
ITTNER C.D., LARCKER D.F. (2003), “Coming Up Short on Non-Financial Performance
Measurement”, Harvard Business Review, November, pp.88-95.
LORINO P. (2003), Méthodes et pratiques de la performance, 3rd Edition, Les Editions d'Organisation.
MALLERET V. (2009), “Can the Cost-Value Tradeoff Be Managed?”, Accounting Auditing Control,
Vol. 15, Issue 1, pp.7-34.
MENDOZA C., CAUVIN E., DELMOND M.-H., DOBLER P., MALLERET V., ZILBERBERG E.
(2009), Coûts et décisions, 3rd Edition, Gualino.
MUNIESA F. (2014), The provoked economy - Economic reality and the performative turn, London
and New York: Routledge.
ROMER D. (1997), Macroeconomics in depth. Paris: Ediscience. Romer, D. (1996) Advanced
Macroeconomics. Boston, MA: McGraw-Hill.
SENAUX B. (2008), “A stakeholder approach to football club governance”, International Journal of
Sports Management and Marketing, Vol. 4, Issue 1, pp.4-17.

Definitions
● Business model: Articulation of the medium and long-term goals pursued by an entity and the main
lines of action chosen. It presents the relatively stable dimensions of the performance model,
including the key industry success factors and the strategic positioning chosen by the managers.
● Goals: The areas that the entity's management seeks to achieve, defined in qualitative terms.
● Lines of action: Potential ways of achieving a goal.
● Model: A schematic representation of the cause-and-effect relationships between different
aggregates, usually based on a mathematical formalism.
● Performance: the goals pursued by an entity and the lines of action chosen to achieve them.

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● Performance model: A schematic representation of the goals that make sense at a given time for the
entity, the lines of action chosen to achieve them, and the cause-and-effect relationships between the
lines of action and the goals.
● Objective10: Operational translation of a goal or a line of action into a result to be achieved.
● Stakeholder: a group or individual liable to affect or to be affected by the achievement of the entity's
objectives (Freeman, 1984)
● Strategy: priority action guidelines established by the leaders to achieve the goals, resulting from the
choice of positioning, key success factors imposed by the sector of activity, and the organisation’s
more cyclical priorities.

Key messages
2.1 A management control system cannot be built without first explaining the performance
dimensions for the organisation concerned, which are always specific to the organisation.
2.2 Building a management control system means that the system must first have explicit goals. To
this end, we need to identify the stakeholders that matter to the organisational entity, and then the
expectations of these stakeholders.
2.3 The diversity of stakeholder expectations reminds us that goals cannot be reduced to profit or
shareholder value. The performance management process can thus be applied to different types
of goals and entities/organisations.
2.4 Identifying an entity’s stakeholders is not easy: there are generally various stakeholders, their
expectations are sometimes ambiguous or contradictory, and their relative importance is difficult
to assess precisely. The relative importance of stakeholders depends on the type of organisation
(private company, public institution, association, etc.) or entity (functional or operational
department), the institutional context, and the sector(s) in which the entity operates. The balance
between stakeholders is also dynamic: the relative importance of each stakeholder may change.
2.5 Clarifying the goals leads to arbitration, and hence to management decisions.
2.6 The definition of performance implies taking the consumption of resources induced by the activity
into account (i.e., its cost) in addition to clarifying the entity’s goals.
2.7 More broadly, setting performance goals involves defining the main lines of action to achieve
them, with actions on cost being only one of these potential areas. This is the aim of performance
modelling.
2.8 A performance model is a manager's subjective representation of the cause-and-effect links
between the goals and the lines of action. As these representations may vary from one manager
to the next, the aim is to encourage the convergence of representations, both vertically and
horizontally. It also involves being able to change this representation if necessary (learning
function).
2.9 A performance model is a simplification of reality. While this is sometimes seen as an
impoverishment, it makes it much easier for managers to understand the cause-and-effect relation
between the goals and the lines of action.
2.10 Performance modelling has an impact not only on the actors’ representations, but also on their
behaviour; it is performative. Vigilance is needed in view of the risks of performative bias.
2.11 To be relevant, the lines of action (and therefore the performance model) need to be consistent
with the strategic lines of the organisation. These include the key success factors of the sector of
activity and the strategic positioning chosen by the leaders who organise and prioritise the
directions of organisational action in a relatively stable manner. The lines of action must also be
consistent with more cyclical priorities.

10
This new definition extends the definition we gave in Chapter 1. It indicates that the goals that need to be translated into
objectives are of two kinds: the performance dimensions (goals) and the lines of action.

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2.12 The literature notes that in practice, aligning management control indicators with a strategy is not
as simple as it seems, and it stresses the importance of a prior performance modelling approach
to achieve this.

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