Complexity and Control: Managing for Value Creation in Complex Firms

Complexity and Control: Managing for Value Creation in Complex Firms

DOI: 10.4018/978-1-5225-3987-2.ch004

Abstract

Measuring and managing a firm's performance in complex settings are at the center of the debate in business management studies in recent years. The causal ambiguity condition that affects the dynamics of value creation makes it difficult to achieve a clear understanding of the mechanisms underpinning economic value. Thus, a conceptualization of the firm as a complex entity and a complexity management model are proposed, with the aim to contribute towards improving the disentanglement of the messy nature of the process of economic value creation. Finally, building on the assumption that financial and quantitative measures should always be the end goal of the process of the firm's economic value measurement, the most important models and metrics of value creation are reported.
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Introduction

Managing for value creation is the essence of business management studies, especially in recent years. The diminished trust in the economic system and the redefinition of the firm’s ultimate purpose as creating shared value is stimulating a new conception of capitalism (Kramer & Porter, 2011). The focus on improving profitability in a systematic way represents the central issue in strategic management studies, where the attention is devoted to understanding how to manage a firm’s resources and external competing forces for sustaining a firm’s competitive advantage. The rationale underlying this assertion is that performance measurement systems need to be explicitly linked to the firm’s strategy domain, in order to stimulate action and redirect it toward the pursue of desired goals. All performance measurement systems consist of a set of economic performance measures, used to quantify the efficiency and effectiveness of individual and organizational actions (Neely, Mills, Platts & Richards, 1994). The traditional approach to performance measurement has demonstrated the inability to link the long-term strategy of the firm with its short-term actions. The design of management control systems around financial measures and targets, without taking into consideration criteria that measure a firm’s performance from additional perspectives, failed to monitor the firm’s progress in achieving long-terms strategic objectives (Kaplan & Norton, 2007). Supplementing traditional financial measures with a set of quantitative and qualitative measures that rely on additional perspectives (e.g.: customers, internal processes, learning and growth) is aimed at measuring both the current firm’s operating performance and the drivers of future performance. In this way, action and strategy are linked and the efforts of the organizational units are aligned and coordinated in order to maximize organizational economic value.

In order to clearly understand the relationships between the measurement of a firm’s economic value and the mechanisms of value generation, the shift toward an integrated performance measurement system provides a window into the organization by which strategic and business decisions are made. The substantial insights coming from the financial and non-financial set of performance measures allow us to constantly monitor the process of strategy implementation and the impact of operational activities. However, other methodological tools and methods are generally needed to fully understand and manage the drivers of a firm’s value creation. This is particularly important when measuring a firm’s value in complex settings. Under conditions of complexity, the measurement and control of a firm’s economic value require:

  • The construction of a conceptual model that explicitly assumes the firm as complex system and detects the fundamental variables affecting value generation

  • The treatment of the paradox of the causal ambiguity that, on the one hand, protects a firm’s competitive advantage from imitation and enhances the firm’s superior performance, and, on the other hand, limits manager ability to clearly understand the causal relationships between organisational resources and economic performance (King, 2007)

  • The development of economic value management systems that assume a multilevel perspective, able to emphasize two related issues concerning economic value (value creation and value capture), with particular attention to the integration between financial and non-financial measures

In particular, the starting point for the elaboration of a conceptual and methodological framework, able to focus on the firm as complex entity, can be searched within the contents of different premises. In particular: 1) a firm’s competitive advantage and performance depend on the combination of three structural dimensions: strategy, operational processes and resources (Kaplan & Norton, 1996); 2) the firm as a complex object, embedded within a complex environment (Comuzzi, 2016); 3) the firm as a continuously changing entity, that evolves by alternating sequences of order and disorder, continuity and discontinuity, stability and innovation (Stacey, Griffin & Shaw, 2000).

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