CHAPTER 1

Introduction

Falconer Mitchell and Hanne Nørreklit

This book is concerned with the production and use of information for performance management. Performance management is considered to include the organizational planning and control processes that facilitate managers and employees in making decisions and help them take actions that are in the overall interest of the organization. For a performance management system to function effectively in planning and control, it has to be grounded in the business reality of an organization.

The pivotal point in the conventional wisdom of performance management is the objective measurement of the results of organizational activities and historical data–based estimations of consequences of decision alternatives. The relationships between action and observational points of measurement tend to be explained by a type of deterministic “natural law causality.” However, such mechanical prescription for management practice might be damaging for organizational practices (Ghoshal 2005). For instance, there is a huge literature pointing to the flexibility inherent to the techniques used in performance measurement as well as the various short- and long-term dysfunctional effects of performance measurement on the actions of the managerial staff whose performance is assessed by their use (Merchant and Van der Stede 2012).

Overall, there are more dimensions involved in understanding human action than can be encompassed in the force of mechanical law, and there are no meta-empirical laws for running a business. The successes of companies such as LEGO and Apple did not happen because their top managers recognized and made employees adapt to some meta-laws for conducting business successfully. Rather, their successes are the result of organizational actors’ efforts in developing and establishing a joint set of functioning activities, producing products and services that meet or even change peoples’ values by introducing new functions and qualitative features in their lives. Hence, human actors are central to the construction of organized reality.

In view of that, this book considers pragmatic constructivism as a paradigm for understanding actors’ construction of business practices to be performed. Pragmatic constructivism approaches organizational practices as constructed through the activities of the organizational “actors.” Herein, the actors are organizational managers. Thus, an actor is a human being who participates in overseeing and conducting organizational activities with the intention of being a part of initiating and developing them. Driven by their own intentions and way of reasoning, actors create, influence, and control organizational activities in interaction with the organizational environment. From this perspective, they can be viewed as the coauthors of organizational activities. Organizational actors change, adapt, and align their actions and goals with existing organizational structures, routines, rules, and objectives. But since even the most specific instructions are to be interpreted and reflected within context of the situation in which specific practice occurs, managers and employees cannot function as adaptors only. They should also concerned about whether structures, routines, rules, and objectives are “reasonable.” Accordingly, the practice of all actors, at all levels of the organization, is interactive, reflective, and innovative to some extent.

Actors do not act in a void but act in the physical, biological, human, and social world. Actors always act under presumptions of a specific perception and understanding of the world and creating a relationship with that world. They continuously construct, adjust, and reconstruct their relationship with the world in light of new experiences, contexts, and communication. The outcome of the actor–world relationship is a reality construction. The reality construction may be well-functioning and creating intentional results, or it may be ill-functioning and dominated by activities that do not succeed. The thesis of pragmatic constructivism is that the four dimensions of reality—facts, possibilities, values, and communication—must be integrated in the actor–world relationship if an actor’s belief construct aims to form a successful basis for effective actions.

In the view of pragmatic constructivism, the shortcomings of the conventional approach to performance management do not imply that the management accounting tools for such purposes as planning and control are obsolete. Indeed, to observe and create a coordinated set of construct causalities across organizational activities, practitioners need to create a highly detailed and complex set of performance management models.

Based on the pragmatic constructivist conceptualization of human reality, this book discusses the concepts and methods developed for the performance management of organizational practices (NØrreklir 2017; NØrreklit et al. 2007, 2010). Part 1 of the book explains core concepts of a pragmatic constructivist approach to performance management while part 2 provides specific applications of pragmatic constructivism to the core task of performance management action in a series of real-life case illustrations. More specific, it addresses such topics as (i) core features of a successful construction of organizational reality, (ii) organizational actors and an actor-based method, (iii) planning and decision making, (iv) performance management of investment center managers, (v) strategic performance management, and (vi) operational performance management. It is intended for students and practitioners who work actively with developing, using, and assessing performance management systems.¹