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Strategy Selection and Performance Measurement Choice When Profit Drivers Are Uncertain

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  • Ronald A. Dye

    (Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, Illinois 60208)

Abstract

This paper studies a manager's attempt to maximize his firm's discounted expected profits by choosing what strategic actions to select and what performance measurement system to employ in a setting where the manager is uncertain about what variables ÜdriveÝ the firm's profits, the firm's profit drivers remain stationary over time, and strategic actions differ in the amount of information they produce about the firm's profit drivers. For each available performance measurement system, this paper identifies necessary and sufficient conditions for experimentationÔthat is, deviating from the firm's short-run expected profit-maximizing actionÔto be optimal. In addition, the paper determines what factors influence a firm's preferred performance measurement system, and it explains why the preferred performance measurement system is likely to change over time.

Suggested Citation

  • Ronald A. Dye, 2004. "Strategy Selection and Performance Measurement Choice When Profit Drivers Are Uncertain," Management Science, INFORMS, vol. 50(12), pages 1624-1637, December.
    • Handle: RePEc:inm:ormnsc:v:50:y:2004:i:12:p:1624-1637
    DOI: 10.1287/mnsc.1030.0160
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    References listed on IDEAS

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    1. Philippe Aghion & Patrick Bolton & Christopher Harris & Bruno Jullien, 1991. "Optimal Learning by Experimentation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(4), pages 621-654.
    2. Hirao, Yukiko, 1993. "Learning and Incentive Problems in Repeated Partnerships," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 101-119, February.
    3. Karen Hopper Wruck & Michael C. jensen, 1997. "Science, Specific Knowledge, And Total Quality Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(2), pages 8-23, June.
    4. Kaplan, Rs, 1975. "Significance And Investigation Of Cost Variances - Survey And Extensions," Journal of Accounting Research, Wiley Blackwell, vol. 13(2), pages 311-337.
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    Cited by:

    1. Zhang, Jingwen, 2017. "The adaptation of management control systems to different agents," Other publications TiSEM 647192e2-8d0d-4265-8bc1-d, Tilburg University, School of Economics and Management.
    2. Bol, Jasmijn C. & Moers, Frank, 2010. "The dynamics of incentive contracting: The role of learning in the diffusion process," Accounting, Organizations and Society, Elsevier, vol. 35(8), pages 721-736, November.

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