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A PERFORMANCE MEASUREMENT-BASED EARLY WARNING SYSTEM IN
A GOVERNMENT REVENUE ORGANIZATION
by
Elnur Asgarli
A Dissertation Presented in Partial Fulfillment
of the Requirements for the Degree
Doctor of Management in Organizational Leadership
UNIVERSITY OF PHOENIX
July 2012
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20 12 by ELNUR K. ASGARLIALL RIGHTS RESERVED
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Abstract
The present quantitative study explored the relationship between the application of the
performance measurement system and the ability of the decision-makers of a government
revenue agency of the Republic of Azerbaijan to detect the events that could harm the
operations of the entire organization. Based on the literature review, the expectation was
that the organizational decision makers could detect organizational crises in earlier pre-
crisis stages using a properly designed performance measurement system. Two
quantitative research designs were used by exploring one research question for each
design. A correlational design was used by running a multiple regression on 28 quarterlyobservations on the quarterly tax revenue, quarterly performance report scores on audit,
cash operations control, tax debts, tax return processing, and taxpayer services, and
quarterly GDP figure of Azerbaijan. A survey design was used by administering an
online questionnaire to 344 managers of the revenue agency. The results of both research
questions indicated an overall positive relationship between the performance
measurement system and the ability of the decision-makers of a government revenue
agency to detect events that could harm the operations of the entire organization.
However, several deviations from the overall observed relationship were detected
indicating that further research may be needed to understand the relationship between
performance measurement and crisis leadership. Recommendations were also included
for the organizational leaders on improving the predictive capacity of the performance
measurement systems of their organizations.
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v
Dedication
I dedicate this dissertation to my parents who always inspired me for continuous
education, and I owe to them for everything that I have achieved in this life. I also
dedicate this dissertation to my wife and my daughters who kept me energized
throughout my study and were my source of joy and happiness.
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Acknowledgments
I am very grateful to everyone who helped me throughout my doctoral studies. I
especially thank my mentor Dr. Richard Brunkan. Dr. Brunkan was very helpful in
providing timely and quality guidance and directing me in the right way towards
completion of my dissertation.
I thank my committee members Dr. Richard Turner and Dr. Mohammad
Shraifzadeh who supported me with their valuable feedback. I also thank my academic
advisor Carola Garfias who would regularly check my progress and help make my
doctoral studies more efficient.I also thank Dr. Gafar Gurbanov for helping me to approach my doctoral
dissertation from a student's perspective. Dr. Gurbanov, based on his online doctoral
experience, provided me with very practical help in balancing my personal life with
doctoral studies ad making it fun and useful at the same time.
My special thanks go to the people at the Ministry of Taxes of Azerbaijan. Mr.
Fazil Mammadov, Minister of Taxes, provided overall support for my doctoral studies,
and I am very grateful to him for this support. I thank Mr. Sahir Mammadkhanov,
Deputy Minister of Taxes, who personally helped me in organizing and conducting data
collection for the dissertation at the Ministry of Taxes. I especially thank Dr. Asaf
Asadov, Advisor to the Minister of Taxes, for his exceptional support in formulating my
research idea and validating my research instrument. My thanks also go to the team of
the performance measurement section of the Ministry of Taxes, Mirgulu Mursaliyev,
Subhan Kamilzada, Ismayil Agalarov, and Ziya Askarov for their continuous support in
data collection.
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Table of Contents
List of Tables ............................................................................................................ xi
List of Figures .......................................................................................................... xii
Chapter 1: Introduction .............................................................................................. 1
Background of the Problem ....................................................................................... 1
Statement of the Problem ........................................................................................... 2
Purpose of the Study .................................................................................................. 4
Significance of the Problem ....................................................................................... 4
Nature of the Study .................................................................................................... 5
Appropriateness of research method .................................................................. 6
Appropriateness of research design. ................................................................... 7
Research population and instrument ................................................................... 8
Research Questions and Hypotheses ......................................................................... 9
Theoretical Framework ............................................................................................ 10
Signal detection theory. .................................................................................... 10
Performance measurement theory .................................................................... 12
The study as a bridge between the framework theories .................................... 12
Controversies in the field .................................................................................. 13
Definition of Terms.................................................................................................. 14
Assumptions ............................................................................................................. 15
Scope and Limitations.............................................................................................. 15
Delimitations ............................................................................................................ 15
Summary .................................................................................................................. 16
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viii
Chapter 2: Review of the Literature ......................................................................... 17
Title Searches, Articles, Research Documents, and Journals .................................. 18
Literature Review..................................................................................................... 19
Historical overview. .......................................................................................... 20
Performance measurement in the first decade of the 21 st century .................... 22
The purpose of performance measurement in public organizations ............ 23
Performance measurement as an early warning system .............................. 24
Crisis leadership ................................................................................................ 26
Signal detection ............................................................................................ 27
Crisis response ............................................................................................. 30
Stakeholder theory of crisis management .................................................... 32
Crisis communication .................................................................................. 32
Organizational complexity ........................................................................... 33
Organizational learning from crises ............................................................. 35
Variables .................................................................................................................. 36
Research question 1. ......................................................................................... 36
Research question 2. ......................................................................................... 38
Research Gap ........................................................................................................... 39
Conclusion ............................................................................................................... 40
Summary .................................................................................................................. 41
Chapter 3: Method ................................................................................................... 43
Research Method ..................................................................................................... 43
Research Design....................................................................................................... 44
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ix
Research Questions and Hypotheses ....................................................................... 46
Population ................................................................................................................ 48
Sampling Frame ....................................................................................................... 49
Sample...................................................................................................................... 50
Sample for Research Question 1 ....................................................................... 50
Sample for Research Question 2 ....................................................................... 50
Informed Consent and Confidentiality..................................................................... 52
Geographic Location ................................................................................................ 53
Instrumentation ........................................................................................................ 53
Validity and Reliability ............................................................................................ 55
Data Analysis ........................................................................................................... 58
Research question 1 .......................................................................................... 58
Joint hypotheses test. ................................................................................... 58
Research question 2. ......................................................................................... 59
Summary .................................................................................................................. 60
Chapter 4: Analysis and Results .............................................................................. 62
Data collection procedure. ................................................................................ 63
Results for Research Question 1 .............................................................................. 64
Descriptive statistics ......................................................................................... 64
Hypothesis results for research question 1. ...................................................... 67
Results for Research Question 2 .............................................................................. 71
Demographics of the sample ............................................................................ 71
Descriptive statistics ......................................................................................... 72
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x
Hypothesis results for research question 2. ...................................................... 74
Summary .................................................................................................................. 76
Chapter 5: Conclusions and Recommendations ...................................................... 77
Research Questions and Hypotheses testing ............................................................ 77
Research question 1 .......................................................................................... 78
Research question 2 .......................................................................................... 78
Interpretation of the results. .............................................................................. 79
Limitations ............................................................................................................... 79
Implications.............................................................................................................. 80
Recommendations for Key Stakeholders ................................................................. 83
Recommendations for Future Research ................................................................... 84
Summary .................................................................................................................. 86
References ................................................................................................................ 88
Appendix A: Authorization Letter ......................................................................... 101
Appendix B: Informed Consent Form ................................................................... 103
Appendix C: Research Instrument ......................................................................... 107
Appendix D: Sample Performance Measurement Report ...................................... 120
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List of Tables
Table 1 Distribution of Key Word Searches ............................................................ 19
Table 2 Possible Choices in a Simple Signal Detection Case ................................. 28
Table 3 Summary Statistics of the Variables ........................................................... 65
Table 4 Predictors of Tax Revenue .......................................................................... 68
Table 5 Predictors of Tax Revenue in a Parsimonious Model ................................ 70
Table 5 Normality Tests ........................................................................................... 74
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List of Figures
Figure 1 . Graphical representation of Revenue and GDP variables. ....................... 65
Figure 2 . Graphical representation of independent variables. ................................. 66
Figure 3 . Distribution of QPM variable. ................................................................. 72
Figure 4 . Distribution of Leadership variable. ........................................................ 73
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1
Chapter 1: Introduction
Organizations perform in complex environments, and changes in these
environments may result in crises and disruptive events (Mitroff, 2004; Parskevas, 2006).
Use of early warning systems and signal detection theory in management and leadership
is an emerging managerial practice for increasing organizational agility and
responsiveness before and during crises (Mitroff, 2004). The purpose of this study was to
explore whether a properly devised balanced performance measurement system may be a
basis for an early warning system of an organization.
Chapter 1 discusses the importance of the problem from social context andresearch perspectives. Then, the general and specific problems of the study and the
general population for the study are defined. Afterwards, the research purpose is
discussed by explaining the research method and design and their appropriateness for the
study. The discussion goes on by explaining the significance of the study for research
and leadership, the nature of the study, research questions and hypotheses, theoretical
framework, assumptions, limitations, and delimitations.
Background of the Problem
Any discontinuity in the performance of a government agency responsible for
collecting taxes may harm the governments revenues and taxpayers rights. A
discontinuity in a revenue organizations performance may occur for various reasons, for
example, a terrorist attack, an earthquake, or a major failure of an organizations
computerized information system. Organizations need to have contingency plans for
mitigating possible and impossible crises; however, for this study, only discontinuities
that can result from misrepresentation of performance measures will be considered. Tax
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revenues may decrease if taxpayers become increasingly dissatisfied with the
performance of the tax agency and if voluntary compliance is reduced. The revenue
agency could have predicted a decrease in taxpayer satisfaction by measuring and
analyzing the taxpayer satisfaction level in a timely fashion (DBM Consultants, 2009).
To avoid discontinuities, a revenue agency needs to scan its external and internal
environments for the signals of potential major events that may cause discontinuity or
crisis. Deverell and Olsson (2010) suggested that detecting and reading early warning
signals might improve the quality and timeliness of organizational decisions.
Organizations need some tools for predicting and preventing events that may harm their performance.
The problem is important both socially and from a research perspective. As a
social concern, a disruptive event in the operation of a government agency of a
nationwide scale may negatively affect the lives of many citizens and organizations. As a
research focus, the problem is important because crisis leadership research is relatively
young, and theoretical and empirical research in this field may help develop the area by
incorporating other well-researched fields such as performance measurement.
Statement of the Problem
According to Mitroff (2004), early warning signals precede crises, and
organizations may sense these signals using signal detection mechanisms. The problem
is that the early warning signals are usually weak. In many cases, organizational systems
may lack proper detection mechanisms for sensing and transferring these signals to the
right people in the organization (Mitroff, 2004). If the government revenue organization
fails to predict early warning signals of the disruptions in the activities of the
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organization, the results may be decreased revenue to the state budget, poor taxpayer
services, increased tax burden on taxpayers because of the poor tax administration and
many other negative effects (U.S. Government Accountability Office (GAO), 2009a,
2009b, 2010).
Organizational decision-makers may use appropriate tools to detect the weak
signals about the opportunities and threats facing the organization (Mitroff, 2004). One
of these tools is the performance measurement system of the organization. The specific
problem is that performance measurement systems are useful as early warning systems
only if performance measures are balanced, appropriately designed, and aligned with thestrategy of the organization (Kaplan & Norton, 2007; Parida & Chattopadhyay, 2007).
The quantitative descriptive survey research was used to study the quality of the
performance measurement system of a government revenue organization as a tool for
detecting crises. The quantitative method and the survey research design were
appropriate for this study because the purpose of the study was to test the relationship
among variables identified before the study and not emerging during the study (Creswell,
2005). The study used two data sets. Managers of government revenue organizations
who participate in making decisions under uncertainty constituted the general population
for the survey. Tax revenue, gross domestic product (GDP), and performance scores on
core tax agency processes constituted the general population for the regression analysis.
The reason for selecting the Ministry of Taxes of the Republic of Azerbaijan (the
MOT) as the source of data was that performance measurement systems used across
organizations differ from one another that results in inconsistent performance
measurement data across organizations. Another reason was that access to detailed
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performance measurement results of many organizations was restricted. Obtaining
required data for this study from many organizations would be difficult.
Purpose of the Study
The purpose of the present study was to measure the relationship between the
application of the performance measurement system and the ability of the decision-
makers of a government revenue agency to detect potentially disruptive events or the
events that could harm the operations of the entire organization. The study may be
important for understanding the role of performance measurement as an early warning
system in the organization and how this phenomenon is accepted by the managers of theorganization. Quantitative research methods were used for the study because the
explanation of trends and relationship among variables was needed for exploring the
problem (Creswell, 2005).
The specific population for the correlational research design using multiple
regression analysis consisted of tax revenue and GDP data of the Republic of Azerbaijan
and performance measurement scores of the Ministry of Taxes of Azerbaijan. The
specific population for the survey design included 577 managers of the Ministry of Taxes
of Azerbaijan. The managers worked in different areas of tax administration that was
useful in gathering information from all functional areas of the organization. The
population for the survey study was geographically located in the territory of the
Republic of Azerbaijan.
Significance of the Problem
Fink, Siebe, and Kuhle (2004) indicated that organizations make decisions in the
presence of uncertainty, complexity, and rapid change. These three factors can produce
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unexpected disruptive events. Fink et al. suggested that some forms of weak signals
precede these events. Organizations need to use early warning systems to guide their
decisions.
From this perspective, the results of the current study may be useful to leadership
research by combining leadership theory and decision-making theory with signal
detection theory and by providing an empirical investigation about the usefulness of this
combination. The results of the study may contribute to government performance
measurement as part of ongoing efforts to modernize the activities of the government
sector and to make government agencies as effective as private organizations (Currie,Humphreys, Ucbasaran, & McManus, 2008; Wallis & McLoughlin, 2007). Although the
results of the study cannot be generalized to all government agencies in all countries, the
expectation is that the study results may be generalized to some extent to the government
revenue agencies operating in other countries with similar economic and social
conditions as the Republic of Azerbaijan. The results of the study may also contribute to
leadership research by providing an empirical investigation of using performance
measurement systems as early warning systems for predicting and leading crises and
disruptive events.
Nature of the Study
According to Creswell (2005), in quantitative research, the researcher conducts an
objective, unbiased study by asking specific questions, collecting quantitative data, and
analyzing these data using statistical methods. In qualitative research, the researcher
conducts a subjective study by gathering qualitative data in text, audio, video, and other
formats, asking non-specific questions, and analyzing the themes in the data (Creswell,
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2005). Creswell further indicated that the quantitative research method is required when
the relationship among variables needs to be studied, and the qualitative research method
is required when little-known or unknown problems need to be explored, or a central
phenomenon needs to be understood in detail. The purpose of this study was to explore
the relationship among the performance measurement indicators of future performance
and organizational crises; therefore, the quantitative research method was used.
Appropriateness of research method . McBurney and White (2009) argued that
in an ideal situation, the quantitative research, specifically a true experiment should be
selected as a research method because it offers a better degree of control over variablesand results that are more valid. However, carrying out true experiments on real-life
objects and in real-life situations is not always possible. Therefore, a degree of control
over research variables and settings may be lost in exchange for arriving at a better
description of reality (McBurney & White, 2009). The major rationale in selecting the
research method was that the research problem should match the selected research
method for the present study (Creswell, 2005).
The research problem for the present study consisted of the observations that early
warning signals preceding organizational crises were usually weak and that the
performance measurement systems used by organizations may not help them detect the
early warning signals if the performance measurement systems were not appropriately
designed and implemented. These general and specific problems were studied by
investigating the variables of performance results provided in performance measurement
reports, fulfillment of tax revenue forecasts, quality of the performance measurement
system of the organization, and capacity of the organization to forecast potential crises.
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The quantitative research method was appropriate for achieving the goals of this study
because the study explored known variables by explaining the relationships among these
variables (Creswell, 2005).
Appropriateness of research design. Because of the different natures of the
research questions, two quantitative research designs were used in the study. The
correlational research design was used to explore if the performance results predict the
fulfillment of tax revenue forecasts. The survey research design was used to gather
information systematically from the participants and quantitatively describe the
population to which the participants belonged (Groves et al., 2009) and explore there is arelationship between the quality of the performance measurement system of the
organization and the capacity of the organization to forecast crises. The experimental
design was not selected for the study because the researcher had no control over the
extraneous variables and did not give treatments to the participants (Creswell, 2005).
According to Creswell (2005), the correlational research designs are used to
predict the scores and explain the relationship among variables. Therefore, the
correlational research designs can be of two types: a prediction design and an explanatory
design (Creswell, 2005). The current study used the correlational prediction design to
answer the first research question because the first research question explored the
existence of a predictive relationship among scores of variables.
Sjoberg, Dyba, and Jorgensen (2007) argued that survey research is preferred
when the researcher cannot or does not want to control independent and dependent
variables, when the research has to be carried out in the natural setting of the phenomena
of interest, and when the research covers the events happening in current time or the
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recent past. The present study did fit the situation described by Sjoberg et al. (2007).
The variables of the second research question were out of the control of the researcher,
and the crises, detection of the early crisis signals, and performance measurement process
had been taking place in the recent past in their natural setting. Based on the described
features of the phenomenon of interest, survey research was an appropriate design for the
present study.
Research population and instrument . The source of the data set for the
correlational design was the performance measurement results obtained from
performance measurement reports and the reports on the fulfillment of tax revenueforecast by the MOT. The performance measurement reports provided numerical results
of the performance of the organization in the areas of tax return processing, tax audits,
cash operations control, enforced tax debt collection, and taxpayer services. The MOT
also produced statistical reports on fulfillment of tax revenue forecast by the organization
that also contained numerical data.
Data required for the survey design were gathered using a Likert-type scale
questionnaire distributed among 577 managerial-level employees of the MOT responsible
for making decisions in different functional areas. Searching for the existing survey
questionnaire for the purpose of the present study did not produce any results. A
questionnaire specifically developed for this research was used (see Appendix C). The
questionnaire contained questions about the quality of the performance measurement
system, crises the organization had faced, and the ability of the organizational leadership
to sense the early warning signals. The questionnaire did not contain questions that were
directly about the relationship among variables (de Vaus, 2002).
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Research Questions and Hypotheses
The MOT uses the performance measurement system for aligning organizational
strategy with the performance goals of the departments and individual employees. The
system is based on balanced measures covering different fields of organizational
activities and produces a broad picture of the organization in a simple and visual format.
The final report of the performance measurement system shows results in three colors.
Green means good performance, yellow means a near-critical situation, and red means a
critical situation. The performance measurement system contains lead indicators, so it
may point to potential future disruptive events.The MOT, as a major government revenue agency, is responsible for ensuring
timely inflow of tax revenues into the state budget. The amount of tax revenue that the
MOT ensures will enter the state budget is forecasted by the Parliament and the
government annually. The MOT reports to the government each year about tax revenue
forecast implementation. The major external indicator for assessing the performance of
the MOT is the forecast fulfillment, and under-achievement of the forecast is considered
a crisis in the MOT (A. A. Asadov, personal communication, December 10, 2009). The
research questions were focused on exploring whether the performance measurement
system was effective as an early warning system.
RQ1: How well do the performance results predict fulfillment of tax revenue
forecast?
H1 0: =0, no relationship exists between performance results and fulfillment of
tax revenue forecast.
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H1 a: 0 , a relationship exists between performance results and fulfillment of tax
revenue forecast.
RQ2: What is the relationship between the quality of the performance
measurement system of the organization and the capacity of the organization to forecast
crises?
H2 0: =0, no significant correlation exists between the quality of the performance
measurement system and the detection of crises.
H2 a: 0, a significant correlation exists between the quality of the performance
measurement system and the detection of crises.The variables used in the study to test the hypotheses were performance results
provided in performance measurement reports, fulfillment of tax revenue forecasts,
quality of the performance measurement system of the organization, and capacity of the
organization to forecast potential crises. In the first research question, the performance
results provided in performance measurement reports constituted a predictor variable, and
the fulfillment of tax revenue forecasts constituted a criterion variable. The null
hypothesis for the first research question was tested using a bivariate regression method.
For the second research question, the null hypothesis was tested by measuring the
correlation, and therefore, in the second research question, the quality of the performance
measurement system of the organization and the capacity of the organization to forecast
potential crises were not defined as either predictor or criterion variables.
Theoretical Framework
Signal detection theory. Signal detection theory provided the broad theoretical
framework for the study. Signal detection theory has long been used in technical fields
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such as radar and sonar signal processing and communication systems, and more
recently, in emerging applications using electronic sensors (Benjamin, Diaz, & Wee,
2009; Levy, 2008). From a pure mathematical statistics perspective, signal detection is
about selecting between the two alternative statistical decisions based on the likelihood
ratio exceeding or falling short of a certain value (Laming, 2010). The observer of the
state of nature is distanced from the state of nature and uses certain communication
channels to receive signals from the state of nature . The observers performance in terms
of understanding the likelihood of the signals representing the true state of nature and
making the right decisions (hits or correct rejections) or wrong decisions (misses or falsealarms) is limited to the capacity of the communication channel used (Laming, 2010;
Lerman et al., 2010).
For the present study, the communication channel was a performance
measurement system of a state revenue agency. A decision-maker of the organization
receives, through the performance measurement system, early warning signals about
possible events that may happen to the organization. The decision-maker needs to assess
whether the event is potentially disruptive to the organization and what the likelihood of
the event is and make relevant decisions. The decision makers ability to predict future
disruptive events is limited to the capacity of the performance measurement system used
as a communication channel.
Almost all decisions are made in the presence of uncertainty, and limitation of the
capacity of the communication channel to transmit useful information has important
implications for organizational leadership. Uncertainty implies that early warning signals
on which the decision is based are not strong and certain because useful information is
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mixed with non-useful information. The result is the noise associated with the signal.
The objective is to detect the signal and extract useful information from the noise that is
important for crisis leadership (James & Woten, 2010; Mitroff, 2004).
Performance measurement theory . An appropriately developed performance
measurement system may provide sound indicators about the past and future performance
of the organization in all fields of the organizational activity (Bhasin, 2008). Historically,
the first systematic study of performance measurement in the organization was done by
Taylor (1911). Taylor, in his Principles of Scientific Management , tried to align the
interests of employees and employers by proposing performance measures that wouldincrease the productivity of the employer and result in a higher salary for the employee.
After Taylor, the development of performance measurement research can be
divided into two major phases. In the previous phase, historical accounting measures of
organizational performance were researched, whereas in the later phase, balanced
measures, including lead indicators, are being researched (Kaplan & Norton, 1992).
Improving the performance measurement system by including the lead indicators of
future performance of the organization also meant that the capacity of the performance
measurement system as a communication channel in predicting the crises would improve.
Balanced performance measurement will also form the theoretical framework of the
study together with signal detection theory.
The study as a bridge between the framework theories . The two theories
constituting the theoretical framework of the present study were established at different
times and developed in different paths until they merged into the context of
organizational leadership. The research field devoted to using performance measurement
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as an early warning system is emerging (Andersen & Fagerhaug, 2002; Spitzer, 2007).
The increasing complexity of the environment of organizations, and the increased
possibility that organizations will face a crisis because of the changes in the environment
(Paraskevas, 2006), make environmental scanning, using different early warning
indicators, important for the organization. From this perspective, the study fits into the
research framework that attempts to combine developments in the fields of crisis
leadership, signal detection, and performance measurement research.
Controversies in the field . Performance measurement research is subject to
controversial ideas and concepts. One of the main sources of controversy isimplementation of performance measurement systems. According to Paranjape, Rossiter,
and Pantano (2006), examples of successful implementation of performance
measurement systems coexist with examples of failures. Certain researchers may argue
that failures in implementing performance measurement initiatives are the result of poor
implementation skills of the organizational leadership, whereas others may argue that
some internal flaws of performance measurement result in initiative failures (Paranjape et
al., 2006; Sptizer, 2007).
Examples of failures in implementing the performance measurement system
indicate that measuring organizational performance is difficult. Researchers do not
provide straightforward guidelines on developing performance measures that are
applicable across all organizations. Organizational leaders have to answer certain
questions about how to implement the performance measurement system in their
organization, including the design and selection of measures, their implementation in
practice, and updates of these measures based on organizational change (Paranjape et al.,
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2006). Different answers to these questions are another source of controversy in
performance measurement research (Paranjape et al., 2006).
Elg and Kollberg (2009) argued that supporters of performance measurement
focused on the technical side of performance measurement design and implementation of
performance measurement systems by accepting performance measurement as something
objectively given. Critiques of performance measurement accept it as being constructed
by certain people and being incomplete (Elg & Kollberg, 2009). To address the existing
controversy, Elg and Kollberg suggested analyzing performance measurement in a
broader organizational context, by accepting performance measurement as a part oforganizational design. The present study may be helpful in resolving the controversy in
performance measurement research by providing empirical results on the implementation
of performance measurement in an organization.
Definition of Terms
Crisis : A crisis is an event th at affects or has the potential to affect the whole
organization (Mitroff, 2004, p. 63). The result of a crisis may be a loss in the lives,
property, financial earnings, reputation, and general well- being of an organization
(Mitroff, 2004, p. 63). For the purposes of this study, the phrases a crisis and a
disruptive event are used interchangeably.
Performance measurement system : A performance measurement system is a
graphical and numerical information system (often referred to as a performance
dashboard or scorecard) used to monitor, assess, diagnose, and achieve desired
performance levels (Harbour, 2009, p. 10).
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Early warning signals : Early warning signals are any events or indications that
predict a possible crisis (Kappelman, McKeeman, & Zhang, 2006). An organization
needs to have a signal detection mechanism to sense early warning signals and act upon
them (Mitroff, 2004).
Transition economy : Countries moving from centrally planned to market -
oriented economies. These countries, which include China, Mongolia, Vietnam, former
republics of the Soviet Union, and the countries of Central and Eastern Europe, contain
about one- third of the world's population (Soubbotina, 2004, p. 132). Azerbaijan is a
former Soviet Union republic and a country with a transition economy.Assumptions
The assumption was that participants would answer questions honestly. For this
purpose, the questionnaire explicitly stated that the survey is confidential, and the
answers would not affect the participant professionally or personally. The questionnaire
also included a statement that honest answers to the survey would produce better results
that may be used to improve the performance measurement system of the organization.
Scope and Limitations
This study was limited to subjects who agreed to participate voluntarily. This
study was also limited to the number of subjects surveyed and the amount of time
available to conduct the study. Another major limitation was the possible bias in the
answers of the survey participants because of possible fear of retaliation.
Delimitations
The study was confined to surveying 577 tax administration managers at different
decision-making levels. The study focused on organizational performance data of the
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MOT of the Republic of Azerbaijan, including perceptions of managers of the
relationship between the performance measurement results of the organizational units of
the MOT and detecting disruptive events. The research was delimited with a government
organization operating in a transition economy.
Summary
Chapter 1 introduced the dissertation and the problem and purpose statements,
along with other elements of the research design. The problem is the inability of some
organizations to detect weak early warning signals that precede organizational crises
(Mitroff, 2004). The purpose of the study was to explore whether the performancemeasurement system of the organization can be used as an early warning system
(Andersen & Fagerhaug, 2002). Chapter 2 examines the literature on crisis leadership,
signal detection and early warning as important parts of crisis leadership and how
performance measurement might serve as an early warning system.
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Chapter 2: Review of the Literature
Crises are a part of everyday life. Though crises are low-probability events, the
consequences of a crisis for an organization can be devastating. One of the positive sides
of the issue is that weak early warning signals precede the crisis, and the organization
may sense these signals if it is equipped with appropriate detection mechanisms (Mitroff,
2004). According to the Organization for Economic Cooperation and Development
(OECD), tax administrations of countries can use performance measures in different tax
areas, such as costs of tax administration, staffing levels, the number of employees
devoted to taxpayer auditing, efficiency of tax audit activities, efficiency of tax arrearscollection, taxpayer satisfaction, and other areas (OECD, 2006). Each of these
performance measures can provide leaders with valuable information regarding possible
future problems.
A sudden increase in the costs of the tax administration compared with the tax
administrations of other countries may trigger political discontent in the country.
Understaffing of the tax administration compared with the tax administrations of other
countries may be a reason for unsatisfactory organizational performance and lack of
taxpayer satisfaction. The purpose of the research was to determine whether the
performance measurement system of a government revenue agency contained early
warning indicators to sense a crisis in advance.
The literature review starts with the history of performance measurement research
to reveal how developments in the field resulted in the inclusion of early warning
indicators in performance measurement systems. The crisis leadership concept and the
difference between proactive crisis leadership based on early warning signals and
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reactive crisis management dealing with the results of the crisis are discussed further.
The latest developments in the leadership research are analyzed from the perspective of
crisis leadership, and the implications of the literature for the present research are
discussed. Relevant literature about the variables and the methodology of the study is
discussed further, followed by the research gap in the literature.
Title Searches, Articles, Research Documents, and Journals
The search for literature on performance measurement, crisis leadership, signal
detection, and early warning signals provided abundant results. The literature on using
performance measurement as an early warning system was narrow. According to Mitroff(2004), the crisis leadership field is relatively young, and the literature on application of
early warning and signal detection theory to organizational leadership, especially to
performance measurement, may expand in the future.
The major source of information for the literature search was University of
Phoenixs online library, which provided access to databases of scholarly texts in
different areas. The databases included EBSCOhost, Gale PowerSearch, ProQuest, and
others. Other sources of information were government reports and reports of inter-
governmental organizations. Peer-reviewed literature constituted the major source of
information, though Internet search engine results were used as hints for forming
appropriate search strings.
The keywor ds searched for included performance measurement, signal
detection, early warning signals, crisis leadership, crisis management, and public
sector modernization. Table 1 documents the distribution of key word searches
according to the sources.
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Table 1
Distribution of Key Word Searches
Key Words Searched Peer-
Reviewed
Articles
Popular
Works
Germinal
Works
Books
Performance measurement 26 1 4 5
Signal detection 2 1 1 4
Early warning signals 3 3 1 2
Crisis leadership 6 2 1 3
Crisis management 13 1 1 1
Public sector modernization 6 3 1 1
The literature review included the study of 91 references, of which 86% were
published within the last 5 years and about 90% represented founding theorists, empirical
research, peer-reviewed articles, books, and journals.
Literature Review
A literature review of performance measurement and crisis leadership research
may be too broad. A crisis may occur in any or all spheres of human activity in which
complex relationships exist among people, organizations, and technologies (Mitroff,
2004). The crisis may involve separate organizations, different industries, a country, a
group of countries, and even the whole world, like the financial crisis of 2008. Theliterature review considered a particular form of crisis, namely the organizational crisis.
The organizational crisis is not the sole object of the literature review. The focus
of the review is the cross-section of research in the fields of performance measurement
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and crisis leadership. The review will start with a discussion of historical development of
performance measurement research that resulted in performance measurement systems
that allow detection of early warning signals. Then modern performance measurement
systems will be discussed. That will be followed by a discussion of the signal detection
mechanisms capable of sensing early warning signals for predicting crises. The literature
review will be narrowed to discussing how performance measurement systems may serve
as early warning systems in the organization and the research gap in the field.
Historical overview. The history of performance measurement and related
research is very interesting because it is rich and goes hand in hand with the developmentof management thinking. The history of measurement may be as old as the history of
humanity; however, systematic measurement of performance for management purposes
starts with the attempts of Frederick Taylor (1911). Taylor used different performance
measurement techniques to make employees work harder and be more productive
(Radnor & Barnes, 2007). From this perspective, productivity was the major
performance indicator for T aylors scientific ma nagement.
Scientific management represents the one-dimensional performance measurement
system that prevailed in performance research for a long time (Franco-Santos et al.,
2007). In one-dimensional measurement systems, the major indicators were financial
indicators used in both private and commercial organizations (Bhasin, 2008; Franco-
Santos et al., 2007; Kneiding & Tracey, 2009). If profit was the major financial indicator
for the private organization, saving taxpayers money and accountability were the major
indicators for government organizations (Yang & Hsieh, 2007). Financial measures are
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easily calculated and seem to be obvious indicators of efficient organizational
performance (Bhasin, 2008).
Financial measures remained dominant until the researchers started questioning
using only financial indicators for measuring performance (Franco-Santos et al., 2007;
Bhasin, 2008). One of the characteristics of the financial indicators is that they provide
the results of the past performance of the organization, and when the financial data
become available, making corrections to the past performance becomes impossible
(Marc, Peljhan, Ponikvar, Sobota, & Tekavcic, 2010). As strategic management became
popular, the managers of the organization wanted to manage future performance of theirorganizations, and that required applying lead performance indicators (Beamon & Balcik,
2008; Bhagwat & Sharma, 2007).
Although past financial data relate to future performance of the organization,
researchers have argued that lead indicators, like customer and employee satisfaction, are
also indicators of future performance (Kaplan & Norton, 1992; Parida & Chattopadhyay,
2007). Kaplan and Norton (1992) argued that operational performance measures such as
customer satisfaction, internal processes, and human resources indicators need to be used
together with financial indicators to arrive at a balanced picture of the organizations
performance. The logic behind this approach was that if an organization succeeds in
terms of operational performance, then financial success would inevitably follow (Davila
& Wouters, 2007; Kaplan & Norton, 1992).
As researchers began to understand the shortcomings of using only financial
performance measures, the number of new research papers proposing new performance
measurement systems increased considerably in the last two decades of the 20 th century
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(Radnor & Barnes, 2007). Even after this period, the pace of the revolution has not
slowed down, because some of the proposed measurement systems did not work in
practice. Developments in information and communication technologies permitted
improving previous measurement systems and supplying leaders with more performance
measures (Van Aken, Letens, Coleman, Farris, & Goubergen, 2005).
Although the number of research papers in the field has increased, the most
widespread performance measurement concept is still the balanced scorecard made
popular by Kaplan and Norton (1992). These authors developed the balanced scorecard
concept further and transformed it from a tool for measuring only performance to a toolfor linking organizational resources with the organizational strategy through strategy
maps (Kaplan & Norton, 2007). The use of balanced performance measures that put
strategy at the center of the measurement process was a major step toward using
performance measures as early warning indicators.
Performance measurement in the first decade of the 21 st century . After the
systematic account of performance measurement in organizational management was
started by Taylor (1911) at the beginning of the 20 th century, performance measurement
research has been expanded. A qualitative shift took place in the 1990s, when the focus
of performance measurement changed from internal organizational productivity to
external customer satisfaction (Ratnayake, 2009). The shift in performance measurement
research had implications for the purpose of performance measurement, led to certain
controversies in the field, and was evident in attempts by public sector organizations to
reinvent themselves by focusing on outcomes for society rather than just on
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organizational productivity. The next subsections will provide comparative discussion of
the relevant changes in performance measurement research.
The purpose of performance measurement in public organizations . One of the
major purposes of contemporary performance measurement is to provide a link between
organizational strategy and organizational outcomes (Antic & Sekulic, 2006; Kaplan &
Norton, 2007). From a performance measurement perspective, the measures of
organizational outcomes include financial and nonfinancial indicators to get a more
balanced picture of the organization (Antic & Sekulic, 2006; Burgess, Ong, & Shaw,
2007). The organization may have several strategic directions to meet the needs of andcreate value for different stakeholders, including shareholders, customers, employees, the
government, the community, and suppliers. Financial and non-financial performance
indicators may be assigned to the goals of creating value for all stakeholder groups (Antic
& Sekulic, 2006).
The goals of the stakeholders may differ; therefore, the purpose of performance
measurement for different stakeholder groups may differ (Bromberg, 2009). The
shareholders may be interested in financial dimensions of the performance measurement
system, whereas the community may be interested in corporate social responsibility
indicators. Encompassing different purposes of performance measurement for different
stakeholder groups the major theme seems to be ensuring organizational accountability in
all fields by providing information and increasing transparency. Accountability is
especially important in the case of public organizations (Bromberg, 2009; Dubnick &
Frederickson, 2010; Halachmi & Holzer, 2010; Taylor, 2009).
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Another purpose of performance measurement for a public organization is to
improve performance and organizational productivity. The stakeholders who expect
increased accountability from a public organization also expect better performance from
it. Bromberg (2009) argued that these two goals of performance measurement, namely
accountability and performance improvement, may be difficult to achieve at the same
time. Taylor (2009) argued that a performance measurement system might not produce
reliable information for performance improvement in line with accountability
improvement. Performance measures imposed in a public organization by stakeholders
may create an additional red tape for managers and reduce productivity; therefore, performance measures need to meet the needs of both stakeholders and managers by
providing them with useful information (Ammons & Rivenbark, 2008; Bromber, 2009).
Accountability and performance improvement assume sustainability in
organizational operations. No accountability or performance improvement can be
required of an organization that does not function for any reasons. The stakeholders are
interested in smooth and uninterrupted functioning of the organization. From this
perspective, another purpose of performance measurement is to serve as a tool for crisis
leadership in predicting early warning signals of a crisis (Bhasin, 2008). The leaders and
researchers of the 21 st century are challenged to develop and use multi-dimensional
performance measurement systems to serve different purposes of performance
measurement. The research focused on the third purpose of performance measurement as
an early warning system.
Performance measurement as an early warning system . Performance
measurement is closely related to early warning signal detection. Signal detection theory,
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in fact, is concerned with measuring performance of the observer in discriminating
signals from noise. If the observer is replaced with the organization, then on the
organizational level, signal detection theory deals with measuring performance of the
organization in detecting the early warning signals of the crises. Andersen and
Fagerhaug (2002) argued that performance measurement systems function as early
warning systems in the organization because a balanced performance measurement
system that includes lead indicators may point to potential problems in terms of market
performance or business processes.
Crises may strike organizations in different fields of activity (Paraskevas, 2006).Because all crises send early warning signals (Mitroff, 2004), the organization needs to
have detection tools in all activity areas. Balanced performance measures may serve as
early detection tools if the measures cover the four perspectives of finance, internal
processes, customers, and learning and development (human resources). The four
perspectives of the balanced scorecard cover both operational and financial performance
of the organization, and by tracking the indicators in these fields, the organizational
leader may sense the coming crisis (Fink et al., 2004; Spitzer, 2007). Fink et al.
suggested a modified version of the balanced scorecard that includes scenarios such as
tools for picking up weak early warning signals.
Andersen and Fagerhaug (2002) created a series of activities starting from
generating knowledge inside the organization, performing business processes based on
this knowledge, creating products and services based on these processes, and finally
arriving at financial results as these products and services are sold. According to
Andersen and Fagerhaug, the time difference between knowledge development and final
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financial results may be considerable. If only financial results are taken as performance
measures, many wrong and unsound decisions made during the stages before the
financial results appear will go unnoticed and uncorrected (Parida & Chattopadhyay,
2007). Andersen and Fagerhaug argued that using performance measures on market
performance, business processes, and knowledge development in the organization
provided the leader with effective early warning indicators.
Pride and Chattopadhyay (2007) and Iskandarani and Reifschneider (2008)
reported the importance of performance measures as early warning indicators. Hunter,
Le Menestrel, and de Bettignies (2008), Kneiding and Tracey (2009), and Plaza-Ubeda,Burgos-Jimenez, and Carmona-Moreno (2010) argued that key stakeholder attitudes
serve as early warning indicators of future organizational performance and reputation.
Bhasin (2008) also pointed out the importance of using performance indicators as early
warning indicators; however, he argued that only if all indicators are aligned could the
performance measurement system be effective in terms of strategy implementation. The
approach is not limited to theory. The performance management software developed by
Supply Chain Management (2006) contains a module on early warning indicators that,
based on considerable deviation of indicators from a historical mean, warns the user of
the possible problem.
Crisis leadership . The performance measurement system may allow
organizational leaders to deal with organizational crises proactively as part of crisis
leadership. No unified definition of crisis exists (Coombs, 2010). Braden, Cooper,
Klingele, Powell, and Robbins (2005) defined organizational crisis as an unexpected,
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dramatic, and often unprecedented event that forces an organization into chaos and may
destroy the organization without urgent and decisiv e action (p. 1).
Virtually all crises send early warning signals, and according to Mitroff (2004),
the best form of crisis leadership is the ability to detect these signals and avoid the crisis.
From this perspective, crisis leadership is proactive. Crisis management, on the other
hand, is active and becomes visible after the crisis happens.
Signal detection . Mitroff (2004) argued that signal detection is the most important
element of crisis leadership, and the new organizational structure dealing with crises
needs to include signal detection mechanisms. If early warning signals preceding thecrisis are detected and acted upon, the organization may avoid (the best form of crisis
leadership) or mitigate the crisis (Mitroff, 2004). Although signal detection is used in
organizational crisis leadership, the roots of signal detection stem from technical fields
such as reading signals on the radar screen to understand whether enemy planes are
approaching (Abdi, 2010), or in the mathematical statistics and electronic
communications fields (Levy, 2008). The major theme of signal detection in all fields is
that almost all decisions are made in the presence of uncertainty (Levy, 2008), and signal
detection helps managers to understand the dimensions and characteristics of the error in
decision-making under uncertainty (Cook, Noyes, & Masakowski, 2007).
Signal detection theory usually involves differentiating decision-making stimuli
created by known processes from accidental stimuli because of chance. The former
stimuli are called signal and the latter are called noise (Goldstein, 2009). A classical
example of the essence of signal detection in a simple matrix format is shown in Table 2.
The radar operator may see on the screen of the radar dots indicating that some flying
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objects are approaching the border (Cook et al., 2007). The dots may represent enemy
planes (signal) or a flock of birds (noise). The operator needs to decide whether the dots
indicate the enemy planes or not.
Table 2
Possible Choices in a Simple Signal Detection Case
Decision
Reality Yes No
Enemy planes (signal) Hit Miss
Other objects (noise) False Alarm Correct Rejection
In the case shown in Table 2, the objective is to maximize the proportion of hits
and correct rejections and decrease the proportion of false alarms and misses. The
easiness of the task and the strategy of the decision-maker will affect how the objective is
achieved (Abdi, 2010). If the noise level is lower, and distinguishing the signal from the
noise is easier, the proportion of hits and correct rejections will be higher. The
appropriate balance between hits and correct rejections is very important because if the
operator decides to say yes more often than no to increase the proportion of hits, he
or she will increase the proportion of false alarms as well. The result will be wasted
resources in terms of time, money, and fuel when planes are sent to fight non-existing
enemy planes (Cook, Noyes, & Masakowski, 2007).Table 2 can be compared to Type I and Type II errors in statistics. When making
inferences about the population based on a sample from this population, the researcher
needs either to reject the null hypothesis or not reject the null hypothesis (Creswell,
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2005). In this case, four outcomes are possible. The researcher may erroneously reject
the null hypothesis when the null hypothesis is true (Type I error) or may fail to reject the
null hypothesis when the null hypothesis is not true (Type II error). In other cases, when
the researcher rejects the null hypothesis when the null hypothesis is not true, and when
the researcher does not reject the null hypothesis when the null hypothesis is true, no
error is committed.
The signal detection theory example may successfully be applied to the early
warning systems of an organization, as well. Researchers have indicated the importance
of detecting early warning signals in dealing with organizational crises (Braden et al.,2005; Garcia, 2006; Mitroff, 2004; Paraskevas, 2006). Then organizations need
appropriate detection mechanisms to distinguish early warning signals from false alarms.
As in the radar example, responding to false alarms may waste valuable organizational
resources, while missing the true signals may damage the organization even more
(Mitroff, 2004).
Early warning signals of a crisis are usually weak and are mixed with noise. The
source of this noise may be both internal and external. If the people in the organization
do not possess the necessary skills to detect early warning signals, or the organization
does not have a mechanism for transferring the signal to the right people (Mitroff, 2004),
the internal noise will be present. External noise is the result of the complexity of the
environment in which the organization operates. Complexity of the external environment
increases the number of interrelated factors that the leaders need to take into account in
making decisions and makes it difficult to identify the factor or set of factors causing the
crisis (Fink, Marr, Siebe, & Kuhle, 2005).
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The organization needs to have mechanisms in place to scan the changes in
different environmental elements for improving organizational decision-making taking
into account early warning signals of the crises, (Mitroff, 2004). The complexity of both
the organization and the organizational environment makes signal detection even more
difficult (Lagadec, 2006; Paraskevas, 2006). In this case, removing all noise is not
advisable because the noise can carry some useful information (Aliev, 2007). Lagadec
argued that responding to contemporary crises with traditional reactive emergency
measures is not sufficient, and the new response strategy needs to address a very broad
circle of players.Crisis response . When a crisis occurs, a timely response to the crisis usually
becomes very important (Garcia, 2006). Garcia argued that a slow response to a crisis
sometimes becomes more dangerous to the organization than the scale and severity of the
crisis. Decreasing crisis response time depends on how well the organization is prepared
for the crisis, including the presence of an early warning system, the designation of a
senior official to deal with the crisis preparation, and speedy authorization of
organizational decisions during initial crisis detection (Garcia, 2006). Successful
responsive crisis management depends on effective pro-active crisis leadership (Wooten
& James, 2008).
The recent oil spill of the Deepwater Horizon oil rig of British Petroleum (BP) in
the Gulf of Mexico indicates how early warning signs can help an organization avoid
disaster (Gulf oil spill, 2010). According to the preliminary investigation of the
Committee on Energy and Commerce of the U.S. House of Representatives (Waxman &
Barton, 2010), the explosion on the oil rig that caused the death of 11 employees and a
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major oil spill in the Gulf was preceded by three major early warning signals. Fifty-one
minutes before the explosion, the amount of fluid pumped in started to outweigh the
amount of fluid coming out of the well; 41 minutes before the explosion, the well
continued to flow even though the pump was shut down; and 18 minutes before the
explosion, mud return increased, the pressure increased abruptly, and the pump was shut
down (Waxman & Barton, 2010). Nevertheless, company employees could not process
these signals appropriately, did not take enough preventive actions, and as a result, loss of
human lives and considerable damage to the environment occurred.
Crisis leadership is not easy. In theory, if crises are preceded by early warningsignals, a leader can detect these signals and prepare for the crisis in advance, manage
through the crisis, and deal with the following crisis in the same way. The theory may be
oversimplified when applied to real-life crises. Crises are not clearly identifiable through
space and time because the crisis may dynamically oscillate over considerable time,
sometimes scaling down, sometimes becoming severe (Boin & Rhinard, 2008;
Moynihan, 2008). If the conflict between the environment of the organization and
organizational values and belief system is not resolved, the crisis may continue until the
organization is obliterated (Braden et al., 2005).
The difficulty of crisis leadership and management is evident in examples of crisis
leadership failure. According to Jaques (2008), examples of badly managed crises
outnumber examples of well-managed crises in the crisis management literature. This
literature is still expanding for deeper analysis of the reasons and ways of better
managing the crises.
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importance of leadership communication during the crisis and afterwards in managing
relationships among the organization and stakeholders and the resulting reputation of the
organization.
Crisis communication and stakeholder theory of crisis management are closely
interrelated. According to Hunter et al. (2008), leadership communication affects the
feelings of the stakeholders about the organization. If the leader tries to take a defensive
position based on incomplete information instead of dealing with key stakeholder
concerns, the damage to th e organizations reputation may increase (Coombs, 2007;
Hunter et al., 2008). Woodward and More (2010) argued the ability to communicate attimes of volatility is a fundamental competency for contemporary leaders (p. 130). The
implication of crisis communication literature for the current study was that the research
instrument should contain questions about the organization-stakeholder relationships and
leadership s communication during crisis.
Organizational complexity . Organizations are complex systems working in
complex environments; therefore, crises may be of different kinds that reflect
malfunctions in various elements of complex systems (Paraskevas, 2006). Leaders
cannot be prepared for all kinds of crises; however, organizations may cultivate the sense
of crisis leadership through their strategic plans in all organizational activities
(Hawabhay, Abratt, & Peters, 2009; Jaques, 2007). Wooten and James (2008) argued
that for a long time, research on crisis management focused on communication issues
during the crisis, and little attention was paid to the leadership skills required during and
before the crisis. Wooten and James indicated that leadership competencies are required
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in all phases of crisis leadership, and one of these competencies is the ability to detect
early warning signals preceding the crisis.
Leadership in organizations as complex systems needs to consider the
interconnections among its elements and environment that requires reconsidering the
traditional reductionism and determinism approaches to analyzing the organization
(James, 2010). According to Scharmer (2009), traditional and modern industrial
structures or forms of thinking and operating (p. 3) were successful in the past; however,
they are not suitable for contemporary leadership and are the reason for failures of
leadership. Scharmer introduced Theory U, which aims to solve the core problems ofleadership practice and theory. If other leadership theories deal mainly with what leaders
do and how they do it, Theory U tries to address the source of leadership decisions as the
inner place from which leaders operate (Scharmer, 2009). According to Theory U, the
source of thinking is invisible to leaders, and therefore is called the blind spot
(Scharmer, 2009).
Scharmer (2009) approached crises from a different perspective in Theory U.
According to Scharmer, the crises of the contemporary world are not the results of the
failure of a leader, an organization, or a country. Crises happen because old social
structures are becoming broken, and simultaneously, norms or values are being lost. The
result is the chaos that produces crises in different areas of human life (Scharmer, 2009).
Scharmer (2009) argued that, when dealing with crises, experience is not useful
and coined the term presencing (a combination of the words presence and sensing),
which means that the leader needs to look at the future, see what the most potential future
state is, and change the current actions to bring that future into reality. Presencing is
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described by Scharmer (2009) as illuminating the blind spot (p. 17) of leadership.
Lowe, Aparicio, Galbraith, Dorman, and Dellert (2009) argued that performance
measures could be used to help practitioners understand their blind spots by comparing
their performance results with those of others. Fried and Orellana (2006), on the other
hand, argued that the way the performance measurement system is used in an
organization could create blind spots because this system cannot represent the entire
reality of the organization.
To illuminate the blind spots created by the use of the performance measurement
system and ensure that organizational reality is expressed, organizational leaders need toevaluate the effects of the performance measurement system on organizational practices
periodically and make appropriate changes to the system (Fried & Orellana, 2006). This
process of reevaluation has implications for the performance measurement system of the
organization as an early warning system. According to Scharmer (2009), an organization
may miss early warning signals because of its past successful experiences that are not
successful now. In some cases, organizational culture needs to change so that the
performance measurement system functions as an early warning system.
Organizational learning from crises . Dennis and Eliott (2009) identified three
types of relationships that differ between a crisis and learning: organizations can learn to
prevent a crisis; the learning process can trigger changes in the core beliefs by resulting
in a crisis within the organization, and finally, organizations can learn from the crisis.
According to Deverell (2009), a crisis can trigger different levels of organizational
learning based on the number of crises the organization has faced, single or double loop
learning that the organization engages in, and the presence of external critique and loss of
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credibility. Eliott (2009) argued that one reason for the repetition of crises is the
organizations failure to learn f rom past crises. Eliott asserted that after the crises, the
policy is changed and improved most of the time, whereas, practice in the organization is
not affected, and the lessons learned from the crises are not transferred into the practicing
organizations. The implication of this discussion for the current study is that the research
instrument should contain questions about what the organization learned from the crisis
to assess the efficiency of the crisis leadership system of the organization.
Variables
Research question 1. The first research question of the present study exploredhow well the performance results predict the fulfillment of tax revenue forecast or in a
broader sense is there a predictive relationship between the performance measurement
results and performance of the organization. The literature review provided mixed results
on this question. In the first research question, performance was a criterion or dependent
variable. For testing the relationship using quantitative techniques, performance should
be made operational or empirically testable (Neuman, 2003). Performance cannot be
observed directly; therefore, proxy variables should be used (Dant, Kacker, Coughlan, &
Emerson, 2007).
March and Sutton (1997), in their seminal article, argued that using organizational
performance as a dependent variable is problematic for several reasons. The first is that
performance improvements are quickly diffused across organizations in the industry, and
statistical techniques cannot reliably detect the relationship between the performance
improvement and the determinants of this improvement across organizations. The second
reason is that performance may affect its determinants, thus decreasing the predictive
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capability of the statistical models. The third reason applies to situations in which
performance is made operational through surveys by asking questions about past events.
In this case, the retrospective bias can be observed because the current performance of
the organization may affect how the participants comprehend its past performance
(March & Sutton, 1997).
The study used the tax revenue collection as a proxy for organizational
performance to overcome the problem with the variables of the first research question.
The data about performance of the organization were not collected through a survey
among employees to avoid the retrospective bias mentioned by March and Sutton (1997).The data came from tax revenue reports provided by government statistics and
represented a more objective basis for measurement than personal opinions.
Controlling confounding variables is v
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