Structural Causal Modeling of Managerial Interventions: What If Managers Had Not Intervened by Doing This?

Abstract

Establishing causality beyond association, influence, or correlation is key to informed managerial decisions and interventions. What-if questions such as “What will happen to firm performance if managers intervene by doing this?” and “What if managers had not done this?” can now be formulated and answered by using the tools of structural causal modeling (SCM). SCM tools contribute a systematic methodology for designing and evaluating managerial interventions. Powered by SCM, researchers can increase the precision in theorizing mechanisms and develop the research designs that facilitate causal identification. As a demonstration of how to apply SCM for advancing theory and research design in strategic management, we study why and how the effect of governance mode on firm performance is transmitted through a reduction in the deviation of managerial decision from theory-based prescription. For example, managers may switch to a governance mode that is consistent with the governance mode prescribed according to transaction cost economics (TCE). The insights arising from SCM inform whether switching governance mode for the purpose of aligning with TCE prescription will improve performance, and, if yes, by how much. Beyond TCE, we point to theory-based prescriptions in strategic management that could benefit from using SCM to probe what-if questions.