This is my very first blog, so for now it’s a kind of experiment. The reason why I want to write a blog is both selfish and altruistic at the same time. The selfish part is that it helps me to order my thoughts on new or changing business themes. And the altruistic part is that it may help others to think on those topics. Well, we will see where it will bring.
One Firm Performance
At this moment I am writing the theoretical chapter of my MBA-BIT thesis. The main topic of the thesis is about understanding cooperation of executive teams and their impact on firm performance. The issue now is how is firm performance defined (in academic literature). One would think that there is a common understanding on how to measure the performance of an organization. Well, that’s not the case. Even with plenty of articles reporting research outcomes of some executive team practice and their impact on firm performance. But, what I have read so far, they all have a different way to measure it. I think it is worth discussing the statement: Should the firm performance be a pure objective financial measure?
Let’s split the statement in two and start with: Should the firm performance be a pure financial measure? If you ask this question to a corporate finance expert, then the answer is short and clear: yes, firm performance is about financial performance of a firm, period. Wheather it is expressed in terms of ROI (return on investment) and ROE (return on equity) to quantify profit. Or as a composite including also ROA (return on assets) and/or change in revenue. It is all information that can be retrieved from the annual financial statement of a firm. Is it really so simple? Is this how we define the success of a firm? I don’t think so.
Firm Performance Context
Measuring success of a firm is also not that simple. As firm success is dependent of it’s context. That can be a specific geography, specific market and a specific economic time. Firms of specific geography and specific economic environment have their own specific definition of success. For example in a research on firms that are located in a country with an emergent economy (India) the firm performance is measured by one item: “growth of annual sales”. Another example is a research within a geography (Taiwan) where one of the 3 dimensions of firm performance is the internationalization, i.e. the number of overseas subsidiaries. This is understandable, but at the same time these firm success definitions make if difficult to compare research outcomes from countries with a different macro-economic characteristics.
Is there an alternative? I think so, all firms: sell something whether it is a service or a product, have competitors and have customers. So can these 3 firm aspects be included in the measurement of firm performance? So, measuring firm performance in a financial measure is good, but including a product and market perspective is better.
Objective Measure!?
Then the second part of the firm performance statement: Should firm performance be a pure objective measure? If you ask this question to an executive, then the answer is most likely: yes, an objective measure gives an precise answer and is measured with a calibrated ruler. Like a meter-stick. But, are calibrated rulers in business also time invariant? I don’t think so.
Measuring success of a firm in terms of objective measures assumes that a specific numerical value X along the chosen meter-stick has a unique business value Y on a specific moment of time. But, “times are changing”, times changed in the past and will in the future. We have seen how macro economical circumstances change and technologies change. So deep down, we know that, that an objective measure of lets say 5% sales growth in the Netherlands in 2008 is not the same as 5% sales growth in 2018. And it also differs from a 5% sales growth in India or China.
Is there an alternative? In think so, all firms have executives and customers (or representatives). Ask them their subjective opinion on how they perceive their business. How is their firm doing in their market, and in respect of their competitors. It is their daily job, they know and they will tell you. So, measuring firm performance with a objective measure is good, but including a time and market dependent subjective perspective is beter.