FIVE CATEGORIES OF PERFORMANCE MEASURES
The overall organizational performance construct can be categorized into several distinct groupings. The four primary categories of overall organizational performance variables are:
(i) accounting measures;
(ii) operational measures;
(iii) market-based measures; and
(iv) survival measures.
In addition, measures of economic value creation are popular in practice but are not frequently used in strategic management or entrepreneurship research.
Accounting Measures
Accounting measures are those that rely upon financial information reported in income statements, balance sheets and statements of cash flows. Accounting measures can be further subcategorized into profitability measures, growth measures, leverage, liquidity and cash flow measures, and efficiency measures.
Operational Measures
Operational measures include variables that represent how the organization is performing on non-financial issues. Measuring performance on non-financial dimensions has received renewed attention over the past many years as corporations have adopted a ‘balanced scorecard' approach for the integration of strategy and performance measurement (Kaplan, 1984; Kaplan and Norton, 1992). These variables include market share, changes in intangible assets such as patents or human resources, customer satisfaction and stakeholder performance. Most of the measures in this category require primary data from management in the form of their assessment of their own performance, which may lead to questions of the validity of the responses.
Market-Based Measures
Market-based measures of performance include ratios or rates of change that incorporate the market value of the organization. These variables include return to shareholders, market value added, holding period returns, Jensen's alpha and Tobin's Q. The calculation of these variables requires a market valuation for the company and is generally only available for publicly traded companies.
Survival Measures
Survival measures of performance simply indicate whether the organization remained in business over the time period of interest. Barnard (1938) and Drucker (1954) proposed that survival is the ultimate measure of long-term performance. However, since most empirical research in entrepreneurship and strategic management addresses time horizons of five years and less, survival is rarely used as a measure of overall organizational performance
Economic Value Measures
Economic value measures of performance are adjusted accounting measures that take into consideration the cost of capital and some of the influences of external financial reporting rules. These measures have rarely been used by researchers in strategic management or entrepreneurship empirical studies because the values are not generally reported and most companies do not even calculate them internally. Typical economic value measures include residual income, economic value added and cash flow return on investment.
There are advantages and disadvantages to the use of measures in each of the categories shown above. While each category of measurement addresses performance from a unique perspective, not all organizations can be measured in all categories. It is incumbent upon each researcher to select a set of measures that capture the essence of organizational performance given the environmental circumstance of the individual study.
The overall organizational performance construct can be categorized into several distinct groupings. The four primary categories of overall organizational performance variables are:
(i) accounting measures;
(ii) operational measures;
(iii) market-based measures; and
(iv) survival measures.
In addition, measures of economic value creation are popular in practice but are not frequently used in strategic management or entrepreneurship research.
Accounting Measures
Accounting measures are those that rely upon financial information reported in income statements, balance sheets and statements of cash flows. Accounting measures can be further subcategorized into profitability measures, growth measures, leverage, liquidity and cash flow measures, and efficiency measures.
Operational Measures
Operational measures include variables that represent how the organization is performing on non-financial issues. Measuring performance on non-financial dimensions has received renewed attention over the past many years as corporations have adopted a ‘balanced scorecard' approach for the integration of strategy and performance measurement (Kaplan, 1984; Kaplan and Norton, 1992). These variables include market share, changes in intangible assets such as patents or human resources, customer satisfaction and stakeholder performance. Most of the measures in this category require primary data from management in the form of their assessment of their own performance, which may lead to questions of the validity of the responses.
Market-Based Measures
Market-based measures of performance include ratios or rates of change that incorporate the market value of the organization. These variables include return to shareholders, market value added, holding period returns, Jensen's alpha and Tobin's Q. The calculation of these variables requires a market valuation for the company and is generally only available for publicly traded companies.
Survival Measures
Survival measures of performance simply indicate whether the organization remained in business over the time period of interest. Barnard (1938) and Drucker (1954) proposed that survival is the ultimate measure of long-term performance. However, since most empirical research in entrepreneurship and strategic management addresses time horizons of five years and less, survival is rarely used as a measure of overall organizational performance
Economic Value Measures
Economic value measures of performance are adjusted accounting measures that take into consideration the cost of capital and some of the influences of external financial reporting rules. These measures have rarely been used by researchers in strategic management or entrepreneurship empirical studies because the values are not generally reported and most companies do not even calculate them internally. Typical economic value measures include residual income, economic value added and cash flow return on investment.
There are advantages and disadvantages to the use of measures in each of the categories shown above. While each category of measurement addresses performance from a unique perspective, not all organizations can be measured in all categories. It is incumbent upon each researcher to select a set of measures that capture the essence of organizational performance given the environmental circumstance of the individual study.
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