Documentos de Académico
Documentos de Profesional
Documentos de Cultura
HIG
NC
R FOR M
A
PE
IN
STITUTE
Contact
institute@kenexa.com
ABOUT KHPI
The Kenexa High Performance
Institute (KHPI) features a
multidisciplinary team of highly
qualified professionals with offices in
London and Minneapolis. President
Dr. Jack Wiley oversees rigorous,
global and innovative research and
development programs, spanning
all aspects of human capital
management. KHPI produces books,
academic papers for top journals
and practitioner articles. For more
information, visit www.khpi.com.
This paper reviews the financial metrics used to measure business performance, and
suggests best practice ways forward. Section II discusses the major challenges posed by
business performance measurement. In Section III the primary accounting, market
and hybrid measures of firm performance are described and evaluated. Section IV
analyzes the bundle of indicators that could be used to create a reliable measure of
performance. Section V reviews the Frontier Analysis. Section VI concludes.
II. THE MAJOR CHALLENGES POSED BY BUSINESS PERFORMANCE MEASUREMENT
Three key challenges are associated with measuring the performance of business
enterprises: measurement complexity, measurement time span and measurement
benchmarking. These challenges underpin the lack of consensus regarding business
performance management.
HIG
[ WHITE PAPER ]
NC
R FOR M
IN
Measurement Complexity
Several factors mean that a single construct cannot be used
satisfactorily to measure business performance. We discuss two
factors here. First, businesses have different stakeholders with
diverse needs who use different performance dimensions to
judge firm effectiveness. In addition, for a variety of reasons,
the desirability of the different business performance outcomes
varies across countries. Hence, in the U.S. and UK great
importance is attached to shareholder returns, whereas in Japan
and Germany the maintenance of employment is more highly
valued (Devinney et al. 2010). Second, the different business
environments, strategies, capabilities and resources of firms
lead them to focus on different performance dimensions. For
instance, businesses seeking to establish a dominant position
in newly emerging industries (as in the case of Amazon.com),
or to gain a strong base in an established industry (as in the
case of Toyota when they entered the U.S. car market) may
sacrifice short term profitability in order to build sales and gain
market share. In contrast, firms in a very competitive market
during a recession may let market share fall in order to boost
cash flows. Hence, the inherently complex nature of business
in the modern world means that it is not possible to gauge
firm performance with a single metric. Several dimensions are
required to adequately capture the performance of firms.
Measurement Time Span
Depending on the question of interest, practitioners and
researchers apply very different time horizons when evaluating
firm performance. Some shareholders adopt a relatively short
timescale, while researchers have adopted ten-, twenty- or even
fifty-year timescales to explore the maintenance of superior
performance (Jacobsen, 1988; Maruyamaa and Odagirib,
2002). Therefore, when it comes to the measurement of
firm performance, there is no standard time horizon of
measurement.
Measurement Benchmarking
In market economies, firms compete against each other and
try to dominate their peers by building competitive advantage.
This enables sustained superior performance to be achieved for
a period of time. Firms can build competitive advantage by
molding their industrial environment to their own advantage
(Porter, 1980) and/or by building durable and distinctive
firm capabilities and resources (Conner, 1991), or through
innovation. This means that the performance of firms has to
be judged through a process that compares them with their
peers. However, the process of making peer comparisons
between businesses is not straightforward because each firm
has a unique mix of participation in different industries,
market segments and countries, which sometimes makes the
selection of peers for comparison difficult. Furthermore, the
different systems of industry classification have strengths and
weaknesses which impinge on, and affect the results of, the
measurement process.
PE
STITUTE
HIG
NC
[ WHITE PAPER ]
IN
Market Measures
We identify two groups of market measures: shareholder-value
measures and competition-based measures.
Shareholder-Value Measures
R FOR M
PE
STITUTE
Debt capital is the capital that a business raises by issuing bonds or taking out a loan. Conversely, equity capital is the amount of capital raised from owners in the company.
HIG
[ WHITE PAPER ]
NC
R FOR M
IN
PE
STITUTE
[ WHITE PAPER ]
HIG
NC
R FOR M
IN
EVA
C
PERFORMANCE
POSSIBILITY FRONTIER
E
B
D
F
ROA
VI. CONCLUSIONS
PE
STITUTE
Description
Return
on Assets
(ROA)
Return
on Sales
(ROS)
Return
on Equity
(ROE)
Return on
investment
(ROI)
Return on
capital
employed
(ROCE)
Devinney et al (2010)
Sales
growth
(SG)
Description
Diluted
earnings
per share
(DEPS)
Wiley (2011)
Total
shareholder
return (TSR)
Market
share (MS)
Sales per
employee
(SpE)
Labor
productivity
(LP)
Labor
productivity
(II)
Description
Tobins q
(Q)
Altmans Z
score (Z)
Economic
value
added
(EVA)
[ WHITE PAPER ]
HIG
NC
R FOR M
PE
IN
STITUTE
NON-SCIENTIFIC CRITERIA
Measurement
complexity
Measurement
time- span
Measurement
benchmarking
Usage
Comparability
Ease
Economic and
investment value
Total Score
Return
on Assets
(ROA)
Medium (2)
Weak (1)
Weak (1)
Strong (3)
Medium (2)
Strong (3)
Weak (1)
13
Return on
Sales (ROS)
Medium (2)
Weak (1)
Weak (1)
Strong (3)
Weak (1)
Strong (3)
Weak (1)
12
Return
on Equity
(ROE)
Medium (2)
Weak (1)
Weak (1)
Medium (2)
Weak (1)
Strong (3)
Weak (1)
11
Return on
investment
(ROI)
Medium (2)
Weak (1)
Weak (1)
Strong (3)
Weak (1)
Medium (2)
Weak (1)
11
Return on
capital
employed
(ROCE)
Medium (2)
Weak (1)
Weak (1)
Weak (1)
Medium (2)
Strong (3)
Weak (1)
11
Sales
growth
(SG)
Medium (2)
Weak (1)
Weak (1)
Weak (1)
Weak (1)
Strong (3)
Weak (1)
10
Note: Numbers reported in parentheses are the scores assigned to each category: 1 for weak, 2 for medium and 3 for strong.
NON-SCIENTIFIC CRITERIA
Measurement
complexity
Measurement
time- span
Measurement
benchmarking
Usage
Comparability
Ease
Economic and
investment value
Total Score
Diluted
earnings per
share (DEPS)
Medium (2)
Medium (2)
Weak (1)
Weak (1)
Weak (1)
Strong (3)
Medium (2)
12
Total
shareholder
return (TSR)
Medium (2)
Strong (3)
Weak (1)
Medium (2)
Weak (1)
Strong (3)
Medium (2)
14
Market
share (MS)
Medium (2)
Weak (1)
Strong (3)
Medium (2)
Medium (2)
Weak (1)
Strong (3)
14
Sales per
employee
(SpE)
Medium (2)
Weak (1)
Medium (2)
Weak (1)
Weak (1)
Strong (3)
Medium (2)
12
Labor
productivity
(LP)
Medium (2)
Medium (2)
Medium (2)
Medium (2)
Medium (2)
Weak (1)
Medium (2)
13
Note: Numbers reported in parentheses are the scores assigned to each category: 1 for weak, 2 for medium and 3 for strong.
NON-SCIENTIFIC CRITERIA
Measurement
complexity
Measurement
time- span
Measurement
benchmarking
Usage
Comparability
Ease
Economic and
investment value
Total Score
Strong (3)
Strong (3)
Strong (3)
Strong (3)
Medium (2)
Weak (1)
Strong (3)
18
Altmans Z
score (Z)
Medium (2)
Strong (3)
Weak (1)
Weak (1)
Medium (2)
Strong (3)
Medium (2)
14
Economic
value
added
(EVA)
Strong (3)
Strong (3)
Medium (2)
Strong (3)
Medium (2)
Weak (1)
Strong (3)
17
Return on
investment
(ROI)
Medium (2)
Weak (1)
Weak (1)
Strong (3)
Weak (1)
Medium (2)
Weak (1)
11
Tobins q
(Q)
Note: Numbers reported in parentheses are the scores assigned to each category: 1 for weak, 2 for medium and 3 for strong.
[ WHITE PAPER ]
HIG
NC
R FOR M
PE
IN
STITUTE
Return on
Sales (ROS)
Return on
Equity (ROE)
Formula
ROA =
(Net income / Total assets) * 100
Yahoo! Finance and Google Finance both provide the ROA indicator for public companies. We
can also estimate it by ourselves. Net income is taken from the income statement and total
assets is taken from the balance sheet.
ROS =
(Operating income / Sales) * 100
Where operating income, in most of the cases, is
equal to earnings before interest and taxes. It is also
known as operating profit in the UK account system.
ROE = (Net income / Total shareholder equity) * 100
ROI = (Net operating profit /
Netbook value of assets) * 100
Return on
investment
(ROI)
Return on
capital
employed
(ROCE)
Sales growth
(SG)
Yahoo! Finance and Google Finance both provide the ROS indicator for public companies.
We can also estimate it by ourselves. Operating income and sales are taken from the income
statement.
Yahoo! Finance and Google Finance both provide the ROS indicator for public companies. We
can also estimate it by ourselves. Net income is taken from the income statement and total
shareholder equity is taken from the balance sheet.
Yahoo! Finance and Google Finance both provide the ROI indicator for public companies. We
can also estimate it by ourselves. Net operating profit is taken from the income statement.
Assets, intangible assets and total liabilities are taken from the balance sheet. Yahoo! Finance
and Google Finance both provide the ROI indicator for public companies. We can also estimate
it by ourselves. Net operating profit is taken from the income statement. Assets, intangible
assets and total liabilities are taken from the balance sheet.
Yahoo! Finance and Google Finance both provide the ROCE indicator for public companies.
We can also estimate it by ourselves. NOPAT is taken from the income statement. Total assets
and current liabilities are taken from the balance sheet.
Yahoo! Finance and Google Finance both provide on sales. Sales care taken from the income
statement.
Market Measures
Measure
Diluted
earnings per
share (DEPS)
Formula
Yahoo! Finance and Google Finance both provide the DEPS indicator for public companies. We
can estimate also it by ourselves. Net income is taken from the income statement, dividends
are taken from the cash flow statement and average common shares are taken from the
Yahoo! Finance and Google Finance website.
Total
shareholder
return (TSR)
Market share
(MS)
Sales per
employee
(SpE)
Labor
productivity
(LP)
Labor
productivity
(LPII)
Historical data on stock prices can be obtained from Yahoo! Finance. Data on dividends can be
obtained from the cash flow statement.
Yahoo! Finance and Google finance provide data on firm sales. Data on Industry sales should
be estimated by determining the competitors that operate in this industry.
Yahoo! Finance and Google finance provide data on firm sales. Data on sales (revenues) can
be obtained from the income statement. The number of employees per firms is also available in
Yahoo! Finance.
The number of employees per firms is available in Yahoo! Finance. Data on value added are not
publicly available and we have to estimate it.
Yahoo! Finance and Google Finance both provide the data on total sales. Sales care taken
from the income statement. Data on Industry sales should be estimated by determining the
competitors that operate in this industry.
Hybrid Measures
Measure
Formula
EVA = NOPAT - CC
Economic
value added
(EVA)
Tobins q (Q)
NOPAT is available from the income statement (Earnings before interest and taxes minus taxes).
Data on capital charged are not publicly available and we have to estimate it.
Data to calculate the Altmans Z score can be obtained from Yahoo! Finance or Google
Finance. Current assets, current liabilities, total assets value, book value of equity and total
liabilities can be obtained from the balance sheet. Retained earnings can be obtained from
the cash flow statement. Earnings before interest and taxes can be obtained from the income
statement.
HIG
NC
[ WHITE PAPER ]
IN
REFERENCES
R FOR M
PE
STITUTE
Hawawini, G. (2003), Is Performance Driven by Industry- of FirmSpecific Factors? A New Look at the Evidence, Strategic Management
Journal, Vol. 24, No. 1, 1-16.
HIG
[ WHITE PAPER ]
NC
R FOR M
IN
PE
STITUTE
Stern & Sewart (1996), Forget EPS, ROE, and ROI. The true measure of
your companys performance is EVA!
Teece, D. (1981), Internal Organization and Economic Performance: an
empirical analysis of the Profitability of Principal Firms, The journal of
industrial Economics, Vol. 30, No. 2, 173-199.
Thomas, B. (1988), Does Leadership Make a Difference to Organizational
Performance?, Administrative Science Quarterly, Vol. 33, no. 3, 388-400.
Tobin, J. (1969), A General Equilibrium Approach To Monetary Theory,
Journal of Money, Credit and Banking, Vol. 1, No. 1, pp. 15-29.
Verbeeten, F. & Boons, A. (2009), Strategic priorities, performance
measures an performance: an empirical analysis in Dutch firms, European
Management Journal, 27, 113 128.
Wasserman, N., Nohria N., & Anand, B. (2004), When Does Leadership
Matter? The Contingent Opportunities View of CEO Leadership,
Strategy Unit, Harvard University, Working Paper No. 02-04.
Weiner, N. (1978), Situational and Leadership Influences on
Organizational Performance, Ohio State University.
Patterson, M., West, M., Lawthom, R., & Nickell, S. (1997), Impact
of People Management Practices on Business Performance, Institute of
Personnel and Development.
Roquebert, J., Phillips, R., & Westfall, P. (1996) Market vs. Management:
What Drives Profitability?, Strategic Management Journal, Vol. 17, no. 8,
653-664.
Rowe, W. & Morrow, J. (1999), A Note on the Dimensionality of the
Firm Financial Performance Construct Using Accounting, Market, and
Subjective Measures, Canadian Journal of Administrative Sciences, Vol. 16
(I), 58-70.
Rumelt, R. (1991), How much does Industry Matter?, Strategic
Management Journal, Vol. 12, 167-186.
Schmalensee, R. (1985), Do Markets Differ Much?, American Economic
Review, Vol. 75, No. 3, 341-351.
Short J., Ketchen, D., Palmer, T., & Hult, T. (2007), Firm, Strategic
Group, and Industry Influences on Performance, Strategic Management
Journal, 28: 147-167.
ABOUT KENEXA
Kenexa is in the business of improving companies and
enriching lives, because to us, business is personal. Our
unique combination of content, technology and services
provides the insight and expertise to deliver products and
solutions across the entire employee lifecycle. Where other
companies focus on just one piece, we focus on bringing
all of the pieces together to create the best picture for your
companys success. With every person we recruit, every
assessment we administer, every technology solution we
deliver, every survey we conduct, every leader we develop
and every compensation strategy we support, lives are
impacted by our craft.
Stapleton, D., Hanna, J., Yagla, S., Johnson, J. & Markussen, D. (2002),
Measuring Logistics Performance Using the Strategic Profit Model,
International Journal of Logistics Management, Vol 13, 1: 89-106.