Firm performance - from how to measure to how to manage. An overview

Abstract

The term 'performance' and the two main concepts, performance measurement and performance management, have evolved, becoming an important topic for both academics and practitioners. As a result, the literature in the past decades has grown exponentially, containing various definitions, frameworks and models. The purpose of this paper is to exhibit the evolution of 'performance' determined by the major breakthroughs, the models and frameworks created, which one is the most common and used in practice and if innovation, social and environmental concerns could lead to the design and implementation of a new performance framework.

Headnote

Abstract: The term 'performance' and the two main concepts, performance measurement and performance management, have evolved, becoming an important topic for both academics and practitioners. As a result, the literature in the past decades has grown exponentially, containing various definitions, frameworks and models. The purpose of this paper is to exhibit the evolution of 'performance' determined by the major breakthroughs, the models and frameworks created, which one is the most common and used in practice and if innovation, social and environmental concerns could lead to the design and implementation of a new performance framework.

Key-words: performance measurement, performance management, model, framework, sustainability.

1.Introduction

When we refer to the concept of 'performance', there are a variety of terms that try to properly define and cover the key aspects (Dimon, 2013).

Michael and Philippa Bourne (2012) claim that in a very simple way, good performance can be seen as achieving the objectives, but this is not enough, you should know as an organization how to achieve those objectives without being successful on short-term jeopardizing the success of the company for long-term. This means that it is important to know the nature of good performance and, before measuring and benchmarking performance, the organization should determine what success is for its particular business.

Performance measurement has started to increase in popularity, both in research and practice since Johnson and Kaplan (1987) published their seminal book, Relevance Lost - The Rise and Fall of Management Accounting. A few years later, Neely (1999) supported the idea of an increasing interest in performance measurement, by identifying over 3.600 articles between 1994 and 1996, when he introduced the phrase "performance measurement revolution".

The paper is organized as follows. In the next part, I will review the literature in order to exhibit the evolution of performance and the factors that have contributed to the development of concepts such as performance measurement and performance management, the design and implementation of various frameworks and models.

Other distinct parts of the paper are focused on presenting the increased importance of financial reporting, the differences between CSR and sustainability that led performance from how to measure to how to manage and to the development of a model that includes this concerns. The results, discussions and conclusions are presented in the last part of the paper.

2.Objectives

The main objective of this paper is to present the evolution from a simple concept, to a major concern for academics, practitioners and pundits, resulting in a plethora of studies, models, frameworks, fuelled by the dynamics of social, economic, political and technological environment.

Another objective is to emphasize the influence of factors like sustainability, financial, non-financial indicators, CSR etc. on performance and the development of a framework that contains all of the above.

3.Literature review

According to Bititci et al. (2012), performance measurement and performance management practices can be found today in all sectors of industry and commerce, including the public sector. In the 21st century, the world is changing both in business and natural sense and issues such as environmental and social problems, global warming become concerns for individuals, small and multinational businesses, public servants and politicians.

These concerns are influenced by technological development, globalization effects, removed trade barriers and the changes in how organizations are managed (Bititci et al. 2012).

Richard et al. (2009) claim that previous research has shown a multidimensional conceptualization of organizational performance with limited effectiveness of commonly accepted measurement practices. Franco-Santos et al. (2007) suggest that business performance management (BPM) over the past 20 years has been studied using different perspectives, summarized in 3 main research streams:

a. operations perspectives

b. strategic control perspective

c. management account perspective

Performance management and the management field have a long history, which emerged, in the opinion of most researchers, in the 13th century, the origins of performance measurement underlying in the double entry bookkeeping that remained unchanged until the Industrial Revolution (Bititci; 2015). Starting with the Industrial Revolution, several events have had an important impact on how management has been developed and perceived today, as shown in Table 1 (Bititci; 2015).

At that time (between '60s and '80s), the performance measurement literature mainly focused on whether the strategy is being implemented as planned and whether the results are those intended (Steiner, 1969; Schendel and Hofer, 1919; Wheelen and Hunger, 1983; Glueck and Jauch, 1984; Hax and Majluf, 1984; Schreyögg and Steinmann, 1981) and, in particular, whether short-term performance indicators linked to the achievement of long-term performance should be developed as strategic controls (Horovitz, 1979; Goold and Quinn, 1990; Simons, 2008).

Due to the fact that the focus was on what to measure and how those measures reach the strategic alignments, different performance measurement models and frameworks were developed in order to align the performance measures with the business strategy (DuPont Corporation, 1920s; Cross and Lynch, 1988; Keegan et al., 1989; Dixon et al., 1990; Fitzgerald et al., 1991; Kaplan and Norton, 1992, 1996, 2001; Flamholtz, 1995; Neely et al., 1996; Atkinson and Waterhouse, 1997; Bititci et al., 1997; EFQM, 1999; Bourne et al., 2000; Neely and Adams, 2002; McAdam and Bailie, 2002; Rouse and Putterill, 2003; Hagel III et al., 2009; Thomas and McElroy 2015), but the most popular are the models below:

A. The Du Pont Model, ROI and RONA Ratios (started to be developed in the 1920s);

B. The Strategic Measurement Analysis and Reporting Technique (SMART), a.k.a The Performance Pyramid (1988);

C. The Performance Measurement Matrix (1989);

D. The Performance Measurement Questionnaire (1990);

E. The Results and Determinants Framework (1991);

F. The Balanced Scorecard (1992 onwards);

G. The Pyramid of Organizational Development (1995);

H. The Cambridge Performance Measurement Design Process (1996);

I. The Integrated Performance Measurement System Reference Model (1997);

J. The Business Excellence Model of the European Foundation for Quality Management (1999);

K. The Performance Prism (2002);

L. The Integral Framework for Performance Measurement (2003);

M.The Shift Index (2009);

N. The MultiCapital Scorecard (2015).

As a result, numerous authors asked one fundamental question: "How should performance measures be used to manage the performance of the organization?" (Meekings, 1995; Neely et al., 2000; Bourne et al., 2000).

This thought ended up with the development of the concept of Performance Management as a process - where performance measures enable the management of the organizations' performance (Lebas, 1995; Bititci et al., 1997; Waggoner et al., 1999; Bourne and Neely, 2000; Marchand et al., 2000; Neely et al., 2000; Haag et al., 2002; Adair et al., 2003; Kennerley and Neely, 2003; Nudurupati and Bititci, 2005).

This research brought up factors such as: system maturity, organizational structure, size and culture, management style, information and communication systems, being key factors that have an impact on the success or failure of performance measurement (Langfield-Smith, 1997; Otley, 1999; Reid and Smith, 2000; Hoque and James, 2000; Chenhall, 2003; Franco and Bourne, 2003; Garengo and Bititci, 2007; Simons, 2013).

While the research in performance measurement became richer and richer, several fields were developed or started to grow in parallel adding new perspectives to performance management:

a) HR started to be aligned with the organizational performance measurement systems (Meyer et al., 1995; Kaplan and Norton, 1996; Ittner and Larcker, 1998; Scott and Tiessen, 1999; Lawler, 2003; Sanchez and Heene, 2004; Corona, 2009; Dutta, 2009; Bacal, 2011), with Huselids (1995) groundbreaking study, who exhibited that a set of HR practices, named "high performance work systems" (HPWSs) were related to turnover, accounting profits and firm market value. New perspectives on performance management were created, such as: teaming measures and managerial measures (Çiçek et. al., 2005; Mendibil and MacBryde, 2005; Van Vijfeijken et. al, 2006);

b) The quality management field started to extensively use performance measurement in order to improve performance processes and the organizations, with approaches such as Six Sigma and Lean Enterprise (Hines and Rich, 1997; Lynch et al., 2003; Swinehart and Smith, 2005; Banuelas et al., 2006; Greiling, 2006; Baker et al., 2007; Kanji and Sá, 2007; Purbey et al., 2007);

c) innovation management started explore how to measure and manage the performance of innovation and R&D activities and processes (Adams et. al., 2006; Chiesa and Frattini, 2007; Chiesa et al., 2009);

d) the influence of environmental and social considerations were added on the use and design of performance measurement systems, from strategic to operational and supply chain perspectives (Xie and Hayase, 2006; Molina-Azorín et al., 2009; Wood, 2010), by integrating corporate social responsibility, environmental management and green supply chain practices all around the organization's performance measurement systems (Ditz and Ranganathan, 1997; Elkington, 1997; Epstein and Roy, 1998; Andersen and Fagerhaug, 1999; Sarkis, 2003; Hervani et al., 2005; Liu and He, 2005; Xie and Hayase, 2006; Tsai and Hung, 2009).

3.1.Is performance accurately reflected in financial reports?

According to Sacer et al. (2016), financial statements are used to show the financial position and the business performance of a company and, as a consequence, they have become a source for the decision-making process; the elements from the financial statement should be measured by using international or national accounting standards. They claim that based on what evaluation method is used, the elements from the financial reports are more or less a subject of estimates (Sacer et al., 2016).

Having in mind the fact that making estimates means a certain degree of subjectivity, different estimates on the same element are the result of different accounting information, and the financial information and performance of a company will also be different (Sacer et al., 2016).

The same idea is supported by Sherman and Young (2016), who claim that financial statements depend on estimates and judgment, and due to the increasing impact of innovative companies from the emerging markets, these metrics are not the most accurate in comparing the firms or showing how well a company is performing. They also point out the issue that rises from using financial indicators, which is that of inaccurate metrics provided by the two main accounting standards, IFRS and GAAP (Sherman and Young; 2016). There are cases of companies where, when applying both standards, different results were obtained. This is a big issue for an investor and can put a merger or an acquisition in danger and can have an impact on the company's market value (Sherman and Young; 2016).

The International Accounting Standards Board (IASB; 2015), as the International Financial Reporting Standards' setter, confirms that "to a large extent, financial reports are based on judgement and models rather than being exact depictions".

The auditors are an important piece from this puzzle, and it is a challenge for them to establish the fair value of the companies, even when they have to work with companies and assets that can be measured. But the real challenge is how to evaluate intangible assets, goodwill, patents, projects from R&D department (Sherman and Young; 2016).

Accounting estimates have become a major issue for the accounting profession, a fact that is confirmed by the audit companies which have adverse inspections concerning the estimation methods applied by companies (KPMG, 2015).

3.2.Sustainability and the impact on performance indicators

The concept of sustainable development was introduced in 1987 by the Brundtland Commission and since then, governments, companies, national and international organizations have adopted sustainability. Veleva et al. (2003) claim that, by embracing sustainability and its issues, companies can cope with the global competitive markets and the challenges they face.

In some researchers' opinion, traditional CSR (Corporate Social Responsibility) programs do not qualify as sustainability measures (Whelan and Fink; 2016). Including sustainability in the company strategy can provide business opportunities and increase profits; this statement is supported by a growing number of evidence and example of companies which benefit from adopting sustainable measures (Whelan and Fink; 2016).

In order to be able to measure and evaluate the progress related to sustainability, researchers, practitioners and companies started developing and using sustainability tools and indicators (Veleva and Ellenbecker, 2001; Veleva et al., 2003; Searcy, 2012; Goyal, Rahman and Kazmi, 2013).

According to Neely et al. (2005) "performance indicators are the metric used to quantify the efficiency and/or effectiveness of actions of part or of an entire process or a system in relation to a pattern or target".

To have a better understanding and to improve performance, managers started to recognize and incorporate sustainability indicators (Epstein and Roy, 2001). The companies realized that by using sustainable indicators, they could improve their imagine or bring a competitive advantage and, as a result, companies around the world responded to sustainable development by changing their business activities in product development (Pujari et al., 2003; Aragón-Correa et al. 2003).

For planning and strategic control cycles, performance indicators are vital elements (Neely et al., 1997) and The Balanced Scorecard is one of the best known and applied PMS which translates strategic objectives into actions and performance indicators (Kaplan and Norton, 1995). The Balanced Scorecard does not explicitly address the environmental variables, but it is used as a tool in order to manage social and environmental issues, claim different authors (Epstein and Roy, 2001; Figge et al., 2002; Möller and Schaltegger, 2005; Hubbard, 2009).

Since the Brundtland Report (1987) defined the concept of sustainable development as being the "development that meets the needs of the present without comprising the ability of future generations to meet their needs" (Beheiry et al., 2006; Arena et al., 2013), the interest of introducing the features of sustainability in the Performance Measurement System has increased, thanks to the strategic integration of non-financial indicators for organizations (Kaplan and Norton, 1995).

Therefore, the Triple Bottom Line (TBL) came out as the concept of sustainability, as the integration of economic, social and environmental dimensions (Elkington, 1997). The Triple Bottom Line, beside the economic indicators of performance typically used in most companies for performance, attached social and environmental indicators of performance (Nappi and Rozenfeld; 2015).

In this regard, the Global Reporting Initiative (GRI) works towards a sustainable global economy, providing the sustainability reporting guidelines in the Triple Bottom Line dimensions (Samuel et al., 2013). Bos-Brouwers (2010) claim that GRI's sustainability reporting tool is the most widely used tool although it is for voluntary use; its performance indicators listed there are used to measure and report the economic, social and environmental performance (Global Reporting Initiative, 2011).

According to a research in McKinsey's volume, "sustainability programs are not only strongly correlated with good financial performance, but also play a role in creating it" (Bonini and Swartz; 2014). In order to be successful in the sustainability program, companies should: set priorities, identify the proper metrics in the value chain, aim at long-term sustainability; set strong goals and have the concept of circular economy in mind (Bonini and Swartz; 2014). Beside the direct impact on financial performance, companies will benefit from improved reputation, perception of customers, better business relationships with stakeholders.

3.3.Multi-Capital scorecard

Thomas and McElroy (2015) claim that there is an explicit need for measuring sustainability performance in literal terms and in a company-specific context, due to the fact that corporate reporting standards treat climate change discretionarily and most companies do not provide disclosures in this regard.

Same authors suggest that a step ahead is the implementation of a performance accounting system (a.k.a. multicapitalism), which measures economic, social and environmental impacts in an integrated way, focusing on the impacts of "vital capitals" - natural capital for the environment; and human, social and other capitals for social and economic impacts (Thomas and McElroy, 2015).

Gleeson-White (2014), argues in her book that multiple capital accounting is becoming a mainstream. Also, in a report entitled "Raising the Bar - Advancing Environmental Disclosure in Sustainability Reporting", the United Nations Environmental Programme (UNEP, 2015) recommended the following:

S "All companies should apply a context-based approach to sustainability reporting"

S "Reporting standards/guidance bodies such as GRI, IIRC, SASB, CDP etc. should integrate Sustainability Context more explicitly into their frameworks, for example by applying the concept of carrying capacities to multiple capital-based frameworks."

Thomas and McElroy (2015) developed a Multi Capital Scorecard (MCS), suggesting that there is a need for structured, context and capital-based methodology that organizations can use to measure, manage, and report their performance. A scorecard that would be on the one hand, a truly Triple Bottom Line measurement and reporting system, and on the other hand, it would work as an open source innovation and public good that can be adapted. This type of scorecard should evaluate performance relative to the organization's specific circumstances and not just in general terms.

They also provide a sample report of the MultiCapital Scorecard, which has shown success with three U.S. pilots: Ben & Jerry's; New Chapter, Inc., a subsidiary of Procter & Gamble; and Agri-Mark, Inc. (aka, Cabot Creamery Cooperative), a large dairy food producer in New England, in Figure 1 (Thomas and McElroy, 2015).

Thomas and McElroy (2015) claim that multiple capital accounting, by using the MultiCapital Scorecard, represents a crucial evolution in performance measurement and reporting that must be generally adopted around the world if the aspirations of COP21 are to become reality.

4. Results and discussions

The literature is rich when it comes to performance measurement having various approaches. According to Neely et al. (2002), the performance management systems enable support of the decision-making process by gathering, elaborating and analysing information. Marchand and Raymond (2008) see performance measurement as a system for information integration, useful for the implementation of objectives in organizations and combined inside. Other authors claim that performance measurement is the main management tool for decision making, control and ensuring useful information for effective resource allocation (Parker, 2000; Kuwaiti, 2004).

As a tool for performance improvement and strategic planning, performance measurement is analysed by Gunawan et al. (2008). Tucker and Pitt (2009) opine that performance measurement helps the process of value creation and in evaluating and changing performance goals.

Also, concerning CSR, Carroll (1999) claims that this is an evolving concept, Wilson (2003) opines that corporate sustainability is a corporate management paradigm by which companies integrate social, environmental and economic concerns into their strategy and decision (García-Benau, Sierra-Garcia and Zorio, 2013). While Souto (2009) said that CSR is considered a tool used to provide confidence to stakeholders as the organization is perceived responsible and reliable.

Financial and non-financial measures are used in the analysis of PMS and CSR. Arena and Arnaboldi (2014) suggest that we must distinguish between financial and non-financial indicators and between leading and lagging indicators. Accounting indicators are considered the "core" foundation of performance reporting (Speziale and Kloviene, 2014). Non-financial indicators can detect weak signals from both external and internal processes (Arena and Arnaboldi, 2014). Financial and non-financial measures where developed, for example the Balanced Sorecard (Kaplan and Norton, 1992), the Value Based Costing (Gupta and Gunasekaran, 2005) and other different models (De Toni and Tonchia, 2001; Taticchi, Tonelli and Cagnazzo, 2010; Nudurupati et al. 2011; Franco-Santos, Lucianetti and Bourne, 2012; Choong, 2013).

5.Conclusion

In the study, I have approached the evolution of performance, from performance measurement to performance management, the design of various models and frameworks, presenting current trends and a model that incorporates them, called MultiCapital Scorecard. The findings support the idea that performance is a major concern for both the public and the private sector, with a huge interest for both academics and practitioners. Since the environment becomes more complex, new variables are added to the context, so the models and frameworks should take into consideration the concerns such as sustainability, innovation, intangible assets, nonfinancial indicators etc.

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