Performance Measurement, The Importance of Multidimensional Structure

The fourth article in the series discuss the need for constructing a multidimensional structure of business performance in order to achieve the best possible results when conducting performance measurement.

Business performance is a complex multidimensional variable what makes its measurement a difficult task (Brush and Vanderwerf, 1992). Venkatraman and Ramanujam (1985) suggest that measures such as sales growth, net income growth and return on investment indicate for different dimensions. In order to overcome that hurdle scholars used several different measures in order to achieve more accurate estimation of the differences between key dimensions of business performance (Zahra, 1996). Later studies supported such arguments, Brush and Vanderwerf (1992) and Tsai, Macmillan and low (1991) discuss the need for using both profitability and growth dimensions – both dimensions can be defined as financial performance - because it is possible that these two dimensions are polling in opposite directions, it’s means that even if we’re focusing on financial performance measurement a uni-dimensional measurement approach could be inadequate and cause for inconclusive findings. As for Venkatraman and Ramanujam (1986) such arguments reinforced the notion that financial performance measurement is insufficient and operational performance measurement is an important supplemental ingredient for business performance measurement.

Two empirical studies support the need for multidimensional measurement approach. Woo and Willard (1983) statistical analysis indicates that fourteen financial and operational measures grouped into four dimensions – profitability/cash flow, relative market position, change in profitability/cash flow, and revenue growth. A statistical analysis of nineteen financial performance measures conducted by Murphy, Trailer and Hill (1996) results in nine different dimensions, none of these dimensions explain more then fourteen percent of the variance of business performance.

Performance Measurement, Difficulties in Measuring Small Business Performance

Trying to measure performance, in general, is a difficult task for scholars; the difficulties intensify when the subject is the measurement of small business performance. In this article, which is the third in the series, an overview of the major obstacles for measuring small business performance is presented.

Time is a substantial factor that needs to be taken into consideration when trying to measure performance in small business, because measuring the profitability of small businesses in their first years of operation can be misleading. Mcdougall, Robinson and denisi (1992) state, that small businesses are usually not expected to generate any profit in their early years of operation. Biggadike (1979) define a milestone of eight years in operation, in average, before new venture is expecting to generate profits.

Growth rate is not equal in all businesses; moreover it varies substantially between businesses and across industries. Cooper (1979) has related to the potential influence of rapid growth, and noted that operational losses or poor profits in small businesses with growth orientation can’t be used as an indicator for management failure, if the cause for the result is heavy investments in new markets or products. If at different industries we’re expecting different growth rate, then as Miller and Tolouse (1986) states, the industry in which the business is operating in is affecting the level of business performance in general as well as the small business performance.

Accounting measures consider as objective and more accurate then nonobjective measures, but even if such objective measures can be obtain it is very hard to interpret them in small businesses (Covin and Slevin, 1989, 1990). This statement reinforced by Rappaport (1981) and Stewart (1991) findings of weak correlation between accounting measures related to small business performance and the small business value. Dess and Robinson (1984) argue that the reason for the difficulty in interpreting objective data such as accounting measures may be due to different accounting rules for different types of corporation like proprietary limited company and partnership. Covin and Slevin (1990) relate to the small business owners’ salaries as another potential cause for problem, which is unique for small businesses. In many of the small businesses the owner salaries takes substantial share of the business profitability.