Performance Measurement of Listed Companies

Performance Measurement of Listed Companies:

A Critical Assessment

1. Introduction

Nowadays, company performance is becoming more and more essential, which illustrates not only the general perception in the market, but also what the company is worth. Measuring a company’s performance may largely help shareholders to find out how their shares will perform and help stakeholders, such as investors, customers, employees and suppliers, to evaluate if they should risk their money. However, unlike some scientific subjects, such as  physics, mathematics and so on, there is no certain formula to evaluate all kinds of companies’ performance directly, because it is not necessary a zero-sum game and really different in each industry.

This project will state the current widespread definition firstly and then analyze why company performance should be measured from four specific dimensions. Several different methods of company performance measurement will be shown from two aspects: financial and non-financial, after that some typical characteristics of these various kinds of methods will be given.

2. Definition of Company Performance Measurement

There is no doubt that company performance measurement has been widely discussed for over 20 years in both publications and academic researches but rarely defined (Neely, 1998). Lingle and Schiemann (1996) mentioned that it was better for companies to use balanced performance measurement systems as the foundation of performance management.        

According to this, a definition which includes several constituent parts had been made by Neely (1998: pp.5): “A performance measurement method enables informed decisions to be made and actions through acquisition, collation, sorting, analysis, interpretation, and dissemination of appropriate data.” (The information-processing activities are also defined specifically)

It is obvious that language in the area of company performance measurement is confusing, so it is essential to come up with an all-sided definition. To be specific, the three main parts of this definition are separately quantifying efficiency and effectiveness; combination of the whole performance of a company; a supporting foundation where data can be acquired, collated etc. (Neely, 2002).

3. Reasons for Measurement

Different answers will be given by different people, if they are asked why they should measure company performance. Despite the diversity of opinion, there is a wildly believed opinion in which every reason can fall into one of four generic categories.

Firstly, the most essential one is to check position, because only if there are precise measures, can everything from strategic planning to operational improvement become reliable at best and possible at worst. The next one is to communicate with different kinds of positions, which includes interested external aspects like customers, owners, suppliers and internal aspects like employees and unions. To some extent, they can help companies to build not only brand awareness but customer loyalty as well by communicating to the market like a language. The third reason is that company measurement is one of the most effective means to control management and cost. Last but not least, company performance measurement can help organizations to make progress in several ways like motivation, reward and so on (Neely, 1998).

According to the four reasons mentioned above, it is obvious to find that company performance measurement could play a multitude of roles guaranteeing compliance, checking health and allowing the strategy to be implemented.

4. Existing Company Performance Measurement Methods

Organizations all around the world have already used the measurement frameworks to evaluate the companies’ business performance for so many years. In the early years, only financial measures were used, while some non-financial measures are added into measurement frameworks to assess company performance later.

4.1 Financial Measures

“DuPont” is the first company to use a pyramid of financial ratios which had a specific hierarchical structure to reward on investment. However, Johnson and Kaplan (1987) believed that the unsuccessful financial performance measurements would have a bad influence on changes in the competitive situations and strategies of modern corporations, which is thought to be the shortcoming in the DuPont pyramid. Specifically, it paid almost the whole attention to the historical view and put very little indication of performance in the future (Bruns, 1998).

4.2 Non-financial Measures

Fortunately, with the revolution in company performance measurement, more and more non-financial measures have been used, because non-financial information would demonstrate company’s goals in a similar way as well as financial information does. It is noticeable that General Electric is the first expert to implement the balanced approach into company business measurement in the 1950s, but until the 1980s and 1990s, these non-financial measures have started to be widespread and acceptable. From then on, plenty of measurement frameworks have been designed to help corporations evaluate their business performance.

4.2.1 “External” and “Internal”

One of the classic measurement frameworks is to categorize measures as being “external” or “internal”. For example, Keegan, Eiler, and Jones (1989) came up with this framework to allow a company to find where they should focus on and how they could adjust the measurement. Moreover, Wang Laboratories (Lynch and Cross, 1991) introduced a pyramid called SMART (Strategic Measurement and Reporting Technique) to support the view that “external” and “internal” should be included to the measurement of company performance as well. In this model, Wang Laboratories adds the idea of “cascading measures down the organization”, in this way, both internal and external business unit objectives can be reflected by the company performance measures at department as well as work-center level. Based on this, a great number of researches related to causes, effects and results in some specific industries like services and manufacturing have been gradually made in the 20th century.

4.2.2 The Balanced Scorecard Measurement

Nowadays, the balanced scorecard suggested by Kaplan and Norton (1992 and 1996a) is one of the most popular methods of company performance measurement frameworks. In this method, four different aspects of company performance have been identified and integrated: financial, customer, internal business, and innovation and learning perspectives. What’s more, equal weighting should be given to financial performance, because customer and internal operational performance, present improvement and future performance are all driving factors of this.