Abstract
Firm performance is a relevant construct in strategic management research and frequently used as a dependent variable. Despite this relevance, there is hardly a consensus about its definition, dimensionality and measurement, what limits advances in research and understanding of the concept. This article proposes and tests a measurement model for firm performance, based on subjective indicators. The model is grounded in stakeholder theory and a review of empirical articles. Confirmatory Factor Analyses, using data from 116 Brazilian senior managers, were used to test its fit and psychometric properties. The final model had six first-order dimensions: profitability, growth, customer satisfaction, employee satisfaction, social performance, and environmental performance. A second-order financial performance construct, influencing growth and profitability, correlated with the first-order intercorrelated, non-financial dimensions. Results suggest dimensions cannot be used interchangeably, since they represent different aspects of firm performance, and corroborate the idea that stakeholders have different demands that need to be managed independently. Researchers and practitioners may use the model to fully treat performance in empirical studies and to understand the impact of strategies on multiple performance facets.
Highlights
Rigorous construct measurement is critical for the advance of science, when the variables of interest are complex or not observable
The lack of measurement accuracy affects quantitative research quality and masks true relationships (Venkatraman & Grant, 1986). This is critical in the case of firm performance, one of the most relevant constructs in the field (Rumelt, Schendel, & Teece, 1994), and a construct commonly used as the final dependent variable (Richard, Devinney, Yip, & Johnson, 2009) in various fields (Cho & Pucik, 2005; Sila & Ebrahimpuor, 2005; Wiklund & Shepherd, 2003)
Research into firm performance suffers from problems such as lack of consensus, selection of indicators based on convenience and little consideration of its dimensionality (Combs, Crook, & Shook, 2005; Crook, Ketchen, Combs, & Todd, 2008; Richard et al, 2009)
Summary
Rigorous construct measurement is critical for the advance of science, when the variables of interest are complex or not observable. The lack of measurement accuracy affects quantitative research quality and masks true relationships (Venkatraman & Grant, 1986). This is critical in the case of firm performance, one of the most relevant constructs in the field (Rumelt, Schendel, & Teece, 1994), and a construct commonly used as the final dependent variable (Richard, Devinney, Yip, & Johnson, 2009) in various fields (Cho & Pucik, 2005; Sila & Ebrahimpuor, 2005; Wiklund & Shepherd, 2003). To make a contribution to these issues, we propose and test a multidimensional measurement model of firm performance in this paper
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