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FIRM PERFORMANCE

CHAPTER 4: INNOVATION, COMPETITIVENESS AND FIRM PERFORMANCE

4.8 FIRM PERFORMANCE

Scholars (Hudson, Smart & Buurne, 2001; Phillips, Wee & Shanka, 2003; Chong, 2008) assert that SMEs may be differentiated from larger companies by a number of key characteristics such as personalized management, with little devolution of authority, severe resource limitations in terms of management, manpower and finance, reliance on a small number of customers, and operating in limited markets; flat, flexible structures and reactive, firefighting mentality. The significant differences in the structure and philosophy of SMEs indicate a need to assess the performance of SMEs differently from large firms (Fatoki, 2011:198).

Chong (2008) declares that there are four main approaches to measure the performance of organisations: the goal approach, system resource approach, stakeholder approach and competitive value approach. The goal approach measures the extent to which an organisation attains its goals while the system resource approach assesses the ability of an organisation to obtain its resources The stakeholder approach and the competitive value approach evaluate the performance of an organisation based on its ability to meet the needs and expectations of the external stakeholders, including the customers, suppliers, and competitors. Among these approaches, the goal approach is the most commonly used method due to its

simplicity, understandability and internally focused nature, and it is adopted for purpose of the current study.

According to Richard, Devinney, Yip and Johnson (2008), the goal approach directs the owner-managers to focus their attention on the financial (objective) and non- financial measures (subjective). Atieno (2009) notes that financial measures are objective, simple and easy to understand and compute but suffer from being historical and are not readily available in the public domain, especially for SMEs. ECFs’

understanding of performance is totally different than that of established firms. For instance, established firms see performance as the number of projects completed on time and within budget while ECFs would want to argue the number of vehicles (assets) purchased over a period. How well firms are faring, as determined by how they perceive the results of their operations measured against their own internal standards or against the competition, is a matter of great concern for business organisations. The next section attempts to clarify the concept of firm performance.

4.8.1 DEFINING FIRM PERFORMANCE

Firm performance is one of the many ambiguous management concepts. While some authors have attempted to define the concept, others have applied its measurement indicators as a definitional proxy. Investorwords (2011) defines performance as the results of activities of an organisation or an investment over a given period. On the one hand, Lin, Peng, China and Kao (2008) define firm performance as the outcome of organisational operations. These authors (Lin et al., 2008) identified these outcomes to include achievement of a firm’s internal and external objectives. Such outcomes could translate into sales growth or increase in the number of employees;

competiveness perceived through innovation outcomes typified by product, process and organisational innovations or profitability and growth (Cook & Wills, 1999:22;

Zainol & Ayadurai, 2011:61).

On the other hand, some authors (Attiya & Robina, 2006; Hafeez, Chaudhry, Zafar Ullah Siddiqui & Rehman, 2011) have adopted a less definitional approach and proceeded to identify relevant performance measurement indicators. These authors

contend that organisational performance is measured based on three specific areas of firm outcomes: (i) financial performance (profits, return on assets, return on investment, etc.); (ii) market performance (sales, market share, etc.); and (iii) shareholder return (total shareholder return, economic value added, etc.). Firm performance could then be explained in terms of a set of organisational outcomes which may include financial and non-financial connotations. The current study perceives firm performance in terms of organisational operating outcomes, which encompasses financial as well as non-financial dimensions.

4.8.2 IDENTIFYING FIRM PERFORMANCE INDICATORS

Determination of firm performance indicators is one area which has raised a lot of ambiguity in research. Adopting the traditional economic indicators, some authors have measured firm performance in terms of sales performance (market share, sales volume, prices, numbers of new customers, and numbers of customers retained) or financial analysis (return on equity, return on assets, return on sales) (Lwamba, Bwisa

& Sakwa, 2014). Other authors from the traditional school of thought have measured firm performance using such indicators as customer satisfaction, customer loyalty, and relationship development (Chong, 2008; Alasadi & Al Sabbagh, 2015). In the construction industry customer satisfaction and loyalty, quality of product and competitiveness, among others, are very important indicators of business performance in the highly competitive environment. However, there are allegations of unethical conduct of tender fixing/rigging, bribery and corruption, to mention a few, which have plagued the industry, making it difficult for objective determination of competitive performance measurement of construction firms in South Africa and many developing economies.

Another notable measurement instrument often applied which comprises both a financial and non‐financial indicator is the balanced scorecard (Krechovská, 2014:86).

The balanced scorecard measures four strategic areas related to financial, customer, process and learning and growth (Kaplan & Norton, 1996; David, 2011). Thus, using the balance scorecard, ECFs are able to determine their financial progress and the perception their customers have of them.