Academic journal article Academy of Entrepreneurship Journal

Organizational Financial Performance: Identifying and Testing Multiple Dimensions

Academic journal article Academy of Entrepreneurship Journal

Organizational Financial Performance: Identifying and Testing Multiple Dimensions

Article excerpt


There is little dispute that one of the core purposes of both entrepreneurship and strategic management theory and research is the improvement of organizational performance (Eisenhardt & Zbaracki, 1992; Venkatraman & Ramanujam, 1986). However, there is no consensus regarding the best, or even sufficient, measures of organizational performance.

It has long been reported that different measures of organizational effectiveness and performance have been used in entrepreneurship and management studies with little or no thoughtful discussion of why the measures used in the studies were chosen (Cameron, 1986). Little attention has been paid to the limitations that these measures may impose on the interpretation or generalizability of the results of the research. The most frequently used measures of organizational performance are financial. However, no study has successfully proposed and empirically tested a generalizable multi-dimensional model of organizational financial performance. This is a particularly challenging issue since changing environmental conditions may dictate that different performance dimension priorities exist at different times. For instance, during economic recessions, liquidity may be more crucial than profitability, while during economic booms, profitability and growth may take precedence.

This research examines the multi-dimensional structure of organizational financial performance and seeks to empirically identify distinct financial performance constructs and appropriate measures of those constructs.


The topic of this research is particularly important for several reasons. First, a multidimensional model of organizational financial performance has not previously been explicitly studied. However, in 1987, Venkatraman and Ramanujam empirically demonstrated that growth and profitability were distinctly different measures of performance, but did not attempt to propose a specific model for financial performance measurement. In 1996, Murphy, Trailer and Hill examined the dependent measures used in entrepreneurship research and through exploratory factor analysis found nine distinct financial performance constructs among the more than 50 different dependent financial performance variables reported upon. And, in 1998, Robinson empirically tested the relationship between four separate independent variables (stage of the life cycle, industry concentration, entry barriers, and product differentiation) with eight different measures of financial performance used in new venture research and found significantly different results between each independent variable and the eight different dependent financial performance variables. This further demonstrated the existence of multiple dimensions of organizational financial performance. Finally, part of this research involved an analysis of 1,045 articles published in the leading entrepreneurship and management journals between 1996 and 2001. Of these 1,045 articles, 138 purported to use overall organizational performance as the dependent variable. Over 70% of these 138 articles used a financial performance measure as the dependent variable. Further, 46% of these 138 articles used only a single measure, 25% used two measures, and 18% used three measures to represent organizational performance. Overall, a total of 88 different dependent measures were used to represent overall organizational performance in these 138 articles, generally without any support for the validity of the measures utilized. In short, it can be inferred from these statistics that there is no consensus in the entrepreneurship and strategic management research conducted over the 5 years with respect to valid measures of organizational performance. However, it is also clear from this prior research that organizational financial performance is definitely a multi-dimensional construct.

Second, a generalizable and more powerful model for measuring organizational financial performance has significant implications for future research and for reexamining the findings of prior research where less powerful dependent variable measurement models were used. …

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