Academic journal article Journal of Business Strategies

Alternative Measures of Performance for E-Companies: A Comparison of Approaches

Academic journal article Journal of Business Strategies

Alternative Measures of Performance for E-Companies: A Comparison of Approaches

Article excerpt

Abstract

Understanding firm performance is as important in the new economy as it was in the old one. It seems difficult, however, to make a judgment about which measures of performance are good predictors of future success for e-companies. This paper contrasts indicators of asset productivity, shareholder value, growth, survival, and cyberspace usage, exploring how these different indicators reflect performance for a sample of e-companies, and compares them with a sample of brick-and-mortars competing in the same industries. Results suggest that multiple indicators are more necessary than ever to capture the variability of outcomes in the Internet economy.

Introduction

One of strategic management's main challenges as a field has been the conceptualization and measurement of firm performance (Barney 1997; Venkatraman & Ramanujam 1986). Several authors have highlighted the importance of firm performance for the field of strategy (Day, Farley & Wind 1990; Prahalad & Hamel 1994; Rumelt, Schendel & Teece 1994) and have also pointed out the inadequacy of most indicators to capture its complexities (Jacobson 1987; March & Sutton 1998; Venkatraman & Grant 1986). Now, the transformation of business models accompanying the new economy seems to be making it even more challenging to find indicators that can help managers and researchers predict a firm's future success based on its current operations.

The e-commerce environment seems to complicate the measurement of firm performance and, at the same time, seems to offer new opportunities for developing new performance indicators. On one hand, the emphasis on information-based operations and on the use and exploitation of intangible assets that characterize the new economy suggests that e-companies performance cannot be measured with traditional accounting or assets productivity indicators such as ROA and ROE. Also, the condition of "newness" of these firms precludes the use of profitability ratios to assess their future potential of success. On the other hand, this same emphasis on interactive information and the access it provides to direct customer data has created opportunities for the development of new performance indicators, such as accessibility, web presence, and usefulness.

Understanding, explaining and predicting firm performance is, nevertheless, as important in the new economy as it was in the old one. Why do firms perform differently? What are valid and useful measures of firm performance? What indicators allow us to predict when an operation is on the right track, and when it is not? How can we distinguish a strong industry performer from a weak one? Questions such as these are still fundamental, especially if we want to develop theories that are useful and that offer effective recommendations for managers.

When discussing performance of e-commerce firms, some of the prevailing arguments do not seem to offer very useful answers to these questions. We frequently find a position of skepticism about the future of Internet-based firms, more now that the optimism and enthusiasm characteristic of the e-commerce initial boom (Fox 1999) have turned into widespread pessimism (Chen & Linsday 2000; Kedrosky 2000) as many companies have been unable to survive the inevitable shakeout (Choi & Whinston 1998; LeDuff 2000; Useem 2000). If we take this position, the answer to the question will be not to bother studying and analyzing these companies since most of the "no-profit" companies are going to die anyway.

Another stance regarding e-companies performance is to argue that not enough time has passed yet in order to be able to understand and predict what is going on; that it is better to wait before attempting to value the performance of firms in the e-commerce world (Warren Buffett, as cited by de Figueiredo 2000). This position seems to assume that, with time, it will be possible to develop performance measures for e-companies and to value their results. …

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