Measuring long term superior performance

Yip, G and Devinney, T and Johnson, G (2009) Measuring long term superior performance. Long Range Planning, 42 (3). pp. 390-413. ISSN 0024-6301

Abstract

This article examines the issue of determining long-term sustained superior financial performance. We demonstrate that the technique of frontier analysis is a robust and theoretically consistent way to identify relative performance. We show how our approach, although dependent on the reliability of reported financial data (which recent events show needed to be treated with caution for some companies), addresses the three critical issues in the measurement of performance: balancing short-term and long-term performance, capturing the multidimensional nature of performance, and finding the right peer comparators. The approach is particularly important today, given the failure of past performance to signal in any way how firms would be able to weather a pervasive global crisis. Academics and practitioners would both agree that the primary job of senior management is to manage for sustainable long-term performance that results in superior returns for the owners of the firm's assets (i.e., shareholders), while also meeting the claims of other stakeholders. However many studies have noted that few companies manage to achieve such long-term superior performance.1 This article argues that the difficulties managers face in sustaining long-term performance arise not just from a competitive environment that naturally flattens out a firm's performance profile, but also from the inherent problems in accounting for the multidimensional character of performance as it is commonly understood and measured. To understand superior sustained performance, one requires a theoretically consistent and robust understanding of what it means to perform.2 This article proposes an approach for characterising performance that accounts for the major dilemmas in determining what it means to be a superior financial performer. This question has been at the forefront of strategic thinking for decades, and has come to the fore, not just in terms of theory - e.g., what does it mean to have sustainable competitive advantage – but also in terms of practice – e.g., in going from ‘good to great’, what is meant by ‘good’ and ‘great’. Characterising sustained superior performance requires dealing with three specific challenges: (1) how to balance long versus short term performance, (2) how to address the issue of the existence of multiple, perhaps conflicting, measures of performance, and (3) how to determine what the relevant basis of comparison should be. Each is discussed below, and their practical implications discussed in Exhibit 1 using GE as an example.