Non-financial performance measurement and management practices in manufacturing firms”

Researchers have argued that organizations facing competitive business environment need to identify and meet customer desires, produce superior products at competitive costs and be market-orientated (Kohli and Jaworski, 1990; Senge, 1990; Day, 1991; DeGeus, 1988). According to Banker et al. (2000) many firms are using non-financial performance indicators (NFPIs) such as product quality and customer satisfaction. A principal justification for the use of these indicators is that they are leading indicators of financial performance. Several other reasons have been suggested to explain why these measures are used. NFPIs are believed to complement short-run financial figures as indicators of progress towards a firm’s long term-goals (Johnoson and Kaplen 1987). Commentators argue that NFPIs are capable of measuring and controlling the organization’s internal performance drivers (Dixon et al., 1990; Fisher, 1992). It is argued that financial performance indicators partially reflect the effects of past and current activities. More importantly, NFPIs reflect the effects of current managerial actions that will not show up in financial performance until later (Kaplan and Norton, 1992). The use, form and content of performance measurement systems (PMS) have been extensively studied in management accounting and control systems (MACS) literature (Bruns, 1992; Eccles, 1991; Kaplan, 1990; Kaplan and Norton, 1996; Simons, 2000). However, previous research findings provide mixed evidence on the financial implications/consequences of the use of NFPIs. For instance (Arthur Andersen & Co, 1994; Ittner and Larcker 1998) reported no significant associations between the use of customer satisfaction indicators and accounting or market return. On the other side, a recent study by Ittner et al. (2003) surveyed service firms to examine the relationships between strategic performance measures (SPM) practices and actual financial outcomes (accounting and stock returns) in financial services firms. They reported consistent evidence that SPM practices are associated with 1- and 3- years stock returns, but no significant associations were found between the use of NFPIs and economic performance measures used in their survey. They concluded that the relation between the use of NFPIs and firms’ economic performance is far from being clear and merits further investigation. They also concluded that financial services firms that make more extensive use of a broad set of financial and non-financial measures than those with similar strategies or value drivers earn higher stock returns. They, interestingly, found that returns are even higher in firms with more mature performance measurement systems which lead them to suggest that a time lag exists between the deployment of measurement practices and the economic yields achieved. Similar findings were reported in Said, HassabElnaby and Wier (2003) study where they examined the implications of NFPIs included in compensation contracts on current and future stock market performance, but that was partially supported for accounting performance improvements. This study has two main objectives: first, testing for significant associations between the levels of usage of NFPIs of five categories (customer satisfaction, product quality, on-time delivery, efficiency and utilization and employee morale) and their financial implications/consequences in Italian manufacturing firms over a period from 2004 to 2006. Second, determining the extent of variations in financial returns related to variation in the levels of usage of NFPIs in the surveyed firms. Our study distinguishes itself from that of Said et al. (2003) in two ways; first our study focuses on NFPIs of various categories in use while their study relied on NFPIs in compensation in contracts. Second, our study incorporates around twenty NFPIs, while their study considered the use of NFPIs in aggregate terms which could lead to misleading inferences. Data were collected in two large surveys of Italian manufacturing firms in years 2004 and 2006. In the first survey (2004), data were collected from CERVED listed Italian manufacturing firms. Two years later, another survey (2006) was carried out to update responses from the sampled firms in the first survey. Two data files exist: the first contains 2004 survey data (142 firms) and the second contains 2006 survey data (212 firms). The two surveyes were funded by the European Union, Italian Ministry of Research and Padova University, Italy. In order to compare between the two data sets, the study incorporates only those firms that exist in both data sets. Accordingly, the sample frame is confined to 106 surveyed Italian manufacturing belonging to various industry sectors. For the 106 firms, number of employees and industry codes are unchanged in years 2004 and 2006. Various nonparametric and parametric statistical techniques are applied in analyzing data. Results suggest for significant associations between some of the categories of NFPIs used in manufacturing firms and financial performance.