Traditional Definitions of Firm Performance

Strategic management as a field of study pursues the building of theories that explain and predict differences in firm performance (Rumelt, Schendel & Teece 1994). Why are firms different? Why do firms perform differently? Those are fundamental research questions for strategic management scholars (Prahalad & Hamel 1994; Rumelt, Schendel & Teece 1994). In a sample of Strategic Management Journal current issues (January-August 2000), approximately sixty percent of articles dealt with performance as a dependent variable. Similarly, about forty percent of articles published during the last two years in the Journal of Business Strategies assessed firm performance as the researcher's dependent variable.

Within the field, there are many definitions of firm performance and not a general agreement on particular definitions. One approach that seems to be widely followed, however, compares the value that an organization creates using its productive assets with the value that the owners of these assets expect to obtain. It addresses the feasibility and survivability of the firm, assuming that owners of the productive assets will continue to make those assets available to a particular firm only if the value it creates is at least as large as the value they expected. A firm's level of performance is determined by its ability to generate the expected value. A firm can perform according to expectations, below expectations, or above expectations. Firms performing above normal will enjoy competitive advantages to attract productive assets in their industry. This perspective for defining firm performance is the one adopted by most authors in strategic management (Porter 1980; Rumelt 1984) and the resource-based view of the firm (Amit & Shoemaker 1993; Barney 1986; 1991; 1997; Michalisin & Kline 2000).

Within this approach, firm performance has been measured as survival, or operationalized using accounting, stakeholder, or present-value indicators. Profitability ratios such as...