Nature of Firm Performance in Construction

Firm performance is a crucial concept in business domains. However, an implicit understanding of firm performance may undermine the knowledge derived from quantitative organizational studies because the construct of firm performance is usually operationalized with low reliability and validity. Furthermore, managing professionals, such as senior managers and executives, may also face difficulties in appropriately measuring firm performance in order to accurately examine the status of their companies. The purpose of this paper is to explore the nature of firm performance in construction and find relevant hard evidence for eliminating potential pitfalls. Three distinct types of firm performance are proposed and examined: multidimensionality, dynamism, and comparability. Factor analysis and data envelopment analysis (DEA) are used to address these three issues by using 10-year (2002-2011) financial data of 265 of the U.K.'s largest construction companies. Several critical findings and implications are reached: (1) the result of factor analysis confirms the multidimensionality of firm performance, and these dimensions are interrelated and implicit; (2) the low reliability of selected measures (i.e., most Cronbach's a values are below 0.7) demonstrates that simply measuring and aggregating firm performance would lead to inconsistency and significant measurement errors in quantitative studies; (3) DEA is superior to simple aggregation of performance measures, and it is also useful for evaluating the longitudinal performance of individual companies (i.e., dynamism) in order to compare with competitor performance (i.e., cross-sectional comparability); and (4) although profitability measures have higher internal consistency reliability than employee and growth measures in representing the overall performance of construction companies, a broader selection of performance measures can help more comprehensive evaluation and then better assist managerial activities. This paper primarily contributes to explicitly and empirically examining the multidimensional, dynamic, and comparable nature of firm performance in construction. It also demonstrates an alternative approach to measuring firm performance in both empirical research and practice. (C) 2013 American Society of Civil Engineers.