Academy of Management Discoveries

GUIDEPOST TRILOGY – CLAIMS ON THE CORPORATION:

DIRECTIONS FOR STAKEHOLDER RESEARCH IN THE FIELD
OF MANAGEMENT

Measuring Firm Performance in a Way that is Consistent

With Strategic Management Theory

Journal: Academy of Management Discoveries

Manuscript ID AMD-2018-0219

Manuscript Type: Guidepost (By Invitation Only)

Stakeholder Theory < Organizational & Management Theory, Resource-

based View - Resource Stocks, Factor Markets < Organizational &
Keywords:
Management Theory, Behavioral Theory of the firm < Organizational &
Management Theory

Much empirical work in strategic management adopts measures of firm

performance originally developed in accounting and finance. Not
surprisingly, these measures are based on theories of how firms create
value developed in these two disciplines. Strategic management has
Abstract: developed a different theory of how firms create value that focuses on
assembling resources from multiple stakeholders, some of whom may be
outside the boundaries of a firm. Progress in empirical research in
strategic management will require the development of a measure of firm
performance that adopts this stakeholder perspective.
Page 1 of 7 Academy of Management Discoveries

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3 GUIDEPOST TRILOGY – CLAIMS ON THE CORPORATION: DIRECTIONS FOR STAKEHOLDER
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5 RESEARCH IN THE FIELD OF MANAGEMENT
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Measuring Firm Performance in a Way that is Consistent
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11 With Strategic Management Theory
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13 Jay B. Barney
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16 Presidential Professor of Strategic Management
17 Lassonde Chair of Social Entrepreneurship
18 University of Utah
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22 Much empirical work in strategic management adopts measures of firm performance originally
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developed in accounting and finance. Not surprisingly, these measures are based on theories
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27 of how firms create value developed in these two disciplines. Strategic management has
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29 developed a different theory of how firms create value that focuses on assembling resources
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32 from multiple stakeholders, some of whom may be outside the boundaries of a firm. Progress
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34 in empirical research in strategic management will require the development of a measure of
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37 firm performance that adopts this stakeholder perspective.
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Key Words: Performance measurement, resource-based theory, stakeholder theory
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 Academy of Management Discoveries Page 2 of 7

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3 The field of strategic management needs to develop an empirically tractable measure of
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6 firm performance that acknowledges the role that individuals and organizations outside the
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8 boundaries of firms—stakeholders--have on their ability of firms to generate economic profits.
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11 Strategic management scholars are interested in how firms create and appropriate
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13 economic value (Brandenburger and Stuart, 1996). These processes often involve access to
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16 resources that are outside the traditional boundaries of firms (Amit and Schoemaker, 1993;
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18 Helfat and Peteraf, 2003; Barney, 2018; Dyer and Singh, 1998; Adner, Oxley, and Silverman,
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2013). And yet, currently popular measures of firm performance in strategic management
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23 struggle incorporating the impact of such partners.
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25 Consider, accounting measures of performance, including ROI and ROA. The numerator
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28 in these measures of performance focuses only on profits generated by a firm, and not on
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30 profits generated by a firm and its partners. And the denominators in these measures—
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33 investment and assets, respectively—refer only to investments and assets a particular firm
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35 controls, despite the fact that access to resources outside a firm may be instrumental in
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generating profits.
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40 These problems are not addressed in modified accounting measures of performance,
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including, Economic Value Added (EVA) and Tobin’s q. For example, while the numerator of
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45 Tobin’s q (a firm’s market value) incorporates the effects of a firm’s partners on its value, the
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47 denominator (replacement value of a firm’s assets) focuses on those assets that a firm owns.
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50 Finance also has measures of firm performance, including event studies, “buy and hold”
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52 measures, and, more generally, present value techniques. These measures examine firm
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55 performance from the perspective of a key stakeholder, shareholders. This emphasis on
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Page 3 of 7 Academy of Management Discoveries

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3 shareholders is justified by the assumption that a firm’s shareholders are its only residual
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6 claimants, and that all its other stakeholders have fixed claims.
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8 However, strategic management theory (Castanias and Helfat, 1991; Barney, 2018)
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11 suggests that treating all stakeholders, except shareholders, as fixed claimants means that—in
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13 most competitive settings--a firm will not be able to generate an economic profit, unless it is
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16 lucky (Barney, 1986). This is because non-shareholder stakeholders will generally be unwilling
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18 to make profit-generating resources available to a firm using fixed claim contracts since such
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contracts eliminate the possibility of sharing in the economic upside created by these
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23 resources. Put simply, strategic management theory suggests that if a firm’s only residual
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25 claimants are shareholders, then firms will not be able to gain access to the resources needed
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28 to generate an economic profit.
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30 None of these observations about accounting and finance measures of performance
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33 should be understood as criticisms. Indeed, it would be surprising if measures of performance
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35 developed in other disciplines would be appropriate for strategic management research. What
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is required is not additional criticisms of accounting and finance but rather a way of measuring
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40 firm performance consistent with strategic management theory.
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What would such a measure look like? First, it would have to abandon the firm as the
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45 only unit of value creation and appropriation, and instead also focus on how bundles of
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47 resources assembled from extra-firm sources can generate profits. This suggests that this
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50 measure would have to incorporate a stakeholder perspective, but one that focuses mostly on
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52 stakeholders whose resources are important for profit generation. McGahan (2018) discusses
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 Academy of Management Discoveries Page 4 of 7

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3 that identifying who these stakeholders is not a trivial problem, and will require additional
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6 theoretical development.
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8 Second, this measure would have to calculate profits and losses at three levels: at the
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11 level of the firm that assembles resources to generate profits (Type One Performance), (2) at
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13 the level of each of the individuals and organizations who make profit-generating resources
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16 available to a firm (Type Two Performance), and (3) at the level of the set of all those who are
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18 involved in generating profits (Type Three Performance). This acknowledges the possibility, for
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example, that a strategy might generate an economic profit overall (Type Three Performance),
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23 that stakeholders providing critical resources to a firm might appropriate most of these profits
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25 (Type Two Performance), but that the firm that assembled these resources to generate a profit
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28 appropriates relatively little of them (Type One Performance)—a possibility anticipated by Coff
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30 (1999). In this example, even though the focal firm does not appropriate much of the economic
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33 profit it helped create, it would be inappropriate to say that its strategies did not create
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35 economic profit.
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Third, while this measure would have to recognize the importance of legally
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40 incorporated firms, it would also have to recognize that many parties may be instrumental in
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generating economic profits, besides firms. For example, some employees, customers, and
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45 other suppliers may be part of the bundle of resources that generate economic profits, but not
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47 be legally defined firms.
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50 Finally, as suggested by Kaplan (2018), even as we develop this new measure of
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52 performance, it must be recognized that simply maximizing the expected level of this new
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55 definition of performance may not always be a sufficient guide to managerial decision making.
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Page 5 of 7 Academy of Management Discoveries

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3 Sometimes, firms may have to make decisions, not because they positively affect
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6 performance—however defined—but because they are the right things to do.
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8 Developing this new measure of firm performance is likely to be challenging, but
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11 probably no more challenging than what accounting and finance scholars faced when they
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13 initially developed their measures of performance. Indeed, when it became clear that
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16 accounting measures of performance did not capture the broader social and environmental
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18 impacts of firms, new accounting measures of firm performance emerged—the Global
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Reporting Initiative (GRI) in 1997 and Sustainable Accounting Standards Board (SASB) in 2011.
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23 These reporting standards have substantially expanded traditional accounting measures of
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25 performance. Perhaps similar efforts could be used to develop measures of firm performance
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28 that more fully capture the impact of a firm’s stakeholders on its ability to generate profits.
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30 However, as both McGahan (2018) and Kaplan (2018) have observed, developing this
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33 new measure of firm performance is likely to require both theoretical and empirical work.
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35 Additional theoretical work will be required to identify stakeholders who are instrumental in
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enabling a firm to generate economic profits. Empirical work will need to focus on how the
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40 profits generated by a bundle of resources are actually distributed across those that provided
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access to these resources.
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45 In the end, in order for the field of strategic management to continue to evolve and
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47 grow, it must develop a measure of firm performance that is consistent with its theory of profit
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50 generation—a theory that recognizes that firms generate profits by accessing resources from a
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52 variety of stakeholders, including shareholders.
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55 Bibliography
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 Academy of Management Discoveries Page 6 of 7

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3 Adner, R., Oxley, J., and Silverman, B. 2013. Collaboration and completion in
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6 business ecosystems. Advances in Strategic Management, 31: 9 – 18.
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8 Amit, R. and Schoemaker, P.J. 1993. Strategic assets and organizational rents.
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11 Strategic Management Journal, 14: 33 – 46.
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13 Barney, J. B. 1986. Strategic factor markets: Expectations, luck, and business
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16 strategy. Management Science, 32(10): 1231 – 1241.
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18 Barney, J. B. 2018. Why resource-based theory’s model of profit appropriation
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must incorporate a stakeholder perspective. Strategic Management Journal,
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23 forthcoming.
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25 Brandenburger, A. and Stuart, S. 1996. Value-based strategy. Journal of
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28 Economics and Management Strategy, 5(11): 5 – 24.
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30 Castanias, R. and Helfat, C. 1991. Managerial resources and rents. Journal of
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33 Management, 17(1): 155 – 171.
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35 Coff, R. 1999. When competitive advantage doesn’t lead to performance. Organization
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Science, 10: 119 – 133.
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40 Dyer, J. and Singh, H. 1998. The relational view: Cooperative strategy and
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sources of inter-organizational competitive advantage. Academy of Management
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45 Review, 23(4): 660 – 679.
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47 Hagiu, A. 2006. Pricing and commitment by two-sided platforms. The Rand
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50 Journal of Economics, 37(3): 720 – 737.
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52 Helfat, M. and Peteraf, C. 2003. The dynamic resource-based view: Capability
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55 lifecycles. Strategic Management Journal, 24: 997 – 1016.
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3 Kaplan, S. 2018. Beyond the business case for social responsibility. Academy of Management
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6 Discoveries, this volume.
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8 McGahan, A. 2018. Where does an organization’s responsibility end?: Identifying the
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11 boundaries of stakeholder claims. Academy of Management Discoveries, this volume.
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