Nature of Firm Performance in Construction
Publication: Journal of Construction Engineering and Management
Volume 140, Issue 2
Abstract
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 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.
Get full access to this article
View all available purchase options and get full access to this article.
References
Balatbat, M. C. A., Lin, C. Y., and Carmichael, D. G. (2010). “Comparative performance of publicly listed construction companies: Australian evidence.” Constr. Manage. Econ., 28(9), 919–932.
Bassioni, H. A., Price, A. D. F., and Hassan, T. M. (2005). “Building a conceptual framework for measuring business performance in construction: an empirical evaluation.” Constr. Manage. Econ., 23(5), 495–507.
Beatham, S., Anumba, C., Thorpe, T., and Hedges, I. (2004). “KPIs: a critical appraisal of their use in construction.” Benchmarking: An International Journal, 11(1), 93–117.
Brown, R. (2006). “Mismanagement or mismeasurement? Pitfalls and protocols for DEA studies in the financial services sector.” Eur. J. Oper. Res., 174(2), 1100–1116.
Charnes, A., Cooper, W. W., and Rhodes, E. (1978). “Measuring the efficiency of decision making units.” Eur. J. Oper. Res., 2(6), 429–444.
Cheah, C. Y. J., Kang, J., and Chew, D. A. S. (2007). “Strategic analysis of large local construction firms in China.” Constr. Manage. Econ., 25(1), 25–38.
Cherchye, L., Moesen, W., and Puyenbroeck, T. (2004). “Legitimately diverse, yet comparable: On synthesizing social inclusion performance in the EU.” J. Common Market Stud., 42(5), 919–955.
Cherchye, L., Moesen, W., Rogge, N., and Puyenbroeck, T. V. (2007). “An introduction to ‘benefit of the doubt’composite indicators.” Social Indic. Res., 82(1), 111–145.
Costello, A. B., and Osborne, J. W. (2005). “Best practices in exploratory factor analysis: Four recommendations for getting the most from your analysis.” Pract. Assess. Res. Eval., 10(7), 1–9.
Cronbach, L. J. (1951). “Coefficient alpha and the internal structure of tests.” Psychometrika, 16(3), 297–334.
Deng, F., and Smyth, H. (2013). “Contingency-based approach to firm performance in construction: Critical review of empirical research.” J. Constr. Eng. Manage., 04013004.
Devinney, T. M., Yip, G. S., and Johnson, G. (2010). “Using frontier analysis to evaluate company performance.” Br. J. Manage., 21(4), 921–938.
Dyson, R. G., Allen, R., Camanho, A. S., Podinovski, V. V., Sarrico, C. S., and Shale, E. A. (2001). “Pitfalls and protocols in DEA.” Eur. J. Oper. Res., 132(2), 245–259.
Egan, J. (1998). Rethinking construction, Construction Task Force Report for Dept. of the Environment, Transport and the Regions, Her Majesty’s Stationery Office, London.
El-Mashaleh, M. (2010). “Decision to bid or not to bid: a data envelopment analysis approach.” Can. J. Civ. Eng., 37(1), 37–44.
El-Mashaleh, M. S., Minchin, R. E., Jr., and O’Brien, W. J. (2007). “Management of construction firm performance using benchmarking.” J. Manage. Eng., 23(1), 10–17.
Fellows, R., and Langford, D. (1980). “Decision theory and tendering.” Build. Technol. Manage., 18(9), 36–39.
Franco-Santos, M. (2007). “The performance impact of using measurement diversity in executives annual incentive system.” Ph.D. dissertation, Cranfield Univ., Cranfield, UK.
Franco-Santos, M., Lucianetti, L., and Bourne, M. (2012). “Contemporary performance measurement systems: A review of their consequences and a framework for research.” Manage. Account. Res., 23(2), 79–119.
Glenigan Constructing Insight, Constructing Excellence in the Built Environment, and Dept. for Business, and Innovation. (2011). UK industry performance rep. based on the UK construction industry Key Performance Indicators, UK-KPI, London.
Grafton, J., Lillis, A. M., and Widener, S. K. (2010). “The role of performance measurement and evaluation in building organizational capabilities and performance.” Account. Organ. Soc., 35(7), 689–706.
Henri, J. F. (2006). “Management control systems and strategy: a resource-based perspective.” Account. Organ. Soc., 31(6), 529–558.
Horta, I., Camanho, A., Johnes, J., and Johnes, G. (2013). “Performance trends in the construction industry worldwide: an overview of the turn of the century.” J. Productivity Anal., 39(1), 1–11.
Horta, I., Camanho, A., and Moreira da Costa, J. (2012). “Performance assessment of construction companies: A study of factors promoting financial soundness and innovation in the industry.” Int. J. Prod. Econ., 137(1), 84–93.
Horta, I. M., Camanho, A. S., and Da Costa, J. M. (2010). “Performance assessment of construction companies integrating key performance indicators and data envelopment analysis.” J. Constr. Eng. Manage., 136(5), 581–594.
Houthoofd, N. (2009). “Business definition and performance implications: the case of the Belgian construction sector.” Constr. Manage. Econ., 27(7), 639–652.
Ittner, C. D. (2008). “Does measuring intangibles for management purposes improving performance? A review of the evidence.” Account. Bus. Res., 38(3), 261–272.
Jin, Z. G., Deng, F., Li, H., and Skitmore, M. (2013). “Practical framework for measuring performance of international construction firms.” J. Constr. Eng. Manage., 139(9), 1154–1167.
Jung, W., Han, S. H., Park, H., and Kim, D. Y. (2010). “Empirical assessment of internationalization strategies for small and medium construction companies.” J. Constr. Eng. Manage., 136(12), 1306–1316.
Kagioglou, M., Cooper, R., and Aouad, G. (2001). “Performance management in construction: A conceptual framework.” Constr. Manage. Econ., 19(1), 85–95.
Kale, S. (2002). “Competitive positioning in United States construction industry.” J. Constr. Eng. Manage., 128(3), 238–247.
Kale, S., and Arditi, D. (2003). “Differentiation, conformity, and construction firm performance.” J. Manage. Eng., 19(2), 52–59.
Kim, H. J., and Reinschmidt, K. F. (2011). “Effects of contractors’ risk attitude on competition in construction.” J. Constr. Eng. Manage., 137(4), 275–283.
Kim, H. J., and Reinschmidt, K. F. (2012). “Market structure and organizational performance of construction organizations.” J. Manage. Eng., 28(2), 212–220.
Lee, S. H., Thomas, S. R., and Tucker, R. L. (2005). “Web-based benchmarking system for the construction industry.” J. Constr. Eng. Manage., 131(7), 790–798.
Lovell, C., Pastor, J. T., and Turner, J. A. (1995). “Measuring macroeconomic performance in the OECD: a comparison of European and non-European countries.” Eur. J. Oper. Res., 87(3), 507–518.
Luu, T. V., Kim, S. Y., Cao, H. L., and Park, Y. M. (2008). “Performance measurement of construction firms in developing countries.” Constr. Manage. Econ., 26(4), 373–386.
McCabe, B., Tran, V., and Ramani, J. (2005). “Construction prequalification using data envelopment analysis.” Can. J. Civ. Eng., 32(1), 183–193.
Miller, C. C., Washburn, N. T., and Glick, W. H. (2013). “The myth of firm performance.” Organiz. Sci., 24(3), 948–964.
Mohamed, S. (2003). “Performance in international construction joint ventures: Modeling perspective.” J. Constr. Eng. Manage., 129(6), 619–626.
Nasir, H., Haas, C. T., Rankin, J. H., Fayek, A. R., Forgues, D., and Ruwanpura, J. (2012). “Development and implementation of a benchmarking and metrics program for construction performance and productivity improvement.” Can. J. Civ. Eng., 39(9), 957–967.
Norušis, M. J. (2008). IBM SPSS statistics 17.0 guide to data analysis, Prentice Hall, Upper Saddle River, NJ.
Nunnally, J. C., Bernstein, I. H., and Berge, J. M. T. (1967). Psychometric theory, McGraw-Hill, New York.
Office for National Statistics (ONS). (2007). UK Standard Industrial Classification of Economic Activities 2007, Fareham.
Office for National Statistics (ONS). (2008). UK construction statistics annual, C. Ormerod, ed., Palgrave Macmillan, London.
Ozorhon, B., Arditi, D., Dikmen, I., and Birgonul, M. T. (2010). “Performance of international joint ventures in construction.” J. Manage. Eng., 26(4), 209–222.
Peter, J. P. (1979). “Reliability: A review of psychometric basics and recent marketing practices.” J. Market. Res., 16(1), 6–17.
Peter, J. P. (1981). “Construct validity: A review of basic issues and marketing practices.” J. Market. Res., 18(2), 133–145.
Phua, F. T. T. (2006). “Predicting construction firm performance: an empirical assessment of the differential impact between industry- and firm-specific factors.” Constr. Manage. Econ., 24(3), 309–320.
Pilateris, P., and McCabe, B. (2003). “Contractor financial evaluation model (CFEM).” Can. J. Civ. Eng., 30(3), 487–499.
Rankin, J. R. J., Fayek, A. R. F. A. R., Meade, G. M. G., Haas, C. H. C., and Manseau, A. M. A. (2008). “Initial metrics and pilot program results for measuring the performance of the Canadian construction industry.” Can. J. Civ. Eng., 35(9), 894–907.
Richard, P. J., Devinney, T. M., Yip, G. S., and Johnson, G. (2009). “Measuring organizational performance: Towards methodological best practice.” J. Manage., 35(3), 718–804.
Scheel, H. (2000). EMS: Efficiency measurement system user’s manual, Operations Research and Wirtschaftsinsformatik, Univ. of Dortmund, Dortmund, Germany.
Smirlis, Y. G., Maragos, E. K., and Despotis, D. K. (2006). “Data envelopment analysis with missing values: An interval DEA approach.” Appl. Math. Comput., 177(1), 1–10.
The KPI Working Group (2000). “KPI Report for the Minister for Construction.” Dept. of the Environment, Transport and the Regions, London, UK.
Tsolas, I. (2012). “Construction project monitoring by means of RAM-based composite indicators.” J. Oper. Res. Soc., 64(8), 1291–1297.
Tsolas, I. E. (2011). “Modelling profitability and effectiveness of Greek-listed construction firms: An integrated DEA and ratio analysis.” Constr. Manage. Econ., 29(8), 795–807.
Venkatraman, N., and Grant, J. H. (1986). “Construct measurement in organizational strategy research: A critique and proposal.” Acad. Manage. Rev., 11(1), 71–87.
Venkatraman, N., and Ramanujam, V. (1986). “Measurement of business performance in strategy research: A comparison of approaches.” Acad. Manage. Rev., 11(4), 801–814.
Yip, G. S., Devinney, T. M., and Johnson, G. (2009). “Measuring long term superior performance: The UK’s long-term superior performers 1984–2003.” Long Range Plann., 42(3), 390–413.
Yu, I., Kim, K., Jung, Y., and Chin, S. (2007). “Comparable performance measurement system for construction companies.” J. Manage. Eng., 23(3), 131–139.
Zhu, J. (2003). Quantitative models for performance evaluation and benchmarking: data envelopment analysis with spreadsheets and DEA excel solver, Kluwer, Dordrecht.
Information & Authors
Information
Published In
Journal of Construction Engineering and Management
Volume 140 • Issue 2 • February 2014
Copyright
© 2013 American Society of Civil Engineers.
History
Received: Oct 10, 2012
Accepted: Jul 19, 2013
Published online: Sep 13, 2013
Published in print: Feb 1, 2014
Discussion open until: Feb 13, 2014
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.