The Moderating Role of Competition in the Relationship between Nonfinancial Measures and Future Financial Performance

The mixed results from earlier studies examining the links between nonfinancial measures and financial performance suggest that contextual variables may moderate these relationships. We use data from more than 800 stores of a retail chain to assess whether the relationship between nonfinancial measures such as employee satisfaction and customer satisfaction, and financial performance is influenced by the competitive characteristics of retail store locations. We model and estimate the relationship between employee satisfaction, customer satisfaction and earnings, controlling for past earnings to evaluate whether these nonfinancial measures are lead indicators of financial performance. In doing so, we examine the role of competition as a moderating variable in these relationships. We find that nonfinancial measures have significant incremental information content in predicting future store profitability only in the high-competition urban locations. In additional tests we estimate whether these nonfinancial measures are correlated with subjective information that senior management implicitly relies on when evaluating the performance of store managers and selecting stores for closure. The study underscores the importance of understanding the context when using nonfinancial measures as an integral part of the management control system