Keep the customer satisfied — especially in competitive markets

May 7, 2007 -- Success isn't always measured in dollars and cents. But does a company's non-financial performance measures reveal anything about the future bottom line? That's the question Raj Mashruwala at the Olin School of Business at Washington University in St. Louis addressed with a colleague in a recent study. The finding: there's definitely a link — but only when the competition is stiff.

Taking data from more than 800 stores of a retail chain, Mashruwala studied the company's earnings and its measures of employee and customer satisfaction to determine if those non-financial measures are indicators of the company's future financial performance. Previous studies have had mixed results, so Mashruwala and Rajiv D. Banker, a Temple University professor, focused on the role that competition plays in connecting non-financial and financial measures.

"The study is significant because there has always been an assumption that if a company's non-financial performance is high, then the company's financial situation must also be doing well," said Mashruwala, assistant professor of accounting. "Our study shows that emphasizing non-financial measures may make sense in locations with high levels of competition. But the same may not be true where competition is limited — where customers have fewer choices of where to shop and employees have fewer options for finding other retail jobs."

In urban areas, where there is intense competition for customers as well as employees, the level of customer and employee satisfaction does predict the level of the store's profitability, Mashruwala said. In contrast, in rural areas, where competition is low, it probably doesn't make sense for retailers to spend resources on improving employee or customer satisfaction.

"The findings make the case for the managers' inclusion of non-financial measures in their reporting system in high-competition areas. Without a formalized monitoring system, information may only be obtained in an ad hoc, qualitative, inconsistent and costly manner," said Mashruwala.

The study will be published in Contemporary Accounting Research in the fall.

Professor Mashruwala is available for live or taped interviews using Washington University's free VYVX or ISDN lines.