Enterprise relationship management, operating condition dynamics, and the relevance of non-financial information for management decisions

This study employs a system dynamics approach to examine the time-series of incremental profits achievable by incorporating a chain of non-financial measures into the internal decision-making process as several conditions change. The profitability model is based on enterprise relationship management concepts that posit a cause-and-effect chain from employee behavior to customer behavior to profits. Conditions include (1) the number of periods (or time-lag) for changes to affect financial performance, (2) measurement error of non-financials, and (3) product demand volatility. The research also investigates how the benefits change when non-financial measures are used with varying frequency in decision-making.; Simulation results show that integrating employee satisfaction and customer satisfaction measures into the decision process can generate higher profits than basing decisions on financial measures alone, because integration improves the timing of managerial expenditure decisions and reduces the variability of the decision environment. The financial benefits, however, are affected by a variety of factors including how managers incorporate the non-financials into decision-making. Specifically, non financial measures are less beneficial when they are measured infrequently or when only a subset of the relevant measures is used.; Variation in operating conditions also greatly influences the magnitude and timing of the financial benefits. When demand is volatile, firm performance improves because non-financial measures help determine if demand changes are due to changes in (more) controllable factors, such as employee satisfaction and customer satisfaction, or due to changes in uncontrollable factors, such as a recession. On the other hand, measurement error as well as unpredictable satisfaction shocks reduce the benefits. As the time-lag grows longer, using non-financial measures improves financial performance but increases the length of time required to see the positive effects. In fact, operating and financial results decrease before rapidly increasing. Thus, the longer a firm has used non-financial measures in decision-making, the higher the probability that the non-financials are positively influencing performance.