Managers are concerned with organizational performance–the accumulated end results of all the organization’s work processes and activities. It’s a complex but important concept, and managers need to understand the factors that contribute to high organizational performance. After all, they don’t want (or intend) to manage their way to mediocre performance. They want their organizations, work units, or work groups to achieve high levels of performance, no matter what mission, strategies, or goals are being pursued.
Managers measure and control organizational performance because it leads to better asset management, to an increased ability to provide customer value, and to improved measures of organizational knowledge. In addition, measures of organizational performance do have an impact on an organization’s reputation. Managers at high-performing companies do–they manage the organizational assets in ways that exploit their value. Asset management is the process of acquiring, managing, renewing, and disposing of assets as needed, and of designing business models to take advantage of the value from these assets. It’s not just the top-level managers who are concerned with asset management. Managers at all organizational levels and in all work areas manage their available assets–people, information, equipment, and so forth–by making decisions that they hope will lead to high levels of performance. Because achieving high levels of organizational performance is important in both the short run and long run, managers look for ways to better manage their assets so that they look good on the key performance measures used by both internal and external evaluators.
- Increased ability to provide customer value: Providing value to customers is important for organizations. If customers aren’t receiving something of value from their interactions with organizations, they’ll look elsewhere. Managers should monitor how well they’re providing customer value, and they can do that when they measure performance.
- Impact on organizational reputation: You know that your personal reputation is important in what others think of you. It influences whether they will ask you for advice, listen to what you have to say, or trust you to complete assigned tasks. Organizations strive to have good reputations, as well. They want others–customers, suppliers, competitors, community, and so forth–to think highly off them. The advantages of a strong correlation between an organization’s financial performance and its reputation. Which leads to the other? It’s not always clear which comes first, but we do know it’s difficult to have one without the other. In fact, a study of reputation and financial performance showed a strong correlation between good reputation and strong financial measures such as earnings growth and total return.
- Organizational knowledge: In learning organizations, organizational knowledge is recognized as a valuable asset, just like cash, equipment, or raw materials. What is Organizational knowledge? It’s knowledge that’s created by means of collaborative information sharing and social interaction that lead to organizational members taking appropriate actions. The key to valuable organizational knowledge is this connection between information and action. Organizational employees must share what they know and use that knowledge to make changes in work practices, processes, or products to achieve high levels of organizational performance.
Measures of Organizational Performance
There are three ways of measuring organizational performance. Generally applied measures are (1) Productivity, (2) Organizational Effectiveness, and (3) Organizational Ranking.
Peter F. Drucker the well-known management guru was of the view that an organization’s employees need to see the connection between what they do and the outcomes. He said, “The focus of the organization must be on performance… The spirit of organization is high performance standards, for the group as well as for each individual.” But before employees can see this connection and work toward achieving high performance, managers need to specify the performance outcomes that will be measured. The most frequently used organizational performance measures include organizational productivity, organizational effectiveness, and industry rankings.
- Productivity is defined as the overall output of goods or services produced divided by the inputs needed to generate that output. Organizations strive to be productive. They want the most goods and services produced using the least amount of inputs. Output is measured by the sales revenue an organization receives when those goods and services are sold (selling price x number sold). Input is measured by the costs of acquiring and transforming the organizational resources into the outputs. It’s management’s job to increase productivity by reducing the input cost and increasing the output price (selling price). Doing this means being more efficient in performing the organization’s work activities. So, organizational productivity becomes a measure of how efficiently employees do their work.
- Organizational Effectiveness is a measure of how appropriate organizational goals are and how well an organization is achieving those goals. It’s a common performance measure used by managers. Other descriptions of organizational effectiveness have been suggested by management researchers. For instance, the systems resource model or organizational effectiveness proposes that effectiveness is measured by the organization’s ability to exploit its environment in acquiring scarce and valued resources. The process model emphasizes the transformation processes of the organization and how well the organization converts inputs into desired outputs. Then, finally, the multiple constituencies model says that several different effectiveness measures should be used, reflecting the different criteria of the organization’s constituencies. For example, customers, advocacy groups, suppliers, and security analysts each would have their own measures of how well the organization was performing. Although each of these different effectiveness models may have merit in measuring certain aspects of organizational effectiveness, the bottom line for managers continues to be how well the organization accomplishes its goals. That’s what guides managerial decisions in designing strategies, work processes, and work activities, and in coordinating the work of employees.
- Ranking of Industries is determined by specific performance measures. For instance, Fortune’s Top Performing Companies of the Fortune 500 are determined by financial results including, profits, return on revenue, and return on shareholder’s equity; growth in profits for 1 year, 5 years, and 10 years; and revenues per employee, revenues per dollar of assets, and revenues per dollar of equity. Industry Week’s Best Managed Plants are determined by organizational accomplishments and demonstrations of superior management skills in the areas of financial performance, innovation, leadership, globalization, alliances and partnerships, employee benefits and education, and community involvement. Thus, different agencies apply different parameters or measures through which performance of organizations is decided to rank the Industry/organization.