ASSESSING ORGANIZATIONAL PERFORMANCE

Assessing organizational performance is a vital aspect of strategic management.

Executives must know how well their organizations are performing to figure out what
strategic changes, if any, to make.

ORGANIZATIONAL PERFORMANCE: A COMPLEX CONCEPT

ORGANIZATIONAL – is the adjective of organization. An organization is an organized
group of individuals with a specific purpose.
PERFORMANCE - is the process of action of performing a function or task we perceive
according to how successfully the people carry out the function.
ORGANIZATIONAL PERFORMANCE - it is how successfully an organized group of
people with a specific purpose performs a function.

Organizational performance refers to how well an organization is doing to reach

its vision, mission, and goals. Performance is a very complex concept, however, and a
lot of attention needs to be paid to how it is assessed. It can be assessed for
individuals, teams, groups, or even the organization as a whole. In other words,
organizational performance can be defined as the actual outputs or results of an
organization as measured and gauged against its intended outputs, goals, and
objectives.
Two important considerations are:
(1) Performance measures and
(2) Performance referent.

Performance measures are metrics along which organizations can be gauged. Most
executives, investors and stakeholders watch and examine measures such as profits,
stock price, and sales in an attempt to better understand how well their organizations
are competing in the market, as well as future predicted results. But these measures
provide just a glimpse of organizational performance.
Performance referents are also needed to assess whether an organization is doing
well. A performance referent is a benchmark or standard used to make sense of an
organization’s standing along a performance measure.
Using a variety of performance measures and referents is valuable because
different measures and referents provide different information about an organization’s
functioning. Strongly managed organizations must develop a deep understanding of
what events or actions support strong(er) performance and then ensure these measure
these as well.
 How Organizations and Individuals Can Use Financial Performance Measures and
Referents

Key Measure for

Types of Measures Key Referent for Organizations
Organizations

Liquidity measure: Helpful for Current ratio A ratio of less than 1.0 suggests
understanding if obligations can be (Current assets ÷ the firm does not have enough
paid when due. current liabilities) cash to pay its bills.

Competitors’ debt-to-equity ratios.

Leverage measures: Helpful for
The use of debt varies across
understanding if debt level is too
Debt-to-equity industries. Auto companies, for
high. The term leverage refers to
ratio example, tend to have high debt-
the extent to which borrowed
to-equity because they must build
money is used.
massive factories.

Profitability measures: Helpful for Net income Last year’s net income. An
understanding how much profit, if (income after increase shows the firm’s profits
any, is really being made. taxes) are moving in the right direction.

THE BALANCED SCORECARD

To develop a more predictive set of organization performance measures,
Professor Robert Kaplan and Professor David Norton of Harvard University developed a
tool called the “balanced scorecard.” Using the scorecard helps managers resist the
temptation to fixate on financial measures and instead monitor a diverse set of
important measures. Indeed, the idea behind the framework is to provide a “balance”
between financial measures and other measures that are important for understanding
organizational activities that lead to sustained long-term performance. The balanced
scorecard recommends that managers gain an overview of the organization’s
performance by tracking a small number of key measures that collectively reflect four
dimensions:

1. financial focus,
2. customer focus,
3. internal business process focus, and
4. Learning and growth focus.
Financial Measures

Financial measures of performance relate to organizational effectiveness and

profits. Examples include financial ratios such as return on assets, return on
equity, and return on investment. Other common financial measures include
profits and stock price. Such measures help answer the key question “How
do we look to shareholders?” Such measures have long been of
interest to senior management and investors.

Financial performance measures are commonly articulated and

emphasized within an organization’s annual report to shareholders. To
provide context, such measures should be objective and be
coupled with meaningful referents, such as the firm’s past
performance
Customer Measures
 Customer measures of performance relate to customer attraction, satisfaction,
and retention. These measures provide insight to the key question “How do customers
see us?” Examples might include the number of new customers and the percentage of
repeat customers.

Starbucks realizes the importance of repeat customers and has taken a number
of steps to satisfy and to attract regular visitors to their stores. For example, Starbucks
rewards regular customers with free drinks and offers all customers free Wi-Fi access.
Starbucks also encourages repeat visits by providing cards with codes for free iTunes
downloads. The featured songs change regularly, encouraging frequent repeat visits

Internal Business Process Measures

Internal business process measures of performance relate to

organizational efficiency. These measures help answer the key question “What
must we excel at?” Examples include the time it takes to manufacture the
organization’s good or deliver a service. The time it takes to create a new product
and bring it to market is another example of this type of measure.

Organizations such as Starbucks realize the importance of such efficiency

measures for the long-term success of its organization, and Starbucks
carefully examines its processes with the goal of decreasing order fulfillment
time. In one recent example, Starbucks efficiency experts challenged their
employees to assemble a Mr. Potato Head to understand how work could be
done more quickly. The aim of this exercise was to help Starbucks employees in
general match the speed of the firm’s high performers, who boast an
average time per order of twenty-five seconds.

One key aspect for organizations producing physical goods (as compared to
services) are supply-chain management indicators. Both Walmart and GM are
examples of the increased profits that can result from effective management of the
supply chain through initiatives such as “just-in-time”’ supply-chain management. Of
course, to reduce supply inventory, data must be both timely and accurate (or else you
run out of key parts and the production line stops…). In the 1990s (pre-Internet)
Walmart acquired their own satellite system that allowed them to collect sales by item
and ordered replacement to restock their shelves every eight hours, while GM kept only
enough tires for four hours of car assembly at any one time!

Learning and Growth Measures

Learning and growth measures of performance related to the future. Such

measures provide insight to tell the organization, “Can we continue to improve and
create value?” Learning and growth measures focus on innovation and proceed with an
understanding that strategies change over time. Consequently, developing new ways to
add value will be needed as the organization continues to adapt to an evolving
environment. An example of a learning and growth measure is the number of new skills
learned by employees every year.

One way Starbucks encourages its employees to learn skills that may benefit
both the firm and individuals in the future is through its tuition reimbursement program.
Employees who have worked with Starbucks for more than a year are eligible.
Starbucks hopes that the knowledge acquired while earning a college degree might
provide employees with the skills needed to develop innovations that will benefit the
company in the future. Another benefit of this program is that it helps Starbucks reward
and retain high-achieving employees.

Organizational performance is a multidimensional concept, and wise managers

rely on multiple measures of performance when gauging the success or failure of their
organizations. The balanced scorecard provides a tool to help executives gain a general
understanding of their organization’s current level of achievement across a set of four
important dimensions. The triple bottom line provides another tool to help executives
focus on performance targets beyond profits alone; this approach stresses the
importance of social and environmental outcomes.

ENTREPRENEURIAL ORIENTATION

Is a key concept when executives are crafting strategies in the hopes of doing
something new and exploiting opportunities that other organizations cannot exploit. EO
refers to the processes, practices, and decision-making styles of organizations that act
entrepreneurially. Any organization’s level of EO can be understood by examining how it
stacks up relative to five dimensions:

1. Autonomy, 4. Proactiveness,
2. Competitive aggressiveness, 5. Risk-taking.
3. Innovativeness,
AUTONOMY

 The tendency to bring forth ideas and see them through completion.
 Autonomy affords entrepreneurs the free will and flexibility to develop and
perform entrepreneurial initiatives.
 Entrepreneurial autonomy refers to the capability to make crucial decisions as to
what gets accomplished, how everything gets accomplished, and even when it
gets accomplished, as well as the whole company's business corporate strategy
(Lumpkin et al., 2009).
  Janz and Prasarnphanich (2005) describe autonomy as the extent to which an
individual or group has the freedom and discretion to determine what actions are
required and how best to accomplish them.

EXAMPLE:
Microsoft embraced a huge challenge when developing and launching its
Xbox gaming system to compete with market leaders Nintendo and Sony.

Competitive Aggressiveness

Competitive aggressiveness is the tendency to intensely and directly challenge

competitors rather than trying to avoid them. Aggressive moves can include price-
cutting and increasing spending on marketing, quality, and production capacity. An
example of competitive aggressiveness can be found in any number of “attack ads” in
the political arena. When Justin Trudeau became the leader of the Liberal Party in
Canada, he was subject to ads targeting his judgment and, specifically, recent
comments on the economy, terrorism, and the legalization of marijuana (Maloney,
2014).

Sometimes aggressive moves can backfire. During the 1993 Canadian federal
election, the Progressive Conservative Party produced a televised attack ad against
Jean Chrétien, the Liberal leader. The ad (sometimes referred to as the “face ad”) was
perceived by many as a focus on Chrétien’s facial deformity, caused by Bell’s palsy.
The resulting outcry is considered to be an example of voter backlash from negative
campaigning (Wikipedia, 2014).

Too much aggressiveness can undermine an organization’s success. A small

firm that attacks larger rivals, for example, may find itself on the losing end of a price
war. Establishing a reputation for competitive aggressiveness can damage a firm’s
chances of being invited to join collaborative efforts such as joint ventures and alliances.
In some industries, such as the biotech industry, collaboration is vital because no single
firm has the knowledge and resources needed to develop and deliver new products.
Executives thus must be wary of taking competitive actions that destroy opportunities
for future collaboration.

INNOVATIVENESS

Innovativeness is the tendency to pursue creativity and experimentation. Some

innovations build on existing skills to create incremental improvements, while more
radical innovations require brand-new skills and may make existing skills obsolete.
Either way, innovativeness is aimed at developing new products, services, and
processes. Those organizations that are successful in their innovation efforts tend to
enjoy stronger performance than those that do not.
 For Examples
SpaceX: SpaceX, founded by Elon Musk, is innovative in space technology. They
developed reusable rocket technology, significantly reducing the cost of space
exploration and making it more accessible for future missions.
Retail: Amazon Go stores employ innovative technology, allowing customers to
shop without checkout lines. Sensors and cameras track items taken from shelves,
automatically charging customers as they exit the store.
Social Media: Platforms like Instagram and Snapchat introduced innovative
features like Stories, enabling users to share temporary photos and videos, and
changing the way people interact and share content online.

TYPES OF INNOVATIVENESS

1. Technological Innovativeness:
• Smartphones with Foldable Screens: Devices like Samsung Galaxy Fold
introduced a new form factor, revolutionizing the smartphone industry.
2. Product Innovativeness:
• Tesla Electric Cars: Tesla's electric cars combined cutting-edge technology,
performance, and sustainability, reshaping the automobile market.
3. Process Innovativeness:
• Lean Manufacturing: Toyota pioneered lean manufacturing techniques,
optimizing production processes to reduce waste and increase efficiency.
4. Service Innovativeness:
• Netflix Streaming Service: Netflix transformed the way people consume
entertainment by offering a convenient, on-demand streaming service.
5. Business Model Innovativeness:
• Subscription Box Services: Companies like Birchbox and Blue Apron disrupted
traditional retail by offering subscription-based models, delivering curated products to
customers regularly.

6. Social Innovativeness:
• Microfinance Institutions: Organizations like Grameen Bank provide financial
services to the underprivileged, empowering communities and fostering economic
development.
7. Marketing Innovativeness:
• Viral Marketing Campaigns: Companies create innovative and shareable
content, leveraging social media to reach a broader audience quickly.
8. Sustainable Innovativeness:
• Solar Energy Solutions: Advancements in solar technology have led to
innovative solar panels and energy storage systems, promoting sustainable energy
practices.
9. Design Innovativeness:
• Apple Products: Apple is known for its innovative and sleek product designs,
setting trends in the consumer electronics industry.
10. Open Innovation:
• LEGO Ideas Platform: LEGO allows fans to submit their own designs, and if
they garner enough support, LEGO manufactures and sells the sets, embracing ideas
from their community.

PROACTIVENESS

Proactiveness - is the tendency to anticipate and act on future needs rather than
reacting to events as they arise. An organization that has an opportunity-seeking
mindset is proactive. Using proactive methods in business entails anticipating changes
in the external environment, forecasting future problems, and organizing and putting into
action countermeasures before the problems arise. This method differs from reactive
tactics, which react to events after they have already occurred.

Risk Taking

- refers to the tendency to engage in bold rather than cautious actions.

- also the process of identifying, evaluating, mitigating, and trying out potential
opportunities and strategies that may help you build or grow your business but could
also lead to personal or professional loss.
Examples of Risk-taking in Entrepreneurship:

Starbucks made a risky move in 2009 when it introduced a new instant coffee
called VIA Ready Brew. Instant coffee has long been viewed by many coffee drinkers as
a bland drink, but Starbucks decided that the opportunity to distribute its product in a
different “make-at-home” format was worth the risk of associating its brand name with
instant coffee. Starbucks Coffee Company has been committed to ethically sourcing
and roasting the highest quality Arabica coffee in the world. Today, with stores around
the globe, the company is the premier roaster and retailer of specialty coffee in the
world. Through their unwavering commitment to excellence and guiding principles, they
bring the unique Starbucks Experience to life for every customer through every cup.
Jeroen van der Veer, CEO of Royal Dutch Shell PLC, entered a risky energy deal in
Russia’s Far East. At the time, van der Veer conceded that it was too early to know
whether the move would be successful. The prices of crude oil, natural gas, oil products
and chemicals can be volatile and are affected by supply and demand, both globally
and regionally. Macroeconomic, geopolitical and technological uncertainties can also
affect production costs and demand for the products. Just six months later, however,
customers in Japan, Korea, and the United States had purchased all the natural gas
expected to be produced there for the next twenty years. If political instabilities in
Russia and challenges in pipeline construction do not dampen returns, Shell stands to
post a hefty profit from its 27.5 percent stake in the venture.

Building an entrepreneurial orientation can be valuable to organizations and individuals

alike in identifying and seizing new opportunities.

Entrepreneurial orientation consists of five dimensions:

(1) Autonomy - is defined as a business owner/founder having decision rights

regarding what work is done, when it is done, and how it is done.
(2) Competitive aggressiveness - is the tendency to intensely and directly challenge
competitors rather than trying to avoid them.
(3) Innovativeness - is the practice of establishing creating new business ideas
intending to generate profit, assist their community and accomplish company goals.
(4) Proactiveness - refers to the propensity of human agents to take action in the face
of external constraints.
(5) Risk taking - the willingness and ability of entrepreneurs to make decisions and
take actions that involve uncertainty, potential loss, and the possibility of failure.