LESSON 2

ORGANIZATIONAL PERFORMANCE

TOPICS
1. Organizational Performance
 Performance Measures
 Performance Measurement
 Performance Management
2. Efficiency vs. Effectiveness

LEARNING OUTCOMES
At the end of the lesson, you should be able to:
1. Determine the organization’s performance through performance measures,
performance measurement and performance management;
2. Comprehend on the complexities associated with assessing organizational
performance; and
3. Differentiate efficiency and effectiveness.

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 TOPIC 1: ORGANIZATIONAL PERFORMANCE

Organizational performance is measured for different levels of hierarchy and

can be assessed for individuals, groups, and the entire organization as a whole (Knies,
Jacobsen and Tummers, 2016). The measures for organizational performance depend on
who is asking the questions and why they need to measure performance. Some of the
reasons why professionals need to measure and report organizational performance are to
justify the valid use of investors’ money, guide managerial decision making by pointing
out the trouble areas, compare performances of different functions, projects, and people,
and to exercise control. Therefore, the definition of organizational performance can
change as per the use it is put to.

1. Performance measures
These are designed to measure systems of service and are derived from
guidelines. Data that is defined into specific measurable elements provides an
organization with a meter to measure the quality of its service or products.
Performance measures are a metrics along which organizations can be gauged.
Most executives, investor 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 measures should be distinguished from guidelines. Guidelines are

systemically-developed statements to assist employees and customers in making decisions
about appropriate services or products to be given to customers. Attributes of good
guidelines include validity, reliability, reproducibility, applicability, clarity, multidisciplinary
process, review of evidence and documentation. (1) Performance measures provide an
indication of an organization's performance in relation to a specified process or outcome.
Guidelines that outline the expectations of results. Because performance measures and
standards, each serve a different purpose, they are not always identical.

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. Suppose, for example, that a firm
has a profit margin of 20 percent in 2011. This might sound great on the surface. But
suppose that the firm’s profit margin the year before, in 2010, was 35 percent and that the
average profit margin across all firms in the industry for 2011 was 40 percent. Viewed
relative to these two referents, the firm’s 2011 performance is cause for concern.

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Figure 2. Financial performance measures and referents for organizations and individuals

Performance measures and referents can be done through the following:

1. Balance Scorecard
2. Triple Bottom Line

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.

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Financial Measures/Focus
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. For example, Starbucks’s 2009
annual report highlights the firm’s performance in terms of net revenue, operating
income, and cash flow over a five-year period.

Customer Measures/Focus
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 relate 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,

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 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.

Triple Bottom Line

Ralph Waldo Emerson once noted, “Doing well is the result of doing good. That’s
what capitalism is all about.” While the balanced scorecard provides a popular
framework to help executives understand an organization’s performance, other
frameworks highlight areas such as social responsibility. One such framework, the triple
bottom line, emphasizes the three Ps of people (making sure that the actions of the
organization are socially responsible), the planet (making sure organizations act in a way
that promotes environmental sustainability), and traditional organization profits. This
notion was introduced in the early 1980s but did not attract much attention until the late
1990s.

In the case of Starbucks, the firm has made clear the importance it attaches to the
planet by creating an environmental mission statement (“Starbucks is committed to a role
of environmental leadership in all facets of our business”) in addition to its overall
mission. In terms of the “people” dimension of the triple bottom line, Starbucks strives to
purchase coffee beans harvested by farmers who work under humane conditions and are
paid reasonable wages. The firm works to be profitable as well, of course.

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.

2. Performance Measurement
Performance measurement is a process by which an organization monitors
important aspects of its programs, systems, and processes. Data is collected to reflect how
its processes are working, and that information is used to drive an organization’s
decisions over time. Typically, performance is measured and compared to organizational
goals and objectives. Results of performance measurement provide information on how
an organization’s current programs are working and how its resources can be allocated to
optimize the programs’ efficiencies and effectiveness.

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Why Does an Organization Need to Measure Performance?
Performance measurement provides a reliable process to determine if an
organization’s current system is working well. Also in today’s economy, there is a
demand for transparency and increasing scrutiny of an organization’s business practices.
These reasons promote an organization’s use of process and outcome data as a means to
demonstrate its performance. There are other typical circumstances of why an
organization may choose to measure its performance, such as:
 Distinguish what appears to be happening from what is really happening;
 Establish a baseline; i.e., measure before improvements are made;
 Make decisions based on solid evidence;
 Demonstrate that changes lead to improvements;
 Allow performance comparisons across sites;
 Monitor process changes to ensure improvements are sustained over time; and
 Recognize improved performance.

3. Performance Management
Performance management is a process for setting goals and regularly checking
progress toward achieving those goals. It includes activities that ensure organizational
goals are consistently met in an effective and efficient manner. The overall goal of
performance management is to ensure that an organization and its subsystems (processes,
departments, teams, etc.), are optimally working together to achieve the results desired by
the organization. Performance management has a wide variety of applications, such as,
staff performance and business performance. Because performance management strives
to align all the subsystems to achieve results, the focus of performance management
should also affect the management of an organization’s performance overall. Fig. 2
below shows the process of the performance management.

Figure 3. Performance Management

Source: HRTrendOnline

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 TOPIC 2: EFFICIENCY vs. EFFECTIVENESS

Organizational performance stimulation has always been a priority in private as

well as in public sectors, since it is directly associated with the value creation of the
entity. Organizations are constantly striving for better results, influence and competitive
advantage. However, most organizations are struggling to get it right. Management is not
always aware of the adequate assessment of their organizational performance. Plethora of
models, frameworks or methods for conducting entities valuation creates unnecessary
stress for management to select the path that is congruent with organizations believes and
cultural philosophy (Richard, 2009). Common measures of the organizational
performance are effectiveness and efficiency (Bounds at all, 2005; Robbins, 2000).
Within strategic management, organizational success if often expressed in terms
of efficiency and effectiveness, though in reality such measures are more complex than
often expected. For example, in many production oriented businesses that manufacture or
produce tangible goods, the measure of efficiency may be a direct almost mathematical
relationship between inputs and outputs as discussed above and therefore easily
measured. In many service industries, this relationship is not so clear cut and
consequently our ability to accurately measure efficiency in a simple relationship
between inputs and outputs is difficult or the result meaningless.

Organizational efficiency is a measure of the relationship between

organizational inputs (resources) and outputs (goods and services provided) and in simple
terms the more output we can achieve with a given amount of inputs or resources, the
more efficient we are. For example, if we can make 100 cars with X value of resources
we are more efficient than someone else who only makes 80 identical cars with the same
value of resources. Efficiency relates to the term productivity and a major focus of all
managers is to maintain or improve the level of productivity of their work unit and
organization.
Organizational effectiveness relates to goal attainment. An individual, group or
an organization, that achieves their goals are said to be effective, and have used their
resources to achieve an effective outcome. But does this also mean they have used their
resources efficiently? The figure below shows how efficiency differ with the
effectiveness.

Figure 4. Chain of Effects

Effectiveness oriented companies are concerned with output, sales, quality,

creation of value added, innovation, cost reduction. It measures the degree to which a
business achieves its goals or the way outputs interact with the economic and social
environment.
Efficiency measures relationship between inputs and outputs or how successfully
the inputs have been transformed into outputs (Low, 2000). To maximize the output

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Porter’s Total Productive Maintenance system suggests the elimination of six losses,
which are: (1) reduced yield – from start up to stable production; (2) process defects; (3)
reduced speed; (4) idling and minor stoppages; (5) set-up and adjustment; and (6)
equipment failure. The fewer the inputs used to generate outputs, the greater the
efficiency.

Effective yet inefficient organization?

Organizations can be managed effectively, yet, due to the poor operational
management, the entity will be performing inefficiently (Karlaftis, 2004). Inefficient and
ineffective organization is set for an expensive failure. In such case there is no proper
resources allocation policy and there is no organizational perspective of their future.
Organization has leadership issues, high employee turnover rate and no clear vision
where the organization will be standing tomorrow. If the organization is able to manage
its resources effectively, yet it does not realize its long term goals, it will bankrupt
slowly. This strategy is cost efficient but it is not innovative and creates no value.
Management has no clear customer oriented policy set in place, which leads to constant
focus on efficiency. Such organization uses all its efforts to implement strict resource
allocation policy, which translates into strict staff cost control, training cost reduction or
even elimination. These actions lead to low morale of the organization high turnover rate
of the employees and low customer satisfaction. Efficient but ineffective organization
cannot be competitive and it will bankrupt eventually. To avoid this to happen, the
characteristics of efficiency and effectiveness were shown below.

Figure 5. Characteristics of Effectiveness and Efficiency

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 Activity 1 – PICTURE OBSERVATION AND ANALYSIS

See the picture given below which is based on the story of the blind men and the
elephant. In understanding the complexities of Organizational performance, kindly make
an observation and analyze what is being told by the seen.

ASSESSMENT

Numerical
Description
Score
The student elicits the correct ideas from the readings and
video, shows evidence of internalizing these, and
4
consistently contributes additional thoughts to the core
idea.
The student not only elicits the correct ideas from the
3 readings and video but also shows evidence of internalizing
these.
The student is able to elicit the ideas and concepts from
2 the readings and videos and shows correct understanding
of these.
The student is able to elicit the ideas and concepts from
1
the readings and video but shows erroneous.
The student is unable to elicit the ideas and concepts from
0 the reading and video indicating that s/he has not read the
prescribed reading or watched the video.

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 Activity 2 – GIVE WHAT IS ASKED
Give your answer in each question given below.

1. How might you apply the balanced scorecard framework to measure performance of
your college or university?
2. Identify a measurable example of each of the balanced scorecard dimensions other than
the examples offered in this section.
3. Identify a mission statement from an organization that emphasizes each of the elements
of the triple bottom line.

ASSESSMENT

Rubrics
Originality 20%
Content 50%
Organization 30%
TOTAL 100%

Activity 3: State your insight!

Give your insight to the statement of Bill Gates below. State your answer in 150 words or
below.
“The first rule of any technology used in a business is that automation applied to an
efficient operation will magnify the efficiency. The second is that automation applied to
an inefficient operation will magnify the inefficiency.”
— BILL GATES, FOUNDER AND CHAIRMAN OF MICROSOFT

ASSESSMENT
Numerical
Description
Score
The student elicits the correct ideas from the readings and
video, shows evidence of internalizing these, and
4
consistently contributes additional thoughts to the core
idea.
The student not only elicits the correct ideas from the
3 readings and video but also shows evidence of internalizing
these.
The student is able to elicit the ideas and concepts from
2 the readings and videos and shows correct understanding
of these.
The student is able to elicit the ideas and concepts from
1
the readings and video but shows erroneous.
The student is unable to elicit the ideas and concepts from
0 the reading and video indicating that s/he has not read the
prescribed reading or watched the video.

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Activity 4: Case Analysis

ASSESSMENT
Numerical
Description
Score
The student elicits the correct ideas from the readings
and video, shows evidence of internalizing these, and
4
consistently contributes additional thoughts to the core
idea.
The student not only elicits the correct ideas from the
3 readings and video but also shows evidence of
internalizing these.
The student is able to elicit the ideas and concepts from
2 the readings and videos and shows correct
understanding of these.
The student is able to elicit the ideas and concepts from
1
the readings and video but shows erroneous.
The student is unable to elicit the ideas and concepts
0 from the reading and video indicating that s/he has not
read the prescribed reading or watched the video.

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