Most of us discuss some form of performance on a regular basis. When we talk about our automobiles, sports teams, or even retirement accounts, performance forms the basis of the conversation. In our minds, there is typically a standard we measure actual outcomes against which the results signifies the value of the effort or investment. The difference between our expectation and the outcome determines the perceived level of performance.
The examination of organizational performance is not different. It compares the actual results of the organization to the intended results (goals) or capability (resource inputs). Given that organizational performance is primary concern of the study of management, considerable research has been done on what is performance, how should it be measured, and how can it be improved. One of the most influential and widely used methods of assessing performance pertains to the Balanced Scorecard.
Following the 1992 Harvard Business Review article by Kaplan and Norton, organizations began defining and measuring organizational performance based on a scorecard approach. Kaplan and Norton building on previous work on the multi-dimensionality of performance proposed four dimensions that relate to performance:
- Financial: encourages the identification of a few relevant high-level financial measures that answer to the question “How do we look to shareholders?”
- Customer: encourages the identification of measures that answer the question “How do customers see us?”
- Internal business processes: encourages the identification of measures that answer the question “What must we excel at?”
- Learning and growth: encourages the identification of measures that answer the question “Can we continue to improve and create value?”
Their work has made a scorecard a common part of the management lexicon and an important tool in managing organizations. Five years after their article, Kurtzman in his 1997 Fortune article “Is your company off course? Now you can find out why” found that 64 percent of the firms he surveyed were measuring performance from a Balanced Scorecard methodology.
More recently, Pierre J. Richard, Timothy M. Devinney, George S. Yip, Gerry Johnson in their 2009 Journal of Management article entitled “Measuring Organizational Performance: Towards Methodological Best Practice” discussed three core performance outcome areas: financial performance (profits, return on assets, return on investment, etc.); product market performance (sales, market share, etc.); and shareholder return (total shareholder return, economic value added, etc.). Their work clearly demonstrates the continued commitment to a multidimensional and results-oriented to assessing performance.
When examining the work of the last 20 years, there is strong evidence that supports the precepts of the balanced, yet multidimensional approach. While most organizations have adopted financial and non-financial indicators of organizational performance, there is opportunity to further refine the measures. Figure 1 captures an alternative concept of organizational performance. The four factors related to overall organizational performance include:
- Cost management: includes measure that relate to keeping costs low in facets of the operation and maximizing resources
- Process management: relates to if the most efficient, yet effective processes are being utilized to produced desired products and services
- Adaptability: incorporates the organizations ability to adapt to environmental factors (administrative, economic, social, and technological)
- Product effectiveness: encompasses the organization’s alignment of its products and services to the marketplace’s needs and wants.