What is Organisational Performance?
A very simple question, yet it is not easy to define, primarily as we focus on several elements introduced by the concept of Intentional Organisation.
defines Organisational Performance as
the actual output or results of an organization as measured against its intended outputs (or goals and objectives)
This definition, widely adopted as a baseline, concentrates a lot on the output, which is a general approach in the description of performance.
A Complex Definition
In a paper dated 2009, Prof. Pierre Richard et al.
, analysed the research background and definitions existing in management literature on organisational performance, underlining that it “is one of the most important constructs in management research”.
Their research focused on over 720 articles and ended up conceptualising two specific concepts:
Organizational performance encompasses three specific areas of firm outcomes: (a) financial performance (profits, return on assets, return on investment, etc.); (b) product market performance (sales, market share, etc.); and © shareholder return (total shareholder return, economic value added, etc.).
Organizational effectiveness is broader and captures organizational performance plus the plethora of internal performance outcomes normally associated with more efficient or effective operations and other external measures that relate to considerations that are broader than those simply associated with economic valuation (either by shareholders, managers, or customers), such as corporate social responsibility.
What they found is that there is an assortment of points of view weighing in on the definition of Organisational Performance, and it is not possible to find one unique meaning capable to satisfy them all. Their analysis brought several implications:
Implication 1: Measuring performance requires weighing the relevance of performance to focal stakeholders.
In our proposed model, this means focusing on the Ecosystem to understand the key stakeholders in our framework of reference. For many years the equation performance = profit highlighted the idea that the primary stakeholder to please was the shareholder (primarily through Friedman’s thesis
). With the developing theory of Stakeholder Capitalism
, which is getting traction today, the question becomes much broader in terms of how you define performance then
Implication 2: Measurement of performance must take into account heterogeneity of environments, strategies, and management practices.
This is an essential element to consider because any form of performance measurement is influenced by the tools we use to measure the performance itself. As well as management strategies or also expectations from some stakeholders. Amazon has been able not to produce profits for many years, still enjoying high market valuations, while many traditional retailers suffered whenever their revenues failed to cover costs.
Implication 3: Measurement of performance requires an understanding of the time series properties relating organizational activity to performance.
Think about a simple example. In many organisations, performance is managed linked to the budgeting process. I.e. it is evaluated against a plan of inputs/outputs (this can be quickly reviewed in the incentives that organisations have in place or in the way also financial markets react, not on absolute performance measures, but instead on the distance between forecasts and planned budgets).
The Blind Men and the Elephant
Therefore, understanding Organisational Performance can be described as an almost impossible task. The ancient parable of The Blind Men and an Elephant
comes to mind.