The Intentional Organisation - Issue #36 - Organisational Performance
1. Organisational Performance
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.
Wikipedia 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 (c) 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.
Seven blind men who had never come across an elephant before are put in front of an elephant. Each one of them feels the large mammal by touching one and only one part of the body. Then they describe the animal, interpret a different animal, abstracting knowledge from a particular and partial experience.
Why is it relevant?
Understanding the concept of performance is very relevant from an Intentional Organisation perspective because of some of the elements we have included in our discourse.
An Intentional Organisation defines a Purpose that allows the organisation to establish its Definition of Value. Essentially, through purpose, each organisation can determine how its performance can be evaluated.
The mapping of the Ecosystem allows defining if this value creation is sustainable. For example, will customers buy our products or services? For how long? Will I be able to hire the right talents? How much will it cost me? These are just a few of the questions related to the Ecosystem and the broad sense of sustainability (which essentially anchors us to a long term perspective).
Internally, choosing the right Operating Model will help the organisation define the Value Delivery Chain that will enable performance and Value to be produced.
So, is this about Value Creation?
Yes, this is the critical concept beyond Organisational Performance.
How much Value is the organisational creating?
Answering this same question demands an Intentional Act defining which point of view the Value will be examined. Let's recall a vital principle: Value is in the relationship. We tend to think of Value in terms of financial quantities, but the reality is that Value is always relative to the relationship we're considering.
Organisational Performance therefore becomes the level of congruence that the intentional organisation achieves in the value it exchanges with its ecosystem.
A vital element to consider and that we will be continuing to explore in the coming weeks.
What do you think?
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