2.3 Evaluation of company performance - mastery of strategic management (2023)

learning goals

1. Understand the complexities involved in evaluating business performance.
2. Get to know all dimensions of the Balanced Scorecard Framework.
3. Find out what is meant by a "triple bottom line".

Organizational performance: A complex concept

organizational performancerefers to how well an organization is able to achieve its vision, mission and goals. Evaluation of organizational performance is an essential aspect of strategic management. Leaders need to know how well their organizations are performing to identify what strategic changes, if any, they need to make. However, performance is a very complex concept and much attention needs to be paid to how it is evaluated.

Two important considerations are (1) performance measures and (2) performance references (Figure 2.5 “How organizations and individuals can use financial performance indicators and references”). Aperformance measurementis a metric by which organizations can be measured. Most executives examine metrics like earnings, stock prices, and sales to better understand how well their organizations compete in the marketplace. But these metrics only provide a small glimpse into organizational performance. Performance references are also needed to assess whether an organization is doing well. APerformance Advisoris a benchmark used to understand the value of an organization along a key performance indicator. For example, suppose a company has a 20 percent profit margin in 2011. On the surface, that sounds great. But suppose that the company's 2010 profit margin was 35 percent and the average profit margin for all companies in the industry for 2011 was 40 percent. Relative to these two benchmarks, the company's performance in 2011 gives cause for concern.

Using a variety of performance metrics and references is valuable because different metrics and references provide different information about how an organization is functioning. The parable of the blind man and the elephant, popularized in Western cultures in the 19th century by a poem by John Godfrey Saxe, is helpful in understanding the complexities involved in measuring organizational performance. As the story goes, six blind men set out to "see" what an elephant looked like. The first man touched the elephant's side, believing the animal to be like a great wall. The second felt the tusks and thought elephants must be like spears. When the third man felt the trunk, he thought it was some kind of snake. The fourth man felt a limb and thought it was like a tree trunk. The fifth, examining one ear, thought it was like a fan. The sixth, touching the tail, thought it was like a rope. If the men didn't share their differing impressions, they would all be partially right but wrong about what ultimately counts.

This story responds to the challenge of understanding the multidimensional nature of organizational performance, as different metrics and benchmarks can tell a different story about organizational performance. For example thewealth500 lists the top-grossing US companies. However, these companies are generally not the strongest performers in terms of stock price growth, in part because they are so large that it is difficult to make major improvements. In the late 1990s, some Internet-centric companies experienced exceptional growth in sales and share price, but reported losses rather than profits. Many investors in these companies, simply fixated on a single performance metric -- revenue growth -- suffered severe losses as the stock market's attention turned to earnings and these companies' share prices plummeted.

However, the number of performance measures and references relevant to understanding an organization's performance can be overwhelming. For example, a study of what performance metrics were used in restaurant organizations' annual reports found that 788 different combinations of metrics and references were used within that one industry in a single year (Short & Palmer, 2003). As such, leaders must select a rich but limited set of KPIs and references to focus on.

Die Balanced Scorecard

To organize an organization's key performance indicators, Harvard University Professor Robert Kaplan and Professor David Norton developed a tool called thebalanced scorecard. Using the scorecard helps managers resist the temptation to fixate on financial metrics and instead monitor a variety of key metrics (Table 2.6 "Beyond Profits: Performance measurement with the Balanced Scorecard"). In fact, the idea behind the framework is to create a “balance” between financial metrics and other metrics important to understanding organizational activities that lead to sustainable, long-term performance. The Balanced Scorecard recommends that managers gain an overview of organizational performance by tracking a small number of key metrics, which together reflect four dimensions: (1) finance, (2) customers, (3) internal business processes, and (4) ) learning and growth (Kaplan & Norton, 1992).

financial measures

Financial KPIs relate to organizational effectiveness and profit. Examples include financial metrics such as return on assets, return on equity, and return on investment. Other common financial metrics are earnings and stock prices. Such actions help answer the key question, "How do we view shareholders?"

Financial performance metrics are commonly articulated and emphasized in an organization's annual report to shareholders. To provide context, such metrics should be objective and coupled with meaningful references such as the company's past performance. For example, Starbucks' 2009 annual report highlights the company's performance in terms of net sales, operating income, and cash flow over a five-year period.

customer actions

Customer performance measurements relate to customer acquisition, satisfaction and retention. These measures provide information about the key question "How do customers see us?". Examples could be the number of new customers and the percentage of repeat customers.

Starbucks understands the importance of repeat customers and has taken a number of steps to keep repeat customers happy and to attract them to their stores. For example, Starbucks rewards regular customers with free drinks and offers free Wi-Fi access to all customers (Miller, 2010). Starbucks also encourages repeat visits by providing cards with codes for free iTunes downloads. The featured songs change regularly, encouraging frequent return visits.

Internal business process measures

Internal business process KPIs relate to organizational efficiency. These measures help answer the key question, “What do we need to excel at?” Examples include the time it takes to produce the organization's goods or deliver a service. The time it takes to develop a new product and bring it to market is another example of this type of measure.

Organizations like Starbucks recognize the importance of such efficiencies to their organization's long-term success, and Starbucks carefully reviews its processes with the goal of reducing order-to-fulfilment time. In a recent example, Starbucks efficiency experts asked their employees to assemble a Mr. Potato Head to understand how the job could be done faster (Jargon, 2009). The goal of this exercise was to help Starbucks employees in general keep up with the speed of the company's top performers, who have an average time per order of 25 seconds.

learning and growth activities

Learning and growth measures of performance relate to the future. Such actions provide insights to say to the organization, “Can we keep improving and creating value?” Learning and growth actions focus on innovation and proceed with the understanding that strategies change over time. Consequently, new ways to add value must be developed as the organization continues to adapt to an evolving environment. An example of a measure of learning and growth is the number of new skills employees learn each year.

One way Starbucks encourages its employees to acquire skills that may benefit both the company and individuals in the future is through its tuition reimbursement program. Eligible are employees who have worked at Starbucks for more than one year. Starbucks hopes that the knowledge gained during a college degree will give employees the skills to create innovations that will benefit the company in the future. Another benefit of this program is that it helps Starbucks reward and retain high-performing employees.

Performance measurement with the Triple Bottom Line

Ralph Waldo Emerson once said, "Good work is the result of good deeds. That's what capitalism is all about.” While the Balanced Scorecard is a popular framework to help leaders understand an organization's performance, other frameworks emphasize areas such as social responsibility. One such framework thattriple bottom line, emphasizes the three Ps ofPeople(ensuring that the organization's actions are socially responsible), thePlanet(ensuring that organizations act in a way that promotes environmental sustainability) and traditional organizationprofits. This term was introduced in the early 1980s but did not attract much attention until the late 1990s.

In the case of Starbucks, the company has demonstrated the importance it places on the planet by creating an environmental mission statement (“Starbucks is committed to environmental leadership in all facets of our business”) in addition to its overall mission (Starbucks, 2011). . Referring to the “People” dimension of the Triple Bottom Line, Starbucks strives to purchase coffee beans that are harvested from farmers who work under decent conditions and receive decent wages. Of course, the company also works profitably.