Strategic Management - Performance Issue

Organizational performance is a multidimensional concept. For businesses, organizational performance means how much an organization matches its vision, mission, and goals. Assessment of organizational performance is core to strategic management. Managers must understand organization’s performance to learn whether strategic changes, if any, are needed.

Two important considerations for assessment are −

• Performance measures and
• Performance referents

Performance measures are a kind of metrics with which organizations can be gauged. Profits, stock price, and sales performance are the common factors to better understand how well an organization is competing in the market, and to predict future results.

Performance referents are also important. It is a benchmark or standard used to match an organization’s position along a performance measure.

The Balanced Scorecard

Professor Robert Kaplan and Professor David Norton of Harvard University developed a tool called the “balanced scorecard.” The balanced scorecard tracks a small number of key measures that collectively refers to four dimensions −

• Financial measures
• Customer measures
• Internal business process measures
• Learning and growth measures

Financial Measures

Financial performance measures are linked to organizational effectiveness and profits. Examples include financial ratios such as return on assets, return on equity, and return on investment. Some other very common financial measures are profits and stock price. Such measures help us assess and answer the key question “How do shareholders see us?” Financial measures are core to a business’s existence and have long been a matter of interest to senior managers and investors.

Customer Measures

Customer performance measures are customer attraction, satisfaction, and retention. These measures answer the key question “How do customers see us?” Examples may be the number of new customers added and the percentage of repeat buys by customers.

Internal Business Process Measures

Internal business process performance measures are linked with organizational efficiency. They help answer the key question “What must we excel at?” Examples are time of manufacturing the goods or delivering a service. The time an organization takes to build a new product and make it available in the market is also an example of this measure.

Learning and Growth Measures

Learning and growth performance measures relate to the future. Such measures offer an insight to answer the question, “Can we continue to improve and create value?” Learning and growth measures usually focus on the aspect of innovation. An example of this measure is the number of new skills learnt by employees every year.

The Triple Bottom Line

Ralph Waldo Emerson said, “Doing well is the result of doing good. That’s what capitalism is all about.” The balanced scorecard offers a good framework to help executives understand an organization’s performance; the other frameworks focus on areas, including social responsibility.

One such framework, the triple bottom line, emphasizes the three Ps, people (ensuring that the actions are socially responsible), the planet (making sure it promotes environmental sustainability), and traditional organizational profit.

Starbucks has responsibility towards the planet, which it established by creating an environmental mission statement. Its mission statement states - Starbucks is committed to a role of environmental leadership in all facets of our business. For the “people” bottom line, Starbucks purchases coffee beans from farmers who work under good conditions and are well paid. Nonetheless, the firm wants to be profitable as well.