Importance of strategy in organisational performance
ORGANISATIONS set goals and objectives as part of their strategy formulation, and their performance is a measure of the extent to which they achieve these set goals and objectives over time.
High-performance organisations achieve the bulk of their set goals while low-performance organisations only achieve a few of their set goals.
While there is no universally accepted definition of organisational performance, it refers to the actual output or results that an organization achieves in comparison to its set goals and objectives.
Many variables can be considered in defining and measuring organisational performance and, traditionally, these include financial performance, product-market performance and shareholder return.
In recent times organisational performance has also been measured considering other variables such as employee stewardship, knowledge management, corporate social responsibility and real estate investment.
Kaplan & Norton have proposed the categorisation of variables that can be standardised and measured in determining organisational performance. Through their ‘Balanced Score Card’ (BSC), organisational performance can be measured through financial, customer service, business processes, and learning and growth objectives.
The combination of what managers and their respective teams accomplish towards achieving these organisational objectives is what constitutes organisational performance. Organisational performance is influenced by a myriad of factors, some of which are external to the organisation while others are internal. External factors include competition, regulatory control, macro-economic forces, the political climate, socio-cultural influences, technological changes, and environmental. Internal factors include Information Technology (IT), Intellectual Capital (IC), motivation, organisational culture, productivity, retention, and real estate investment.
Measurement of organisational performance
The measurement of organisational performance, which has generally been termed, “Performance Measurement (PM)” is a very critical aspect of strategic planning and ascertaining organisational sustainability and growth. In strategic planning, organisations set objectives and Key Performance Indicators (KPIs), the latter being standards or yardsticks to measure the extent to which organisational objectives have been achieved or otherwise.
Financial measures of performanceFinancial performance of firms has largely been measured by four major variables; market valuation, profitability, productivity and return on equity. Real estate investment has in recent times been considered as another significant variable in measuring a firm’s financial performance. The sections below discuss the measures for the financial performance of firms.
Market valuation
The market valuation is the systematic and analytical process of determining the price or value of an asset or firm at a given time.
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In estimating the value of a company, analysts may take into account such factors as the capital structure composition, future earnings forecasts, the market value of its assets, and the firm’s management, among other metrics.
A firm’s open market value is indicative of the extent to which it is performing well or otherwise. Primarily, fundamental analysis is employed in market valuation of firms, while other different valuation models, for example, capital asset pricing model (CAPM), the dividend discount model (DDM), and economic value added (EVA) may be used.
The value of a firm can be measured in absolute terms, wherein we are considering its intrinsic value, or in relative terms, whereby we are comparing its value to the value of other firms. The higher the market value of a firm (both in absolute and relative terms), the better it is perceived to be performing.
Profitability
Profitability is the firm’s capability to deploy its resources to generate revenue, which is in excess of its expenses. A firm’s profitability can be measured by computing a number of financial metrics, or profitability ratios, that are designed to evaluate the business’ ability to generate earnings relative to its revenue, operating costs, balance sheet assets, and shareholders’ equity over a specific period.
Gross Domestic Product
Profitability ratios are broadly categorised into margin ratios and return ratios. Margin ratios, such as gross margin, operating margin, profit before tax margin, and net profit margin, measure a firm’s capability to convert sales into profit, at different cost levels. Return ratios, for example, return on assets, return on equity and return on investment, facilitate the measurement of the extent to which a firm generates returns for its shareholders. Profitability is closely associated with liquidity, the latter being commonly measured by liquidity ratios comprising current ratio, acid-test ratio and liquid ratio.
Productivity
This refers to the firm’s level of efficiency in converting production inputs, such as labour and capital, into outputs. It is a critical element of economic growth and competitiveness, which is utilised in measuring not only firm performance but also in making macro-economic assessments.
At a national level, productivity is measured as a ratio of the gross domestic product to national labour hours. At the firm level, it is computed by measuring the units of production relative to employee labour hours or by measuring the firm’s net sales relative to employee labour hours.
Productivity growth constitutes an important element for modelling a firm’s productive capacity, facilitates the measurement of capacity utilisation, determination of the firm’s stage in the business cycle and becomes the basis for forecasting future economic growth.
In addition, production capacity is used to assess demand and inflationary pressures. Higher levels of productivity are indicative of high organisational performance. The greater the level of productivity the lower the cost of production per unit, the greater the scope for profitability for the firm.
Return on equity
One of the major and primary objectives for the shareholder investing in any firm is so that they get a return on their investment. The performance of the firm to an investor is thus measured by the return on equity, a ratio that measures the company’s capability to earn returns on the shareholders’ equity investments.
An increase in the company’s asset base, coupled with the generation of more returns with higher margins translates into equity growth for stockholders. Various studies have evaluated the impact of a number of variables such as job satisfaction, intellectual capital efficiency, board structure, capital structure and sustainability reporting on firm performance as measured by return on equity.
Other authors have however criticised the use of return on equity as a measure of firm performance as flawed citing a weak linear relationship between certain performance measures tested and the return on shareholders’ equity.
Real estate investment
One of the indicators of good firm performance is its creation of capacity to invest in real estate. Acquisition of real estate has a number of financial benefits to the firm which include strengthening of the balance sheet, reduction in operational costs as rentals are eliminated from the firm’s overheads and generation of rental income where the firm has excess space to let out to third parties.
Generally, real estate in one of the few assets that appreciate in value over time, creating scope for an accumulation of revaluation reserves and growth of the shareholders’ equity. Other intangible benefits that accrue from real estate investment include good corporate image, goodwill, investor confidence, increased employee satisfaction, improved labour productivity, good market perception that the firm has sound establishment as a going concern and is ‘here to stay’. Real estate investment has in recent times, invariably, become an important measure of an organisation’s performance.-chronicle.cozw
