Is there any research suggesting that certain performance measures are better for measuring organizational performance?
Conducting strategic planning is not simply an exercise for management to place goals on a piece of paper and hope for the best. If a company wants real change, they must create a plan that has some achievable measures, but more importantly a metrics for success. A plan must be measurable in some form to be successful, this allows stakeholders to determine whether it is working, or the plan needs to be adjusted, as well as what are the issues with it. Dmitriev and Wu (2016) argue that you “can’t manage what you don’t measure”, metrics drive the direction of an organization. The tools used to gauge success, are not one size fits all and each organization must find tools that are appropriate for them to monitor progress on organizational performance. A company that has a plan to increase customers would not necessarily use the same tool for a company that is attempting to increase revenue, although they may be intertwined at varying levels. The tools will vary, but the measuring of outcomes remains a critical aspect in successful organizational change.
The first step in identifying the tool to measure is to determine what it is that you want to measure to begin with. If an organization is attempting to measure retention rates as part of performance, using financial tools would not be best suited to give a clear picture. The assessments for measurement also will change based on motivation or type of organization; a for profit company, publicly traded company, and government/public organization will not have the same goals or motivations as each other, due to the nature of the entity. Zou and He (2018) also state that performance evaluations need to follow the SMART (Smart, Measurable, Achievable, Relevant, Time Bound) themes in that whichever tool is used such as a KPIs (key performance indicator) or OKRs (objectives and key results). The researchers continue to state that KPIs are the firm’s appraisal tools whereas the OKR looks to score what matters most to an organization or its goals as a critical thinking framework for results. Independently, they both show measures for organizational performance that together build a picture of what the performance is.
The individual tools vary drastically by industry and the goals attempting to be measured. Several studies offered example of tools, but the focus was narrow based on the exact industry such as accounting, banking, or marketing. One trend noticed in several papers was the overall impact of organizational performance was increased with both leadership and employee/stakeholder buy-in to what is trying to be achieved. Para-González et al. (2018) and Shanker et al. (2017) both concluded that engagement was a major factor in whether organizational performance had noticeable improvements. Their research began with understanding the climate in the organization and the conditions that were set to be able to measure the overall impact. Organizational performance is enhanced by physiological factors relating the attitudes of those involved in the change or plan to increase organizational behavior.
Successful organizational performance does not happen by chance, there is a plan and some method to measure what is attempting to be achieved. Creating a framework of what is to be measured seems like the best performance measure, versus a specific tool itself. Several researchers cite Kaplans (1992) balance score card and Tangen’s (2004) Performance Pyramid as a basis for a framework that can be used as a start. Taouab and Issor (2019) researched and found overall incomplete literature that addresses performance measures themselves that can be agreed upon, let alone applied to every measure or situation. They also found a constant evolution of measuring organizational performance over the last 100 years has drastically changed, due to the traditional and non-traditional approaches so many uses towards the subject, plus the creativity organizations use in their unique circumstances.
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A common objective of most publicly traded firms is to create and manage shareholder values. A question often faced by stakeholders of organizations concerns performance measurement (Hall, 2018). More specifically, what measures are best for shareholder value creation or destruction (Hall, 2018)
Siburian and Yohanes (2018) noted that the increase in shareholder wealth is closely related to the maximization of corporate value. Companies that focus on shareholders' wealth creation are constantly asking questions on how to measure and assess firm performance to obtain excellence, efficiency, and performance enhancement (Hall, 2018; Siburian and Yohanes, 2018). These concerns are flooded with new performance measures to consider. Managers have an increasing number of measures at their disposal; therefore, they need to know if there are any specific measures of shareholder value that can be used as an indicator of value creation for any firm in any industry (Hall, 2018).
Siburian and Yohanes (2018) noted that shareholder value creation should be accurately measured and described so management can make the right decisions on maximizing shareholder value. Additionally, investors can correctly interpret the value drivers that contribute the most, and analysts can give accurate views to clients in stock and corporate valuations. To manage a firm optimally for shareholders, the most appropriate shareholder value creation measure should be used as a yardstick and compass (Hall, 2018). As such, both research articles explored which shareholder value creation measures are best suited for a particular type of firm.
Rothaermel (2017) demonstrated three approaches for assessing and measuring firm performance, namely, accounting profitability, shareholder value creation, and economic value creation. Each has its advantages and drawbacks. Siburian and Yohanes (2018) and Hall's (2018) studies both demonstrated that each industry has a unique set of variables that determine shareholder value creation.
Siburian and Yohanes (2018) investigated three industries, namely, healthcare, materials, and real estate, and Hall investigated seven industries, capital-intensive, labor-intensive, construction and materials, food and beverages, industrial goods, retail, and technology. Similar accounting-based and economic-based variables were used in both studies. The five major measures used as dependent variables were market value less economic capital employed (MVA), market-adjusted stock return (MAR), market-to-book ratio (MTB), Tobin’s Q ratio (Qratio), and return on capital employed divided by cost of equity (ROEKE). The independent variables were also similar, namely, economic value added (EVA), return on assets (ROA), return on equity (ROE) return on capital employed (ROCE), and spread.
Overall, both studies used regression analyses to determine which industry has a distinct set of variables that result in shareholder value creation. For example, Siburian and Yohanes (2018) noted that accounting-based variables such as cash flow from operating activity are more suitable in the healthcare industry, whereas economic-based variables are appropriate for the real estate and material industries. Meanwhile, Hall (2018) found EVA to be a significant variable in the construction and materials industry, and accounting-based variables were appropriate for the retail industry. The remaining industries had a combination of variables. Table I in the Excel file attached herein, depicts a summary of the set of variables that determines shareholder value creation by industry.
Results in Table 1 indicated that each industry has a specific shareholder value creation measure. Therefore, managers can use this information to determine what is the best measure for their specific industry when doing analyses. For example, in the retail industry, managers should use MVA as a shareholder value creation measure and concentrate on the ROE and the Spread to increase shareholder value (Hall, 2018). This should be their focus as issues such as purchasing goods for resale at a competitive price and controlling operating expenses are high concerns in the retail sector. Whilst, in the healthcare industry, optimizing the company’s operational scheduling, maximizing the use of facilities in hospitals, and minimizing errors while taking care of patients are high priorities (Siburian and Yohanes, 2018). In short, management should prioritize effectiveness and efficiency in each business activity and link each activity back to the company’s vision and mission as they continue to adhere to shareholder values. This is a good indication that managers are using accounting data to assess competitive advantage and firm performance.
Hall, J. H. (2018). Value creation measures: an industry-based study. International Journal of Productivity and Performance Management, 67(2), 426–444. https://doi.org/10.1108/IJPPM-08-2016-0178
Rothaermel, F.T. (2017). Strategic management: Concepts and cases (3rd ed.). New York, NY: McGraw-Hill Irwin. ISBN: 978-1-259-42047-4
Siburian, E., & Yohanes, A. (2018). Shareholder value creation measurement analysis in Healthcare, Materials, and Real Estate Industry in Indonesia. 1st Asia Pacific Business and Economics Conference (APBEC 2018)