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Topics Covered
- Common performance metrics
- Alphabet case study
- Strategic management
- Competitive advantage
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Talk Citation
Amason, A.C. (2023, February 28). Understanding organizational performance [Video file]. In The Business & Management Collection, Henry Stewart Talks. Retrieved October 7, 2024, from https://doi.org/10.69645/FROG1478.Export Citation (RIS)
Publication History
Other Talks in the Series: Strategic Management: Theory and Practice
Transcript
Please wait while the transcript is being prepared...
0:00
I'm Allen Amason,
I'm the Dean of
the Parker College of Business
at Georgia Southern University.
I'm also a scholar and
professor in the area of
strategic management.
I'm talking about a facet of
Strategic Management
in this section that
deals specifically with
organizational performance.
0:22
Competitive advantage, as
we've stated elsewhere,
is really the crux of
strategic management.
It's the ultimate objective
that a strategic
manager pursues.
However, competitive
advantage is really
related to organizational
performance,
somewhat indirectly, but
nevertheless strongly
related to organizational
performance.
Firms ultimately, are
judged on their performance
and so it seemed appropriate
and perhaps important
to talk about organizational
performance early on
in this series of talks on
strategic management
so that everyone could
understand that
organizational performance
is a complex idea,
although a simple
one in many ways,
nevertheless, a complicated
one in its detail.
1:06
I'll give you an example
of that by talking about
some common but
imperfect metrics of
organizational performance
to illustrate how, on
closer inspection these
relatively simple ideas
can be somewhat complex.
The first is profitability.
Of course, we talk a
lot about profit and
profitability when we talk
about organizational performance
but it's hard to
really unpack that term
when you think
about it in detail.
For instance, let me just give
you two hypothetical example.
Suppose you have
one business that
makes $100,000 of profit in
a given year versus
another business that
makes $1 million profit
in that same year,
would we say that the
million dollar firm
outperformed the $100,000 firm?
On first blush, we might,
but it's really quite
difficult if we
begin to think about
those two firms.
Suppose the $100,000 firm
had $1 million in sales,
in which case, $100,000 in
profit would be a 10%
return on the sales,
that's really quite good.
Suppose the firm that had
$1 million of profit had
$1 billion in sales.
Well, that is actually quite a
small return, one-tenth of 1%,
and so quite smaller
than $100,000.
Profitability, depending
upon how you look at it,
can seem in one way to
be a very simple measure
but in another to be a
very complicated one.
Sometimes we look at sales,
revenue and growth in
sales and revenue.
The company with a lot
of sales or a lot of
revenue perhaps is considered
to be the best performer.
But suppose we were to look
at that revenue over time.
Even though we had
a company with
very large revenue in a year,
that revenue was down
from previous years.
In fact, this would
be, let's say
the fifth straight
year of decline.
Would we say that
company was performing
well compared to a company
with much smaller revenue,
but where the revenues are
increasing year upon year?
Revenue again, while
a simple idea,
can be a very
complicated measure.
Then the last one that
I'll use as an example is
stock price or the
overall valuation.
Look pretty carefully
over the course
of this series at Alphabet,
which is the parent
company of Google.
Alphabet currently has a market
capitalization of $1.87 trillion,
that's an enormous
capitalization.
How does that compare
with other firms?
Well, it is lower than
Apple's capitalization,
but it is much higher than
the capitalization
of some other firms.
Does that mean they are a
better performing firm?
Well, again, it depends upon
what you mean by capitalization.
If we were to compare them
to Aramco for instance,
the oil producing company
for Saudi Arabia.
It would probably be
smaller than Aramco.
Does Google or Alphabet
perform better?
It's difficult to
say based again,
on a simple measure like that,
simply because there
is no way to compare
publicly traded
companies that have
an available capitalization
with privately held companies.
Or even to know exactly what
that capitalization means
in the case of Alphabet,
could we turn that $1.87
trillion into cash?
Well, we couldn't and so it's
difficult to know exactly
what that capitalization
represents and what
exactly it means in
relation to the management firm
and the performance of the firm.
I'm reminded when I think
about organizational
performance of
a quote by Justice of
the Supreme Court who
said back in 1973,
I believe it was
about another topic,
but he said "I can't define it,
but I know it when I see it".
Performance is a
little like that,
we know it when we see it,
we know there's
something meaningful in
the underlying concept of a firm
performing better
than another one or
a firm performing better
than it has in the past.
But it's difficult to define
what exactly we mean
by performance.
It's difficult to know exactly
which metric is the
most important to us,
which is one of the reasons
why in strategic management,
we'd like to focus on
competitive advantage
and allow organizational
performance to follow.
In other words, if you focus
on strategic management,
a good organizational
performance
should take care of itself.