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Understanding organizational performance
Published on February 28, 2023 11 min
A selection of talks on Strategy
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.
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.
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.