Measuring business performance

Organisations face the intense pressure of carrying out their processes efficiently, effectively and sustainably every day (Ghosh & Fedorowicz, 2008). Companies compete in a fierce environment characterised by globalisation, change, dynamism, complexity, and uncertainty (Bose & Thomas, 2007). According to Neely et al. (2002) performance measurement plays an important role when quantifying the efficiency and effectiveness of strategies and objectives related to the quality, time cycle, productivity, profitability, organisational control and achievement of financial objectives (Kaplan & Norton, 1992; Ittner & Larcker, 2003).

The pros and cons of traditional financial measures

Models of traditional financial measures have the advantage of focus on maximising shareholder value, increasing profits and cash flow (Ittner & Larcker, 2003). In addition, there exists an urgent need to discover, evaluate and track the true profitability in line with the organisation's business objectives and strategies (Neely et al., 2005). The traditional financial measurement models according to Ittner & Larcker (2003), as its name implies, evaluate the financial position of the organization through standardised templates, dashboards and structures that are of great interest to different consumers, clients, suppliers, and government entities and shareholders (Neely et al., 2002) Although these measures are of interest to many, according to Kaplan & Norton (1992), they also fall short as they tend to measure operational strategies and business activities in the past with short prospects for the future and therefore new business opportunities (Barnabè, 2011).

Organisations cannot continue to rely on a traditional analytical approach to understand new and changing market and industry trends as this could be fatal (Kaplan & Norton, 1992). Today according to Porter (1992), organisations are required to expand and upgrade their business vision and strategy in goals, indicators and targets by designing, building and operating their own modern and balanced approaches to measuring performance (Neely et al., 2005). According to Kaplan & Norton (1992), today's organisations should seek a balanced approach that is directed and focused on the customer and their needs, but at the same time improving quality and service, shortening response times, emphasizing teamwork, identifying and measuring the core competences and capabilities of the organization and therefore of its employees(Barnabè, 2011)

Balance between the tangible and intangible

Laureate Online Education (2015), highlights that these nonfinancial metrics and approaches are important because they can predict future financial performance, creating a link as well as an opportunity to monitor current actions with tomorrow's objectives and strategy through additional perspectives e.g. through the customers eyes, through analysing internal business processes while learning and growing in order to modify strategies and operations in real time (Kaplan & Norton, 1992). One of the best known balanced approaches is the Balanced Scorecard (BSC), a tool that helps in allocating and evaluating resources (tangible assets), but at the same time gain sustainable competitive advantage and long-term sustainability (Bose & Thomas, 2007), since it evaluates and monitors the implementation of business plans, internal processes, strategies, organizational decisions and intellectual capital through the implementation of a consistent and reliable structure (Ittner & Larcker, 2003).

The competitive landscape is multi-dimensional with financial performance forming a part of the whole picture (Barnabè, 2011). Customer sentiment in terms of satisfaction, value perception, brand value, as well as other intangible metrics provide the opportunity for organisations to be able to visualise and understand the business as a whole and compete more effectively (Bose & Thomas, 2007)

References:

Barnabè, F. (2011) ‘A system dynamics-based Balanced Scorecard to support strategic decision making: insights from a case study’, International Journal of Productivity and Performance Management, 60 (5), pp. 446-473.

Bose, S. & Thomas, K. (2007) ‘Applying the balanced scorecard for better performance of intellectual capital’, Journal of Intellectual Capital, 8 (4), pp. 653-665.

Ghosh A. & Fedorowicz, J. (2008) ‘The role of trust in supply chain governance’,

Business Process Management Journal, 14 (4), pp. 453-470.

Ittner, C. & Larcker, D. (2003) ‘Coming up short on nonfinancial performance measurement’, Harvard Business Review, 81 (11), pp. 88-95.

Kaplan, R.S. & Norton, D.P. (1992) ‘The balanced scorecard – measures that drive performance’, Harvard Business Review, 70 (1), pp. 71-79.

Neely, A., Gregory, M. & Platts, K. (2005) ‘Performance measurement system design: a literature review and research agenda’, International Journal of Operations and Production Management, 25 (12), pp. 1228-1263.

Neely, A., Adams, C. and Kennerley, M. (2002) ‘The performance prism: the scorecard for measuring and managing business success’, Financial Times Prentice Hall, London

Laureate Online Education (2015) ‘Analysis and assessment of business’, New York: McGraw-Hill Higher Education [VitalSource e-book].

Porter, M. (1992) ‘Towards a dynamic theory of strategy’, Strategic Management Journal, 12, pp. 95-118.