Tuesday, February 8, 2011

Dissertation on Performance Management

Dissertation on Performance Management

How, when, where and by whom should organizational, managerial, product and service performance be measured?
Organizational and managerial performance can be measured in a variety of ways. All methods of measuring performance can be guided by a set of common requirements as stated by Pettinger1. For and organization and its managers, it is essential that “clarity and purpose of direction” is present. The importance here is that without this element, the measurement of an organization’s performance is meaningless. There is nothing to measure because the meaning of “success” within the organization has not been defined. A second prerequisite for the effective measurement of successful performance is an adequate level of resources. These may include staff (and related training facilities), information systems and investment. The expertise required to analyze performance results is an obvious requirement. This leads us to the third requirement, an understanding of the market and environment in which the organization operates. This again is vital because the measurement of performance is usually in done in terms of a specific market or industry. These three fundamentals lead the way for various measure of performance to be carried out with a sense of direction. Performance measurement itself can be divided into a range of areas.

Organisational Performance
Organizational performance is by and large measured quantitatively. This is done using various indicators. In his book “Introduction to Management” Pettinger highlights the following components of performance measurement. In terms of an organization, I would specify these particular components from the range stated by Pettinger.


Firstly, the profitability of the organization is an evident indicator of its success. This is a specific, quantitative measure and is simple to calculate and can be evaluated in a straightforward manner. Profit ratios can be presented in reports and this is commonly done due to its simplicity.

A profit ratio is defined as follows:

Profit ratio = (Net profit / Total Sales)*100

This figure can be made readily available to analysts and managers for them to assess the success of the organization. The use of this indicator is related to when it would be most necessary. For example, seasonal products and services such as holidays and antifreeze will have their profitability assessed in the build-up to periods of high demand and also following such periods.

Market standing and position is also an indicator of the success of an organization. This can be measured using intelligence information gathered on leading competitors as well as performing market research. The organizations position in the market in relation to its desired position at a particular point in time is clearly a way of evaluating its progression towards it long-term goals. This research should be conducted throughout the industry in order to obtain a clear picture of the organizations market standing. Quantitatively, an organization’s market position could be measured using concentration ratios similar to those used in economic theory. For example, a five-firm concentration ratio measures the proportion of total sales in a market made up by the total of the five firms with the largest sales. In terms of a single organization, an equivalent ratio would be:

Market share = (Total Revenue / Total Industry Revenue)*100

The market share indicator would typically be calculated every six to twelve months using information gathered by finance departments. In the longer term, (for example some firms have a “five-year plan”) market share would indicate the success of the organization more generally and would be viewed by potential investors to be a key indicator.

Pettinger also mentions “resource utilization” as an important component of measuring organizational performance. A successful organization will be efficient in its production of goods and/or services. Wastage would be viewed as a sign of inefficiency. Economic analysis can be used to evaluate to efficiency of a firm. Productive efficiency (i.e.: when a firm produces at the lowest average cost) and allocative efficiency (i.e.: when a firm produces where price is equated to marginal cost) are two points that firms may wish to aim for. However, this again depends on the firm’s long-term objectives as well as the share of the market which it occupies. As you can see, many of the performance measuring components are related to each other.

Organizational culture is a good way to gauge the level of motivation and morale in a firm. The relationships within a firm are important to its functioning and these interactions (for example, between departments or between regional sites) need to be well oiled to ensure the long-term success of an organization. Such qualitative measures are commonly conducted using a mixture of in-house research in the form of questionnaires and also external observers such as management consultants. It is important that these types of measure are regularly and consistently executed in order to avoid inefficiencies.

Managerial Performance
Managerial performance measurement is instantly recognized as dissimilar to organizational performance measurement due to its less quantitative nature. It tends to be based more on value judgements and is therefore less straightforward to execute.

Managerial performance can be measured at different levels and across different departments. It includes assessing the strengths and weaknesses of managers and will also aim to gauge the effort put in by the managers to iron out the creases in their performance.

A clear link to managers is the staff that work beneath them. The efficiency, morale and productivity of the staff are, in my opinion, a reflection on the managers that they work under. Staff performance can be measured in terms of productivity (output per worker) and this is one of a few quantitative measures that can be used to measure the performance of managers. The development of the management as a response to changing market conditions and also changing conditions within the organization is seen as a key indicator of the management’s performance. Managers with such dynamic qualities will tend to perform to a superior standard.

Style of management will also be scrutinized when measuring performance. For example, does the manager take a hands on or detached approach. The amount of time that a manager spends interacting with lower levels in an organizations workforce as a proportion of the total hours worked by the manager can be used to evaluate a manager’s dedication to improving the performance of the organization as a whole. It is commonly accepted that a manager with detailed knowledge of the working of the organization at many different levels is in more of a position to introduce effective changes and manage them successfully.

It is necessary to constantly evaluate to performance of managers because they are highly paid and in order to justify their salaries, their performance must be up to standard.

Product and Service Performance
The performance of products and services can be measured in qualitative and quantitative means. Many of the methods will overlap with those used to measure organizational performance. For example, market share and profit ratios are good indicators of the success of a product or service as well as a straightforward measure of the management of their production. And again, market research and sales statistics play a vital role in measuring the success of a product or service.

Performance Appraisal
Performance appraisal is used to measure the performance of different factors of an organization at the place of work. Pettinger states that for appraisal to be successful and effective, certain elements must be present. For example, a set of aims and objectives is a prerequisite. Targets should be realistic for them to be taken seriously. Also, the process of appraisal must entails regular reviews and these must be done consistently in order for confidence to be built into the system. These reviews should occur every three to six months and the process should be dynamic to cope with changing circumstances between reviews.

To address the question of “by whom” is performance measured, it is necessary to look to the stakeholders in an organization. A stakeholder is defined as anyone who has some sort involvement in any part of the organization or is affected directly as a result of the organizations operations. A few of the potential stakeholders who actively or indirectly may assess the performance of an organization are summarized below:

  • The customers – Their interests lie in the organization’s success at providing a quality service.
  • Workforce – Staff working inside the organization will be eager to get involved in making decisions at different levels and being given the opportunity to do so.
  • Investors – This group of people will obviously be interested in the performance of an organization and its managers because it is what their involvement is based upon.
  • Competitors – In order to evaluate their own performance, competitors will need to measure up to an organization and assess its performance to possibly provide a benchmark to aim for.
  • Suppliers – These have a vested interest in the performance of the organization that they supply because of the derived demand for their own products or services.

Different stakeholders will have interests in different measure of performance. For example, consumers will not be interested to know what percentage of market share the manufacturer of their coffee table occupies. Similarly, suppliers will not have an interest in the quality of service encountered in a particular branch of the organization that they supply.

As mentioned earlier, it is vital that an organization has a clear set of aims and objectives otherwise the monitoring of performance becomes a pointless exercise. There are a range of quantitative and qualitative measure that can be utilized when attempting to measure both managerial and organizational performance. As well as these, there are a range of various stakeholders with different interests in various parts of the organization. In conclusion, it is important for all concerned that effective performance evaluation is executed at the right times and by the correct individuals or groups. Without effective assessment of organizational progress, any aims and objectives that exist within the organization are themselves made worthless. The Deming* cycle of continuous improvement shown below is a useful tool for aiding measurement:

PLAN: Establish performance objectives and standards.
DO: Measure actual performance.
CHECK: Compare actual performance with the objectives and standards – determine the gap.
ACT: Take the necessary actions to close the gap and make the necessary improvements.

Before this cycle is used however, the questions of why measure, what to measure, where to measure and how to measure must be answered.

Identify specific performance measures that could be used to analyze each of the following products and services from the following points of view: (a) the company itself; (b) customers, clients and end users; (c) suppliers; (d) the community at large.

  • EasyJet
  • People carrier cars
  • Madame Tussauds

In order to answer this question, it is important to recognize that each of the above points of view will entail different measure of performance, but possibly with some degree of overlapping. For example, the performance indicators used by the suppliers would be similar to those used by the company itself due to the nature of the demand for the suppliers goods (i.e.: the demand is derived). Also, the interests of the community may possibly be a reflection on the interests of the customers, clients and end users.

The company itself would be interested in its own performance in order to monitor its progress towards its fulfillment of the aims and objectives it has set out. Customers, clients and end users would be interested in the continuation of satisfaction and service as well as possible improvements for the future. The suppliers clearly would have a strong interest in the performance of the organizations because the demand for their products and services is derived. The community at large would also have an interest in the performance of the organization because the operation of the organization may entail externalities.

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