- What is Organizational Performance?
- The Three Outcome Areas
- Factors of Organizational Performance
- Internal and External Environments
- How to Measure Organizational Performance
- Measuring Levels of Organizational Performance
Organizational Performance: What You Need to Know
A lot of HR professionals, especially Strategic Planners, are placing a big part of their efforts on organizational performance; but as this term arises, we see that operations managers, finance directors, legal advisors, and entrepreneurs are also focusing on organizational performance management.
Effective organizations run like a well-designed, well-oiled machine; every part integrates to successfully produce the outcomes the organization sets out to achieve, wasting as little time and resources as possible. Organizational performance is the modern way to measure and guide organizations to reach their goals.
What is Organizational Performance?
Let’s break these two words: “Organizational” is an adjective derived from “Organization”, and an organization refers to an organized group of people working together with a specific purpose. “Performance” refers to the action of performing a specific task or set of tasks and it’s measured on how successfully an individual or organized group performs such tasks.
So, Organizational Performance refers to the analysis of an organization’s performance against its objectives and goals. Or comparing the intended results vs the actual results.
When we think of effectiveness we probably think of examples of successful people like Mark Zuckerberg or Steve Jobs; but in an organizational context, effectiveness might get harder to define. One thing is to have a successful company, but whether it is effective or not is different.
You can be very successful but if you were also effective, your success would increase significantly. The more effective an organization is, the more chances it has to survive and flourish throughout the years. You need to know that implementing organizational processes to become more effective is something that needs to be learned and practiced on a daily basis, it is a commitment that has to be revised and assessed every certain amount of time to see how it’s working and tweak the areas that need improvement.
Organizational effectiveness is defined as a concept to measure the efficiency of an organization in meeting its objectives with the help of given resources without putting undue strain on its employees. It is about how the company can produce the target quota of products and/or services, how efficient its process is, and how much waste is produced.
We know that performance always improves when leadership is at its best. Leadership plays a great role in setting teams’ direction, the creation of strategies and effectively implementing them to achieve goals, efficient communication, alignment of goals across the organization, development of the employees, accountability, and best usage of resources.
So, to bullet point it, organizational effectiveness refers to how an organization has achieved full self-awareness due in part to:
- Leaders setting well-defined goals for employees and outlining ways to efficiently execute those goals.
- Management implementing clear decision-making processes and communication pipelines.
- Engaged employees — who are carefully selected and fairly compensated—producing work that prioritizes results.
An Organizational Performance definition according to Wikipedia says that: “Organizational performance comprises the actual output or results of an organization as measured against its intended outputs (or goals and objectives).”
We agree although we feel that organization performance really breaks down into three operational terms: financial or economic performance, operational performance, and human capital performance.
- The Economic Performance of the organization looks at the financial and market outcomes which include topics like profits, sales, return on investment, and other financial metrics.
- The Operational Performance of the organization focuses on observable indices like customer satisfaction and loyalty, the firm social capital, and competitive edge derived from capabilities and resources.
- The Human Capital Performance of the organization which covers topics around Employee Engagement, Culture, development and internal promotion opportunities, etc. Metrics here are often things like eNPS and employer of choice.
The Three Outcome Areas of Organizational Performance
To successfully manage organizational performance, you must understand that organizational improvement outcomes are focused on three main areas:
- Financial Performance: This area focuses on a company’s operations and policies regarding monetary terms. In other words, in terms of value in dollars, euros, pounds, and other currencies.
In order to see how good a company’s financial performance is, you need to check its return on assets and return on investment, but you can also evaluate financial performance by measuring value-added.
- Product Market Performance: Market performance measures how good a product or service does within the marketplace. It focuses on whether a product’s market share rises or if an upgrade helped boost sales, etc.
When referring specifically to a product instead of a whole organization, it’s referred to as ‘product-market performance’.
- Shareholder Value: This area looks at how much a company enriches its shareholders. Many say this is the ultimate organizational performance measure. Shareholder value may also refer to a company’s market capitalization.
Factors of Organizational Performance
Organizations are not all the same, there are a number of factors that differentiate each and every one of them, and these factors can be related to both the objective of the organization and the strategies and tools chosen to work towards achieving those objectives.
These factors, that determine the organization’s activities, goals, and work structure, can be grouped into:
- External factors: These factors are those surrounding the organization and are not under its control, but still affect its development, performance, and structure. They include:
- Internal factors: These are those factors within the organization, characteristics such as:
- Individual choice factors: Teams or individual decisions about expected costs and/or benefits.
Internal and External Environments of Organizational Performance
Environment plays an important role in organizational effectiveness and performance, and it has a lot to do with determining the success or failure of a company. Leaders should always work on aligning their organization with the environment, both internal and external.
A company’s internal environment is integrated by those elements that lie within the organization, like employees themselves, but especially a strong organizational culture and core values.
Some of these elements can affect the entire organization, but some of them can affect only managers or employees.
It’s no surprise that a manager’s leadership style has a heavy influence on employees and their adopted behaviors in the workplace. Traditional and older managers tend to just give orders and instructions to employees and measure strictly their outcomes; while contemporary managers empower their direct reports and encourage them to shape their decisions and work style while measuring not only their outcomes and results, but also their emotional wellbeing. The power of changing leadership style is completely under the control of managers.
The internal environment of a company is composed of its owners, chairmen, managers, employees, physical environment, and culture.
The external environment of an organization is integrated by general and task environment layers. The general environment is composed of broader and more intangible elements of the organization that affects its activities. It has five dimensions: economical, technological, sociocultural, political-legal, and international. The effects of these dimensions over the organization are broader and occur more gradually.
There’s another environment that has a more immediate impact on the organization: the Task environment, which consists of other dimensions of the organization’s surroundings: competitors, customers, suppliers, regulators, and strategic partners.
How to Measure Organizational Performance
There are different ways to measure organizational performance, but some of the most common are:
- Survival and Growth: Substantially, this means that a company or organization can define if its performance is effective depending on the meeting of their growth expectations and have a steady growth flow. The only downside of this metric is that it doesn’t precisely take into account the external and internal factors of the organization.
- Good fit with the Environment: This limitation, provided by Lorsch (1970), believes that if firms are able to find a right fit between their environmental demand and internal capabilities and resources, they will therefore perform better.
- Relevancy: This measure addresses the systems view of organizations, but still fails to consider the ever-changing modern markets and the pressure they put on companies to continuously evolve.
Measuring Levels of Organizational Performance
The reason behind measuring Organizational Performance is so we can improve, as we do when assessing the performance of anything else. Managers and leaders are always looking for ways to improve based on past performance.
Organizational performance can be seen at each level of the organization:
Individual Performance focuses on aspects of work that are best achieved by individuals working on their own. Individual performance on its own has deeper levels:
- Task Performance: this points out the completion of the assigned tasks to an individual; the quality of their work, acquired skills and knowledge like successful planning, problem solving, decision making, etc.
- Contextual Performance: these are actions that go beyond the description of the individual’s tasks, those things proving an employee goes above and beyond and can be manifested in social, organizational, and/or psychological areas. This performance can be associated with indicators such as resourcefulness, motivation, engagement, creativity, doing extra tasks, etc.
- Adaptive Performance: As its name suggests, this basically measures the ability of an individual to adapt to changes and circumstances, but also aspects like innovation and flexibility.
- Counterproductive Work: Like always, there are negative indicators that need to be measured. Counterproductive behaviors can be shown in indicators like tardiness, absenteeism, substance abuse, disregard of instructions, and even bigger threats like theft and disregard of safety regulations.
Team performance focuses on aspects of work that are best accomplished by teams of individuals working together. Task proficiency is another indicator of good performance as team members who are proficient in their tasks and are associated with higher performance levels. These teams may be reporting to the same individual or maybe cross-functional in nature. In some cases they are permanent and in others, they exist for the duration of the project at hand.
Focuses on aspects owned by organization units such as departments. Performance at this level is frequently at a slower cadence than at the Individual or Team level.
Looks at strategic execution and is typically owned at the executive level. When organizations assess their strategic management and planning using internal and external assessments with a cascading system of goals, strategies, and plans, the effectiveness of meeting such goals is found to be improved.
It is important to note that there is also dimensionality to measuring organizational performance. You may want to see how the organization is performing from the perspective of:
- Regions and territories
- Brands and products
- Departments and processes
- Time Horizons (e.g quarterly, monthly, etc.)
- Owners and individuals in the organization
There are four major elements to successful organization performance, generally categorized as:
- Strategic planning and goal-setting - where there are clear goals that drive alignment and performance.
- Employee Engagement - which includes Employee skills development, challenges, internal promotion opportunities, learning and growth, rewards and compensation, work environment and Technology, organization design, culture, alignment, etc.
- Performance monitoring and management - which includes techniques like OKRs (Objectives and Key Results) and KPIs (Key Performance Indicators).
(You can learn more about Performance Management here)
- Strategy execution - which includes techniques like agile management, lean, six sigma, etc.
An effective human resource management department usually works non-stop looking for ways to improve work performance and help managers and strategic planners help their own individual employees. Organizational strategies are not always so easy to plan, but we hope you’re able to take advantage of what you’ve found here and unlock your company’s potential to help you in your quest of improving organizational performance.
Remember that here at Hirebook, we want you and your organization to thrive, and empower your employees towards bigger and better outcomes!