In business, the idea of measuring what you are doing, picking the measurements that count like customer satisfaction and performance...you thrive on that."
- Bill Gates
So, why do businesses measure performance? Let's take a look at what factors influence business performance and how businesses can assess and evaluate their performance.
Business performance definition
Overall business performance can be defined as the ability of a business to implement a strategy to achieve organizational objectives and is considered as an important tool for businesses to analyze how effective management is at achieving business goals.
It is important to measure business performance to understand whether a business is achieving its goals in form of key performance indicators (KPIs). Some examples of KPIs could be:
Labour productivity,
Net sales growth,
Looking at how many new customers make purchases,
Customer satisfaction ratings,
Monthly traffic generated from the business's website,
Order delivery and fulfilment speed.
Let's take a look at what impacts business performance and how it can be measured.
Leadership and business performance
Effective leadership is important for business performance. Leaders need to understand how to motivate employees to collectively achieve business objectives. In a study conducted by Yildiz, Basturk & Boz (2014), the researchers found that both leadership and innovativeness have significant consequences for business performance. The study included a questionnaire, where the responses of 576 people in the service industry were analyzed. The study concluded that both transformational and transactional leadership, in addition to innovation, have a positive impact on business performance.
To learn more about the characteristics of different leadership styles, take a look at our explanation on leadership.
Organizational culture and business performance
Another important factor that affects business performance is organizational culture. Organizational culture can be a key source of advantage for a business.
Organizational culture includes the shared values and beliefs of a business that impacts the daily work environment of employees of an organization.
Positive organizational culture can be very motivating for employees, however, a toxic environment can have a negative impact on business performance. Attributes of a toxic environment could be:
Poor leadership,
Using fear to engage employees,
Double standards by leadership,
Unethical leadership,
Corruption,
Or when results are the only thing that matters to leadership.
Business performance assessment examples
Evaluating business performance should be an ongoing process within a business. You can evaluate your business performance in many ways depending on the initial business objectives you have set. This can be done through both financial and non-financial data. Some examples include:
Measuring performance (marketing data): how well your business is performing in different areas or departments of the business.
How much of the market share is owned by your business.
Measuring profitability and financial performance (financial data): Profitability is one of the most prominent ways of measuring your business's financial success. Profitability is an essential objective for all businesses.
Leadership and organizational culture (human resource data): understanding how well leaders are doing their jobs of motivating employees and cultivating a conducive environment for productive work is also important for performance evaluation.
Employee output (operations data): measuring the performance of employees in different departments.
Looking at how many new clients the sales team has acquired in the past month or looking at labor productivity.
Benchmarking: measuring how well your business is performing relative to other businesses in the industry.
Business Performance Evaluation
Two of the most significant means of measuring business performance is measuring financial performance and benchmarking.
1. Measuring financial performance
Measuring financial performance can be a useful tool to analyze overall business performance. Financial planning and budgeting can help businesses achieve their business goals and plan for improving certain areas of the business in the future. One way to measure business performance is by looking at profitability. Most businesses have a target profit margin they wish to achieve, so looking at whether the business was successful at implementing its strategy to achieve this objective can be useful. When looking at profitability, we can analyze the gross profit margin which shows us how much money the business has made after accounting for the cost of goods sold.
Therefore, we can measure business performance by looking at the business's financial statements. The business's cash flow statement represents the amount of money moving in and out of a business over a defined period. It is essential to assess the cash flow statement regularly, as it can help us understand whether the cash flow is positive or negative. If it's negative it means that more money is going out of the business, whereas if it is positive it means that more money is coming into the business. This statement can provide a basic overview of the financial performance of the business.
Another effective way of measuring business performance is by looking at the financial performance of the business over time. It can often be tricky to interpret the real performance of the business when only looking at the current financial position. By comparing financial performance over time, it is more likely that we spot certain patterns and trends. This could be useful especially if we spot long term issues that we would have otherwise missed if we only looked at financial data from a single period.
Figure 1. Measuring Financial Performance
2. Benchmarking
Benchmarking includes the process of comparing your business to other high-performance companies.
Typically, the motive behind benchmarking is to analyze the current position of your business and identify areas of improvement for your business based on the comparison. During benchmarking, the comparison is made with high-performance businesses that are not necessarily in the same industry - they are not direct competitors. Benchmarking can be useful for understanding best practices and how to improve your business model.
There are multiple types of benchmarking.
Performance benchmarking gathers quantitative data in the form of KPIs in order to find gaps in organizational performance.
Practice benchmarking is when you gather qualitative data on how an activity is conducted through people, processes and technology.
Internal benchmarking compares practices from different departments or units within the organization.
External benchmarking compares the performance of the organization to one or many other organizations.
Similar to benchmarking is comparing business performance to competitors in the same industry. To conduct a competitor analysis, a company needs to have access to certain information about its competitors. The company usually needs to have an understanding of what its competitors offer, how they price their products, the number of customers they have and their strengths and weaknesses compared to the company's business model. Competitor analysis is a great way for investors and management to assess how the business is performing compared to other firms in the industry.
Overall performance - key takeaways
- Business performance can be defined as the ability of a business to implement strategy to achieve organizational objectives.
- Leadership and innovation have a positive impact on organizational performance.
- Organizational culture can also have an impact on business performance. Good organizational culture can motivate employees whereas toxic organizational culture can significantly decrease business performance.
- You can evaluate business performance through various metrics such as measuring performance, profitability, leadership or employee output.
- Two effective ways of measuring performance are done through analyzing financial performance and benchmarking.
- Financial performance can be measured by looking at financial statements like cash flows, profit margins and comparing financial performance over time.
- Benchmarking is conducted by comparing the performance of the business to other best practice firms.
- A competitor analysis compares the performance of the business to other competitors in the industry.
¹ Sebahattin Yıldız, Faruk Baştürk, İlknur Taştan Boz, The Effect of Leadership and Innovative Ness on business performance, Procedia- Social and Behavioral Sciences , 2014² Mercy Harper,What are the Four Types of Benchmarking? , 2019 https://www.apqc.org/blog/what-are-four-types benchmarking
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