This briefing on Primary Measures of Corporate Performance was prepared by Ashley E. Washington while a Business Administration major in the College of Business at Southeastern Louisiana University.
Having a broad knowledge of how your company is performing based on strategy is important. In the past simple financial measures were used but today there are several methods that include non-financial measures that are used. These measures are conducted based on several areas of a corporation.
The Idea in a Nutshell
The concept of the primary measures of corporate performance is to analyze and determine if the use of a particular strategy is a success or a failure. One of the earliest books on performance measurement was written by William Harvey Allen. The idea of measuring corporate performance doesn’t just stop at calculating ROI and EPS; it is very in depth and interesting.
The Top 10 Things You Need to Know About the Primary Measures of Corporate Performance
1. The traditional financial measures of corporate performance include but are not limited to ROI, EPS, ROE, and operating cash flow. It is argued that the best indicator of corporate performance is Return on Investment (ROI). ROE focuses on return to the shareholders of the company. If you are a shareholder, this gives you a quick and easy to understand metric. Many people argue that although ROI is the best indicator of corporate performance it has several advantages as well as limitations.
2. Some non-financial measures are also used to measure the company’s performance. These measures are the ones that most people are familiar with. Some common examples include customer or employee satisfaction, quality, market share, and the number of new products. These measures are considered to be the leading indicators of future financial performance.
3. There are several stakeholder measures that are used to determine how a company is performing. These stakeholder measures include both near term measures and long-term measures. Stakeholders in a company include customers, suppliers, employees, Congress etc. Most of these measures are basically numeric values that don’t include doing various formulas.
4. In 1992, Robert S. Kaplan and David P. Norton began publicizing the Balanced Scorecard through a series of journal articles. In 1996, they published the book The Balanced Scorecard. The Balanced Scorecard is a performance planning and measurement framework, with similar principles as Management by Objectives. It is a tool to execute and monitor the organizational strategy by using a combination of financial and non financial measures. It is designed to translate vision and strategy into objectives and measures across four balanced perspectives.
5. Another method of measuring performance is using the Balanced Scorecard Approach. A balanced scorecard is based on four perspectives: Financial Perspective, Customer Perspective, Internal Business Perspective, and Innovation and Learning Perspective.
6. These four perspectives are then assigned measures, targets, and initiatives. These measures are thought of as key performance measures. More than 50 percent of large enterprises use some type of a balanced scorecard according to a study by Cranfield University. About 70 percent of organizations had at least partially implemented a balanced scorecard by 2006.
7. Performance evaluations are standard practice for directors in different areas of world. These performance evaluations used by many companies. Performance appraisals help supervisors and employees to identify strengths and weaknesses of employee performance. They offer an opportunity for supervisors and employees to discuss the employee’s goals and how to achieve them.
8. Management audits are systematic assessments of methods and policies of an organization’s management in the administration. The objectives of the management audits are to establish the current level of effectiveness, suggest improvements, and lay down standards for future performance.
9. Strategic Audits are also a type of management audit. Strategic audits have several purposes. Some audits assess compliance with laws and regulations. Others measure compliance with the organization’s internal policies and procedures. A strategic audit helps small-business owners assess whether internal processes are helping them toward their strategic goals. Based on audit results, management adjusts operations to maximize progress toward the goals.
10. Economic Value Added is gaining popularity and may eventually be a replacement for ROI. EVA measures the difference between the pre-strategy and post-strategy for the business. ROI can lose it popularity because the numbers can be easily manipulated cover up any blemishes the company might have.
The Video Lounge
I chose a video about the Balanced Scorecard. This video shows some key facts that companies should know about the Balanced Scorecard before they implement it in their company. I find this video kind of interesting because many people working for companies do not understand the strategy and managers fail to execute their strategies.
I think knowing about the Primary Measures of Corporate Performance is very important and necessary. It is also important to realize that measuring performance is not only based on mathematical formulas using data obtained from financial statements, it is also measured in a non-mathematical way. When a corporation’s performance is measured it breaks down each area of the corporation and measures it thoroughly.
Balanced Scorecard. (n.d.). QuickMBA: Accounting, Business Law, Economics, Entrepreneurship, Finance, Management, Marketing, Operations, Statistics, Strategy. Retrieved November 15, 2012, from http://www.quickmba.com/accounting/mgmt/balanced-scorecard/
Balanced Scorecard . (n.d.). Vector Study. Retrieved November 17, 2012, from http://www.vectorstudy.com/management_theories/balanced_scorecard.htm
Balanced Scorecard Fact Sheet and Statistics. (n.d.). Balanced Scorecard Designer software (BSC Designer) – create KPIs, metrics and indicators offline and online. Retrieved November 16, 2012, from http://www.bscdesigner.com/balanced-scorecard-fact-sheet.htm
Brudan, A. (2010, August 7). History of Performance Measurement . AurelBrudan.com. Retrieved November 15, 2012, from http://www.AurelBrudan.com/tag/history-of-performance-measurement/
III, J. H., Brown, J. S., & Davison, L. (2010, March 4). The Best Way to Measure Company Performance – John Hagel III, John Seely Brown and Lang Davison – John Hagel III and John Seely Brown – Harvard Business Review. HBR Blog Network – Harvard Business Review. Retrieved November 15, 2012, from http://blogs.hbr.org/bigshift/2010/03/the-best-way-to-measure-company.html
Martin, M. (n.d.). How Performance Appraisal is Helpful for Business Improvement | Chron.com. Chron.com. Retrieved November 15, 2012, from http://smallbusiness.chron.com/performance-appraisal-helpful-business-improvement-3073.html
Non-Financial Performance Measures Definition from Financial Times Lexicon. (n.d.). Financial Times Lexicon. Retrieved November 15, 2012, from http://lexicon.ft.com/Term?term=non_financial-performance-measures
To contact the author of “Management 101: What You Need to Know About The Primary Measures of Corporate Performance,” please email Ashley E. Washington at firstname.lastname@example.org or email@example.com.
About the Publisher
David C. Wyld (firstname.lastname@example.org) is the Robert Maurin Professor of Management at Southeastern Louisiana University in Hammond, Louisiana. He is a management consultant, researcher/writer, and executive educator. His blog, Business News 24/7, can be viewed at http://wyld-business.blogspot.com/. He also serves as the Director of the Reverse Auction Research Center (http://reverseauctionresearch.org), a hub of research and news in the expanding world of competitive bidding.