The Idea of business performance is seen as the evaluation of all the efforts put in to realize the business goals, which usually comes handy with the question of which method and Criteria for Measuring Business Performance are to consider and which criteria to utilize first for the measurement and evaluation of business performance comes to the mind first.
In a competitive environment where the immeasurable will not be able to be controlled and the uncontrolled will not be able to be managed, a proper measurement of business performance becomes more of a vital issue.
The decision making on investment decisions that will ensure the creation of strategic competition advantage by businesses, and the effective and fruitful usage of the sources depend on a measurement of business performance with correct method and criteria. Therefore, the measurement methods and the used criteria of business performance need to be analyzed.
The Concept Of Business Performance
Today, the concept of business performance has become an instrument frequently used both by academicians and professional managers in all the areas of business sciences, particularly in strategic management studies. If a proper observation is undertaken, it will be understood that while the importance of the concept of business performance is in generally accepted, it would be difficult to set forth the presence of a generally accepted definition and measurement.
For and evaluation, the question arises: in terms of which criteria and dimensions will the business performance be evaluated.
Generally speaking, performance is a concept that quantitatively or qualitatively determines those that are produced as a result of an intended and planned activity . But business performance is the evaluation of all the efforts devoted to achieving the business goals.
Performance measurement can be carried out systematically for a business completely or it can also be conducted for a temporary period or for a specific aim. Every organization has their reasons to measure performance.
Businesses measure performance often to be able to determine whether they cover the needs of their clientele, to be capable of approving the truth of what they know about their activities and likewise to reveal what they do not know about their activities, to determine if they are in the generally successful in the scene or not, to ensure that the decisions are not made based on emotional or assumptions but on real data, to bring to light the problematic fields or to determine those areas that could develop for better.
The Methods Of Measuring Business Performance
There are differents methods to put in place when measuring business performance.
The first of them is through the objective (quantifying) method and subjective (judgmental) methods.
The second method is through the use of criteria such as using the financial leverage (e.g. Profit, sales) and operational customer satisfaction, quality etc. while the third is through the primary method (from organizations) and secondary (from databases) data bases.
In the objective measurement, quantitative data which is the check on absolute performance, data is measured whereas in subjective method what is measured is perceptive opinions about performance according to the competitors or company expectation. The same business performance criteria are measured in both objectively and subjectively.
What matters is to determine those criteria. Your criteria can be qualitative (e.g. customer satisfactory and overall business performance) or quantitative (e.g. profit, sales). The quantitative criteria are measured with an objective or subjective measurement but the qualitative criteria can be measured subjectively.
In essence, it has been shown clearly that there is a high correlation between the objective and subjective measurements and that both using both methods together is suited to performance measurement.
The fact that the objective criteria in the financial statements of a business can be flawed, the lack of relevant objective data, and the difficulty in reaching objective data to measure the performance of businesses makes it necessary to rely on subjective data obtained from the participators . It is usually very difficult to get all neccessary information about objective performance of the data because companies generally do not wish to release such information as their competitors can use that against their growth.
In an effort to measure qualitative and quantitative performance, a subjective measurement method is used by asking to what extent the managers of businesses find their companies successful -compared with other businesses in the sector- in the context of varied performance criteria . Putting forward the view that subjective (perceptive) measurement may change depending on the different personality traits or various organizational position and such a measurement would cause incoherence and doubts in drawing comparison with competitors, the researchers prefer the objective method in the measurement of business performance.
It has been suggested that in order to measure business performance such qualitative criteria as non-financial market share, launching new products into the market, product quality, marketing activity, technological activity in addition to such accounting-based financial criteria as sales increase and profitability (investment return, sales return, equity return and earnings per share).
The relation between the objective and subjective data about business performance is that subjective performance data (assets-return and sales growth) could be used in place of objective data in cases where it is not possible to get relevant objective performance data.
However, this conclusion does not mean that subjective data should be preferred to objective data. Particularly subjective business performance can be fruitful in performance evaluation by making comparisons with similar businesses in an industrial branch but the fact remains that the measurement of a business performance is not enough just by examining financial indicators such as investment return, profitability and productivity, that financial performance is short-term and that it prosperity.
Business performance is truly measured by both the personal evaluations of high level managers about business performance (subjective) and by accounting-based criteria (objective).
Looking at business performance as the evaluation of all the efforts made for the realization of business goals, it has been observed that objective and subjective measurements have been made use of in the evaluation of business performance and that these are generally objective financial performance and subjective financial-nonfinancial performance.
In financial performance measurement, accounting-based and market-based criteria are generally used together. Financial criteria are criteria which are based on accounting and the examples are return-on-assets and return on equity.
Market-based criteria are those which are market criteria and the examples are those value and return per share. It is trite to determine generally accepted and realistic performance measurement method and criteria so as not to keep beating about the bush when considering the subject of business performance.
Actually, when the view is dominant and it becomes difficult to reach objective data or after objective data have been reached, it would not reflect the truth due to speculative movements, then generally the subjective performance measurement can be thought to be preferred.
Similarly, when the view is dominant and the subjective measurement depends on personal views thereby varying from person to person, it may be said that objective performance measurement is preferred. Yet, it has been seen that the view that both objective and subjective methods are used together by making up the deficiencies of both views has claimed its place.
Also, it has been observed that the most widely used criteria in subjective method are profitability, sales, market share and new product launch while in objective method the most widely used ones are return-on-assets, return-on-equity and sales.
However, performance criteria which are unique to private sector can also be used. For instance, hotel occupancy rates discharged patient rates for hospitals and deposit share for banks.
In light of the foregoing, it is trite to also mention that most studies consider business performance to be a multidimensional construct.
Four dimensions (namely, business growth, profitability, image and customer loyalty, and product service innovativeness) have been said to validate a measure for business performance. Although not totally valid dimensions for measuring business performance, there are other two dimensions (namely, business growth and profitability) which show a high degree of correlation.
This simply indicates that business growths are aligned with the profitability growth which is a major concern, and that profitability still remains the key measure of business performance. Others Parameters such as customer loyalty and innovativeness are not regarded as important paremeters for business performance, although these could be a pressing issues for finalcial sectors.
Conclusively, the non-financial dimensions (image and customer loyalty, and product service innovation) cannot be out rightly deemed as valid dimensions for measuring business performance, while the other two dimensions (profitability and business growth) show a high degree of correlation. This indicates that business growth is aligned with profitability and growth for profitability is a major concern, and that profitability still remains the key measure of business performance.
Parameters such as customer loyalty and innovativeness should not regarded as important for business performance, although these could be pressing issues for business organizations and financial institution such as banks.
The exploration of these methods and criteria only stresses the need to understand it and have a clearer view and understanding about the need to explore them rightly especially with an utmost regard for the nature of the business involved.