Five Categories of Performance Measures: How to Measure Performance

Summary

The video explores five key categories of performance measures used to evaluate organizational success: accounting measures, operational measures, market-based measures, survival measures, and economic value measures. It emphasizes the importance of selecting the right metrics based on organizational goals and environmental factors. The video also highlights the growing use of non-financial indicators like customer satisfaction and market share, as well as the challenges of measuring long-term performance. Lastly, viewers are encouraged to join a business mastery program offering extensive resources for entrepreneurs and business leaders.

Takeaways

• 😀 Accounting measures are based on financial data such as income statements, balance sheets, and cash flow reports, and include categories like profitability, growth, leverage, liquidity, and efficiency.
• 😀 Operational measures focus on non-financial performance indicators such as market share, customer satisfaction, stakeholder performance, and changes in intangible assets like patents or human resources.
• 😀 Operational measures have gained importance as companies adopt balanced scorecard approaches to integrate strategy with performance measurement.
• 😀 Market-based measures include performance metrics that rely on market value, such as return on shareholders' market value and holding periods, typically applicable to publicly traded companies.
• 😀 Survival measures simply assess whether the organization has remained in business over a given period, often considered a key indicator of long-term performance.
• 😀 Economic value measures, like residual income and economic value added, adjust accounting measures to account for capital costs and external financial reporting influences.
• 😀 Economic value measures are not commonly used in research or strategic management studies due to their limited availability and lack of widespread internal calculation by companies.
• 😀 Researchers should choose performance measures that best reflect the specific context of the organization and the environment of the study being conducted.
• 😀 While different performance measures provide unique perspectives on organizational success, not all measures are suitable for every company or research scenario.
• 😀 The script promotes the Business Mastery Insider Secrets Club, offering access to various business resources, including courses, tools, templates, and ebooks, for a limited monthly fee.

Q & A

What are the five categories of performance measures discussed in the video?

The five categories of performance measures are accounting measures, operational measures, market-based measures, survival measures, and economic value measures.

What types of data are used in accounting measures of performance?

Accounting measures rely on financial data from income statements, balance sheets, and statements of cash flows.

How are accounting measures further subcategorized?

Accounting measures are subcategorized into profitability measures, growth measures, leverage measures, liquidity and cash flow measures, and efficiency measures.

What are operational measures, and why have they gained attention?

Operational measures assess non-financial performance aspects, such as market share, customer satisfaction, and intangible assets. They have gained attention as companies adopt balanced scorecards to integrate strategy and performance.

What is the difference between accounting and operational measures?

Accounting measures focus on financial metrics, while operational measures focus on non-financial aspects of organizational performance, such as customer satisfaction and market share.

What are market-based measures, and who can use them?

Market-based measures use the market value of an organization, such as return on shareholders' market value and holding period return. These measures are typically available only for publicly traded companies.

What are survival measures, and why are they not often used in research?

Survival measures indicate whether an organization remained in business over a certain period. They are rarely used in research because most studies in entrepreneurship and strategic management focus on time horizons of five years or less.

What are economic value measures, and why are they less commonly used in empirical studies?

Economic value measures account for the cost of capital and external financial reporting influences. They include residual income, economic value added (EVA), and cash flow return on investment. These measures are less commonly used because data on them is not widely available and most companies do not calculate them internally.

What is the advantage of using accounting measures over other types of performance measures?

Accounting measures provide a clear, quantifiable picture of financial performance, which makes them easier to track and compare across organizations. They are also widely understood and standardized.

What is the role of non-financial measures, such as customer satisfaction, in assessing organizational performance?

Non-financial measures, like customer satisfaction, help organizations understand how well they are performing in areas that directly impact long-term success, such as brand loyalty, market positioning, and employee engagement.