One of the hardest questions in Strategic Management -- the study of why some organizations outperform other organizations -- is how to measure performance? Is there one universal measure? Does it depend on industry or structure? How do we make sure that our comparisons are apples-to-apples?
So what measurement do you use to say this organization outperforms that organization?
8 comments:
So what's wrong with some variant of ROI?
There's nothing wrong with it, but all the various ratios have certain implications. With ROI, it's a weighting towards leverage. Also, is performance always a question of accounting profit or do we care about free cash flow in certain circumstances?
Also, what does ROI imply about risk taking?
Performance is the absence of non-Performance.
Kind of like that sometimes the clearest way to think of the probability of something happening is to consider the probability of it not happening.
ROI is also opaque to risk and a better metric for investors choosing between investments than for judging organizational performance.
But let's make this concrete: Apple or Microsoft?
Judging organizational performance and choosing between investments are one and the same thing, surely. You're wondering how professors of strategic management can differentiate themselves from stock analysts. We're wondering why anybody would need professors of strategic management, when stock analysts are available for free.
I'd say it's how large and how durable their free cash flows are in a competitive market.
If only we had some way to set a price on an organization's anticipated cash flows in a competitive market...if somebody could just come up with a way to telescope that future into present-day dollars, then he could probably make a lot of money.
It depends partly on your expectation of longevity, doesn't it?
If you intend to pass the business on to your grandchildren, performance will look different than if you're a hedge fund guy who would surprise himself to still be involved in the business two years hence.
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