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Enhancing Organisational Performance: Strategic Management Insights

Explore the conceptual approach to performance, survival measures, accounting metrics, net present value, and stakeholder perspectives on organisational performance in strategic management. Understand the impact of strategies on performance.

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Enhancing Organisational Performance: Strategic Management Insights

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  1. Organisational PerformanceJ.B. Barney: Gaining and Sustaining Competitive AdvantageCh. 2: What is Performance Fred Wenstøp Fred Wenstøp

  2. Strategy • Most definitions of strategy focus on • Formulation of organisational objectives • What decisions should be made to achieve them • Most definitions of strategic management focus on • The processes needed to produce and implement strategies • All definitions focus on the impact of the strategies on performance Fred Wenstøp

  3. Conceptual approach to performance • An organisation is • an association of productive assets (including individuals) who voluntarily come together to obtain economic advantages • labour, management, entrepreneurial skill, physical capital, financial capital • A measure of performance should • compare the value that an organisation creates using its productive assets with the value that the owners of such assets expect to obtain Fred Wenstøp

  4. Survival as a measure of performance: • Rationale • Organisation that don’t survive create • Strength • Apparently easy to use, ex post • Weakness • Not so easy after all. When does an organisation die • Not very suitable for decision making Fred Wenstøp

  5. Accounting measures of performance • By far most popular (because they are easy to observe) • Profitability ratios (ROE, ROA etc.) • Liquidity ratios (current assets/current liabilities etc.) • Leverage ratios (total debt/total assets etc.) • Activity ratios (sales/inventory etc.) • Limitations • Bias caused by managerial discretion • Bias caused by dynamic instability • Undervalues intangibles • Not all of them are fundamental objectives Fred Wenstøp

  6. Net present-value measureof performance, technicalities • Present value of future cash flows • Net cash flow in period t • NCF = (1-t)(Revenues-Costs) + t´depreciation - investments • t = tax rate • NPV = SNCVt /(1+k)t • k is cost of capital or the expected rate of return • The capital asset pricing model: CAPM • k = RFR + b[ERm-RFR], b = the firms systematic risk • RFR=risk free rate of return (government securities) • ERm=expected rate of return on a fully diversified portfolio (Dow Jones) Fred Wenstøp

  7. Net present-value measureof performance, comments • Strengths • NPV is a shareowner criterion, but the shareowners are the most important stakeholders • Weaknesses • It is very difficult to predict the cash flows • It is difficult to estimate b, long data series are needed Fred Wenstøp

  8. Multiple stakeholder view of performance • Comes closest to the conceptual definition of performance • The organisational performance should be evaluated relative the preferences and desires of the stakeholders that provide resources to the firm • Different firms will choose different criteria for evaluating their performance • Different individuals within the same firm will choose different criteria as well Fred Wenstøp

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