was successfully added to your cart.

Cart

How Companies Measure Success?

By January 16, 2018Home Blog

What would happen to an organization if its goals did not account for external threats and shifting marketplace realities? What challenges will a business face if it doesn’t have sound measures and an effective performance management system, and why?

The first step toward the success of any system, from a small firm to multinational companies, is setting the goal right based on past data studies, current trends and future predictions. Companies must also have a unique and compelling business strategy to achieve their goal. Lacking these characteristics equals setting a system in the direction of failure.

The second step in guaranteeing the success of an organization is to continuously apply efficient types of measurement to evaluate the rate of success in reaching the goal and based on the results, making adjustments to the execution plan or introducing new strategies into the system.

The last but not least step is to check the flexibility of implemented strategy and through foresight, commitment and continuous effort, change the target and plan before it gets too far in direction of failure.

This paper aims to highlight how critical is for an organization to have clear and educated objectives, efficient measurement tools, continuous evaluation and recalibration of target and strong exit strategy in case of emergency.

In order to support our statements and ideas to prove that an efficient strategy can make a difference between total disaster and great success, we used examples of small firms as well as classic examples of billion dollars’ organizations.

 

As we live in an era of continuous technological advancement, organizations- big or small- are facing a radical transition from the scale economy to informational economy. If 65-70 years ago inventions like Integrated Circuit (IC) [1]were taking a long while to move from military application into commercial use, now-a-days, is quite the opposite: military applications are using Original Equipment Manufacturer (OEM) [2] products into their production line. The competition is becoming intense among small firms as well as multinational corporations, so its critical to set the target right and continuously evaluate the performance of that target.

With the increased need for effective professionals in the business sector, the job market is becoming oversaturated with individuals who trust in their expertise and professional abilities. For instance, if it were to search for the word “consultant” in the internet browser, the results are amazing: either working with companies as small as one- employee or big corporations, business consultants consider themselves experts in guiding an organization. Yet, the data shows that over 90% of all startups fail in less than a year [3] .The fact that while there is data available to aid in making decisions, and there are enough advisors to use for guaranteeing a company’s success, the rate of failure is high, is truly upsetting.

We’ll present some examples to identify possible reasons for the high percentage of failures in businesses. The smallest system we can look at is one individual’s life plan. Most students in US rely on government assistance/ student loans to pay for their education, so the fact that once graduated, students cannot find jobs in their field of study shows that the system is defected.

Business schools teach students to be efficient and analytical, but the truth is, many professionals don’t even get chance to apply those skills. The number of educated people who cannot get a job in their field is growing, and insecurity toward future is a big issue among most families in US.

Students attending the university for higher education are cheering and celebrating once they graduate. However, their target is set wrong and so is their measurement for success, causing false celebration. For instance, The University of Tennessee had registered over 34K attending students in 2015 with less than 3K [4]attending an Engineering or Science major. When students enroll to university undecided, a wrong target is set which causes a rise in the number of student graduates in liberal arts and high competition in job markets among students with college degree but no useful skills. Therefore, those graduates are constrained to take on low-skill and low paid jobs to be able to pay for their student loans and other school related debts.

For this reason, a big number of students graduates, switch jobs way too often, losing their loyalty toward one workplace. The unstable employee factor causes additional costs for a company, because after employees receive training, gain experience and become a positive force, they leave to a company that pays better. To avoid such costs, many companies do not invest in training new hires, offering benefits or vacation packages only after 3rd or 5th year from date of hire. This kind of actions have a bad effect on the culture of an organization, as well as on it’s relationship with employees. According to Families and Work Institute Research, workplace engagement is at an all-time low- with 70% of employees “dreaming of having a different job”, and as the Gallup Research puts it, only 28% of American workers are engaged in their work [5]

The shifting demographics in the workforce has become a problem, and to maintain an effective performance management system, companies need to find ways to retain employees across generations. As the largest group in the workforce- the Baby Boomers- is close to retirement, this will result in a loss of talent, experience and expertise, because the newest generation for the most part has different values and ideas. Also, the new generation of workers (so-called Generation X) do not have the experience necessary to fill the managerial and leadership positions that companies are looking for, creating a challenge. In 2008, the Bureau of Labor Statistics projected that the total US civilian workforce growth was expected to go down from an annual rate of 1.1% between 1990 and 2000 to 0.7% through 2025 [6].

Considering these facts, a company that thrives to succeed should find innovative ways to keep employed both categories- Baby Boomers and and the Generation X. Flexibility seems to be a characteristic that most employees agree on, therefore it is up to the organization to show how much it values its employees. Usually, companies that achieve high performance are very protective toward their employees. They consider them an important asset and make sure to show it through open communication, vision toward future, support, benefits and focus on their safety. In return, employees perform better, they want to contribute and have a sense of pride toward their workplace. As the WELCOA case study found, the business functions better when a high performance culture is supported and nurtured within the company, from senior management on down. [7]

In my opinion, a company is successful because of the hard working people driving that success. If an organization has talented individuals on top and has strong goals toward future, it is set for success. Effective managers can overcome issues occurring in their organization by setting goals of performance and acting strong about meeting those goals. According to professor G.S.Odiorne, [5]  managers need standards of performance to achieve control and to be realistic with the goals set by the people who are responsible for producing the end results. Odiorne saw three informal methods as the base standards for managers to help achieve an organization’s goals:

  • Standards based on historical data, which basically look at the company’s success rate throughout the years and use it to calculate the probable success rate in the future.
  • Short interval scheduling, a method used mostly in high volume work environment which consists in premeasuring the amount of work, following-up and correcting when things are not on schedule.
  • Standards evaluated according to expert estimates, which simply brings experts to study the job and make a decision for every job in the future.[5]

Likewise, a manager has to be a leader in organization in order to gain the respect and support in achieving company’s goals. As scholar Zalesnik explains (1977), it takes neither genius nor heroism to be a manager, but rather persistence, hard work, intelligence, analytical ability and most important, tolerance and good will. [15]

While some executives achieve success through measurement and experiments, most executives continue to lean heavily on poorly chosen statistics, driving poor decisions and undermining performance.

The Quartz revolution is a classic example of business failure because of inattention to external factors and threats and stagnation in making adjustments in organization’s goals.

The Quarts example perfectly reflects a company’s need for adaptation to consumers’ wants and to account for the shifting marketplace realities. Swiss watchmaking executives failed to analyze and implement efficient strategies and as result got crushed by competitors and failed. For a long period of time Swiss watchmaking industry was the strongest and the only leader of its kind, holding monopoly over all watchmaking companies. However, as the watch technology became more advanced, Swiss watchmakers refused to conform to it, even though they invented that technology themselves with some help from Seiko manufacturer [8], eliminating themselves from the competition in a matter of a decade. As such, by 1970s, over 60,000 employees in Swiss watch-making industry lost their jobs, only 10 years after the first Quartz watch was produced. [8]

Another example showing companies’ failure due to bad strategies is the car manufacturing industry in USA. For many years European and Asian car manufacturing companies focused on building high efficiency and high gas-mileage vehicles, while US carmakers focused on strengthening vehicles’ engine and enlarging the size. Market data from year 2009 and later shows how companies like Pontiac, Chrysler and Saturn were forced to shut down after years of activity, because as the gas price increased, consumers were more likely to purchase compact, gas efficient vehicles. Since those carmakers oriented their strategies toward designing and building vehicles with bigger/ stronger engine while the market demand shifted toward small, affordable cars, they experienced a permanent damage.

Historically, many companies lost their iconic status in the industry and collapsed because of ignoring competition in the same market. To understand how important is for a company to adapt and implement efficient strategies in this increasingly uncertain age, we take Nokia, an industrial giant that failed to react to market demand and lost. Couple decades ago, it was hard to imagine that Nokia, the world leader in telecommunication industry would be missing among the top six brands for highest market share in 2015 [9]. In 2013 alone, Nokia lost 30% [10] of the global cell phone market, same market that the company initiated and led [11] less than 30 years ago. While other companies like Apple, Sony, Samsung etc., understood and conformed to costumers’ desire for a touch screen cellphone and virtual key pads, Nokia kept its model untouched. Technology shifts can radically change time-honored business principles and Nokia’s delay to adapt resulted with its costumers giving preference to competitors’ products.

The above examples show that no matter of its size, an organization can lose its immunity if the market is not analyzed correctly, if the business sees disruptions and if the external treats and competitors are ignored.

What is driving the change now-a-days is the globalization of economy, the international trade and the global competition. Today, value is measured differently that in the past, so when companies plan to create a new product, the scope of production, marketing and supply chain does not take place in a single state or country, but it extends globally. When analysts attempt to calculate the lowest final cost of a certain product, they have to consider that a manufacturer can build the final product in any part of the world, with materials that can be found at lower prices and the finished goods can be shipped and sold in any part of the world.

Also, as the number of consumers for a product grows, the production continues nonstop, and the car manufacturing industry can be used as an example. A rise in population’s quality of life around the world gives the word “demand” a whole new meaning. So, automakers work at the highest possible speed of production line and team members excel by increasing the production, introducing robots, improving the assembly process, maximizing the efficiency of production lines through “mistake proof” (kaizen) [12] and maintaining a minimum cost.

While the globalization of economy makes it difficult for businesses to decide where to build, what materials to use and where to sell, the increasing informational content of available products and services adds complication to this matter. The new technology is invented and available for public use at such speed, that it is hard to keep up and actually digest the process.  With everything becoming digitized, everyone has a smart tool in their hands and this creates the illusion of being smart and expert on making decisions.

As we’ve entered a new era, the World Wide Web, people became more curious and interested in sharing their opinion about the products and services online. Consumers review products so often now, that reading an online review is becoming a norm and it influences the shopping behavior. While sharing the experience with an item is becoming common between its users, the writers of those reviews do not have a deep knowledge regarding the product. If we refer to reviews about auto vehicles, in most cases reviewers are simple people without technical knowledge about the car. As result, when they review the product, or read about car’s problem, they do not have a proper understanding of who is at fault in the supply chain – suppliers or manufacturer- usually blaming the manufacturer. This is creating a challenge for companies to maintain a high performance while having to deal with external threats.

To understand how consumers’ reviews can influence a company’s performance, we turn to the headphone company formerly called “Beats by Dr. Dre “. Founded in 2006, the company’s vision of quality product was very well received on the market, and to attract new customers, the company changed the purpose of headphones from electronic utility to fashion utility. The strategy implemented brought the company good reputation and profits of approx. $1.5 billion in 2013, seven years after the brand was born. [13]

The headphones example proves the fact that virtually any company can achieve success if it has well set-up strategies aligned with its goals. Flexibility to redirect or reevaluate the goals should be in place. As the process is accelerating and the technological cycles are under pressure, companies should experiment more and plan less. The strategic shift has to be seamless, and the strategy has to be more efficient and collaborative.

Creating good, solid measures that are relevant to the goal and strategy is also very important in achieving performance in organization. Some of the most common measures used are:

  1. Efficiency measures- measures are productivity and cost effectiveness measured as ratio of outputs per inputs.
  2. Outcomes measures- these measures are the end result of whether services meet proposed targets or standards and demonstrate impact and benefit of activities.
  3. Quality measures- these measures gauge effectiveness of expectations and generally show improvement in accuracy, reliability, courtesy, competence, responsiveness, and compliance.
  4. Project measures- These measures show progress against an initiative that has a terminus. The measure is usually stated as the percent complete.

Considering the types of measurement listed above, we look at M. Mauboussin’s article on True Measures of Success [14] to identify some mistakes that led companies toward wrong measurement. As he points out, there are three biases that executives encounter while trying to improve their businesses.

Overconfidence. People’s deep confidence in their judgments and abilities is often at odds with reality. Most people, for example, regard themselves as better-than-average drivers. The tendency toward overconfidence readily extends to business. Consider this case from Stanford professors David Larcker and Brian Tayan [15]: The managers of a fast-food chain, recognizing that customer satisfaction was important to profitability, believed that low employee turnover would keep customers happy. “We just know this is the key driver,” one executive explained. Confident in their intuition, the executives focused on reducing turnover as a way to improve customer satisfaction and, presumably, profitability. As the turnover data rolled in, the executives were surprised to discover that they were wrong: Some stores with high turnover were extremely profitable, while others with low turnover struggled. Only through proper statistical analysis of a host of factors that could drive customer satisfaction did the company discover that turnover among store managers, not in the overall employee population, made the difference. As a result, the firm shifted its focus to retaining managers, a tactic that ultimately boosted satisfaction and profits. [16]

Availability. The availability heuristic is a strategy we use to assess the cause or probability of an event on the basis of how readily similar examples come to mind—that is, how “available” they are to us. One consequence is that we tend to overestimate the importance of information that we’ve encountered recently, that is frequently repeated, or that is top of mind for other reasons. For example, executives generally believe that EPS is the most important measure of value creation in large part because of vivid examples of companies whose stock rose after they exceeded EPS estimates or fell abruptly after coming up short. To many executives, earnings growth seems like a reliable cause of stock-price increases because there seems to be so much evidence to that effect. But, as we’ll see, the availability heuristic often leads to flawed intuition. [16]

Status quo.  Finally, executives would rather stay the course than face the risks that come with change. The status quo bias derives in part from our well-documented tendency to avoid a loss even if we could achieve a big gain. A business consequence of this bias is that even when performance drivers change—as they invariably do—executives often resist abandoning existing metrics in favor of more-suitable ones. Take the case of a subscription business such as a wireless telephone provider. For a new entrant to the market, the acquisition rate of new customers is the most important performance metric. But as the company matures, its emphasis should probably shift from adding customers to better managing the ones it has by, for instance, selling them additional services. [16]

Regardless of the methods and types of measurements used, companies need to consider that in a digital era, staying afloat can be difficult. In order to achieve high performance, it is critical to have clear and educated objectives, efficient measurement tools, continuous evaluation and recalibration of target and a strong exit strategy.

The employee factor has to be valued, and companies need to adapt and become more flexible about all their operations. Executives should progress in their role no matter the uncertainty of environment, the impossibility of measurement or other factors. A successful enterprise can only be successful if it has a strong management system in place and its executives are prepared to succeed using necessary strategies, analyzing data, forecasting and taking educated risks. For all the reasons presented in this paper, organizations must have well-planned goals, be fast and flexible and rely on highly effective executives to make strategic decisions and overcome future difficulties.

 

 

 

 

 

 

 

 

 

References

[1] P. Horowitz, The Art of Electronics, Cambridge University Press, 1989, pp. 61-74.
[2] D. o. Defence, “OEM LICENSE AND DISTRIBUTION AGREEMENT,” [Online]. Available: https://www.sec.gov/Archives/edgar/data/1139023/000119312511173302/dex104.htm. [Accessed 22 11 2016].
[3] N. Patel, “90% Of Startups Fail: Here’s What You Need To Know About The 10%,” Forbes, 16 JAN 2015.
[4] U. O. tennessee, “Headcount Enrollment By College, Level, Gender, and Race/EthnicityDownload,” oira.utk.edu, Knoxville, 2016.
[5] T. M. Thomson, “MANAGEMENT BY OBJECTIVES,” The Pfeiffer Library, vol. 20, no. 2nd, 1998.
[6] D. L. V. ,. a. C. L. C. Barbara A.W. Eversole1, “Creating a Flexible Organizational Culture to Attract and Retain Talented Workers Across Generations,” SAGE journals, 2012.
[7] n. d. Jihn Harris, “Optimizing Business Performance,” Wellness Council of America Presents, 2013.
[8] J. Thompson, “1969:Seiko’s Breakout Year,” EatchTime , 2009.
[9] I. Q. Report, “International Data Corportion WorldWide Quarterly Mobile Phone Tracker,” International Data Corportion, Framingham, 2015.
[10] L. Westaway, “Cnet,” CNET, 29 04 2014. [Online]. Available: http://www.cnet.com/news/nokia-phone-sales-figures-drop-30-percent-intense-competition-to-blame/. [Accessed 02 05 2016].
[11] A. Huurdeman, The Eorldwide History Of Telecommunications, John Wielly& Sons, 2003, pp. 527-532.
[12] M. Imai, Kaizen: The Key to Japan’s Competitive Success, Irwin: McGraw-Hill, 1986.
[13] B.Sisario, “Algorithm for your Personal Rhythm,” NY Times, 01 12 2014.
[14] M. Mauboussin, “The True Measures of Success,” Harvard Business Review, October 2012 .
[15] a.Zaleznik, “Managers and Leaders : Are they different ?,” Harward Business review, vol. May, no. 12, 1977.
[16] M. J. Mauboussin, “HBR.ORG,” OCT 2012. [Online]. Available: https://hbr.org/2012/10/the-true-measures-of-success.
[17] N. Patel, “90% Of Startups Fail: Here’s What You Need To Know About The 10%,” Forbes , 16 Jan 2015.
[18] M. H. ,. A. F. ,. T. M. H. Amir Hoosain, “Seiko Watch Corporation: Moving Upmarket,” Harvard Businss Publishing, 2007.

 

Farshad Rabib

Author Farshad Rabib

More posts by Farshad Rabib

Leave a Reply