Organizational Performance and its influencing factors

Organizational Performance and its influencing factors

An organization consists of a set of resource employed in a productive way to generate wealth and resource for the organization such as building, equipment, skills and competencies of employees, procedures of norms, culture, and values.

In the present day environment, there are increased complexity and uncertainty. This has their effects on the organizational performance. Forces and trends such as changing organizational structures, increased knowledge and new innovative technologies, increased specialization and interdisciplinary collaboration, consumerism, environment protection, and change in regulations are some of the issues which have a part to play with regards to the performance of the organization..

Today, an organization continuously faces external and internal forces. These forces  drive the organization to change and perform in order to meet the requirements created by the competitive prevailing atmosphere around its functioning.  The organization has to overcome these external and internal forces for its performance. Moreover, the organization is to justify its presence in the society by its performance and through it, the organization proves its effectiveness for the society.  Furthermore, the organization is able to reflect its efficient working besides building its image in the society through its performance. Also, the organization is required to sustain and improve its performance since the improvement of the performance is for its dynamic advantage

Organizational performance basically can be defined as the outcome which indicate or reflect the organization efficiencies or inefficiencies in term of corporate image, competencies and financial outcomes. It is concerned with the effectiveness, productivity, efficiency, excellence, or quality of the organization.  It is a central and fundamental feature for the existence of the organization in the present day competing world. The organizational performance is needed to be focused in details since it is the process to increase the effectiveness of the organization.

Organizational performance means the transformation of inputs into outputs for achieving certain outcomes. With regards to its content, performance informs about the relation between minimal and effective cost (economy), between effective cost and realized output (efficiency), and between output and achieved outcome (effectiveness).

Organizational performance is the process to enhance both the effectiveness of the organization and the well-being of its employees through planned interventions. It refers to the actual output or results of the organization as measured against its intended outputs, goals and objective. There are four types of organizational performance measures namely (i) human resource outcomes, (ii) organizational outcomes, (iii) financial accounting outcome, and (iv) capital market outcomes (Fig 1). Human resource outcomes are related to change in employees’ behaviour which includes employees’ satisfaction, turn over, and absenteeism. Organizational outcomes are linked to productivity of various processes of the organization, employees’ productivity, customer satisfaction, and quality of products and services. Financial accounting outcomes include measures such as profitability, returns on assets, and returns on equity. Capital market outcomes reflect how market evaluates the organization and consists of the three indicators which are stock price, growth rate of stock price, and market returns.

Fig 1 Types of organizational performance measures

For having a fair understanding of the concept of the organizational performance, it is essential to know the elements and the characteristics of the each area of responsibility in the organization. For reporting of the organization’s performance level, it is necessary to be able to quantify the results. Also, for the organization to achieve its objectives, there are key performance indicators. These performance indicators ensure that the organization is either meeting its goals or performing well by all standards.

The performance of an organization is affected by both the internal environment and external environment. The internal environmental factors like human resource, technical, financial, production and marketing have their influence on the organizational performance. Similarly, the external environmental factors are cultural, social and political aspects, policies of government as well as the government support which are having influence on the performance of an organization.

The organization is considered to be performing, if it realizes its objectives. The organizational performance is normally considered successful if it accomplishes its goals (effectiveness) using a minimum of resources (efficiency). Thus, the organization which achieves its performance objectives based on the constraints imposed by the limited resources generally always performs better. There are a set of definitions to illustrate the concept of organizational performance. These are (i) performance is a set of financial and nonfinancial indicators which offer information on the degree of achievement of objectives and results, (ii) performance is dynamic and usually requires judgment and interpretation, (iii) performance can be illustrated by using a causal model which describes how current actions can affect future results, (iv) performance can be understood differently depending on the people involved in the assessment of the organizational performance (as an example, performance can be understood differently from a person within the organization compared to one from outside), (v) for defining the concept of the performance, it is necessary to know its elements and characteristic to each area of responsibility, and (vi) for reporting of the organizational performance level, it is necessary to be able to quantify the results.

Organization performance is measured in terms of the goals or objectives which have been set out by the organizational management.  The performance is measured by the organization’s production performance, financial performance, marketing performance, and the shareholders performance.

Measurement of the performance plays an important role in planning and decision making and makes the link between strategy intent, competitive environment, and revenue. In the current dynamic environment, it is becoming even more challenging for the organization to actively manage and maintain its performance for the competitive advantage.

Effective performance measurements are to cover all the aspects of the performance which are relevant for the existence of the organization as well as for the organization to achieve success and growth. Performance measurement system is to include more than financial measurement. It is to include the extent to which the organization is oriented towards and understand the strengths, weaknesses, tactical strategy, and the potential of the organization.

There are three operational performance related capabilities which provide a baseline for competitive advantage. These are (i) product leadership, (ii) customer intimacy, and (iii) operational excellence. Product leadership refers to the competition based on the product and service innovation. Customer intimacy relates to the competition in terms of the strength of customer satisfaction and retention. On the other hand, operational excellence relates to competition by virtue of the efficiency of internal processes.

Top management plays an important role in the performance of the organization. The leadership role of the management requires attention to individuals as well as the organization. Essentially, the management (the leader) is seen filling the gap between employees’ desires and abilities on one hand and organizational goals and requirements on the other hand. In essence, when the gap is filled, there are satisfied employees and the performance of the organization becomes high.

There are no common standards which exist for the measurement of the organizational performance. However, there are four main governing approaches which are normally followed for determining the organizational performance (Fig 2). These four approaches are (i) goal approach, (ii) system resource approach, (iii) constituency approach, and (iv) competing values approach.

Fig 2 Competing approaches for organizational performance

The goal approach method of determining the performance of the organization consists of measuring the ability of the organization to achieve its goals which have been fixed by its stakeholders. The system resource approach is based on the discovering the relationship between the organization and its environment. The performance of the organization is effective when it takes advantage of its environment in the attainment of high value and rare resources to justify its operations.  As per the constituency approach, the organization is effective when multiple stakeholders perceive the organization as effective. The organizations with more control over resources are likely to have the maximum influence on the performance.  The competing values approach states that organizational goals are created in different ways by the various expectations of its multiple departments.  Hence, the organization can have different criteria for measuring its performance. As per this approach, the stakeholders support the adaptability of the organization. They want it to be flexible, stable and effective. A performing and effective organization has a high degree of collaboration and commitment among stakeholders through work groups and the management.

Continuous performance is the objective of any organization because only through performance, the organization is able to grow and progress. Knowing the determinants of organizational performance is important especially in the context of the present day when the technological innovations are taking place at a very fast pace, since it enables the identification of those factors which are to be treated with an increased interest in order to improve the organizational performance.

An organization with good performance is an effective organization. Also, the organization survives to the extent it is effective and it is effective to the extent that environmental information and resource dependencies are managed successfully. Environmental characteristics and uncertainties have been important factors in explaining organizational structure, strategy, and performance. The organization needs a total technology strategy in place. It is to be integrated with the overall organizational strategy, and goes way beyond the traditional information technology.

The organization needs to have in its focus on the use of technology for value-added and cost competitive advantage. It is to isolate a set of characteristics which improves its performance. It is to identify all the characteristics which influence its performance and improves its effectiveness. For this, the factors of organization structure, design, size, and strategic planning need to be considered.

For good performance of the organization, it is essential to look into the role of top management. The actions of the top management are to lead the organization towards performance.  The top management is to follow accepted leadership styles and measurement of practices. The performance of the organization is also influenced by the organizational culture, which affects the way the managerial functions of planning, organizing, staffing, leading, and controlling are carried out. The dominance of a coherent culture has a positive influence on the organizational performance.

In addition to controls, understanding also contributes a lot to the organizational culture. It helps to understand what is happening as employees interacts together within the organization. It helps management to know the environment in which employees are working. It allows the management to identify some of the more expressive aspects of the organization.

The concept of organization design implies the process of developing the relationships and creating the structure to accomplish the purposes of the organization. Hence the structure of the organization is the result of the design process. Organization design is therefore prescriptive and has action orientation. It is geared to solving of the problems and improving of the performance of the organization for its effectiveness.

The organization design which is independent of the nature of the organization and its environment helps the organizational performance. The organizational process and the management practices are part of the organizational design. There are several contingency designs which specify the contingency factors which are likely to improve the organizational performance. These contingency factors include such things as the technology, the environment, the organization’s size, and the social system within which the organization operates. Power control is one of the most important factors which lead to improve the organizational performance. The organization can have the power to manipulate and control its environment. Environment, technology, leadership, culture, strategic planning, structure, and design can explain the diagnostic approach and its link to organizational performance. A substantial portion of the residual variance can be explained by the power-control.

The organizational performance needs multiple criteria. Different organization functions have to be evaluated using different characteristics, and for the organizational performance, it is essential to consider both the means (process) and the ends (outcomes).

In the current scenario, knowing the factors which generate success and the ways in which it can be measured has a critical importance. Performance indicators are to be designed to provide information on the quality of processes performed within the organization offering support to achieve the objectives on time and within a predetermined cost.

There are some key variables which impact the organizational performance. These variable can be divided into two groups namely Ii) independent variables, and (ii) dependent variables. Independent variables include environment, technology, leadership style, culture, strategic planning, human resources, structural design, and power control. Dependent variables are related to the organizational effectiveness. The organizational effectiveness is determined by the employees’ satisfaction, customer satisfaction, stakeholders’ satisfaction, and employees’ training and education.

The organization performance is affected by both the internal environment and the external environment. There are several internal and external environmental factors which supports in getting the viable advantage and enhanced performance. The internal environmental factors are human resource, technical, financial, production and marketing aspects which influences the performance of the organization. The external environmental factors are cultural, social and political aspects, policies of government which are having influence on the organizational performance.

It has been observed that there is a positive and significant relationship between the organizational success and its determinants. The healthy financial resources are important factors for the organization for improving its performance. Then, there is the task environment in the organization which consists of raw materials, work force, financial institutions, suppliers, and customers which has a direct impact on the performance of the organization.

The organizational performance is impacted by the human resource planning, recruitment policy, education of the employees, training and career management in the organization. Further, the technologies, organizational policies, purchased materials and inflation impacts indirectly the performance of the organization. Also, if the organization has the organizational strategy, innovation competency, production competency, and marketing competency then its performance is affected positively.

Organizational performance requires a focus on human resources. The organization is required to help its employees to gain the skills and self reliance in order to master the ever changing environment as well as to find security and support. To perform effectively, the organization is to attract, retain, motivate, and utilize effectively the most talented employees they can find.

Then there can be many constraints which have considerable influence on the organizational performance. These constraints can be financial constraints, management constraints, technology constraints, and innovation constraints.  There are also such factors such as the size of the organization, total assets of the organization, amount of the turnover, and availability of comfortable working capital which impacts the organizational performance.

Various studies on the organizational performance, either with regard to its financial or its operational aspects, have revealed different factors which have significant effects on performance of the organization. These factors include enterprise risk management, multidivisional structure of the organization, charisma of the top management, stakeholders’ involvement and support, intellectual capital, human capital, social networks of the top management, organizational learning, the strategic integration of human resource management, managerial practices related to strategies, performance measurement, corporate governance, innovation and development, along with the external environment, adoption of green supply chain management practices, human resource practices, knowledge management capacity, supportive organizational climate, supply chain quality management, supply chain innovation, human capital disclosure,  and knowledge creation.

The factors influencing organizational performance are often interrelated or complementary in their impact, and they reflect the fact that effective organizational performance needs a systems approach to solving performance related problems or creating effective measures for the performance of the organization. Organizational performance is influenced greatly by the systems which support it. Effective management helps the organizational performance by paying attention to the six categories of performance factors (Fig 3). These factors are namely (i) organizational systems, (ii) employees’ incentive systems, (iii) tools and physical environment, (iv) knowledge and skills, (v) individual attributes, and (vi) external environment. The management is to constantly look for the ways to use them to sustain the systems which enables the organization to perform well.

Fig 3 Six categories of organizational performance factors

Organizational systems – The organization generally has unique culture, policies, and practices which have profound effects on how work gets done and by whom. Hence, the management needs to continuously check, how well the organizational systems is supporting the desired performance. Key components to consider include (i) clear organizational goals, strategic plan, structure, (ii) effective leadership, (iii) clear job expectations and authority, (iv) supportive supervision system, (v) clear operational policies and efficient processes,  (vi) realistic workloads, (vii) effective management systems (finance, human resources, logistics, information), (viii) fair and transparent human resources’ recruitment, management, and appraisal systems, including termination/exit processes, (ix) clear communication and information channels and access, and (x) adequate financial resources.

Employees’ incentive systems – Employees need to be satisfied to perform for the maintenance of the organizational performance, especially when working conditions are difficult, salaries are not adequate, and there is a shortage of work force. Incentives can encourage employees to work better through connecting clear expectations, feedback, and rewards to the improved performance. The organization which provides incentives to motivate employees to positively contribute to the organizational goals and results has generally high performance. The incentive systems provide the employees a reason to perform with dedication. Employees’ incentive systems include such elements as (i) clear expectations regarding responsibility, accountability, and autonomy, (ii) constructive performance feedback, (iii) fair compensation and rewards systems, (iv) recognition for good performance and consequences for poor performance, (v) engaging in meaningful work, and (vi) professional development and career opportunities.

Tools and physical environment – This factor focuses on the physical resources which the employees need to efficiently carry out their job. The management is to ensure that the employees have the necessary and adequate tools, supplies, and supportive physical environment for efficiently doing their work. This factor also examines whether the organization has the maintenance systems in place to support a well-functioning workplace. Key components to consider for this factor include (i) raw materials, equipment, instruments, consumables, and other materials, (ii) procedures, work instructions, manuals, job aids, and recordkeeping tools, (iii) adequate physical work environment such as furniture, workspace, power, water, light, and ventilation etc., (iv) safety measures at the workplace, (v) information technology and communication systems, equipment, and connectivity.

Knowledge and skills – This factor involves a determination of whether or not employees have the necessary knowledge and skills to do the job. It addresses the fundamental question whether the employees know how to correctly do their jobs. This factor includes (i) basic educational requirement needed for the job, (ii) technical and professional knowledge and skills, (iii) social and communication skills, (iv) problem-solving, critical thinking, teamwork, and leadership skills, and (v) relevant work experience.

Individual attributes – When considering employees, it is certain that no two employees are exactly alike. Each individual employee brings different attributes which affects the organizational overall performance. However, it is essential that the personal attributes of individual employees do not affect their ability to work together for performing the assigned jobs. Individual attributes include (i) internal motivation, (ii) gender/ethnic/class identity, (iii) religious, ethical, and moral values, (iv) emotional, intellectual, physical, and creative abilities, and (v) earlier life and work experience.

External environment – There are many variables external to the organization which affects the ability of the organization to perform. Some of these variables are outside the organization’s span of control and can be considered as those situations under which the organization is to operate. Other of these variables can change over time or be influenced or improved by actions of advocacy groups, professional associations or community organizations. All are required to be considered when analyzing root causes of identified performance gaps or strengths. It is needed to be analyzed whether factors in the external environment impede or support the ability of the organization to perform and achieve the organizational objectives. Examples of such factors include (i) national policies, regulations, standards, and professional scopes of work etc., (ii) licensing or accreditation requirements and processes, (iii) societal norms regarding gender, culture, class, religion and ethnicity etc., (iv) socio-economic conditions, education levels, and standards of living, (v) market conditions and customer needs and preferences,  (vi) national and local infrastructure such as transportation, energy, telecom, water and sanitation etc., and (vii) political changes in national and local government.

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