Measuring your business’s performance is essential to its long-term success. By assessing its operations, you can make informed decisions, find ways to improve, and establish accountability in the workplace.
Despite these benefits, many businesses struggle to use the vast amounts of data they have access to. According to a report by data storage company Seagate, businesses act on just 32 percent of the data available to them—with the remaining 68 percent going unleveraged.
If you want to help your organization achieve its strategic objectives, here’s why it’s vital to measure business performance and how to do it.
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Measuring business performance is critical to ensuring effective strategy formulation and implementation. It can also help identify obstacles and setbacks that impact your company’s success—similar to risk management.
According to the online course Strategy Execution, performance measurement comprises the formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities.
Engaging in performance measurement helps you and organizational leaders, investors, and employees understand how your roles and responsibilities relate to your business’s strategy—creating a culture of accountability and commitment to achieving its goals and objectives.
How to Measure Business Performance
Long-term business success doesn’t just result from effective strategy execution; it also relies on a holistic approach to monitoring, measuring, and evaluating performance. This involves creating objective and subjective measures—often called key performance indicators (KPIs).
While objective measures—like revenue and profit margin—are crucial to assessing performance, subjective measures are often overlooked.
“If a measure is objective, you can independently verify it,” says Harvard Business School Professor Robert Simons, who teaches Strategy Execution. “You and I could look at the same set of data and draw the same conclusion. A subjective measure, by contrast, requires judgment.”
For example, measuring employee engagement can help gauge the amount of internal support for your business strategy. High employee engagement can also greatly impact your company’s bottom line—increasing profitability by up to 23 percent.
“These measures work well only when there's a high degree of trust between employees and managers,” Simons says in Strategy Execution. “Employees must feel confident that subjective measures are applied fairly.”
Using diagnostic control systems—information systems managers use to monitor organizational outcomes and correct negative performance—you can ensure consistency and standardization when measuring success.
Examples of diagnostic control systems include:
- Performance scorecards
- Project monitoring systems
- Human resources systems
- Standard cost-accounting systems
Before implementing such systems and measuring your business performance, here are three factors to consider.
3 Considerations When Measuring Business Performance
1. Financial Goals
Measuring business performance starts with financial goals. This is largely because your company’s financial value is its first indicator of success or failure. Financial goals also help ensure your diagnostic control systems effectively monitor profitability and provide insight into how to fix problems.
To set financial goals, you can use a profit plan—a summary of a specific accounting period’s anticipated revenue inflows and expense outflows—presented in the form of an income statement. Profit plans serve several purposes; their most important is creating control systems that place responsibility on management.
“Individual managers can be held accountable for achieving specific revenue and expense targets and the overall profitability of the business,” Simons says in Strategy Execution.
To confirm that your profit plan holds you and others accountable for your organization’s financial health, Simons suggests asking the following:
- Does the business create enough profit to cover costs and reinvest in future endeavors?
- Does the business generate enough cash to remain solvent through the year?
- Does the business create sufficient financial returns for investors?
“Once managers have completed the profit planning process,” Simons says, “people throughout the organization will be in agreement about the direction of the business and the assumptions that underpin the forecasts.”
Related: 7 Financial Forecasting Methods to Predict Business Performance
2. Non-Financial Goals
While financial metrics are critical to assessing short-term profitability, non-financial goals can impact your business’s long-term success.
Objectives like improving customer satisfaction, boosting employee engagement, and enhancing ethical practices can all drive business performance—even financially.
“An organization that's focused just on financial goals will rarely achieve those goals for a long period of time,” says Tom Polen, CEO and president of medical technology company Becton Dickinson, in Strategy Execution. “It's all the other goals that are going to feed into the financial goals.”
In the course, Polen says he consistently communicates his organization’s strategic objectives to employees and uses an incentivization system to reward those working to support non-financial goals.
“As a health care provider, the most important thing—bar none—is quality,” Polen says. “While we’re focused on financial goals, our quality goals—which cut across manufacturing, regulatory, marketing, and medical—contribute to making sure that we have quality products at the end of the day. And we’ll never sacrifice a quality goal for a financial goal.”
3. Intangible Assets
Your goals aren’t the only thing you can use to measure your company’s performance. Intangible assets—non-physical assets your business significantly values—can also help.
Examples of intangible assets include:
- Research capabilities
- Brand loyalty
- Customer relationships
“These are among the most valuable assets in many of today's businesses,” Simons says in Strategy Execution. “But you won't find them anywhere on an income statement or balance sheet.”
Since you can’t monitor these assets using traditional accounting systems, you can instead use a balanced scorecard—a tool designed to help track and measure non-financial variables.
“The balanced scorecard combines the traditional financial perspective with additional perspectives that focus on customers, internal business processes, and learning and development,” Simons says in Strategy Execution. “These additional perspectives help businesses measure all the activities essential to creating value.”
For example, if your business strategy focuses on improving an intangible asset, like brand loyalty, you can use a balanced scorecard to track customer satisfaction through surveys and reviews.
In this way, the balanced scorecard offers a comprehensive view of business performance, helping you make informed decisions to protect and enhance intangible assets’ value.
Start Measuring Your Business Performance
Measuring business performance doesn’t have to be difficult. By implementing the appropriate metrics and control systems, you can seamlessly track strategic initiatives’ progress.
By enrolling in an online course, such as Strategy Execution, you can be immersed in a dynamic learning experience featuring real-world examples of businesses that have employed performance measurement strategies to secure long-term success.
Do you need help measuring your business performance? Explore Strategy Execution—one of our online strategy courses—and download our e-book to discover how to think like a top strategist.
