Organizational Performance

Conceptual Overview

The evaluation of organizational performance plays a central role in organization and management research. One finds evaluation approaches under labels like organizational effectiveness, performance, success, excellence, health, or efficiency. Some authors use these terms interchangeably, often in an attempt to overcome terminological confusion. Others have come up with additional labels, such as organization goodness, to encompass the terminological variety. Overall, organizational performance and effectiveness are the most well-established concepts for evaluating organizations.

Organizational performance used to be associated primarily with the evaluation of financial and economic outcomes of business firms, an evaluation approach typically applied in the field of business policy or strategy research. Organizational effectiveness tended to be the broader concept and was used mainly for evaluating nonprofit and public organizations on a wide range of criteria. Recent conceptual developments that acknowledge the multidimensional nature of performance in both profit and nonprofit organizations have made the distinction between organizational effectiveness and performance largely obsolete.

The rational goal approach is the most traditional model for evaluating organizations. It has its roots in the mechanistic view of the organization and focuses on the degree to which organizations realize their output goals. For organizational performance researchers focusing on profit-seeking firms, the rational goal approach has traditionally been the dominant performance approach. It assumes that the pursuit of financial or economic goals is the primary organizational objective. Performance is usually assessed with accounting indicators (e.g., return on assets, return on investment, return on sales), market indicators (e.g., sales, market share), or shareholder return. These measures provide aggregated performance information and have the advantage of being rather easily accessible and comparable across various types of industries. Yet they have also come in for considerable criticism. Proneness to manipulation, lack of consistency in accounting methods, backward orientation, and short-termism are the major points of critique that have been raised against them. Discontent with these popular performance measures and the growing awareness that multiple and partly conflicting goals exist within profit organizations have challenged the dominance of the rational goal approach to organizational performance. In the late 1980s, multidimensional approaches, such as the balanced scorecard and the stakeholder model, started to gain popularity.

In organizations for which output goals are difficult to define and measure, such as in nonprofit or public organizations, evaluations in line with the rational goal approach are obviously difficult. During the 1970s and 1980s, the lack of common ground in organizational effectiveness research was the topic of numerous papers and books. In a conspicuous attempt to more fully map out the construct space of organizational effectiveness, Quinn and Rohrbaugh categorized effectiveness criteria used in empirical research. Their resulting taxonomy nicely showed the socially constructed nature of organizational effectiveness. This coexistence of various perspectives on effectiveness or performance is at the very core of more recent conceptual developments.

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