Please enable JavaScript.
Coggle requires JavaScript to display documents.
Week 3 understanding performance - Coggle Diagram
Week 3 understanding performance
private sector :no_entry:
How is performance measured in Privtae and third sector companies
Value creation
is the process through which a company combines its resources (e.g. labour, materials) and activities to make a product or offer a service.
Customer surplus - how much customer pay for item and vs what they were willing to pay eg. willing to pay 1000 for laptop but only paid 800, surplus of 200
Producer surplus
profit-cost to make item = ie 300€
Customer surplus + producer surplus = value created
value capture
Value captured by customer = saving money as they were willing to spend more
value captured by producer
how much profit they made
Additional measure for private orgs
such as balance sheets and profit and loss accounts
competitive advantage.
outdated def
org is implementing a value creating strategy not simultaneously being implemented by any current or potential competitor. (Barney, 1991, p. 102; emphasis in original)
modern def
When an organization has a competitive advantage, it has something that competitors don’t, it does something better than other organizations do, or it does something that others can’t. (Coulter, 2013, p. 28)
DDefinitions from Hill or Besanko ?
based on finanical performance
Giarratana (2013) good economic position = create a capture value
Mariana Mazzucato (2018).
neoclassical economic theories
assumptions
value is reflected in market prices
weakness - producer gets maximum profit from value capture - eg costs of pharma pills - production costs compared to price sold
not ethical
Value provided in education or healthcare? or third sector - charities? how to measure?
traditional public sector can be measured by GDP
Performance :chart_with_upwards_trend:
linked to strategy - point out what theyve done badly = understand how to improve
Inputs
time required of human resources, physical assets
defining robust measures that capture whether the inputs have been used in a proper way and provide actual benefits for stakeholders.
Outputs
combine inputs + activites & capital = outputs
results of the internal activities of an organisation, eg. how many police patrols p/week
efficient organisations reduce inputs to = same outputs - using chatgpt at work
Efficenicy
measured by ratio of inputs to outputs
outcomes
Output- build a new railway, resulting in outcome of less traffic on roads
Efficiency
distinction between outputs and outcomes applies to both private and third sector companies
Efficiency
how quick they execute something ? maybe statistics
effectiveness
how good they are at doing their job
ability of an organisation to attain its goals is defined as its effectiveness.
comparing expectations against the outcomes of an organisational action
Ability of police force to reduce crime is measure of its
effectiveness
new research in public sect: define input, output and outcome measures before delving into more sophisticated indicators.
alternative indicators of ‘performance’.
Maximuisation - shareholder value
‘The social responsibility of business is to increase its profits’ (see Friedman, 1970).
'shareholder value movement’, (or ‘maximisation of shareholder value’ MSV)
Public on stock market and private companies
MSV - promoted increasing shareholder value
creating value is also linked to distributing value equitably to a broader set of stakeholders (Mazzucato 2018, pp. 183–8).
Shareholders provide "risk capital" to run business
dividends
short and long term strategy and goals
long term investments - affect short term profit
short term - reduce long term investment affects long term performance
Generating sharholder value- financialisation of the economy,
Short-term performance measures
profitability ratios - for short term analysis and comapring to competition
return on equity ROE
equity is the investment capital
issue shares to raise capital to fund their strategic activities.
shows how much a company is able to generate in net profits using the capital provided by its owners
ROE – ability for investors to make a return.
return on capital employed ROCE
Operating Profit (sometimes known as Profit before Interest and Taxation or as EBIT i.e. Earnings Before Interests and Taxes)
capital employed is calculated by combining the equity with the long-term debt of the company
measures profit
how much capital invested generates positive return
measure of both value capture and creation
ROCE- reward of more capital year on year when upward trend and the efficiency with which its capital is employed
return on sales ROS
generate profits out of sales. eg. not just reducing price
good market position?
ROS could reflect a company’s general marketing capability
Measures firms ability to capture value
ROS- the ability to extract value from sales.
asset utilisation ratio AUR
measures its ability to generate sales from its invested capital.
measure of a firm’s efficiency in generating sales from investment, so it is a measure of its ability to create value.
capital intensive- like aircraft industry needs lots of investment
AUR – ability to create sales out of capital employed
Equtiy = Money invested
Long-term performance measures
Profit growth and other indicators
applies to private and public companies
measured by the increase of net profits over time; looking at the evolution of EBIT over a long trajectory of time,
looking at the evolution of profitability ratios (ROE, ROCE, AUR) over a number of years can offer a more comprehensive picture of performance
Market value
public companies listed on a stock market
Market value calculation
Activity 3.6 -