Operational performance: Thriving business momentum!

A study of strategy performance (3/4): Operational performance

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Operational Performance:

If revenue is a primary driver of every business, there is a second and even more powerful indicator for everyone willing to grow a long-term and sustainable business: profitability.

We have already mentioned that the very least revenue should cover are costs, and the very objective of every business is nothing else than profitability. In that regards, running a business can be understood as managing and investing financial and non-financial resources in order to create value. Hence, there is a meaningful indicator of profitability and of operational performance: EBIT (or EBITDA) - Earnings before Interests and Taxes. 

Operational Performance is closely related to Revenue, but also takes into account all costs directly involved in the value creation process, those usually being mostly organizational costs.

Although a high Momentum on EBIT is a good sign and usually of no harm to anyone, lower Momentum depicts a different situation. Operational performance reflects the overall performance of the management in taking the appropriate strategic decisions, which would in turn influence the motivation of actors external to the company, e.g. customers and partners not willing to engage relationship with a fragile and vulnerable business partner, or existing investors and banks being reluctant to finance additional investments and become unattractive to new investors. In other words, this is not a desirable situation.

Again, as for Revenue performance, it is required that operational performance is monitored over time and analyzed against the business operational lifecycles.

Operational Performance ratio

Now that we figured out the concept of operational performance – or overall performance of an organization – it’s time to actually use this to build a powerful tool, and understand how the organization is doing against the market. Again, this indicator allows to measure and compare actual performance against potential performance, regardless of the competitors. Of course it remains possible to compare to competition and I strongly recommend using the traditional benchmarking and industry averages technique. The Momentum – or performance – approach is designed to evaluate how good or bad a business is doing in regards of a business potential. The comparative analysis then allows to sharpen perception of operational performance and refine strategic orientations as shown in table below:

In addition, the decision taker may want to calculate performance ratios to get more accurate insight and interpretation:

P, the Operational Performance ratio must be compared to an Expected Return on Organization Potential index, where j is the index – j is the operational profitability n periods ago.

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 Frederic Hugo Hoffmann, MBA

Frédéric specialized in initiating and developing new activities within organizations, leading organizational change and innovation.

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