In organizational theory, there are three primary approaches to measuring effectiveness in an organization:

1. The External Resource Approach is used to evaluate the organization’s ability to secure, manage and control scarce and valued skills and resources.
2. The Internal Systems Approach is used to evaluate the organization’s ability to be innovative and to function in a quick and responsive manner.
3. The Technical Approach is used to evaluate the organization’s ability to convert skills and resources into goods and services effectively.

I don’t necessarily believe that one approach is better than the other. In reality, an organization should utilize all three approaches, as they each have a different focus. For example, taking a strictly external resource approach could lead to too much focus on stock price and market share, and lead to inefficiencies and missed market opportunities that would have been discovered using a technical or internal systems approach.

Wrapped around all three approaches is the use of goal setting. Each approach and their measures used should have attached organization goals. For an external control approach, one goal might be to reach a market share of 30%, or reducing material costs by 10% for the year. An internal systems goal might be to bring a new product to market every 6 months, or to reduce the number of people required to make a major decision. A technical goal could be to increase the number of widgets made per day to 50, or to increase client satisfaction by 5%.

The key is to not let your organization measure effectiveness using one approach. A truly effective organization will utilize all three approaches, setting goals that fit into each category and measuring its performance against those set goals.