Final answer:
Organizations measure performance against their potential, which looks beyond financial metrics and considers possible achievements based on resources and market opportunities. Profit, the difference between revenue and cost, is a critical measure and a source of investment for growth. Competition also influences profits and necessitates innovation and cost-effectiveness.
Step-by-step explanation:
Organizations can measure performance against their own past, against peers, and, even better, against potential. Privately owned firms aim to earn profits, which is the difference between total revenues and total costs. While accounting profit considers only explicit costs, economic profit includes both explicit and implicit costs. Measuring performance against potential involves evaluating what a business could achieve based on its resources, capabilities, and market opportunities, going beyond just financial metrics of profit and revenue. It encourages businesses to strive for improved operations and innovation.
Profits are not only a measure of success but also a source of financial capital. Firms with profits exceeding costs can reinvest in their operations, contributing to future growth. Companies that consistently realize a profit are more likely to thrive, while those unable to maintain profitability may cease operations. Competition that introduces better or cheaper products can affect a business's profits and market position, underscoring the importance of companies being innovative and cost-effective.