Working On My Business: Strategic Measures - Results-Based Leadership

Creating effective strategic performance measures.

Over the last six months I've had the opportunity to visit with senior level people at companies throughout the United States and discuss some of the challenges that are part of their everyday lives. The feedback was not too surprising as they reflected on symptoms of the industry as a whole - globalization, the speed of change, worldwide competition, mergers and acquisitions (M & A's), and the dynamics of customer demands were part of the underlying challenges. The surface issues were symptoms of these challenges and I heard comments like the following:

  • We have a plan BUT the plan can no longer be implemented successfully! It won't (doesn't) work. Everything has changed.
  • With all of the consolidation plus the overseas competition, we are really talking about survival. What can we do?
  • Our whole market is changing - we really don't know what our customers want anymore! I don't think that they know either.
  • We have a strategy but I have no way of knowing how good it is until we get the month-end financials - by then it's usually too late to adjust or refine and the results may be catastrophic.

For larger companies in the industry, the sandbox is scattered all over the world and changes are on a scale that most smaller companies can't imagine. The supply chain is shrinking significantly among the big players and whole new value equations are being formulated - sometimes daily. Customers are dictating where they build the products as well as how many and when.

For the smaller companies, it's a matter of survival. Of the 200-plus companies that I contacted in the last six months, 25 have already shut their doors while others have been consolidated within larger companies.

For the smaller companies, being average isn't good enough. Yet less than 10 percent of these companies today would not even be considered for an acquisition primarily because of the state of their fiscal fitness, their mediocre share of a particular market niche, or both. So what to do? Take the money and run? Build a stronger company? Sell out? These are questions that owners and stakeholders must address.

Unfortunately, many smaller companies don't know or realize where they stand today in relation to other companies in their industry. Further, as noted in the last feedback bullet above, the management team often has a difficult time measuring strategic performance, tracking changes in the industry, and then adjusting to market fluctuations with a positive strategic response.

When one measures the effectiveness of strategy, we are looking for parameters that tell us quickly whether we are on-track and on-purpose. These critical success factors are normally developed as part of the strategy and business operations' planning process. Since strategy depends on each company's unique market and operations situation versus the company's vision and goals, so too must the measures be specific for that company. The measures must be targeted and focused such that changes - both internally and externally - can be rapidly assessed.

The Current Ratio, Debt:Equity Ratio, EBITDA, ROI, and shareholder returns are all important but do not necessarily measure market strategy effectiveness in a timely fashion. They do to one degree or another measure the rightness of the strategy and the effectiveness of the decisions made in the execution of the strategy.

As we look for indicators and measurement, the field of vision must stretch well beyond your company's doors. The entire value chain must be involved in the measurement process. Recall the basic principle of business: Customers provide revenue and employees create profit.

Many companies will get caught up in efficiencies versus true productivity issues. An organization can be very efficient in their processes and yet be very low in productivity. Why? The primary reason is that productivity is a focused metric that is attached to creating wealth - revenue and profit. Efficiency is focused only on an individual piece or process. To be productive, a company must look at their company and all stakeholders (supply chain, customers, employees, communities, distribution channels) - upstream and downstream - as an integrated system whose function is to create wealth. Acquire customers - generate revenue: service customers - create profit. Everything else is a subset!

One measure that I advise my clients to track is their customer's income statement based on their role in their customer's business. Essentially you convert your value equation into real dollars (customer basis) in the form of any or all of the following: (a) Inherent savings to your customer (e.g., reduce engineering or design time, reduce purchasing time); or, (b) New revenue for the customer (e.g., help them win a contract, make a product more user acceptable and increase sales, etc.). This becomes a deposit in the customer's equity account. From this, one must subtract the customer's lost dollars that result from your company's performance (e.g., late deliveries, quality issues, prototyping, delivery issues, billing issues, collection issues, start-up issues, and service issues). One must also subtract the lost dollars that are attributable to the customer's practices (e.g., slow payment of invoices - cost of capital issue among others).

One easy basis to use is revenue per hour and profit per hour (i.e., time that facilities are open - both parties). Naturally, one wants to always have a very high positive balance (profit that customer earns because of the business relationship).

All measures must be generated quickly, easy to understand, and easy to assess critical impacts. Usually the number of such indicators is less than 10 and sometimes only two or three. Remember, you're measuring strategic effectiveness in quick time! The trends and variations are normally more important than the actual numbers. If I see a weekly fluctuation in any or all of the critical indicators, I would want to know the root cause(s), potential solutions, and strategic impact of various options - now! It's the only way one can exercise any degree of nimbleness in the market.

These are some of the critical success factors that companies measure as a means of doing a near-real-time audit of strategy. There are certainly others that can be used.

The old story of you can't manage what you can't measure holds true even more so in today's business environment. What do you measure?

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