Metrics: Most companies have them. But, not all organizations, despite using metrics, are successfully executing their business strategy, growing and/or building profitability.
Our purpose in writing this article is to share experience to help you to develop, communicate and implement metrics that will enable achievement of your strategy, creating a path for short-term, mid-range and long-term competitiveness and profitability.
Let’s start with our first question: How well do your company’s metrics (or KPIs – key performance indicators) help employees stay focused on delivering your company’s unique customer value? We define unique customer value as your company’s competitive differentiation; and we consider strategy as including your market strategy, your competitive differentiation and your company’s common purpose or (noble) reason for being.
Looking at the strategy map above, we see can relationships between the following components of an infrastructure:
· The 3 market strategies (note: companies may work on all three, but generally one of the three is primary): Product Leadership (innovative, superior product), Efficient Operations (best solution including providing high value to the customer such as process/product improvement to the customer’s operation), or Customer Intimacy (customizing your products and services to each customer’s needs/benefit) — and identifies your target market.
· Focus areas for metrics: Financial, Customer, Processes, People and Knowledge
· Initiatives that strengthen processes essential to your business strategy (Improve QC, Improve Distribution, Understand Customers, Develop Talent)
You’ll notice the typical strategy map above demonstrates some alignment between infrastructure and strategy. Question 2: what critical strategic elements do not appear on the sample map above (or on most strategy maps)?
Most businesses use metrics to monitor performance across the company on a regular basis. And, most businesses use many metrics. Not all metrics used by executives add value to your workers. Question 3: What are the implications of this statement, do you think?
Turning your attention to your own organization, an important point of consideration, Question 4: How were your metrics chosen?
Often-times, companies establish metrics based on the following:
· Best Practices
· Past Practices
· Financial Results
Experience has shown that the most effective metrics are those that align with, and therefore directly support, the strategy — to positively impact business results short and long term.
Competitive differentiation is a key component of a business strategy, identifying the reason customers choose to do business with your organization over your competitors. Experience shows that keeping people constantly focused on delivering your competitive differentiation and your reason for being (your common purpose) is powerful in driving growth and profitability. Given the fast pace of change in today’s business environment, it’s important to evaluate the effectiveness of your competitive differentiation annually.
Execution of the business strategy is enabled by the emphasis placed on competitive differentiation and the common purpose. Some organizations dilute this critical focus when cascading goals down and across functions, by placing their emphasis on individual “pillars” or goal areas developed with the intent of supporting the strategy. The potential drawback to using these to shape your strategy map is that they are limited in scope and are usually presented without being directly connected to the competitive differentiation or common purpose. This approach breaks the line of sight between goals and strategy, shifting focus away from the company’s unifying common purpose or reason for being; instead of having shared goals under one context, departments have different and, sometimes, conflicting goals.
Returning to Question 1: Let’s look at an example, a small, privately owned machine shop in Worcester, MA where their strategy and common purpose were kept front of mind throughout the organization. They repaired, reconditioned and replaced engine components for the aerospace and automotive industries. They were growing, and had about 35 employees in the year, 2000.
The 2 co-owners had a very clear business strategy of Customer Intimacy. The owners each traveled frequently to see customers and they knew their key customers well. Their competitive differentiation and common purpose formed a driving force, one that enabled them to focus the organization on delivering what their customers wanted. Their common purpose was about producing products with precision, meeting all specifications for safe, reliable and functionality. Their competitive differentiation was quick turn-around.
Their people, their processes and their policies were aligned to deliver top quality machined parts that met regulatory standards (i.e. FAA), fast. Customers could count on outstanding craftsmanship and receiving their parts within hours or days, dramatically minimizing down-time caused by waiting for parts. Customers were willing to pay a premium for these products, particularly for quick turn-around — which were this organizations standard operating procedure.
The company in the story above was very successful and, eventually, when the owners were ready to exit the business, buyers came eagerly to the table.
Aligning their organization, including its metrics, with the strategy, kept people continuously focused on what was most important. Their internal and external communications, consistently connected their goals and metrics with their competitive differentiation and common purpose, held people’s attention, guiding employee priority setting and decision making throughout the organization each day.
Returning to Question 3: These owners did not focus their workforce on the same, large number of metrics used by the co-owners and Accounting/Finance. Instead, they focused workers on a carefully selected critical few metrics that were strategically aligned to provide a unifying context for employees to perform effectively, to solve problems, to make job related decisions and to resolve conflicts. And, the metrics of focus for the workforce tied directly to the work people were doing — where they exercised control by the way they did their jobs.
Industry Best Practices are difficult to tailor to fit any organization, because companies all have different strategic focuses. How many businesses have the same market strategy, competitive differentiation, and common purpose? The differences between companies are many, including other aspects, such as size, locale, workforce skills and demographics. Where would one begin, to customize the practice and the implementation plan of a Best Practice, given these complex variables? It’s more effective (and faster) to develop metrics and communication/implementation plans in alignment with the strategy, than to customize the design, communication and implementation of a Best Practice.
Past Practices are also less effective. They’ve gotten you where you are today, but strategies and business conditions change rapidly in today’s fast-paced environment.
Financials are essential and can provide a valuable framework for measurement. But, lagging indicators highlight results at the bottom line — they are mirrors reflecting past results. We need our businesses to be agile and able to react quickly to adverse conditions or indicators. We need leading indicators and metrics that enable us to anticipate and take action in time to impact the results.
When metrics are developed based on Best Practices, Past Practices and/or lagging Financial measures, people focus on departmental/functional goals related to these measures, instead of aligning with unity around the strategy.
In addition, when managers focus employees on cascaded goals that are unconnected across functions, people often lose sight of the (unifying) strategy.
Indications of misalignment include confusion and disagreements about priorities and criteria for decision making, conflicts and strained relationships between functions (i.e. between Sales and Manufacturing, between Quality and Manufacturing, or between front office and production floor) and/or lackluster performance. Are you seeing any of these typical symptoms in your organization? If so, it may be time to re-assess your metrics.
Returning to Question 4: Developing effective Metrics is key to strategy execution. Metrics should be strategically aligned and metrics should be “balanced” – that is, there should be both lagging and leading measures.
Most of us are very familiar with Lagging Indicators; Lagging measures are Financial, looking back on performance that has already occurred. These are results. We cannot influence these after the fact.
But, Leading Indicators enable forward-looking insights; they, in effect, are proactive measures providing visibility (into potential problems) that can prompt root cause analysis and problem resolution early enough to prevent or mitigate their impact on results.
We can use leading indicators to identify problems and root causes, to develop solutions early. For example, increased Scrap created in production can lead to a number of outcomes — i.e. operating costs will likely increase due to additional labor and materials. Recognized early, there is opportunity for people to act quickly to find the root cause and implement an effective solution.
Balanced metrics need to be aligned with the strategy and communicated, measured and discussed often enough to allow time for benefit to be realized from corrective actions taken in response to leading indicators.
Also important, communication can have greater impact using terms, stories and examples in language that all of your people understand, and with examples they can relate to their work.
Providing a 1-page visual “map” as a basis for discussions can help employees to understand and more fully retain the information; understanding and retention of the information is critical to using it on the job. How might you help your people to better understand and remember such critical data on key metrics?
Returning to question 2: What critical elements do not appear on the sample strategy map above, or on most other strategy maps? In order for a strategy map to have its intended impact on performance, it should include the primary market strategy, common (noble) purpose/reason your company exists, and competitive differentiation. Without these, the strategy map presents only part of the picture. It fails to provide a clear line of sight from the business strategy to the elements of the tactical framework displayed on the map.
In summary: Using the right, strategically aligned metrics effectively enables your people to provide your customers with higher value through highly focused effort. Focused strategic effort reduces cost by concentrating attention to what’s most important. And, focused strategic effort increases profit through improved execution. Higher value provided to customers through this strategic focus creates growth. And, all of these benefits are possible when metrics are developed relating to the primary market strategy, including your competitive differentiation, your common (noble) purpose or reason for being and your company’s top market strategy.
The following key questions for use in assessing the effectiveness of your organization’s current metrics and developing changes and improvements:
1. How many metrics is your workforce focused on? Are they the critical few?
2. In what ways are your metrics aligned with your company’s strategy?
3. Does the strategy include the competitive differentiation and common (noble) purpose?
4. Is there an effective blend of lagging and leading indicators?
5. How effective is your organization’s communication on the strategy and the metrics?
Updated, Copyright 5/27/2021 by Rosanna M Nadeau; Copyright 2018 by Rosanna Nadeau, Prism Perspectives Group LLC ·
“The Balanced Scorecard,” a book by Robert S. Kaplan and David P. Norton
Are you interested in finding out about our Coaching Services?
Message on Facebook LINK: http://Facebook.com/nadeaucoaching