Strategy-Focused Performance Measures. (Strategic Management)
Frigo, Mark L., Strategic Finance
Performance measures that are highly aligned with and linked to an organization's business strategy are critical for communicating and executing strategy. But how can an organization develop performance measures that are truly strategic? This column presents a few guidelines based on detailed, ongoing research with the IMA as well as in-depth applications of strategic performance measurement systems in North America and Europe. These guidelines can be considered by any organization in its quest to improve the way it measures and manages strategy.
Strategy and Performance Measures Are Inseparable: At many companies, there are gaps between strategy and performance measures. In fact, the IMA survey on Performance Measurement found that more than half the survey respondents considered their company's performance measures inadequate in communicating strategy. This is often the result of the separation between strategy-development processes and performance measurement (strategy-execution) processes. Instead, organizations should treat strategy development and strategy execution as parallel, interrelated processes. Strategy-focused performance measures must be driven by a process encompassing the ongoing reevaluation and redesign of business strategy as well as a fervent attention to making strategy execution through performance measurement part and parcel of the strategy design itself. This approach would lead naturally to the types of performance measures the balanced scorecard and other strategic performance measurement systems would encourage.
Strategy First, Then Performance Measures: Ignoring this guideline is a common problem. The first questions some managers ask when embarking on a performance measurement initiative are "What should we measure?" or "How should we measure performance in a given area?" In fact, these are the last questions management should focus on. Strategic performance measurement systems, like the balanced scorecard, are first and foremost about strategy. This requires the development of a business strategy with execution in mind. Once the strategy is well developed, then performance metrics can be identified.
Metrics Should Change as Strategy Changes: Too often organizations are using performance measures that are no longer relevant to their business strategy. Over time, existing strategy can become outdated because products and services are less needed by the marketplace, the market segment may be shrinking in size, or the way the company creates or delivers the product or service offerings may become outmoded as new technologies become available or laws and regulations that restrict or allow activities change. You must consider how forces of change affect the entire value chain of an organization and how those changes can affect the interrelationships of activities within that value chain. All of this affects performance measures.
During the late 1990s, technology took center stage, reshaping the way companies conducted business and the demands consumers place on the goods and services they receive--as companies like Dell have proven. Dell's initial strategy and performance metrics differed from competitors like Compaq. Dell initially focused on operating effectively and efficiently, which, in part, involved shortening its cash conversion cycle by managing days' sales outstanding, days in inventory, and days' payables outstanding. But when the market demanded more innovation of offerings in product and post-sales service, Dell needed to adjust its strategy and performance metrics accordingly.
Align Strategy and Performance Measures with the Right Goal: The highest tenet of Return Driven Strategy is to ethically manage for maximum financial value creation. This goal provides the anchor that will help management make the right decisions as they develop and execute business strategy. …