Using Performance Indicators to Drive Your Business Strategy - White Paper

 

We’ve all heard the old management adage “you can’t manage what you don’t measure”, but in the world of big data where managers have countless reports and data at their fingertips, the key challenge for companies is to identify what they need to measure and to ensure they are measuring it properly. In many companies, existing reporting doesn’t provide the key data that employees need to identify performance issues and take action. Many organizations have a lot of financial accounting data but only a few measures that relate to strategic and non-financial performance. In many cases there is too much data, but too little information, with no linkage to the strategy of the business. How do you go about fixing this problem?

This article describes an approach to developing and aligning performance indicators with strategic objectives. Other processes, such as developing objectives and measures through a formal contin- uous improvement or ISO program can also be used. There is no single “right” way to decide on the best approach for your business; you need to consider what fits both within your business culture as well as the other systems you have in place.

 

A Balanced Approach To Identifying Strategic Objectives

It all starts with a strategy that flows from the company’s mission, vision and values (see Figure 1). If you do not have a strategic plan for your business, you need to start by developing a plan along with specific measurable objectives. These objectives could cover a broad range of perspectives, including these areas:

• Internal Processes - streamlining key processes, applying new technology to improve efficiency
• Environment and Community - support local businesses, community leadership and connecting with future employees
• Learning and Growth - increase expertise and skills through training or mentoring
• Financial – revenue growth, asset utilization, cash flow
• Customer Focus - customer satisfaction, identifying and targeting the most profitable customers
• Employee Satisfaction - staff retention and positive company culture

Identifying the Right Performance Indicators

Once strategic objectives are in place, you need to ask: what are the critical success factors required to drive each objective? For those success factors, develop a list of potential measures we call “indicators”, which will allow you to track performance. From this list of indicators, prioritize the ones that will have the biggest impact on achieving the strategic objectives. A simple example of how a strategic objective is converted to performance indicators is shown in Figure 2.

In order to measure performance, you must be able to readily obtain the data needed. Therefore, it is important to consider the availability of data, the effort required to obtain it, and any changes to systems or processes needed when selecting your performance indicators. If you are implementing performance indicators for the first time, keep it simple. Use data that is readily available in the organization; if you need to collect new data, ensure the benefit outweighs the cost and effort of obtaining it.

Cascading Objectives AND Performance Indicators to Align the Organization
Cascading your strategic objectives and indicators to all levels of the organization is a powerful way to align behaviour across your organization and improve performance. In order to do this successfully, you must develop indicators appropriate for the level of the organization at which they will be used. The manager or team using the indicator must be able to influence the results within their scope of responsibility. It is not necessary to have indicators related to each strategic objective; only the ones that are relevant to the manager or team. The best way to develop these indicators is to directly involve the people who are responsible for achieving results or have an influence on the outcome.

Setting Targets 

Establishing targets enables you to check if you are on track in reaching your objectives. There are a number of ways to set targets, but the main point to keep in mind is that you want your teams to be motivated to achieve the results.

A target can be set using an external or internal benchmark. External bench- marks are applicable in cases where you have access to published data on industry best practices. Frequently they are most applicable in areas such as cost, quality, production cycle time, sales and marketing. Internal benchmarking involves analyzing internal data to understand where the company performance currently stands in order to set improvement targets. If you do not have the data, it may be necessary to collect it for a period of time (e.g. 3 months to 1 year depending on the measure) so as to establish a baseline.

Stretch targets are a great way to challenge and motivate staff to achieve great results. When setting stretch targets, be sure to break them down into more achievable targets or sub targets and quantify them in a shorter time frame. This will reduce the anxiety amongst staff and help them see what actions are needed to achieve results.

An example of how an objective can be cascaded through the organization, with targets set that are specific to the position in the company is shown in Figure 3. 

Developing Reports and Dashboards
Once you’ve identified your performance indicators and set targets, the next step is to establish an approach to ongoing monitoring and reporting that can be used by managers and teams to track progress. The reporting framework must consider requirements of different levels of the organization and the reporting frequency that is required to support effective decision making.

A simple dashboard, which is a one-page tool displaying the performance indicators, targets, and historical data in a graphical form, can be an effective tool for reporting. The purpose of a dashboard is to provide a big picture view, focusing on the key performance indicators, and draw attention to areas of concern so that mangers can drill down into additional information that is needed to take action. There are a wide variety of software tools available for dashboard reporting; however, existing reporting systems can easily be used to create simple custom dashboards. In designing reports or dashboards, here are few things to keep in mind:

• Keep the data for each area of the business limited to a single, easy-to-read page
• Provide context to the data, historical trends and targets help the user to see if they are on track
• Use graphs or tables that clearly communicate the data
• Don’t change your reports too frequently, people need time to get used to them

Implementation

If performance indicators are new to your organization, you need to approach the design and implementation process as a change initiative. You should consider building these steps into your process:

1. Make it a priority – The President / CEO and senior management must support this initiative and ensure there is a sense of urgency within the organization to follow through with this project.
2. Develop a team – This group should have enough authority within the organization to lead the change and include people from various functions. This team needs to be given the time and resources to develop and implement the program. You may want to include an external consultant or advisor who can facilitate and guide the process.
3. Communicate – A clear and consis- tent message needs to be delivered to the business on the strategic objectives and changes that are being implemented to introduce performance indicators. This is not a one-time thing; use as many vehicles as possible to communicate the message (e.g. newsletters, staff meetings, workshops and one-on-one discussions with staff).
4. Empower employees – Involve a broad group of people in the process in order to gain their support and input in developing the performance measures through workshops, facili- tated meetings, or surveys tools.
5. Plan for and celebrate success - Set targets that are achievable so that people can see visible results from their efforts. Acknowledge and celebrate success, reward people who have been fundametal to achieving the results. Be sure to start this early enough in the implementation process to motivate staff and build momentum.
6. Keep the ball rolling – Establish an annual process to review and update your performance indicators to align with changes in strategy and set new targets. Continuously improve your approach by introducing per- formance measures to other levels of your businesses, or link it to your performance management system — any time you do this, remember to start at step one in this process.

Annual Review And Continuous Improvement 

Once you’ve established a performance indicator system, you need to revisit and refine it to ensure relevance to the business. This should be linked to an annual strategic plan review and budget setting process. You should review which measures have worked well and which have not; it is especially important to look at which measures need to be changed based on adjustments to your strategic objectives. If you need to develop new measures, brainstorm on the success factors and identify new measures for each level within the organization. Regardless of whether the measures are new or not, you should be reviewing your annual performance and setting new targets for the upcoming year. Once these are established, they need to be communicated to the appropriate level of the company.

Identifying and linking performance indicators to the organization’s strategic objectives provides a foundation for aligning activities across the business. Developing simple reporting tools or dashboards will improve communication, decision making and performance monitoring. Overall, this process will help you to continuously improve your business and adjust your strategy as needed. 

Further Reading:
Kaplan, R., and Norton, D., “Using the Balanced Scorecard as a Strategic Management System”, Harvard Business Review, July-August 2007
Marr, B., “How to Design Key Performance Indicators” Advanced Performance Institute, (www.ap-institute.com), 2010
Pateman, A., “5 East Steps for Developing Your BSC Measures”, Harvard Business Publishing, March – April 2004

Tips for Development Performance Indicators

• Link indictors to your strategic objectives and align them across your organization for maximum performance improvement
• Develop indicators that are measurable, simple and easy to understand for those responsible
• for the performance
• Indicators must provide meaningful information on progress relative to the objectives
• Ensure there is a clear definition and precise methodology for calculation
• Have clearly defined targets that are challenging and motivating, but obtainable with a reasonable amount of effort
• Review objectives, performance indicators and targets on an annual basis to ensure alignment with the business strategy
• Stay focused, limit number for each level or area of the business to 10 measures maximum

ABOUT US

McNally Brown Group is a boutique management consulting and business advisory firm that works with companies to improve business performance. We work collaboratively with clients to conduct assessments, develop tools, and facilitate implementation of strategic initiatives in a broad range of areas including strategic planning and implementation of key performance indicators and dashboards.

Download a PDF of this white paper

Using Performance Indicators to Drive Your Business Strategy - White Paper

 

We’ve all heard the old management adage “you can’t manage what you don’t measure”, but in the world of big data where managers have countless reports and data at their fingertips, the key challenge for companies is to identify what they need to measure and to ensure they are measuring it properly. In many companies, existing reporting doesn’t provide the key data that employees need to identify performance issues and take action. Many organizations have a lot of financial accounting data but only a few measures that relate to strategic and non-financial performance. In many cases there is too much data, but too little information, with no linkage to the strategy of the business. How do you go about fixing this problem?

This article describes an approach to developing and aligning performance indicators with strategic objectives. Other processes, such as developing objectives and measures through a formal contin- uous improvement or ISO program can also be used. There is no single “right” way to decide on the best approach for your business; you need to consider what fits both within your business culture as well as the other systems you have in place.

 

A Balanced Approach To Identifying Strategic Objectives

It all starts with a strategy that flows from the company’s mission, vision and values (see Figure 1). If you do not have a strategic plan for your business, you need to start by developing a plan along with specific measurable objectives. These objectives could cover a broad range of perspectives, including these areas:

• Internal Processes - streamlining key processes, applying new technology to improve efficiency
• Environment and Community - support local businesses, community leadership and connecting with future employees
• Learning and Growth - increase expertise and skills through training or mentoring
• Financial – revenue growth, asset utilization, cash flow
• Customer Focus - customer satisfaction, identifying and targeting the most profitable customers
• Employee Satisfaction - staff retention and positive company culture

Identifying the Right Performance Indicators

Once strategic objectives are in place, you need to ask: what are the critical success factors required to drive each objective? For those success factors, develop a list of potential measures we call “indicators”, which will allow you to track performance. From this list of indicators, prioritize the ones that will have the biggest impact on achieving the strategic objectives. A simple example of how a strategic objective is converted to performance indicators is shown in Figure 2.

In order to measure performance, you must be able to readily obtain the data needed. Therefore, it is important to consider the availability of data, the effort required to obtain it, and any changes to systems or processes needed when selecting your performance indicators. If you are implementing performance indicators for the first time, keep it simple. Use data that is readily available in the organization; if you need to collect new data, ensure the benefit outweighs the cost and effort of obtaining it.

Cascading Objectives AND Performance Indicators to Align the Organization
Cascading your strategic objectives and indicators to all levels of the organization is a powerful way to align behaviour across your organization and improve performance. In order to do this successfully, you must develop indicators appropriate for the level of the organization at which they will be used. The manager or team using the indicator must be able to influence the results within their scope of responsibility. It is not necessary to have indicators related to each strategic objective; only the ones that are relevant to the manager or team. The best way to develop these indicators is to directly involve the people who are responsible for achieving results or have an influence on the outcome.

Setting Targets 

Establishing targets enables you to check if you are on track in reaching your objectives. There are a number of ways to set targets, but the main point to keep in mind is that you want your teams to be motivated to achieve the results.

A target can be set using an external or internal benchmark. External bench- marks are applicable in cases where you have access to published data on industry best practices. Frequently they are most applicable in areas such as cost, quality, production cycle time, sales and marketing. Internal benchmarking involves analyzing internal data to understand where the company performance currently stands in order to set improvement targets. If you do not have the data, it may be necessary to collect it for a period of time (e.g. 3 months to 1 year depending on the measure) so as to establish a baseline.

Stretch targets are a great way to challenge and motivate staff to achieve great results. When setting stretch targets, be sure to break them down into more achievable targets or sub targets and quantify them in a shorter time frame. This will reduce the anxiety amongst staff and help them see what actions are needed to achieve results.

An example of how an objective can be cascaded through the organization, with targets set that are specific to the position in the company is shown in Figure 3. 

Developing Reports and Dashboards
Once you’ve identified your performance indicators and set targets, the next step is to establish an approach to ongoing monitoring and reporting that can be used by managers and teams to track progress. The reporting framework must consider requirements of different levels of the organization and the reporting frequency that is required to support effective decision making.

A simple dashboard, which is a one-page tool displaying the performance indicators, targets, and historical data in a graphical form, can be an effective tool for reporting. The purpose of a dashboard is to provide a big picture view, focusing on the key performance indicators, and draw attention to areas of concern so that mangers can drill down into additional information that is needed to take action. There are a wide variety of software tools available for dashboard reporting; however, existing reporting systems can easily be used to create simple custom dashboards. In designing reports or dashboards, here are few things to keep in mind:

• Keep the data for each area of the business limited to a single, easy-to-read page
• Provide context to the data, historical trends and targets help the user to see if they are on track
• Use graphs or tables that clearly communicate the data
• Don’t change your reports too frequently, people need time to get used to them

Implementation

If performance indicators are new to your organization, you need to approach the design and implementation process as a change initiative. You should consider building these steps into your process:

1. Make it a priority – The President / CEO and senior management must support this initiative and ensure there is a sense of urgency within the organization to follow through with this project.
2. Develop a team – This group should have enough authority within the organization to lead the change and include people from various functions. This team needs to be given the time and resources to develop and implement the program. You may want to include an external consultant or advisor who can facilitate and guide the process.
3. Communicate – A clear and consis- tent message needs to be delivered to the business on the strategic objectives and changes that are being implemented to introduce performance indicators. This is not a one-time thing; use as many vehicles as possible to communicate the message (e.g. newsletters, staff meetings, workshops and one-on-one discussions with staff).
4. Empower employees – Involve a broad group of people in the process in order to gain their support and input in developing the performance measures through workshops, facili- tated meetings, or surveys tools.
5. Plan for and celebrate success - Set targets that are achievable so that people can see visible results from their efforts. Acknowledge and celebrate success, reward people who have been fundametal to achieving the results. Be sure to start this early enough in the implementation process to motivate staff and build momentum.
6. Keep the ball rolling – Establish an annual process to review and update your performance indicators to align with changes in strategy and set new targets. Continuously improve your approach by introducing per- formance measures to other levels of your businesses, or link it to your performance management system — any time you do this, remember to start at step one in this process.

Annual Review And Continuous Improvement 

Once you’ve established a performance indicator system, you need to revisit and refine it to ensure relevance to the business. This should be linked to an annual strategic plan review and budget setting process. You should review which measures have worked well and which have not; it is especially important to look at which measures need to be changed based on adjustments to your strategic objectives. If you need to develop new measures, brainstorm on the success factors and identify new measures for each level within the organization. Regardless of whether the measures are new or not, you should be reviewing your annual performance and setting new targets for the upcoming year. Once these are established, they need to be communicated to the appropriate level of the company.

Identifying and linking performance indicators to the organization’s strategic objectives provides a foundation for aligning activities across the business. Developing simple reporting tools or dashboards will improve communication, decision making and performance monitoring. Overall, this process will help you to continuously improve your business and adjust your strategy as needed. 

Further Reading:
Kaplan, R., and Norton, D., “Using the Balanced Scorecard as a Strategic Management System”, Harvard Business Review, July-August 2007
Marr, B., “How to Design Key Performance Indicators” Advanced Performance Institute, (www.ap-institute.com), 2010
Pateman, A., “5 East Steps for Developing Your BSC Measures”, Harvard Business Publishing, March – April 2004

Tips for Development Performance Indicators

• Link indictors to your strategic objectives and align them across your organization for maximum performance improvement
• Develop indicators that are measurable, simple and easy to understand for those responsible
• for the performance
• Indicators must provide meaningful information on progress relative to the objectives
• Ensure there is a clear definition and precise methodology for calculation
• Have clearly defined targets that are challenging and motivating, but obtainable with a reasonable amount of effort
• Review objectives, performance indicators and targets on an annual basis to ensure alignment with the business strategy
• Stay focused, limit number for each level or area of the business to 10 measures maximum

ABOUT US

McNally Brown Group is a boutique management consulting and business advisory firm that works with companies to improve business performance. We work collaboratively with clients to conduct assessments, develop tools, and facilitate implementation of strategic initiatives in a broad range of areas including strategic planning and implementation of key performance indicators and dashboards.

Download a PDF of this white paper

War vs. Combat. What’s Your Growth Strategy?

There are two ways to grow a business.


One, I’ll call the War Business Model.


The war business model is the style where you spread out the world map on a table, and expand your business while keeping your ultimate strategy in mind. To win, you need to capture more than 50% of the market share. What the organization needs to do is take dynamic action in the direction of the goal.


Microsoft’s operating system and Google’s search engine are good examples of the war business model. Despite losing hundreds of billions of dollars at first, they were eventually able to turn their losses into profits by continually aiming toward ultimate victory.


By contrast, the combat business model is where you can see the faces of the people you are working with. In our early days when, after much running around all over Japan, we had managed to at last acquire four or five store owners, our style was a good example of the combat business model. In this way of doing business, the organization values each small victory, and slowly builds these small victories into something really big.

The overall strategy that I formulated was to expand the company’s performance in this manner. Through a gradual accumulation of victories, we eventually reached a critical point.

Under the war business model—the model where from the beginning you make large investments and have a big army at your disposal—the return for success is great, but the risk of failure is equally great. With the combat business model you can easily pick yourself up again, even if you fail, because there is nothing much to lose. The reason why we were able to meet the challenge of the Internet shopping business—a model, it was believed, that would never succeed in Japan—was because from the outset, we employed the combat business model. Because I had the psychological fallback of knowing that we could always do things over again, I was able to make bold and decisive decisions.


Do not hold back on your growth ideas just because you can’t afford to wage war. Instead, try combat and grow one small victory at a time.

(Photo: FC Photography)nt

Posted by:Hiroshi Mikitani

Top CEOs Agree: Let Customers Drive Your Business Strategy, Break Down Silos, And Be Entrepreneurial Comment Now

Robert Reiss, 

As we travel through untrodden territories of our digital new world, the old platitude “The only constant is change” has become our new compass. New competitors – in fact new industries – surface seemingly overnight as old business models flash into obsolescence; creating predictable quarterly growth is becoming harder to navigate.  So, in an effort to find solutions, on November 20,2013 I facilitated a conversation with leaders from several industries including healthcare, financial services, travel, and technology. Below are the two solutions that emerged where participant quotes provide perspective. The participants were:

• Keith Banks, President, US Trust
• Adam Goldstein, CEO, Royal Caribbean International
• Bob Lord, CEO, AOL Networks
• Alan Miller, Founder, CEO & Chairman, Universal Health Services
• Vasant Prabhu Vice Chairman & CFO, Starwood Hotels & Resorts Worldwide
• Brad Stewart, CEO, XOJET

Solution # 1: Companies need to involve customers in strategy and be more contextual with customer engagement. The customer now can drive strategy. In fact, according to a recent IBM study of over 4,000 C-suite executives, for the first time customers actually play a larger role in driving strategy than the board of directors cites Dr. Saul Berman, Leader of Strategy & Transformation at IBM. Clearly our digital world of social media and big data, combined with increased customer information and consequently expectations, has escalated the customers’ potential role where they are increasingly becoming involved in not just product development, service, sales, but even talent recruitment and strategy.

Keith Banks from US Trust talked about how clients have become part of the strategy process, “We recently created Client Advisory Councils, where clients share insights on how to best deliver service. We found the number one thing on the minds of our clients was inter-generational wealth transfer. We also found out our younger clients preferred younger advisors who talk like them, communicate in the way they do, use social media instead of meeting a lot.”

Alan Miller of Universal Health Services highlighted how the healthcare model is fundamentally changing, “Consumers are becoming more educated and engaged in making healthcare decisions for themselves and their families. As a result, we are reshaping the way we operate so that we can better meet their demands and become their provider of choice. We are constantly looking to offer new services to meet patients’ needs, and we are making investments in new technology so that we can continue to provide the quality care our customers want and deserve.”

Bob Lord, Global CEO of AOL Networks shared a personal example of how the customer experience is changing, “My daughter has a smartphone and there’s all this contextual information on Instagram that she’s doing when she’s shopping at UNIQLO. UNIQLO is creating a pool of assets that they can collect to learn more about her. That was never there before. But then they’re delivering her a service on the back end, saying for girls who bought this, they also like these kinds of things.”

And customers change in different settings. As Vasant Prabhu from Starwood discussed, “There is something we call a trip persona. You’re a very different person when you’re with family vs. a business conference. You can make big mistakes if you don’t know the context.” He continues, “Customers really drive our business decisions. For example there are now as many Chinese travelling out of China as Americans travelling out of the US. In the US, most people use their Starwood Preferred Guest points for hotel rooms. Well, in China, they want to use it for weddings or at our restaurants. Also, the Chinese guest has different preferences, for example, they like tea, not coffee. And, there is a revolution in how our guests interact with us, mobile has gone from 15% to almost 50% of our digital interactions. We must understand how customers are changing and deliver what they want real time.”

Brad Stewart talked about how the private jet industry is in the early phases of a potential industry transformation,  “What shocks me is that CEOs and private equity executives tell me they’re spending $250k to $1.5 million a year on private aviation and they always say it’s a top 2 or 3 spend, and yet while they are flying their family, kids and pets in this little cocoon, 9, 10 miles in the sky, they often don’t really know what they are spending money on. And so what we’re trying to do at XOJET is fundamentally change the conversation. So the trend needs to be about education and renting experiences.”

Companies also need to be seamless throughout the customer experience regardless of platforms. Adam Goldstein of Royal Caribbean shared, “The Royal Caribbean service standard that our guests expect on board our ships should be evident in all of their interactions with us whether they are onboard or not.” He continued talking about how he personally connects with the customers and the media in a digital world, “I guess I was one of the first CEOs to blog on a regular basis and to take the risks and seek the benefits of doing that. When I would ask journalists, why do you read my blog– and I really meant that question seriously– and they would say because it’s not marketing speak.”

Solution # 2: As the nature of competition intensifies, it is essential to continually innovate and act like entrepreneurs. As customers now control more information, competition intensifies. The winners innovate. And like the Intel slogan, in many cases ‘corporate entrepreneurship inside’ enables agile rollouts of new business models to drive success. As one CEO mentioned, consider the idea that you plugged in your television set and it worked for 10 years. That doesn’t exist anymore; now it’s getting software upgrades, it’s getting rebooted, and it’s changing what it does on any given day. The winners innovate and act like entrepreneurs.

Bob Lord of AOL Networks shared, “Silos are the enemy of business progress, and the way to break down silos is to have customers at the center. You test and you learn, test and learn. And you have to get the whole company including the board comfortable with that structure, so that they’re expecting every quarter that you have a new innovation that you’re testing. When you start acting like a startup, you can create cross-functional teams that have full ownership, work on a particular problem and create excitement, energy, fun and great solutions throughout your organization. You have to try to create that entrepreneurial culture within the bigger organization.”

Adam Goldstein of Royal Caribbean explained how cruise customers have completely changed with the times, “A radical change in our business over 20 years is that in the 90s a mainstay of our communication program was the ability to disconnect from the hassles of daily life and the importance of getting away from it all. Today, it’s unimaginable that you would go anywhere disconnected. In fact we have recently invested heavily to deliver a new technology enabling land line speed connectivity and pervasive Wi-Fi on several of our ships.”

Sometimes the innovations were actually about coming full circle to solutions of long ago. Brad Stewart stated, “It’s almost of going back to the late 1800s and early 1900s in terms of walking into that store. Customers are expecting you as a company to treat them as if you’re their one of five or 10 customers.”

Vasant Prabhu of Starwood provided more historical perspective, “The hotel business is centuries old and it started out with the innkeeper, and he knew everybody. He was always there greeting his guests, and he knew what they wanted. He knew which room they liked. He knew why they were there. He knew how they liked their food. And then we evolved to the era of the chains. They were important, because it was safe, clean and efficient, and very predictable. Now it’s coming full circle. People expect you to know who they are at all times. You’re not supposed to be a stranger. But the technology is getting to the point where you can do it, and frankly, you have to.”

Alan Miller of Universal Health Services shared how the CEO should view this environment, “The biggest thing for the CEO is adaptability. The CEO has to have a lot of different people who have totally differing ideas. And he has to have young people who see the world very differently. If you all wind up growing up together, that’s not going to be a good thing anymore. The way the world is seen by 20 year olds, 40 year olds, 60 year olds are three different worlds totally. Getting everyone to work together is exciting and the feeling of a start-up is great which is good because I’m a pure entrepreneur at heart.”

Keith Banks of U.S. Trust sums up the business climate, “I think it’s going to be a lot more intense competitively. So you’ve got to have the wherewithal to fight that fight. We’re seeing the degree of difficulty from a regulatory standpoint is growing at a rapid pace. And that’s making it more costly to do business, more risky to do business if you get it wrong. What companies need to do is evolve with the client, and sometimes evolve faster than the client. With so many data points, technology can help uncover new directions.”

… As we look at new business models that can help us lead in this new digital world frontier, CEOs need to involve their customers in driving strategy and have the agility and innovative spirit of an entrepreneur. As Len Green, professor of entrepreneurship at Babson College once explained to me, successful entrepreneurs continually exhibit several of the same characteristics. A. They are calculated risk takers;   B. They do not overanalyze problems or spend too much time in meetings discussion solutions.  

Instead they:                                                                                                                                              1. ACT                                                                                                                                                        2. Learn from the actions                                                                                                                           3. Build on what they have learned                                                                                                            4. Repeat the process to solve challenges

What Is the Theory of Your Firm?

by Todd Zenger

Photography: Courtesy of Pace Gallery

Artwork:Tara Donovan,Untitled, 2008, polyester film

If asked to define strategy, most executives would probably come up with something like this: Strategy involves discovering and targeting attractive markets and then crafting positions that deliver sustained competitive advantage in them. Companies achieve these positions by configuring and arranging resources and activities to provide either unique value to customers or common value at a uniquely low cost. This view of strategy as position remains central in business school curricula around the globe: Valuable positions, protected from imitation and appropriation, provide sustained profit streams.

Unfortunately, investors don’t reward senior managers for simply occupying and defending positions. Equity markets are full of companies with powerful positions and sluggish stock prices. The retail giant Walmart is a case in point. Few people would dispute that it remains a remarkable firm. Its early focus on building a regionally dense network of stores in small towns delivered a strong positional advantage. Complementary choices regarding advertising, pricing, and information technology all continue to support its low-cost and flexibly merchandised stores.
 
Despite this strong position and a successful strategic rollout, Walmart’s equity price has seen little growth for most of the past 12 or 13 years. That’s because the ongoing rollout was anticipated long ago, and investors seek evidence of newly discovered value—value of compounding magnitude. Merely sustaining prior financial returns, even if they are outstanding, does not significantly increase share price; tomorrow’s positive surprises must be worth more than yesterday’s.

Not surprisingly, I consistently advise MBA students that if they’re confronted with a choice between leading a poorly run company and leading a well-run one, they should choose the former. Imagine assuming the reins of GE from Jack Welch in September 2001 with shareholders’ having enjoyed a 40-fold increase in value over the prior two decades. The expectations baked into the share price of a company like that are daunting, to say the least.
 
To make matters worse, attempts to grow often undermine a company’s current market position. As Michael Porter, the leading proponent of strategy as positioning, has argued, “Efforts to grow blur uniqueness, create compromises, reduce fit, and ultimately undermine competitive advantage. In fact, the growth imperative is hazardous to strategy.” Quite simply, the logic of this perspective not only provides little guidance about how to sustain value creation but also discourages growth that might in any way move a company away from its current strategic position. Though it recognizes the dilemma, it offers no real advice beyond “Dig in.”

Essentially, a leader’s most vexing strategic challenge is not how to obtain or sustain competitive advantage—which has been the field of strategy’s primary focus—but, rather, how to keep finding new, unexpected ways to create value. In the following pages I offer what I call the corporate theory, which reveals how a given company can continue to create value. It is more than a strategy, more than a map to a position—it is a guide to the selection of strategies. The better its theory, the more successful an organization will be at recognizing and composing strategic choices that fuel sustained growth in value.

The Greatest Theory Ever Told 
Value creation in all realms, from product development to strategy, involves recombining a large number of existing elements. But picking the right combinations out of a vast array is like being a blind explorer on a rugged mountain range. The strategist cannot see the topography of the surrounding landscape—the true value of various combinations. All he or she can do is try to imagine what it is like. 

Todd Zenger is the Robert and Barbara Frick Professor of Business Strategy at Washington University in St. Louis’s Olin Business School.