Measuring Strategic Performance

1. Maintain Balance With Multiple Measures

2. Customize Measures to Your Business

3. Cascade Accountabilities Throughout the Organization

4. Define the Short-Term Implications of Long-Range Objectives

5. Measure Performance Relative to Market and Competitive Conditions

6. Define Measures as Either Objectives or Constraints

7. Focus on Feedback

No one is sure who first said, "If you can't measure it, you can't manage it," but we've been hearing it a lot lately. It's all the rage in the factory, tied to Just-in-Time, total quality, and related concepts that are reshaping the manufacturing landscape.

But does it apply to the softer, broader, and longer-range management of strategy as well? The same logic should hold: (1) set objectives that are both desirable and attainable, (2) monitor progress toward them, (3) analyze variances between those objectives and actual results, and (4) make adjustments accordingly. It's simply a matter of keeping your eye on the ball. Still, measuring strategic performance is a challenge for many organizations. There are several reasons why:

	Need for the right balance. Strategic choices are often between conflicting goods, rather than good and bad. Too much focus on one area—for instance, income growth—can have unintended consequences in other important areas, such as market share or return on investment.
	Lack of flexibility. Because we know that things change, we want room to maneuver. Measurement requires specificity, which reduces our flexibility. Strategic objectives can depend as much on assumptions—about market conditions, competitor activity, and technology change—as on actions. When things do change, measures can become meaningless if the assumptions are wrong.
	Daily distractions. Short-term issues can drown out long-range objectives, often for very good reasons. Day by day, we can indefinitely defer acting on our strategies. When we become distracted, the organization quickly learns to disregard strategic measures.
	Politics. Candid discussion about strategic measurements can be hindered by their close connection with performance appraisal. And setting strategic measures can affect the perceived power of different organizational units. The process can become very politicized.

Still, the sensible notion remains: If you can't measure it, you can't manage it. In GMT's work with clients, we have uncovered a number of principles that help deal with strategic measurement problems. These principles show up in organizations that are serious about strategic performance, and believe that measurement is a very important part of the management process.

1. Maintain Balance With Multiple Measures

Single-measurement strategies can lead to failure. A classic example is the "Earnings per Share (EPS) Game," as played by conglomerates in the '60s. They single-mindedly pursued rapid growth in EPS through acquisition, and it worked—for a while. EPS grew, but overspending on acquisitions grew even faster, causing returns to deteriorate. As this became clear in the financial markets, conglomerate stock prices collapsed, and many operating businesses were badly crippled.

Better-balanced measures of a company's financial performance, such as return on investment (ROI) and return on equity (ROE), still have limitations. ROI may prompt premature harvesting; ROE can lead to over-leveraging. Strategic measures should help focus the organization on the few critical performance factors, but they should not be so focused, nor so few, as to produce strategic "tunnel vision." They should highlight the important tradeoffs, not obscure them.

2. Customize Measures to Your Business

Just as there is no single measure, neither is there a generic list. Performance measures should be tailored to the particulars of your business and its chosen strategy.

In the early days of hand-held calculators, Texas Instruments drove for lower costs and higher share. At the same time and in the same business, Hewlett-Packard focused on higher-priced products with more advanced features.

These companies' strategic measures in areas such as product development, market performance, and financial results were likely very different. Still, both companies succeeded in the different ways they defined success. Selecting measures requires the same careful and customized thought process that is needed to craft a successful strategy.

3. Cascade Accountabilities Throughout the Organization

Strategic performance measures are, by nature, fairly broad. They specify total business results that, generally, no single manager can bring about on his or her own. This presents a danger for, if everyone is involved, then no one may feel individually responsible. The organization's strategic objectives should be translated into sets of specific goals that individual managers and teams strive for. For instance, if service level (fill rate) is a strategic measure, progress can be tracked in departments: Customer Service could work on fast, accurate order entry; Sales on forecast accuracy; and Marketing on product line rationalization. In Operations, Purchasing could focus on vendor reliability, Manufacturing on cycle times, and Engineering on parts commonality. All contribute to the strategic objective.

A key point is for personnel at successively lower layers in the organization to be made explicitly aware of their individual contributions to overall strategic success. Accountability needs to be cascaded down to those levels where daily activity makes the competitive difference.

4. Define the Short-Term Implications of Long-Range Objectives

Strategic changes generally take time, and the measures may change slowly. This is one reason why long-term objectives can be drowned out by short-term pressures. Paying attention to the short "fuses" can distract us from the large "bombs." Translating strategic measures into their near-term implications can help us avoid this. Near-term measures often take different forms than long-term ones. A company intending to gain share with new products should measure share in the long term but, in the short term, track the number and flow rate of new product development projects in the pipeline.

When a strategic result will not be evident for some time, we should look for short-term indicators that will lead toward the intended result. They will help management evaluate the strategic versus current performance tradeoffs that continually confront the business. They may also show situations where strategic progress is being made, although current performance is suffering, and indicate that the company should hold to its course of action. Or they may indicate that long-term objectives are not being served, even though current performance is fully satisfactory—which means that strategy needs to be re-thought.

5. Measure Performance Relative to Market and Competitive Conditions

We tend to think about measurements in absolute terms: X percent growth, Y percent returns. Strategy, however, is a relative game. While scoring 10 touchdowns is impressive, it is strategically meaningless if the opposing team scores 11. A sales growth objective (for example, 10%) only takes on strategic meaning in the context of a related market growth forecast (assume 5%). Then, if we learn that sales actually grew by 11%—but the market unexpectedly grew by 11% also—we'll know that, although sales exceeded budget, efforts to penetrate the market failed.

Relative measures do a better job of calling attention to what is strategically important. In addition, because they combine specificity with flexibility, they are less likely to be made obsolete by assumptions that turn out to be incorrect.

6. Define Measures as Either Objectives or Constraints

We tend to think that more is better, but this isn't always so. Frequently, there are some conditions that we don't want to violate while we pursue our objectives.

These limits we can call constraints; and, here, more is not better. We want to maximize objectives, but subject to satisfying constraints. For example, we may wish to gain share, subject to some margin constraint: We don't want to sell below cost. Or, conversely, we may want to increase margin, but subject to some share constraint: We don't want to price ourselves out of business.

There are many practical examples. As an airline, Peoples Express clearly and successfully pursued market growth and share, but did not satisfy a profitability constraint—and failed. There have been several attempts to establish an all-first-class airline, but these high-margin niche strategies have failed to satisfy the constraint of providing an adequate volume base. In the hand-held calculator example cited earlier, both Texas Instruments and Hewlett-Packard successfully (and differently) structured their performance objectives and constraints. Bowmar did not. Remember Bowmar?

A concentrated focus on objectives is usually a strength, but not if it causes us to forget the underlying conditions that make pursuit of these objectives possible in the first place.

7. Focus on Feedback

Problems can occur when measures take on a meaning separate from the business they describe. This can happen because of measurement's close links with performance appraisals and incentive compensation. There is a fine line between productive "make-the-numbers" discipline and dangerous "manage-the-numbers" nonsense. When that line is crossed, performance discussions can degenerate into denials, and management attention can migrate from the constructive to the cosmetic.

Strategic measurement should be primarily a feedback system, in which bad news is perceived as more valuable than good news. The issue is cultural. Management has to create an atmosphere in which people are willing—and eager—to get their hands on the facts and deal with them candidly and constructively. Measurements should focus on what to fix, not whom to blame.

Business isn't a roulette wheel, but it isn't a sure thing either. We daily deal with uncertainty and, when we deal with strategy, uncertainty is greatest. But we have to decide and act, so we take our best guesses.

Fortunately, unlike roulette, business doesn't require us to wait passively for results. We can track what happens, improve our guesses, and adjust our actions. We can steer, rather than shoot. Feedback is critical to steering.

The continuous process of strategy definition and measurement is a unique journey for every business. The seven principles outlined here can be useful guides to an effective strategic measurement system—one that helps managers make clear and reasoned choices as they select, implement, and adjust successful business strategies.