Friday, October 1, 2010
Strategic Planning Analogy #355: Measuring Up
I used to work for a company that was big into metrics. They wanted to measure everything. As a result, the budgeting department sent a form to each department. On this form, they wanted each department to suggest a key metric to be measured by and a targeted goal with that metric for the following year.
Being in a Strategic Planning Department, I had a hard time thinking of what an appropriate metric for us should be. In talking it over, the department decided that our greatest contributions to the company were ideas. Therefore, we put on the form that our department should be measured by the number of ideas we come up with.
Then we had to come up with a goal for this metric. We picked an arbitrary number. I think it was 1,000. Therefore, we put on the form that our goal was to come up with “at least 1,000 ideas” in the following year.
We turned in the form. We never once heard back from the budget department on our suggestion. That was fine by me.
I don’t think Strategic Planning Departments are well suited to annual metrics. One of their primary functions is to improve the long-term prosperity of the business. This is hard to put into an annual metric, because:
1) You usually do not know how much the long-term prosperity of the business is improved until many years later (falling outside the annual metric).
2) Since there is no control group, it is hard to measure how much of the improvement in a business’ long-term performance was as a result of the strategic planning department (vs. how much would have happened anyway).
3) If a plan fails, it is often difficult to determine how much of the failure was due to the quality of the plan versus the quality of the implementation. Since strategic Planning Departments are more responsible for the quality of the plan (while line operators are more responsible for implementation), it becomes difficult to determine how much credit (or blame) to assign to the strategic planning department versus the implementers.
4) When things go bad, there is always the excuse that “It would have been even worse without the strategic planning department.” Again, this is very difficult to measure.
Since long-term prosperity is a difficult annual metric, companies often look to simpler measures for a Strategic Planning Department, like staying within their budget or successfully completing a planning cycle process. Although these are easier to measure on an annual basis, they still have problems. In particular, there is no correlation between doing well on these measures and in improving the long term prosperity of a business. Creating a planning document on time and within budget does not mean that it is a good plan.
That is why my department did not take the budget exercise in the story seriously.
That being said, one might also conclude that it is not worthwhile to assign metrics to the strategic plan itself. However, I think that would be a mistake. Strategic Plans are not the same as Strategic Planning Departments. Although I think that planning departments are hard to measure, I believe that strategic plans can and should be measured.
The principle here is that a good strategic plan outlines certain conditions which are necessary in order for the plan to succeed. One can and should measure whether or not these events occur, because if they do not occur, your future is in trouble.
As I’ve mentioned in the past, a good plan should encompass three areas:
Conditions should be assigned to these areas and they should be measured.
A position provides the reason why your business exists (from the customer’s perspective). It gives potential customers a reason to prefer your business versus the alternatives. For example, Wal-Mart owns the low price position, which is a reason to prefer it over higher-priced retail alternatives. Mercedes-Benz owns the prestige position, giving a reason to prefer it over other, less prestigious automobile options.
The position is the place where you need to win if the strategy is ever going to succeed. If you do not give customers a legitimate reason to prefer you, they will prefer someone else.
Positions are won in the minds of your desired consumer segment. They either believe it (and give you credit for owning it) or they do not. Your position is only real if they perceive it to be so.
Therefore, if you want to measure the effectiveness of your positioning efforts, you need to measure what is going on in the minds of your desired customer segment. How many believe that you own your desired position? This includes not only the customers who have already purchased from you, but consumers in your desired segment who have not purchased from you. Even if they have not purchased from you, they probably have an opinion about what you stand for, and that opinion may be what is keeping them away.
Pursuit includes the plan to obtain all of the necessary pre-conditions in order to deliver on the promise of the position. This includes things like:
A. Competency—the expertise to know how to deliver on the promise of where you want to win;
B. Capacity—the infrastructure needed to deliver on the promise; and
C. Contacts—proper access to all the other players in the business ecosystem needed to deliver on the promise.
Depending upon your position, there will be different priorities in what you need to pursue.
For example, if Wal-Mart is going to excel at delivering a low price retail position, it needs expertise in low price retailing, an efficient infrastructure of stores and distribution centers with enough capacity to take advantage of economies of scale, and the proper relationships with key vendors and suppliers.
These are measurable conditions. Either you have them or you don’t. Strategic plans should provide a roadmap of where you are deficient and what needs to be done to fill the gap. And then you measure the extent to which the gap is been filled.
And since we live in a dynamic environment, what is necessary to win on your position changes over time. New expertise may be needed, improved infrastructure may be required, new contacts may be needed. A good plan anticipates this dynamic so that you can stay ahead of the curve on pursuing what you need to win in the future. You can measure your progress on these as well.
Productivity is needed in order to ensure that your costs to pursue the position do not exceed the benefits of owning the position. Productivity includes activities such as:
A. Action Trade-offs—Cutting expenditures in less important areas so that you can afford to spend more in areas more critical to the position.
B. Efficiency Efforts—Eliminating Waste without Eliminating Effectiveness
C. Investing in projects which will increase long-term productivity (sometimes you have to spend money in order to save money).
D. Cash Management—Reducing receivables, increasing payables, reducing interest payments, etc.
Particular goals and actions can be addressed in the plan regarding these types of productivity issues. These can be measured.
What Not To Measure
Specific conditions related to positioning, pursuit and productivity can and should be measured. However, there are other metrics which should be avoided (or at least downplayed). The metrics to avoid or downplay are those which can be achieved while ignoring the strategy. For example, look at a metric like sales. There are lots of ways to boost sales in the short run. Many of these methods can damage or destroy a long term positioning.
Toyota, for example, recently got sidetracked into a pursuit of growing sales as fast as they could. To achieve this growth, they took their eyes off the key position of reliability. As a result, reliability slipped, and now Toyota is having to spend a fortune to recapture its position.
Just focusing on sales will not necessarily achieve the plan. But if you properly focus on positioning, pursuit and productivity, the right kind of sales will naturally come.
So, when choosing metrics, ask yourself this question: Is it possible to excel in this metric without advancing the plan? If so, eliminate or downplay that metric.
Although it may be difficult to apply metrics to a strategic planning department, that shouldn’t stop you from applying metrics to the strategic plan. But not all metrics are good metrics. The metrics you choose should be specifically related to actions which advance the plan. In particular, they should measure:
A. Whether consumers believe in your position;
B. Whether you have properly pursued in getting what is needed to deliver on the promise of the position;
C. Whether you have taken specific steps to increase productivity without compromising your ability to deliver on the promise of the position.
Of course, if the best metrics are those designed to measure positioning, pursuit and productivity, then you’d better first create a plan which addresses the issues of positioning, pursuit and productivity. It amazes me how many plans ignore this first step.