Strategy Measurement Metrics Matter – choose wisely!
It is accepted wisdom that companies need measurement systems. The following three phrases capture the thinking:
- What you measure gets managed
- What you measure gets done
- What you measure you treasure
The critical question is not whether to measure at all, but what you choose to measure.
The overarching objective for business strategy, entrepreneurs and leaders is to create a profitable, scalable and valuable business.
A company’s valuation can be separated out into three segments:
- The reproduction cost of tangible and intangible assets
- The competitive advantage value (assuming no revenue growth)
- The value of revenue growth within the competitive advantage
Thinking about business valuation in this way allows you to connect strategy, tactics and valuation. Doing so provides entrepreneurs and leaders with valuable insights.
Strategy measurement metrics should be targeted towards the root drivers of a company’s competitive advantage, which is underpinned by its core capabilities.
Capabilities are the outputs from a blend of resources such as people, process, technology and intellectual property. Examples of capabilities are innovation, brand building and time to market.
In a well-designed capabilities system, every capability supports, reinforces and magnifies each other (see Blog 5 for details).
Consequently, you need to measure the effectiveness and efficiency of the individual capabilities and the capabilities system. A failure to choose the right metrics makes it hard to build a profitable, scalable and valuable business.
Below, we illustrate how to choose the right strategy metrics, and why it matters, using Inditex and Proctor & Gamble as examples (companies we have used throughout the series). Please note that the same principles apply for SMEs.
Inditex – Choosing What to Measure is Critical
Inditex, the owner of Zara, is a global fast-fashion retailer. Central to its business model is to “give customers what they want and get it to them faster than anyone else”.
As far back as the early 1980s, Inditex developed a system that revolutionised the time between design, production and garment display in stores. Zara’s relentless focus on speed enables it to prototype new styles in as few as five days and to achieve a design, production and time to store turnaround in as short as fifteen days.
Speed is a core capability of Zara and a critical component of its competitive advantage. Speed enables Zara to surf the frequent, but unpredictable, fashion-waves and ensure customers continuously have garments that are the height of fashion.
Zara’s focus on speed means that about sixty per cent of manufacturing takes place locally in small batches, its design team is twice the size of rivals, it has its own fleet of trucks and it delivers ironed garments that are ready to be hung in stores.
If Zara had a measurement system that was overly focused on cost and efficiency, then when benchmarked against other retailers it would rank poorly. There would be so many opportunities to lower cost; for example, to manufacture out of China in large batches.
However, for Zara, the benefits it derives from speed more than offset the extra costs incurred. Their customers know that if they don’t buy now, the garments won’t be there in a few weeks. Customers become raving fans, which largely replaces the marketing budget. Zara only has to mark down about half as many garments as the industry standard as its designs are always in fashion and ranges are limited.
A strategy metric that put the brakes on Zara’s speed competitive advantage would ironically cause a crash in its multi-decade, industry-beating results.
Proctor & Gamble (P&G) – Choosing What to Measure is Critical
P&G has a broad scope differentiated strategy delivering branded products. The company has about ten thousand scientists so it would be easy for the technical prowess of its products and services to become the go-to strategy metric.
However, P&G’s strategy is to deliver products of superior quality and value. How customer’s assess the value of branded products and services is complex and comprises logical, emotional and scarcity aspects.
Pampers, a flagship P&G nappy brand, began to lose market share when it became overly focused on nappies’ moisture absorbency as being the key metric for consumer buying decisions.
For years this metric served P&G very well. However, over time competitors caught up with Pampers’ technical proficiency, and consumers began to change the value equation for which nappy was superior. Consumers shifted towards buying on a mixture of feel, design, ease, look, as well as technical performance.
To combat the loss in market share, P&G researched and gained insights to create a new Weighted Purchase Intent (WPI) measurement. The WPI adopted a holistic approach to product and brand preferences and accurately captured why one nappy was bought versus another one.
Guided by the new WPI nappy metric P&G were able to make critical adjustments that lead to market share gains for Pampers. It also rolled out the WPI concept across many other categories.
The WPI holistic measurement approach makes perfect sense for a company like P&G. Its business valuation and competitive advantage are underpinned by five core capabilities: consumer understanding, innovation, brand building, go-to-market and scale.
Had P&G failed to adjust the Pampers metrics away from technical aspects such as absorbency and towards a holistic WPI measurement, it would have eroded Pampers competitive advantage. Over time, such thinking would have eroded the competitive advantage of other categories and damaged P&G’s business valuation.
Key Takeaways
The efficiency and effectiveness of a strategy must be measured. Otherwise, how would you know if it is working or not?
It is critical that you have clarity over the key drivers of your competitive advantage and business valuation. The measurement systems must be designed to measure, support and enhance the durability of your strategy, competitive advantage and business valuation.
Like everything in strategy, choosing what to measure is part science and part art. It is vital that you choose wisely and communicate the metrics clearly across the organisation.
Doing so will enable your strategy to not only theoretically create a competitive advantage, but also do so in the marketplace. And, of course, help you to build a profitable, scalable and valuable business!
By Hugh Page
MD Integrated Value Consulting (IVC)
- IVC is a Business Advisory Firm enabling SMEs and investor-backed Startups to Build, Scale and Sell a Valuable Business at a premium
- We Demystify Strategy & Valuation to Increase Business & Exit Value and Attract & Wow investors for Debt / Equity Raises, Acquisitions & Exits
Take our Valuable Business Builder© Scorecard: get insights to maximise your business & exit value, for free.
For more details see www.ivconsulting.co.uk
Index of this 6 Part Blog Series
- Blog 1: Overview
- Blog 2: Mission Statement
- Blog 3: Target Customer
- Blog 4: Unique Value Proposition
- Blog 5: Core Capabilities System
- Blog 6: Measurement System
This 6-Part series is designed to add value on its own. To go faster, deeper, overcome inevitable obstacles and take your business to the next level, please schedule a call to see how we can help.
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