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ROLE OF METRICS IN STRATEGY MBA600 Week 7

COMMONWEALTH OF AUSTRALIA COPYRIGHT REGULATIONS 1969

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DO NOT REMOVE THIS NOTICE.

WEEK 7 FOCUSES ON TWO LEARNING OBJECTIVES

Acquire advanced knowledge and apply it in real workplace contexts to improve performance and competitive advantage.

Critically assess a diverse range of theories accumulated throughout the Masters’ qualification and the connections that exist between each one.

Other learning objectives

Discuss and translate theory, skills and knowledge into effective management practice.

Undertake independent research to solve complex business problems.

QUICK REVIEW OF KEY CONCEPTS

What we learned in Week 4

RECALL KEY CONCEPTS AND DEFINITIONS

Causal ambiguity Complexity

Lead and Lag Indicators Critical Success Factors

A lack of understanding of cause-and-effect of capabilities and competitive advantage.

(https://journals.sagepub.com/doi/abs/10.1177/1476127017740081)

Having many parts and being difficult to understand or find an answer

(Cambridge Dictionary)

A lead indicator is a predictive measurement A lag indicator is an output measurement

Management term for an element that is necessary for an organization or project to achieve its mission

(Wikipedia)

6 What a Business model Canvass looks like

ALIGNMENT WITH RESOURCES

AND CAPABILITIES

Source: https://en.wikipedia.org/wiki/Business_Model_Canvas

7 Resource-based View and

Dynamic Capabilities Applying the Business model Canvas

RESOURCES

Resources mean the factors of production

Land: natural resources

Labour: human resources, knowledge, automation

Capital: finance, access to funding

ALIGNMENT WITH RESOURCES

AND CAPABILITIES

DYNAMIC CAPABILITIES

Capability

A firm’s capacity to successfully perform a unique business activity

Dynamic capability

A firm can intentionally adapt its resources to create customer value

Source: https://en.wikipedia.org/wiki/Business_Model_Canvas

We will rediscover the Balanced Scorecard

WHAT WE WILL LEARN THIS

WEEK

BALANCED SCORECARD

Role of Metrics

CAUSAL AMBIGUITY AND THE PERSISTENT DILEMMA

‘[Managers] rarely think of measures as an essential part of their strategy. For example, executives may introduce new strategies and innovative operating processes intended to achieve breakthrough performance, then continue to use the same short-term financial indicators they have used for decades, measures like return-on-investment, sales growth, and operating income. The managers fail not only to introduce new measures to monitor new goals and processes but also to question whether or not their old measures are relevant to the new initiatives.’

Kaplan, R. S., & Norton, D. P. (1993). Putting the Balanced Scorecard to Work. Harvard Business Review.

Robert S. Kaplan and David P. Norton

Financial

goals & measures

Internal Processes

goals & measures

Innovate & Learn

goals & measures

Customer

goals & measures

What must we excel at?

Are we working effectively and efficiently?

How do customer see us?

Are we satisfying customer needs?

How can be serve customers better in the future?

Shareholder returns?

How do we look to shareholders?

Can we improve and create value?

What are the emerging opportunities and challenges?

Internal efficiency plus customer satisfaction

equals financial success

BALANCED SCORECARD KAPLAN AND NORTON

Kaplan, R. S., & Norton, D. P. (1993). Putting the Balanced Scorecard to Work. Harvard Business Review.

BUILDING THE BALANCED SCORECARD

State the strategic direction

Recall the strategy planning process (Week 2)

Integrate Capabilities and resources

Recall the Business Model Canvass (Week 5)

Define Critical Success Factors (CSF)

Recall the Business Model Canvass (Week 5)

Define measures and metrics

Complete in the Balanced Scorecard

Shareholders

Customers

Internal Process

Capability

Financial performance

Effective utilization of resources

Customer value

Satisfaction and/or retention

Efficiency

Quality

Human capital and organisational culture

Infrastructure and technology

Strategy Objectives (perspectives)

Key Measures & Metrics

Goals: superior profitability

Measures: cash flow, sales, EBITDA, market share, ROE

Goals: New products, flexible supply, loyalty, partnerships

Measures: new & existing product sales, on-time delivery

Goals: technology capability, new product development (NPD)

Measures: lead-time, unit cost, engineering efficiency, plan accuracy

Goals: leadership, lean production, product focus, time to market

Measures: NPD lead-time, maturity, superior capability

CSF (actions)

BALANCED SCORECARD

PERSPECTIVES

Kaplan, R. S., & Norton, D. P. (1993). Putting the Balanced Scorecard to Work. Harvard Business Review.

https://www.balancedscorecard.org/ BSC-Basics/About-the-balanced- scorecard

WORKSHOP TIME

Questioning if old measures are relevant to new initiatives

QUESTIONING IF OLD MEASURES ARE RELEVANT

TO NEW INITIATIVES

WORKSHOP

In groups or individually, identify what you would do at work to engage people in questioning beliefs and assumptions (15 minutes)

Unquestioned assumptions are characteristic of Groupthink and poor decision-making

Common assumption are: ‘the more KPI the better’; ‘you cannot manage what you cannot measure’

Consider a culture of engagement

An individual’s positive or negative feelings toward a task, colleagues and company that influences the willingness to learn and perform at work

DEFINE CRITICAL SUCCESS FACTORS (CSF)

Rationalising and simplifying governance

DEFINING AN IMPACTFUL SET OF BUSINESS METRICS

Kaplan, R. S., & Norton, D. P. (1993). Putting the Balanced Scorecard to Work. Harvard Business Review.

Governance

Define objectives for

controls

Define Procedure

Identify specific manual or

automated processes

Reduce Causal Ambiguity

Develop a theory of cause-

effect of assumed activity 2 3

Monitor for tends

Evaluate metric results vs

actual observations

What we discuss next

GOVERNANCE: DEFINING

OBJECTIVES FOR CONTROLS

RATIONALISING AND SIMPLIFYING GOVERNANCE

What metrics are currently implemented by firms in an industry? Are existing metrics rationalized to the extent possible?1

Existing

What metrics should be implemented to track new business activities? Do new metrics duplicate or conflict with existing metrics?2

New

How can managers link strategic actions to the metrics? Does readily available data exist to track the metric?3

Actionable

How do metrics relate to customer value and firm performance; and create superior profitability?4

Relevance

What are the implementation issues as a firm migrates to the metrics?

5 Migration

GOVERNANCE: DEFINING

OBJECTIVES FOR CONTROLS

RATIONALISING AND SIMPLIFYING GOVERNANCE

Avoid getting bogged down by too many measures

A measure may conflict with other measures and reward unintended outcomes

What metrics are currently implemented by firms in an industry? Are existing metrics rationalized to the extent possible?1

Existing

What metrics should be implemented to track new business activities? Do new metrics duplicate or conflict with existing metrics?2

New

Kaplan, R. S., & Norton, D. P. (1993). Putting the Balanced Scorecard to Work. Harvard Business Review.

How do metrics relate to customer value and firm performance; and create superior profitability?4

Relevance

How can managers link strategic actions to the metrics? Does readily available data exist to track the metric?3

Actionable

GOVERNANCE: DEFINING

OBJECTIVES FOR CONTROLS

RATIONALISING AND SIMPLIFYING GOVERNANCE

Consider the engagement actions and the willingness of individuals to learn and adapt

Define the dynamic and distinctive capabilities that are priorities for measurement

Kaplan, R. S., & Norton, D. P. (1993). Putting the Balanced Scorecard to Work. Harvard Business Review.

What are the implementation issues as a firm migrates to the metrics?

5 Migration

GOVERNANCE: DEFINING

OBJECTIVES FOR CONTROLS

RATIONALISING AND SIMPLIFYING GOVERNANCE

Evaluate if the data and systems are readily available for reporting measurement results to decision makers

Kaplan, R. S., & Norton, D. P. (1993). Putting the Balanced Scorecard to Work. Harvard Business Review.

DEFINE MEASURES AND METRICS

Complete the Balanced Scorecard

Kaplan, R. S., & Norton, D. P. (1993). Putting the Balanced Scorecard to Work. Harvard Business Review.

RECALLING THE BALANCED SCORECARD FRAMEWORK

We are now discussing the third step in building a

balanced scorecard

24 FINANCIAL

KEY MEASURES AND METRICS

Operating Cash Flow

Cash generated by a company’s usual business operations

Working Capital

Liquidity from current assets minus current liabilities, expressed in monetary terms

Current Ratio

Current assets divided by current liabilities; a ratio between 1.5 and 3 is considered ‘healthy’

Debt to Equity Ratio

Financial leverage of total liabilities divided by total shareholder equity

Revenue Budget Variance

Difference between planned and actual revenue, expressed in monetary or percent terms

25 LEARNING AND GROWTH

KEY MEASURES AND METRICS

Salary Competitiveness Ratio (SCR)

Competitiveness of compensation options

Employee Productivity Rate

Workforce efficiency measured over time

Turnover Rate For Highest Performers

Retention efforts for top performers and plans for talent replacement

Average Time To Hire

Efficiency of the hiring process measured by time to recruit, interview, and hire

Internal Promotion Rate

Successful retention and growth of top performers

26 INTERNAL PROCESS

KEY MEASURES AND METRICS

Customer Support Tickets

Number of new tickets, the number of resolved tickets, and resolution time

Product Defect Percentage

Percentage of defective products in a specified timeframe

On-Time Rate

Percentage of time products were delivered promptly as scheduled

Efficiency Measure

Efficiency can be measured differently in every industry, so this common KPI will vary

Overdue Project Percentage

Number of projects that are late or behind schedule

27 CUSTOMER

KEY MEASURES AND METRICS

Conversion Rate Percentage of interactions that result in a sales transaction

Retention Rate Portion of consumers who remain customers for an entire reporting period

Contact Volume By Channel Number of support requests by phone and email

Customer Satisfaction Index Success at meeting customers’ needs

Net Promoter Score Likelihood that customers will recommend a brand to others

Customer Effort Index Measures customer experience when resolving complaints

28 CUSTOMER

BALANCED SCORECARD METRICS

Net Promoter Score (NPS)

Measures if someone is willing to personally recommend a product or service to a friend, family member or colleague

Customer Effort Score (CES)

Well suited to call centre environments or business areas dealing with problem resolution

TECHNIQUES FOR IDENTIFYING ESSENTIAL CSF AND KPI

VRIO Criteria

PESTLE

SWOT

INDUSTRY WHITEPAPERS AND ANALYSIS

FINANCIAL STATEMENTS

PORTER’S 5 FORCES

WORKSHOP TIME

Identify CSF and KPI that your company uses, or should use

IDENTIFY CSF AND KPI THAT

YOUR COMPANY USES, OR

SHOULD USE

WORKSHOP

In groups or individually, identify what Critical Success Factors and Performance Indicators are useful for governance in your company (60 minutes)

S e e k h e l p w h e n yo u n e e d i t !

Thank you