Linking Strategy with performance measurement - Coombes Corporate Finance

Linking Strategy with performance measurement


Linking Strategy with performance measurement

It is important for every company to periodically evaluate where it is and where it intends to go in the foreseeable future.  This is required, for example, when raising finance, considering expansion or even when there is a substantial change in the economic environment as we are currently experiencing. This evaluation is best achieved by answering the following questions:

  • Where is my company at now?
  • Where do you/managers want this company to be in 5 years?
  • How do I manage the progress of this journey?

These questions will entail a deep and honest look at your company, setting a strategy for the foreseeable future and setting goals and measures to manage the delivery of this strategy. 

Where is my company at now?

The key place to start is a SWOT analysis of your business, a reality check of where your company is now and the opportunities and threats it is facing, focusing on all key aspects of the business, including:

  • The Market, your customers and your competitors;
  • Service delivery including the range of services; efficiency; etc.
  • Management including succession planning; staff remuneration, reward and retention;
  • Management Information systems
  • Financial including profitability and cash flow.

The review should take each of these aspects and detail the company’s current Strengths and Weaknesses in each aspect; and outline the company’s potential Opportunities and Threats, again under each aspect.

Where do you/managers want this company to be in 5 years?

Following on from the SWOT analysis, you should prepare a five year strategy for the company in conjunction with your key management.  This strategy will set out the vision for the business, supported by a detailed business plan that will set out how this vision will be delivered.  The business plan should cover all the aspects outlined in the SWOT analysis, i.e. the market and the customer; the service delivery; the management and information systems.  I would also recommend that you prepare five year financial projections as part of the plan.

This strategy and business plan should be written down and reviewed on a periodic basis. If required, the plan should be updated for changes in the environment the company operates.

How do I manage the progress of this journey?

The success or failure to deliver the strategy should be monitored throughout the life of the plan. This can be effectively achieved through a Performance Measurement and Reward system that will monitor the progress of the company and motivate staff to collectively deliver the vision, strategy and objectives of the company.  The key building blocks of a good system are identifying what should be measured, what standards are set for these measures and what are the rewards for achieving the targets?

Most companies have the traditional accounting measures, such as management accounts.  These are very limited as they measure historical information and it ignores other important areas such as customer satisfaction, process efficiency, etc.   A more useful measurement tool is the ‘Balanced Scorecard’ which compliments financial measures with non financial or operational measures on areas such as customer satisfaction, internal processes, innovation, etc.  The tool includes measures in four areas:

  • Financial – including the traditional actual versus budget, etc, and ‘key financial drivers’, drivers that will deliver the preferred financial results of the future.
  • Customer – including customer satisfaction with the company’s products, pre and post sales service, etc.
  • Internal Business – this area should focus on the internal items that the company needs to be good at in order to succeed, for example, staff retention measures; production efficiency and production quality measures.
  • Innovation and Learning – including employee competency, training, process improvement etc.

Once the company has established what should be measured, it then needs to establish the “owner” of the measure.  This is typically the individual or group of individuals who have the greatest influence on the item being measured.  Once the owner is identified, you then need to set targets for each measure in conjunction with the measure owner, so as to ensure ‘buy in’ both to the method of measuring and the target being set.  These targets need to be stretching of the owner’s ability but yet achievable and fair.

It is also important to include some form of benchmarking, comparing performance with both internal peers and external competitors.  The external benchmarking will ensure that the company keeps a focus on the market environment outside the company.

Finally ensure the measurement system is linked to the reward system as the reward system is used to guide individuals to deliver the standards/objectives previously set out. This reward system should be clear, motivating and the outcome needs to be in the control of the person being held responsible.