Aggregate Metrics need to be supplemented with Granular Metrics
The popular wisdom today is that the success of a business can be managed by focusing on several key top-line variables. While these averages are helpful, our research has shown that the true performance drivers can only be identified by de-averaged granular metrics. The challenge then is to isolate these detailed metrics, measure the concentrations of cost, revenue and profitability, and learn how to harness these underlying performance factors to improve the profitability of the enterprise as a whole.
Performance measurements and quantifiable indicators are essential for the development, execution and monitoring of the desired strategy. The Delta Model aligns performance metrics to the strategic options selected and their required Adaptive Processes, and recognizes that these metrics will be fundamentally different depending on the strategic position they intend to support.
In the Delta Model, we use two types of metrics. First, we need aggregate metrics to give us the overall, integrated view of the business and the firm's performance. Second, we need granular metrics in very specific parameters that will allow us to go in-depth for the necessary understanding of their behavior.
"Managing solely by the averages leads to below average performance."
The Aggregate Metrics we propose are those associated with the Adaptive Processes that support each distinct strategic option. Since these processes are the instruments for the execution of each strategic option, they also serve as the guidelines to define and measure strategic performance — Operational Effectiveness metrics focus on cost drivers, Customer Targeting metrics on profit drivers, and Innovation metrics on renewal drivers. The aggregate metrics used also reflect the nature of the strategic options whose performance they are measuring — the Best Product metrics are product-oriented; the Total Customer Solution, customer-oriented; and the System Lock-in, system-oriented. Of course, specific tailor-made metrics could and should be introduced in each individual business situation.
While aggregate metrics are essential for gathering the full picture of overall performance, they are not enough. They need to be complemented by individual granular metrics whose objective is understanding the variability in the behavior of some critical parameters such as product costs, customer profitability, workers productivity, as so on. The performance of these parameters is inevitably non-linear. This so called 80/20 rule is universal, in the sense that a small percentage of items (say 20 percent of customers) account for a disproportional amount of the output (say 80 percent of the profit). We need to measure this variability in order to assess what is the cause. With that knowledge we can begin to learn how to improve performance by making corrective actions or taking on innovative solutions.
Experimentation and Feedback
Key Adaptive Mechanisms
Success in today's ever-changing world comes not from creating one perfect plan but rather from adapting as the environment changes. This requires incorporating feedback mechanisms and defined experimentation into your processes and improving through a defined process of segmentation, testing, learning and execution.
An important contribution of the Delta Model addresses the issues of experimentation and feedback, key adaptive mechanisms in the pursuit of successful corporate and business strategy development.
Structured experimentation is the key to implementing effectively a major business transformation. This is particularly critical when you want to move from one strategic option to another (say from Best Product to Total Customer Solution), where the number of unknowns is high and the optimal implementation path is unclear. The way to address this challenge is to design a careful set of experiments aimed at building a more thorough, fact-based knowledge of the issues prior to committing to a full-scale organizational effort.
As an example, for a client attempting to adopt a Total Customer Solution strategy, we first requested a list of three critical customers who were willing to participate in a joint research activity, and whose business portfolios would provide valid lessons transferable subsequently to the overall customer community. For each customer we then identified five high priority needs in terms of product and service requirements. We thoroughly analyzed the customer economics and the competitor's offerings. The "test" market allowed us to develop a unique value proposition for each customer and to quantify the level of economic benefit for the customer and the client. We then implemented a roll-out of the successful approach to the balance of the customer base.
Once you have chosen a strategic direction, identified the relative metrics, and conducted the appropriate experiments to "fine-tune" your adaptive processes, you are ready to move forward with implementation. However, after you have done all of that, you will still likely need to modify the selected course of action and the consequent strategic agenda to allow for unexpected changes in your basic hypotheses. Thus you will need feedback. You will need to constantly monitor and measure performance, identify changes versus the original plan, and determine corrective and adaptive actions. You will also need to build enough flexibility into your management system, organizational structure, and resources to allow for proper changes to be made.