The Discipline of Managing Disruption
To Harvard professor Clayton Christensen, coauthor of How Will You Measure Your Life?, a primary task of leadership is asking questions that anticipate great challenges.
by Art Kleiner

http://www.strategy-business.com/article/00170?pg=all

An important lesson from an interview with Clayton Christensen:

S+B: You’ve said that metrics like the internal rate of return (IRR) and return on net assets (RONA) lead to shortsighted decisions. What would be better measures? 

CHRISTENSEN: The answer probably depends on where you are in the cycle of a business. What you measure has a huge impact on what people prioritize—in fact, whatever you measure will put into place a way for people to game the system. Therefore, you’d better pick a measurement that causes people to do good things when they try to game the system. 

For instance, integrated steel companies used net profit per ton to measure their performance in the 1980s. This led them to want to get out of the low, commodity-based end of steel production, because volume at the low end makes it harder to get dollars per ton up. That decision made them vulnerable to the mini-mills. It turns out that most managers don’t even think about where their measurements come from. You can ask executives, “Who decided to measure net profit per ton?” They’ll scratch their heads and say they don’t know. It’s as if somehow the measure came from the sky. And it causes them to do crazy things.

Know the Difference Between Your Data and Your Metrics
by Jeff Bladt and Bob Filbin  |
http://blogs.hbr.org/cs/2013/03/know_the_difference_between_yo.html


The following excerpts should encourage you to read this article. Deciding on the metrics you measure vs. the data you collect is critical. Be sure the metric you chose REALLY drives the results you want.

We were concerned with the wrong metric. A metric contains a single type of data…..A successful organization can only measure so many things well and what it measures ties to its definition of success….there is a difference between numbers and numbers that matter. This is what separates data from metrics. 

You can't pick your data, but you must pick your metrics… 

…Keep in mind that all metrics are proxies for what ultimately matters…Metrics are what you measure. And what you measure is what you manage to…organizations become their metrics….In the business world, we talk about the difference between vanity metrics and meaningful metrics. Vanity metrics are like dandelions - they might look pretty, but to most of us, they're weeds, using up resources, and doing nothing for your property value…. 

Metrics are only valuable if you can manage to them 

Good metrics have three key attributes: their data are consistent, cheap, and quick to collect. A simple rule of thumb: if you can't measure results within a week for free (and if you can't replicate the process), then you're prioritizing the wrong ones. There are exceptions, but they are rare….Organizations can't control their data, but they do control what they care about.

Measuring marketing’s worth.

MAY 2012 • David Court, Jonathan Gordon, and Jesko Perrey
Source: Marketing & Sales Practice


https://www.mckinseyquarterly.com/Marketing/Digital_Marketing/Measuring_marketings_worth_297



I strongly recommend you read the full summary!!

You can’t spend wisely unless you understand marketing’s full impact. Here are five questions executives should ask to help maximize the bang for their bucks 

1. What exactly influences our consumers today?
The digital revolution and the explosion of social media have profoundly changed what influences consumers as they undertake their purchasing decision journey.2 When considering products, they read online reviews and compare prices. 

2. How well informed (really) is our marketing judgment?
Marketing has always combined facts and judgment: after all, there’s no analytic approach that can single-handedly tell you when you have a great piece of creative work. A decade ago, when traditional advertising was all that mattered, most senior marketers justifiably had great confidence in their judgment on spending and messaging. Today, many privately confess to being less certain 

3. How are we managing financial risk in our marketing plans?
Successful communication requires hitting the right audience with the right message at the right time: a small, moving target. With traditional media, marketers have mitigated the risk of failure through years of trial and error about what makes great advertising. That’s not the case with today’s new media.

4. How are we coping with added complexity in the marketing organization?
As the external marketing environment becomes more complex, so must the internal environment. Marketers historically had only a handful of communication vehicles; now they have dozens of them, and the number is growing rapidly. 

5. What metrics should we track given our (imperfect) options?
In an ideal world, the financial returns and the ability of all forms of communication to influence consumers would be precisely calculated, and deciding the marketing mix would be simple. In reality, there are multiple, and usually imperfect, ways to measure most established forms of marketing. Nothing approaches a definitive metric for social media and other emerging communication channels, and no single metric can evaluate the effectiveness of all spending. 

Total Shareholder Returns

This measure of business performance is the best indicator of corporate success.

by Ken Favaro and Greg Rotz

http://www.strategy-business.com/article/00068?pg=all

This very powerful summary is clearly worth looking at. You get what you measure and this article explores the critical measures and systems to optimize them.

Total shareholder return is a measure of corporate performance. But as we shall see, it is also a system of management, grounded in a set of metrics and practices for running a company to maximize its value creation, over both the short term and the long haul. ......When starting down the TSR path, it is helpful to begin with two questions: How broad or narrow should we make our focus on TSR? What issues and opportunities are we seeking to address by adopting a sharper focus on managing for TSR?Primary TSR MetricsThese are the four primary metrics to use when managing for top-tier TSR.1. Total shareholder return. This is the change in a company’s stock price for a given period, plus its free cash flow over the same period, as a percentage of the beginning stock price. For example, if a company has a stock price of US$100 at the beginning of a year, free cash flow of $3 during the year, and a stock price of $110 at the end of the year, its TSR for that year is 13 percent. TSR can be measured only for publicly traded companies because it requires observable stock prices....

...2. Free cash flow (from a shareholder perspective). This is the difference between earnings and retained earnings (sometimes called equity cash flow). At the company level, it is the portion of earnings paid out to investors...

....3. Economic profit. This is the difference between earnings and the cost of invested capital for a given period of time. A business that is earning at least its cost of capital is generating positive economic profit; a business that is earning less than its cost of capital has negative economic profit, even if its earnings are positive...

....4. Warranted value. This is the current value of a company or an operating unit based on the best estimate of its expected free cash flow (or economic profits) under a particular future strategy. This metric is sometimes called intrinsic value. Warren Buffett defines it as “the present value of the earnings power a business has over its remaining life.”...

The Seven Deadly Sins of Measurement

Jim Champy, coauthor, with Harry Greenspun, of Reengineering Health Care: A Manifesto for Radically Rethinking Health Care Delivery, introduces a lesson on the pitfalls of measurement from Faster, Cheaper, Better: The 9 Levers for Transforming How Work Gets Done, by Michael Hammer and Lisa W. Hershman.

http://www.strategy-business.com/article/ac00020?pg=all

Very interesting summary and I strongly suggest going to the article. Remember, you only get what you measure:

"....Vanity. One of the most widespread failings in performance measurement is to use measures whose sole purpose is to make the organization, its people, and especially its managers look good.

 ...Provincialism. This sin permits organizational boundaries and concerns to dictate performance metrics..

...Narcissism. This is the unpardonable offense of measuring from one’s own point of view, rather than from the customer’s perspective.

 ...Laziness. This is a trap into which even those who avoid narcissism often fall: assuming you know what is important to measure without giving it adequate thought or effort.

...Pettiness. Too many companies measure only a small component of what matters

...Inanity. Metrics drive behavior, but too many companies implement metrics without giving any thought to the consequences of these metrics for human behavior and consequently for enterprise performance.

...Frivolity. Not taking measurement seriously is perhaps the most grievous sin of them all"

The Quest for Market Share – At Any Cost
Sat Duggal
http://www.emmgroup.net/organic-growth-blog/quest-market-share-%E2%80%93-any-cost

A critical metric to assess position vs. competition is market share. This is a very insightful article which highlights different approaches to gaining share without necessarily falling into a margin death spiral.....

"Gaining market share is often top-of-mind for many executives. It is a simple metric to understand and visualize, it is usually tracked on an industry-basis and it usually communicates a sense of achievement when the share numbers are looking good. However exclusive focus on market share can also mask numbers that really count – profitability or long-term brand health.....

Market share is available for the taking today. Customer attitudes and behaviors are shifting and many competitors are vulnerable. The easiest thing seems to be to cut price and gain volume and share. However the more sustainable and profitable way to gain share is to understand the new needs of customers and innovate (product, shopping, engagement, etc.) to meet these new needs better than competitors....

While most companies have had to rapidly develop a strategy to address the low-end of the market as customers down-trade across categories, here are some thoughts on how to implement such a strategy, without hurting the entire portfolio:

- Use segmentation to inform your strategy: Not all customers down-trade to cheaper options for the same reason.
- Take a portfolio approach: Many marketers in today’s environment are investing heavily in their entry-level or low-priced products/brands. While this seems relevant given customer behavior for down-trading, lopsided investments will only accelerate the down-trading. Marketers have to equally invest in other brands in their portfolio and give a strong reason for customers to stay with the premium brands.
- Use bundling to average-out the margin: A low-priced product can be used to attract the customer but it can be bundled with other add-ons,
- Leverage design to maintain differences: Customers should be able to instantly tell the difference between an entry-level, mid-range and higher-end product.
- Have a well-defined role for your entry-level brand: It is important therefore to have a medium to long-term goal for the entry-level product, its role in the portfolio and the contribution that it will make to the overall profitability of the company."

Leading Outside the Lines
Integrating formal metrics and informal communication can lead to new levels of performance.
by Jon Katzenbach and Zia Khan
http://www.strategy-business.com/article/10204?gko=788c9

This is an extremely important topic and one worth the added effort to read the full article. They offer case studies of how to address the issue.

"Balancing Hard and Soft
In every company, there are really two organizations at work: the formal and the informal. The formal organization is the default governing structure of most large companies founded in the past century. Businesspeople recognize the formal organization as that rational construct that runs on rules, operates through hierarchies and programs, and evaluates performance by the numbers. If you have been trained in the “hard” disciplines like finance, technology, or operations — as so many senior managers have — you have probably learned to operate naturally in the formal domain, deploying tangible factors like job descriptions, organization charts, process flows, and scorecards.
The informal organization, by contrast, is an agglomeration of all the human aspects of the company: the values, emotions, behaviors, myths, cultural norms, and uncharted networks. The power of the informal is visible in every organization every day — it is an undeniable, emotionally resonant force. Even the most rational managers recognize that the informal organization within a company can create effects that seem like magic, especially in situations of change or transformation. Unexpected leaders emerge from the ranks. Passion swells up and pushes work forward. Units and operations swiftly transform themselves. And there are also less positive effects: Unexpected opposition lurks in the shadows, anxiety and fear hold work back, and critical operational improvements are derailed…..
Organizations that sustain high performance over time have learned how to mobilize their informal organizations while maintaining and adding formal structures, each in sync with the other. And in general, people appreciate the value of “leading outside the lines”: of balancing formal and informal measures in the pursuit of higher performance…..
But it’s difficult for any manager, even one who has a predilection for the informal, to understand exactly how to lead outside the lines. There is, after all, no universal recipe book: The right balance of formal and informal measures will look very different depending on the company, the business, and the circumstances.'

Hewlett-Packard Computes the Value of Bright Ideas
Hewlett-Packard changed the typical formula for measuring a company's investments in innovation against overall sales and profit targets
Business Week, March 23, 2009
By Cliff Edwards

This touches on the never-ending question of choosing the right metrics for R&D spend.

Business leaders are often vexed by research and development spending. How much money do you put into R&D when it could be 10 years before you see a payoff as products hit the market?

Hewlett-Packard (HPQ) CEO Mark Hurd has pushed hard to take guesswork out of the equation. Since arriving at HP four years ago, he's developed one of the most quantitative approaches to R&D in the tech industry. The strategy has helped HP keep its footing during the economic downturn, even as rivals like Dell have struggled. "They have the gold standard," says James Andrew, head of the global innovation practice at Boston Consulting Group.

The key is linking R&D spending to specific product lines. Of the $150 million that goes into HP Labs, the company allocates the money based on where it expects the biggest payoffs. To standardize across a product line that includes everything from printer ink to giant server computers, HP uses a metric it calls "R&D productivity," which is research spending as a percentage of gross margin. A standard desktop computer with low margins may get one or two innovative features. But a laptop, with fatter margins, would get more flash, such as touchscreen technology and cool design materials. "We try to focus a bigger percentage of our overall budget on game-changing types of technologies," says Hurd.

HP's investments in things like multi-touch technology have helped it surpass Dell as the world's top PC maker. Hurd says more standout technologies are on the way, including gesture-based controls, so you can point at your PC to launch a music or photo program. "We [are] trying to get innovation to the highest level we can," says Hurd.

Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things
by Clayton M. Christensen, Stephen P. Kaufman, and Willy C. Shih

This is a great article in the January 2008 edition of HBR (reprint R0801F) on the critical traps in deploying classic financial tools to innovation. One of the more provocative issues discussed is the assumption that if the business does nothing the current cash flows will remain. The flaw in this logic is the concept of “the fade” – if a business does nothing to support its position, the business quality will fade ~10% per year due to stronger competitors and/or stronger customers. Clayton Christensen relates this to classic DCF analyses in the following graph. I highly recommend ordering the reprint for the full article....


The DCF Trap
Most executives compare the cash flows from innovation against the default scenario of doing nothing, assuming—incorrectly—that the present health of the company will persist indefinitely if the investment is not made. For a better assessment of the innovation’s value, the comparison should be between its projected discounted cash flow and the more likely scenario of a decline in performance in the absence of innovation investment.

Metrics for Innovation
Sheila Mello
May 22, 2007
Innovate Forum
http://www.innovateforum.com/innovate/article/articleDetail.jsp?id=428371

This article touches on a critical issue, how to measure success in innovation. This approach is particularly relevant when considering "option plays", i.e., when the level of uncertainty is too high to have "good" numbers—at this stage do not ask for a business plan but the potential value you can create for your target customers. Go to the complete article for the full impact.

Question: Why are financial metrics the wrong yardstick for evaluating potential products for a portfolio and what should companies use instead?

Mello: Hindsight clearly indicates which products and services you ought to have added to your product portfolio when you were doing last year's plan. Lacking a crystal ball, most companies currently rely on a frighteningly inaccurate mix of erroneous financial projections, analysis of past successes or failures, and strong emotion to decide which innovations are worthy of commercialization. The prevalence of an approach that often resembles the efforts of medieval alchemists to transform base metals into gold in part explains why the failure rate for new product introductions is so startlingly high (estimates range from 50 percent to 90 percent).

Instead of profit potential or ROI, companies should measure something else: customer value. So why aren't they? One reason companies don't use customer value as a metric in determining what goes into their portfolios is that they believe they can't measure value before a product is created. They wonder how to determine whether a customer will pay for a product or service that's not yet fully developed.

The starting point for measuring customer value is a documented, repeatable research process to collect information that represents the voice of the customer. A robust, fact-based system to clearly identify both expressed and latent customer needs also provides a common, unambiguous language to discuss projects with product development teams. Instead of arguing over unreliable financials or engaging in political one-upsmanship, teams can focus on getting done what's needed to meet customer needs.

Traditional approaches to gathering VOC data -- such as focus groups, customer surveys, and informal research by marketing staff -- fall short of providing the deep insights needed to reveal true (and often unarticulated) customer needs. In short, if you simply ask what customers want, you may never gain the insights into their needs that allows for true innovation. (Ken Olsen of Digital Equipment Corporation is reported to have said in 1977, "There is no reason anyone would want a computer in their home," and customer surveys probably would have proven him right.)

An effective VOC process involves interviewing techniques such as probing questions, digging down for the so-called golden nuggets, storytelling about customer problems, and structured first-hand observation followed by quantitative Kano analysis. (The Kano Method, developed by Dr. Noriaki Kano of Japan's Tokyo Riko University in the 1980s, is, at its simplest, a series of two-part multiple-choice questions about user needs.) Using these methods, companies can determine the functionality that products must satisfy, as well as those features that delight, disgust, or elicit indifference in customers. With this data in hand, companies can separate potential winners from losers before launching into product development. Taking this method of analysis up a level to executive management allows companies to evaluate entire product portfolios using customer value as a yardstick

The Revenue Growth Gap and the Danger of Hurdle Rates
research@imaginatik.com.

We have learned two important lessons in working with leaders when dealing with the specific performance gap imparted by their growth objectives:

0 Leaders routinely do not apply simple mathematics to their goals: they announce we will grow 10% per year top line but never do the math. A 10% increase for a $1Bn company means you need $100M of new revenue; for a $10Bn company, you need $1Bn!! The first thing we do in working with companies is ensure the leaders understand the scale of their challenge. It always amazes me how their eyes begin to glaze over when they see the math.

0 Creating decision criteria is critical-- we call them the Ballpark Decision Criteria. They should be clearly articulated and broadly disseminated throughout the company to create the conversation leaders want and to enable a rapid, transparent decision making. Leaders must wrestle with how they want their company to grow. As outlined in this article, a key component of the Ballpark Decision Criteria is the potential size of the opportunities. This article deals with this issue.

Refer to the August 6, 2006 positing on Whirlpool to see how they used the Ballpark Decision Criteria.

Now the article:

To achieve growth targets, most companies need to find new sources of revenue, either through expansion into new markets or developing new products. This can be a challenging task. 30 - 50% of commercial launches fail to reach their expected revenue and profitability goals, and only one in four development projects succeed (Source: R. G. Cooper (2001) "Winning at New Products: Accelerating the Process from Idea to Launch").

At the same time, industry consolidation has led to the creation of mega-enterprises who struggle to maintain the same growth rates as their smaller, more nimble competitors. The absolute numbers are staggering. A 5% target growth rate for a $400m company is $20m - high, but not unrealistic depending on the market. Companies like Procter & Gamble, however, face a more daunting task. With $40bn in 2002 revenue, they would need to generate $2bn in new revenue each year, equivalent to creating a company the size of Williams-Sonoma or Siebel Systems.

The Growth Gap (see Research Note on "The Innovation Gap") can be closed partially through standard business operations, such as expanding distribution, and through mergers and acquisitions (for example, P&G's recent agreed purchase of Wella AG will add $2.57bn annual revenue). However, studies conducted by Imaginatik Research have found that 25% and 50% of a company's target growth will need to come through innovation.

Apart from acquisitions, the main innovation-related approaches to closing the gap are either:

The Big Win
- A company embarks on a search for high impact winners that will cover the bulk of the growth target. P&G calculate that their very best new products typically generate $200m - $250m in the first year, which would mean that their 2003 goal would involve finding 2 large scale winners.

Portfolio of Smaller Winners
- A company creates a basket of opportunities with a mix of expected return, risk, resource requirement and timescale. The portfolio is optimized to deliver the highest overall return on investment, with an outside hope that at least one project in the portfolio will become a big win.
Companies tend to blend the approaches. The returns from a big win are significantly larger than a basket of small-scale successes. The pharmaceutical industry in particular has shifted its approach through the 1990s away from generic drug manufacture to the search for $1bn blockbuster drugs, with a fair degree of success.

The key to both concepts are hurdle rates: are the products or markets large enough for warrant serious consideration. Companies therefore put in place framing activities to spot large potential markets, and use the tools within the Innovation Pipeline to develop offerings to meet these needs.

However, the hurdle rate can create some perverse effects. A market may appear too small initially, and often companies cede such niche markets to competitors who are sometimes able to grow the small market into a much larger one (see "The Innovators Dilemma" by Clayton Christensen). Companies also tend to forget their history, and fail to appreciate that the leading products often took years before they gained market traction.

Companies need a range of approaches to closing the Revenue Gap and innovation plays a large part, particularly in organic growth. Fortunately there are many methods to help companies find these large scale wins, and develop a portfolio of opportunities that can potentially become the successes of the future.

FIVE KEY STRATEGIES FOR MAKING METRICS
Business Week On-line, 8/10/06
Dev Patnaik

A question I always get when working with companies is: What are the right metrics to drive growth? The following article sheds light on this subject. Two key points are: leaders must thoroughly discuss these issues and reach alignment on the metrics they want to drive their company; and, everything is not vanilla—differential management (in this case metrics) is essential for sustainable growth.

Corporate leaders often struggle to create meaningful innovation metrics. The same questions keep arising. How innovative are we? What initiatives are giving us the biggest bang for our buck? And what does a good idea look like anyway?

In my experience consulting with a range of companies, I've found five key strategies for developing useful metrics:

Use people, product, and process metrics. Many companies develop metrics systems that focus only on the process. Their intention is to evaluate the effectiveness of various innovation activities. Yet process metrics are just one part of the solution, and they're usually the last part.Start by measuring your people. What traits are you looking for in your team? What behaviors do you want to reward? Next, move to product metrics. How are you measuring the ideas you come up with? Do you have meaningful ways to evaluate new products, as well as new services and business models? Only when people and process metrics are in place does it make sense to evaluate how well the overall process is performing.

Connect the metric to the rhetoric. Some business leaders hope to inspire their organizations by spending hundreds of thousands of dollars on management retreats, pep rallies, and innovation seminars. While those gatherings can be exciting, most companies discover that their employees ultimately prioritize the activities that they're measured on.Marketing managers won't spend time thinking about long-term growth if they're being evaluated solely on this quarter's performance. The most successful companies realize that innovation, like any objective, happens when companies ensure that there's a close alignment between stated goals and individual performance measures.

Start with incentives instead of controls. Metrics systems within companies act as both drivers to ensure constant improvement, and control systems to prevent failure. That can be incredibly helpful when everyone has a general sense of what "good" looks like, and how to achieve it. However, that basic notion of what's good is sometimes missing at the outset. In that case, it's more important to create metrics that reward positive results, rather than protect against adverse outcomes. The goal is to get people to start trying a variety of approaches, so you can figure out what works. If you're in the early stage of building an innovation system, definitely focus on carrots.

Set up multiple tracks. One of the best ways to encourage innovation is to stop discouraging it. That can happen when every new product or service idea has to meet the same performance metrics. Invariably those metrics are designed to evaluate base hits, not home runs. This can lead companies to inadvertently kill the best ideas because they don't fit the metrics. Teams pick up on the pattern quickly, and lower their sights to more tried-and-true projects that can get through the system.If you really want have both incremental and game-changing ideas come to market, develop different sets of metrics for evaluating and managing each idea.

Beware of false precision.Metrics that measure existing systems in current businesses often have a lot of data to draw upon. That's often not the case when a company is trying to do something new or innovative. Still, old habits die hard. Managers can end up trying to evaluate a completely new idea with the same level of precision they had when measuring established businesses. The data that they create may then give a misleading picture of certainty.Instead of detailed projections, try using round numbers, simple scales of 1 to 5, or "Harvey balls," that system of empty or filled-in circles used by Consumer Reports. Highly detailed metrics make sense for incremental improvements on established businesses, but they can be wildly misleading when evaluating greenfield opportunities.

Patnaik is a principal of Jump Associates, a firm that specializes in discovering new opportunities for growth