6.3 Linking performance to strategy

Performance measurement is crucial for executing strategy effectively. Linking measures to strategic objectives ensures everyone's efforts align with the company's goals. This topic explores how to create and cascade meaningful metrics throughout an organization.

Aligning metrics with priorities keeps the focus on what truly matters for success. We'll look at setting targets, using benchmarks, and communicating the strategic relevance of measures to drive performance and achieve key objectives.

Performance Measures for Strategic Objectives

Linking Performance Measures to Strategic Objectives

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• Performance measures are quantitative indicators used to track progress towards achieving strategic objectives
• Effective performance measures should be directly linked to one or more specific strategic objectives
  • Each measure should clearly indicate progress on a key strategic priority
• Performance measures can be leading indicators that predict future strategic outcomes or lagging indicators that confirm if a strategic objective was achieved
  • Leading indicators provide early warning signs of potential issues or opportunities (employee engagement survey scores)
  • Lagging indicators show the final results achieved (annual revenue growth)
  • A mix of both leading and lagging measures provides a comprehensive view

Cascading Performance Measures Through the Organization

• Cascading performance measures down to lower levels of the organization helps translate high-level strategic objectives into actionable targets for teams and individuals to work towards
• Each level of the organization should have specific performance measures that support the strategic objectives relevant to their function
  • Executive level focuses on overall strategic progress and long-term value creation (market share, profitability)
  • Business unit level focuses on key drivers of business performance (customer retention, product innovation rate)
  • Team and individual level focuses on operational excellence and continuous improvement (quality metrics, cycle time)
• Cascaded measures create a clear line of sight between strategic objectives and day-to-day activities
  • Helps employees understand how their work contributes to strategic success
  • Promotes cross-functional collaboration to achieve shared strategic goals

Aligning Metrics with Priorities

Focusing Metrics on Strategic Priorities

• Strategic priorities are the most important goals the organization must achieve to execute its strategy successfully
• Performance metrics should be focused on measuring progress on these critical priorities
  • Avoid measuring everything that can be measured
  • Prioritize metrics that provide insight into strategic success factors
• Each strategic priority should have at least 1-2 key performance indicators (KPIs) that are tracked regularly by leadership to gauge strategic progress and identify issues
  • KPIs are the most important metrics for achieving strategic objectives
  • KPIs should be monitored frequently (weekly, monthly) to enable timely decision making

Keeping Metrics Aligned Over Time

• Performance metrics and strategic priorities should be reviewed periodically and updated as needed to ensure continued alignment as internal and external conditions evolve
  • Annual strategic planning process provides an opportunity to reassess metric alignment
  • Significant changes in strategy, leadership, or competitive landscape may require realigning metrics in real-time
• Focusing performance measurement on strategic priorities avoids overloading the organization with too many metrics
  • Keeps attention on what matters most for strategic success
  • Makes it easier to identify and respond to significant performance deviations
• Periodically sunset metrics that are no longer relevant to strategic priorities
  • Eliminate metrics that have consistently stayed in an acceptable range
  • Replace outdated metrics as strategic focus areas change

Targets and Benchmarks for Performance

Setting Effective Performance Targets

• Targets are the specific, measurable results the organization aims to achieve on each performance indicator within a defined timeframe
  • Targets make performance measures actionable
  • Targets should have clear deadlines to create a sense of urgency
• Effective targets are realistic yet challenging
  • Take into account the organization's past performance, industry benchmarks, and future strategic aspirations
  • Stretch targets can inspire breakthrough performance (20% increase in market share)
  • Overly aggressive targets can demoralize employees and lead to burnout or unethical behavior
• Interim targets or milestones break down longer-term targets into incremental steps
  • Makes big goals feel more achievable
  • Allows for course corrections along the way
  • Provides opportunities to celebrate progress and maintain momentum

Using Benchmarks to Inform Targets

• Internal benchmarks compare current performance to the organization's historic results
  • Identify trends and performance patterns over time
  • Ensure targets represent continuous improvement
• External benchmarks compare performance to industry peers or best-in-class organizations
  • Understand competitive positioning on key strategic metrics
  • Learn from organizations that consistently outperform their targets
• Engaging stakeholders in the target-setting process fosters buy-in and ownership for delivering the targeted results
  • Collaboratively set targets with accountable teams and individuals
  • Ensure targets are perceived as fair and achievable
  • Secure commitment to putting forth best efforts

Communicating Strategic Relevance of Measures

Explaining the Strategic Context of Performance Measures

• Stakeholders need to understand why the organization's performance measures matter and how they link to strategic success
• Leadership should consistently reinforce how performance measures at all levels support the overarching strategy
  • Connect measures to key strategic themes and objectives
  • Explain how measures work together to drive strategic outcomes
  • Share examples of how operational performance improvements have advanced strategic goals
• Visual tools can powerfully communicate how performance measures fit into the strategic framework and relate to each other
  • Strategy maps show the causal linkages between strategic objectives and performance drivers
  • Dashboards and scorecards provide a concise overview of critical metrics and targets
  • Data visualizations bring performance measure results to life through engaging charts and graphs

Recognizing and Reporting Performance Results

• Celebrating and rewarding achievement of performance targets communicates their strategic relevance and value to the organization
  • Acknowledge individuals and teams that exceed performance expectations
  • Share success stories widely to inspire others to raise their performance
  • Provide meaningful incentives (bonuses, promotions) for outstanding results
• Transparently reporting performance measure results to stakeholders demonstrates accountability for delivering on strategic commitments
  • Share results regularly through multiple communication channels (emails, meetings, intranet)
  • Honestly discuss where performance is falling short and outline action plans for improvement
  • Solicit stakeholder feedback on the effectiveness of performance measures for driving strategic success