How to measure what really drives business performance

19 June 2020

By Rhian Silvestro

Are you building your business strategy on received wisdom or real data? Corporate strategies are often based on widely held assumptions about what drives business performance rather than analysis of data from the company itself.

John Willard Marriott, founder of Marriott Hotels, is famous for saying: “You’ve got to make your employees happy. If the employees are happy, they are going to make the customers happy."

While TNT ran with the slogan: “Take care of your people, let them take care of your customers and the rest will take care of itself."

The implication is that happy employees make happy customers, which drive profits. But does this really happen in your organisation?

Some of the core assumptions about what drives financial performance have become so widely accepted that they are often assumed as fact. However, managers are frequently unable to justify the assumptions underlying their competitive strategies with data from their own organisations. The danger is that unless the core assumptions are sound and relevant to your own circumstances, you run the risk of developing wrong-headed strategies that will lead you astray.

The problem is that often some drivers of performance aren’t measured at all; let alone the correlations between them. For example, you may believe that loyal employees create satisfied, loyal customers, but do you have data which demonstrates that your longest serving staff create the highest levels of customer loyalty?

Another assumption is that loyal customers are the most profitable; we’re often told it is five times more profitable to serve existing customers than new customers. It makes sense.

The better we know our customers the more likely we are to meet their expectations and serve them well. And as customer spend often increases over time, it may well be cheaper to serve long-term customers than keep attracting new ones.

But does this actually apply to your organisation? Can you demonstrate that your loyal customer accounts are more profitable than those of new customers?

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Performance topology mapping is a tool that can help with this analysis. The first step is making sure that you’re measuring the right thing. So if your business is built on the assumption that loyal employees create loyal customers, collect loyalty data. Identify your key performance indicators, and then measure the correlations between them in order to build a map of business drivers.

The findings can be surprising. For example, the idea that customer loyalty drives financial performance is often regarded as a basic principle of retail management.

However, research in a home improvement retail chain suggested otherwise. When its managers came to explore the data in their own organisation, they discovered that there was no correlation between customer loyalty and store profitability. Rather, profits in this company were primarily driven by supply chain relationships and volume-based rebates from large suppliers, rather than being based on customer behaviours at store level.

Analysis of the performance topology map of one of the UK’s big four grocery superstore chains also revealed counter-intuitive results. Its management bought into the idea that with satisfied employees they would create high levels of customer satisfaction and loyalty, and drive store profitability. But in fact analysis of store data revealed that the stores with the highest levels of employee satisfaction were the least profitable.

The store management attributed this finding to store size: bigger stores tended to offer the best shopping experience, and were the most profitable, but were also stressful places to work. So in this company employee satisfaction and loyalty did not in fact drive customer satisfaction and loyalty.

Understanding the performance drivers of your business is essential. Because failing to understand what drives your financial performance is to fail to understand why your company has succeeded… or indeed failed.

The reality is that your business strategy is based on all sorts of assumptions about what investments will yield increased market share, revenue growth or profitability. To get the strategy right, start testing those assumptions.

Further reading:

Rhian Silvestro (2016) "Do you know what really drives your business’s performance?", MIT Sloan Management Review, 57, 4, 28-34.

Rhian Silvestro (2014) "Performance topology mapping : understanding the drivers of performance", International Journal of Production Economics, Volume 156, 269-282.

 

Rhian Silvestro is Associate Professor of Operations Management and is Course Director for the online executive course Driving Service Performance.

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