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Performance management: A defense against disruption?

April 18, 2007

Disruptive innovations may be as unique as the organizations that develop them. But what they have in common is their ability to shake up or shift established markets and industries.

Witness the phenomenon of YouTube. Its top downloads have over three times the number of viewers as the top-rated weekly TV shows. This leaves established networks like CNN scrambling to re-gain ground – in this case, by offering its own video Web site.¹

Or consider how Asian automakers displaced the North American auto industry. American cars today account for only 20 percent of vehicle sales in California.² And General Motors continues to lose domestic market share, from 35 percent in 1990 to 25 percent in 2005.³

Disruption or opportunity?

For incumbents, such disruptions can hit hard: share prices drop and lost revenue cuts deep into the bottom line. To stay in the game, they have to respond. But how well they succeed depends on their ability to both foresee and manage change.

BusinessWeek says organizations have to gain competency in change management or they'll be unable to sustainably compete in future.⁴

And from Mitchell Goozé, president of Customer Manufacturing Group: "the strength of a corporation's processes determines whether the company can anticipate its future markets and adapt to them.or be surprised by them – perhaps fatally."⁵

Resistance to change

Every organization should have its eyes on what's going on outside and anticipate disruptive changes. But more often, the focus is on internal efficiency and continuous improvement.

"Most people have a real terrible job of driving change because what people want to do is play around the edge doing continual improvement. The resistance to change is huge," says Greg Hackett, co-founder of The Hackett Group.⁶

David Axson, president of the Sonax Group, further contends that Finance is too diverted by transactions at the expense of watching for encroaching competitors or emerging trends.⁷

How to ride the shifting sands

To avoid stagnation and lost market share, companies should build a decision-making culture that identifies and responds to challenges whenever they happen. So say Hackett and Axson in their paper, The Risk-based Early Warning System.⁸ In their view, organizations can adapt to a changing world. Here are some concrete steps to make it happen:

1. Set up an early-warning risk-based system. Dedicate resources to looking outside at market turmoil, competitive moves, and customer trends to let people know what's happening and prepare them to change direction quickly.



2. Refocus performance reporting and analysis on key relationships and linkages. Most companies focus on reporting operational details that aren't connected to business drivers. Instead, measurement should be based on exceptions, driven by materiality, and triggered by events and trends. Critical business ratios, not absolutes, are what matters. Instead of single point measures like sales per month, companies should be asking: What is our revenue growth relative to market growth?



3. Replace annual planning with a short-cycle-time, tactic-focused process. Instead of just numbers, performance targets should be planned and tied to events, trends, and risk factors – they in turn drive company tactics, improvement efforts, and new initiatives. And the process needs to be constantly refreshed. This way, planning is inextricably linked to the changing environment in which every organization must operate.

The right tools to have

To fill in the picture, managers must know what the company does and what it needs to do to adapt. Having everyone working from the same platform with the same information and numbers is crucial to increasing agility.

A performance management system offers precisely the capabilities to aid this process. Reports, scorecards, analysis, and enterprise planning provide the integrated information environment that supports dynamic, collaborative decisions.

"The challenge is not just to scan the horizon, but to transmit the information across the company and to drive through to planning and action and realignment of the culture," say Axson and Hackett. "Appropriate use of technology to filter and focus this information can promote early recognition and action."⁹

The right reports to read

Finally, if there is a central benefit to a performance-based early warning system, it's this: dynamic management reports can provide instant information about the state of the market and the company's place within it.

A management report should be triggered by events, trends, or tolerances. This way, it brings the qualities of the early warning system into everyday use. Senior executives know on a daily basis what disruptions are coming and the consequences. Perception and understanding are linked: reports aggregate the critical data and executives gain the right context for key decisions.

Having such information on hand is critical in a world where disruptive change is accelerating. “There are lots of risks,” warns Michael Sproule, CFO of New York Life Insurance. “I’d say I’ve probably not ever in my career felt that there was so much geopolitical uncertainty that has ways of impacting the company.”¹⁰

Summary

With the right insight and strategy, disruptive events can drive positive change and growth opportunities for established players. The key is to look beyond company walls, anticipate change, and be prepared to ride it out.

As the McKinsey Quarterly suggests: market awareness usually trumps even good management. In areas such as banking and telecommunications, almost two-thirds of the organic growth of Western companies is due to being in the right markets and geographies.

"Companies that ride the currents succeed; those that swim against them usually struggle. Identifying these currents and developing strategies to navigate them are vital to corporate success."¹¹

Sources

¹ Michael Urlocker. Four Industries Facing Disruptive Threats. Strategy & Innovation. September-October 2006. Volume 4. Number 5.

² Jeneanne Rae. Industrial Strength Innovation. BusinessWeek. September 13, 2006.

³ Phil Rosenzweig. The halo effect, and other managerial delusions. The McKinsey Quarterly. 2007 Number 1.

⁴ Jeneanne Rae. Industrial Strength Innovation. BusinessWeek. September 13, 2006.

⁵ Mitchell Goozé, Ralph Mroz. The State of Competitive Advantage. ChangeThis. February 6, 2007.

⁶ Cognos Innovation Roundtable. Responding to Market Realities, Staying Ahead of Change. Cognos Innovation Center. New York City. October 2004.

⁷ Cognos Innovation Roundtable. Responding to Market Realities, Staying Ahead of Change. Cognos Innovation Center. Dallas. December 2005.

⁸ David Axson and Gregory Hackett. The Risk-based Early Warning System. Innovation in Action Series. Cognos Innovation Center. February 2, 2005.

⁹ Ibid.

¹⁰ Economist Intelligence Unit. CEO Briefing: Corporate priorities for 2007 and beyond. The Economist. January 2007.

¹¹ Ian Davies and Elizabeth Stephenson. Ten Trends to Watch in 2006. The McKinsey Quarterly. January 2006.