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Use performance management to see the signs of a slowdown

May 23, 2008

3M, Apple, Levi Strauss, Volvo, and American Express have at one time or another been at the top of their industries.

But what they also have in common is a similar reversal of fortune: a sudden, sharp decline in revenue and market share after years of strong growth.

Apparel maker Levi Strauss, for one, saw a 35 percent drop in returns over a four-year period. At the same time, the company’s market share decreased by half. All this after doubling its revenue in the previous decade.

According to Harvard Business Review, such hard landings aren’t so rare.

In a study of more than 400 past and current Fortune 100 companies, researchers found that 87 percent had experienced one or more “stall points.”

In each case, they lost an average 74 percent of their market capitalization in the decade around the revenue stall.¹

Are these disasters the inevitable aftermath of precipitous growth? The numbers may suggest so.

But Harvard researchers say no: with the right company intelligence and insight, they can be averted.

Complacency & culture key culprits

As HBR sees it, strategic assumptions are the core issue. After finding a winning strategy that puts them ahead in the market, companies become entrenched in their thinking and operations.

The idea: if this formula works, let’s keeping using it.

Derived from direct experience, these assumptions become “enshrined in the strategic plan” and eventually “harden into orthodoxy.”

As such, when times, markets, and competitors change, it’s the organizations at the top of the prevailing heap that are often the last ones to see the shifts coming.

“One culprit in all our case studies was management’s failure to bring the underlying assumptions that drive company strategy into line with changes in the external environment – whether because of lack of awareness that the gap existed or was widening or because of faulty prioritization,” write HBR's Matthew Olson, Derek van Bever, and Seth Verry.

Core business changes

In most cases, then, it isn’t economic downturns or other external influences that bring a company down. Rather, says HBR, 87 percent of the root causes of growth stalls are under management’s control.

What are the predominant causes?

Failing to fully exploit opportunities in the core business is one. The risk: when a successful business abandons its prevailing operations, other competitors can move in to “displace the incumbent.”

Witness the case of Apple and Microsoft, which took over RCA’s former core markets and started a computing revolution.

Innovation mismanagement and talent shortages

Innovation management breakdown is the second most common reason for growth stalls. HBR defines it as a chronic problem in “updating existing products and services and creating new ones.”

Companies, for example, might over-allocate resources to incremental product improvements at the expense of next-generation R&D investments.

Before its revenue stall, 3M managed a portfolio of 60,000 products; yet 25 percent of all sales came from a handful of newer innovations.

Talent shortfalls can be a critical root cause too, especially at the executive level.

The key issue here: a narrow experience base at the top that prevents an effective response to emerging trends or strategic issues.

Prisoners of success

When a company fails to respond to new competitive challenges or customer shifts, it can also spell trouble.

HBR calls this “premium-position captivity,” where management is “hemmed in by a long history of success.”

Warning signs might be a sudden market share loss or resistance to new solutions from key customers. Other red flags to watch for:

• The organization hasn’t revisited its market definition boundaries or list of emerging competitors.
• Infrequent testing for shifts in customer valuation of products or services.
• Understanding of market share hasn’t been refreshed in several years.

Ask the right questions, avert the stall

How to see the warnings and avert a stall?

HBR says financial metrics aren’t the answer. They are “as likely to lag behind as lead an organization’s change in strategic vitality.”

Instead, assessing vulnerability starts with asking the right question: “What could the company’s senior managers have seen in their markets, in their competitors’ behavior, in their own practices, that might have alerted them to an impending stall?”

An early warning system

In their paper, The Risk-based Early Warning System², Greg Hackett and David Axson suggest an approach that could help answer that question.

In essence, organizations should take steps to build a decision-making culture that anticipates and responds to trends, market changes, and competitor challenges.

The strategy bodes well for growing companies intent on continuing their success.

Preventative steps

First, set up an early-warning risk-based system, where people are dedicated to looking outside at market changes, competitive moves, and customer trends.

Next, focus on key relationships and linkages.

Companies often report on operational details that aren't connected to business drivers. Instead, measurement should be based on exceptions, and triggered by events and trends.

So, rather than single point measures like sales per month, companies should be asking: what is our revenue growth relative to market growth?

Finally, replace annual planning with a shorter, tactic-focused process.

Performance targets should be planned and tied to trends and risk factors. They in turn drive improvement efforts and new initiatives.³

Insight into the business

Strategic flexibility is the goal here. Management needs to know what the company does and what it needs to do to adapt.

Having everyone working with the same information and numbers is crucial to increasing agility.

Reports, scorecards, and analysis can aid this process. They help companies create an integrated information environment that supports dynamic, collaborative decisions.

HBR, for example, says companies should focus their metrics in different areas to spot changes. So instead of just tracking profit per customer, they should correlate the data with customer acquisition costs.⁴

A scorecard can provide this kind of insight by integrating disparate data into a cohesive, more accurate picture of corporate health.

How planning helps

Business agility is also much easier when management has tools that allow flexible scenario modeling and planning.

IBM Cognos planning includes modeling capabilities that enable organizations to consider the consequences of different actions and different economic environments.

Coupled with other capabilities, such as rolling forecasts, management can better anticipate and respond to market changes.

Summary

In the history of too many companies, success doesn’t always breed success. Indeed, it can breed just the opposite: entrenched thinking that can undermine corporate performance and future prospects.

Building strategic flexibility and agility is the best preventative. It depends on having an information-rich environment that fosters business insight, both in and outside the organization.

Armed with information and the tools to anticipate and plan for a dynamic market, companies will more likely avert the hazards of corporate freefall.

Find Out More Cognos Performance 2008: Call for papers

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Sources

¹ Matthew Olson, Derek van Bever, Seth Verry, When Growth Stalls, Harvard Business Review, March 2008.

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

³ Ibid.

⁴ Olson, van Bever, Verry, Ibid.