5.4 Strategic, Operational and People Drivers of Performance

5.4 Strategic, Operational and People Drivers of Performance

Executive Summary: Assessing current performance means more than reading the income statement. A useful framework divides internal performance into three sets of drivers: strategic drivers (where and how the organisation competes), operational drivers (how well it runs its core activities to generate revenue, control costs and grow) and people and organisational drivers (its values, culture, capacity to innovate and learn). Each needs its own measures, and the measures must be read together.

Assessing Current Performance

Internal analysis asks whether the organisation is succeeding now and whether its current objectives still fit its environment. A finance professional starts with trends (are revenue, margins and returns rising or falling?), the rate of change, and how performance compares with targets and competitors (Section 5.2). Data analytics extends this: descriptive analytics shows what happened, diagnostic analytics explains why, predictive analytics forecasts what is likely, and prescriptive analytics suggests what to do.

A single measure, especially short-term profit, can mislead. Profit can rise while customer satisfaction, product pipeline and staff capability are deteriorating. The three-driver view guards against that.

Strategic Drivers

Strategic drivers define the organisation's competitive position—what makes it different and why customers choose it. Five elements are examined:

1. Industry and markets: which industries, customer markets and geographic markets the organisation serves, and its share of each relative to market growth.
2. Customers: which segments it serves, their differing needs, and which customers generate profit (customer profitability analysis often shows that a minority of customers generate most of the profit).
3. Products and services: "What business are we in?" and how each offering performs. The BCG growth–share matrix (Section 7.1) classifies the portfolio into stars, cash cows, question marks and dogs.
4. Channels: how offerings reach customers—direct sales, distributors, retail partners, online and mobile—and the cost and control of each.
5. Competitive advantage: whether the organisation competes on low cost or differentiation, broadly or in a niche (Section 6.2), and whether its internal activities are organised to support that choice.

Exam trap: when a question asks about internal strategic drivers, stay inside the organisation. A STEEPLE or Five Forces essay answers a different question. Analyse the organisation's own portfolio, customers, channels and positioning.

Operational Drivers

Operational drivers are the day-to-day engines of performance: revenue (volume, price and mix), costs (fixed and variable cost structure and the cost drivers of each activity in the value chain—Section 5.1) and growth (capacity, productivity and the ability to scale).

How performance is measured depends on the organisation's view of its purpose:

• Under a shareholder view, operational success is judged mainly through financial measures such as profit margin, return on capital and operating cash flow.
• Under a stakeholder view, the organisation must also measure value for employees, customers, the community and the environment. This raises three questions: which measures suit each stakeholder group, how to balance performance across them, and what to do when measures conflict (for example, when an emissions-reduction target raises unit costs).

Criteria for good performance measures

Good measures are relevant to strategy, valid and reliable (they measure what they claim, consistently), timely, understandable, controllable by the people held accountable, cost-effective to collect and balanced across short and long term. Measures should also be compared against competitive benchmarks so that "improvement" is not mistaken for competitiveness.

The balanced scorecard

Robert Kaplan and David Norton's balanced scorecard links strategy to measures in four perspectives:

The perspectives are linked by cause and effect: capable, engaged people improve processes, which delight customers, which drives financial results.

People and Organisational Drivers

People and organisational drivers determine whether the organisation can sustain and renew its performance:

• Values and culture: whether the values the organisation states are the values people act on (see the cultural web in Section 5.3). A gap between espoused and lived values undermines strategy.
• Innovation and learning: whether the organisation captures knowledge, encourages experimentation and learns from failure. Psychological safety—people's confidence that they can raise problems and ideas without punishment—is a strong predictor of learning.
• Structure, leadership and skills: whether reporting lines, leadership styles and the skills base fit the strategy.

Typical measures include employee engagement, voluntary turnover in critical roles, training investment, internal promotion rates and the number of improvement ideas implemented.

Putting the Drivers Together

The drivers interact. A new channel strategy (strategic) needs new systems and processes (operational) and new skills and incentives (people). Weakness in any one can block the others, so an internal assessment should always consider all three.