February 5, 2020
February 5, 2020
Almost 70 percent of directors report that their company’s existing strategies will become completely irrelevant over the next five years, according to NACD’s 2019-2020 Public Company Governance Survey. This statistic alludes to the struggle of companies and their boards to keep pace with fast-moving market developments that can create or destroy enterprise value and frustrate the achievement of performance goals if not addressed in a timely manner.
Strategic resilience is “the capacity to turn threats into opportunities and the ability to take advantage of opportunities in a timely, non-crisis-like manner.” That kind of resilience is only possible through continuously anticipating and adapting to market trends that can severely impair the core business’s earning power, as well as enacting needed change before this need becomes perilously evident. In the digital economy, many companies are already too late.
As the underpinning of perpetual renewal, strategic resilience requires more forward-looking measures in order to monitor performance to augment the so-called lag metrics dominating today’s performance management systems. Such metrics are retrospective or historical in nature dealing with outputs relating to quality, cost, time, and customer and employee satisfaction. By contrast, lead metrics are input-oriented, offer an earlier warning of emerging issues, and are more conducive to enabling needed change.
When linked to critical assumptions on external market factors and key risks relevant to the strategy, lead metrics offer an early warning of strategic irrelevance by pointing to market opportunities and emerging risks that warrant immediate attention in the C-suite and boardroom.
Simply put: In the digital age, the question “Where are we going—and how can we get there?” may be more important than the retrospective focus on “How are we doing?”
To illustrate this point, an organization with multiple operating units uses selected strategic documents and business plans to develop a profile of the critical risks around key strategic initiatives. This profile includes risks to the strategy’s execution and risks inherent in the strategy. In making this assessment, management considers plausible and extreme scenarios that could invalidate critical assumptions underlying the strategy. For scenarios having the greatest impact, key risk indicators, trending metrics, and other relevant information are identified to facilitate monitoring processes and, for high-velocity scenarios, the development of response readiness plans.
Many of an organization’s most critical risks are driven, at least in part, by the digital economy. Performance monitoring is deficient from a strategic resilience standpoint if it doesn’t address signs that the business model is decaying as circumstances change. That is why directors need to concern themselves with the lack of agility in:
After confirming the risk profile with the executive team, the organization evaluates conceptual alternatives for reporting on strategic execution and selects the best approach to provide transparency into strategic execution risks, to augment quarterly strategic reviews in order to identify signs of stress on the business, to enable timely corrective action, and to supplement the chief executive’s strategy communications with the board.
As part of this process, the organization identifies potential metrics, with an emphasis on lead metrics. Not intended to replace the lag performance metrics currently in place, lead metrics are focused on trends and warning signs that the business model may be under threat from alternative offerings, losing its grip on customer loyalty, facing displacement by emerging technologies, or impacted by other external factors affecting critical assumptions, indicating the strategy is losing steam.
Using such criteria as availability, relevance to strategic risks, and criticality (or importance), the organization narrows the metrics down to a family of measures that can be tracked at a reasonable cost. Performance targets and related tolerance thresholds provide the foundation for a scorecard that tracks actual performance compared to the target.
The metrics and underlying thresholds are used to develop indices for various risk categories to identify and evaluate quarterly trends that can be communicated to the board. Trending reports help to answer three questions:
Because the indices are based on risk metrics, a drill-down capability is available to answer the “why” question. The result is a scorecard providing early warning signals of increasing risk exposure or potential opportunities that indicate the need for management action. This is the kind of anticipatory perspective every board should expect.
Strategic resilience is possible due to the time advantage attained from knowledge of a unique market opportunity or an emerging risk and from actionable decision-making options created for the organization’s leaders before that knowledge becomes widely known in the market.
Using forward-looking reporting linked to the strategy, companies can function as early movers and see change on the horizon as a potential market opportunity, rather than a looming crisis.