STRATEGY • MANAGEMENT • COMPETITION

TURNING STRATEGIES INTO RESULTS

Most companies achieve less than their

full potential in the market. By manag-
ing the real drivers of performance
they will gain better results and their
decision-making will improve. approach is illustrated in Exhibit I, system. Effective management systems
taken from a presentation by the must meet four broad design tests:
managing director of a major global

E ven the best strategies do not

implement themselves. One reason is
that most management systems —
planning, budgeting and internal
reporting — are simply not very
effective. These systems often fall
short because they focus narrowly on
financial measures and results, rather
.,WALTER G. JEWETT, JR.,
than on the real drivers of business
decisions. The concept of a broader,
strategically focused measurement
energy services company.
But measurement — while criti-
cally important — is not management;
1 . They must set fair “stretch” tar-
gets. The effectiveness of a manage-
ment system depends upon its ability
it is merely an element in a modern to set stretch targets that drive per-
performance-focused management formance to the maximum potential.
The credibility of the system rests
on its ability to set targets that are
,BY JOHN K. SHANK, achievable and fair.
2 . They must manage the “drivers,”
,PAUL A. BRANSTAD, not the results. Traditionally, commit-
and the Perform Team ments have been expressed in dollar

........................................................
John K. S h a n k is a professor at the Amos Tuck School of Business Administration at Dartmouth College. He is the author of 13 books, the most recent of which deals
with strategic cost management, and more than 100 case studies and 90 journal articles. Dr. Shank received his M.B.A. from the University of Pittsburgh and his Ph.D. in
accounting from Ohio State University. Walter G. Jewe t t , J r. , a senior vice president in Booz-Allen’s Financial Services Group in New York, received his M.B.A. in
finance with High Distinction from the Amos Tuck School. He is the author of several studies focusing on key banking issues including, “Banking Today: The Real Issues,”
which examined the impacts of new capital and other regulation on the banking industry. He also led a quantitative study of structural costs in commercial banking.
P aul A . B r a n s t a d, a senior vice president in the firm’s Engineering and Manufacturing Group in Chicago, is one of the firm’s senior strategists and was responsible for
the creation of the market-driving capabilities approach to implementing strategic and operational change. Prior to joining Booz-Allen, Mr. Branstad was with Arvin
Industries, Litton Ship Systems and the Boston Consulting Group. He holds an M.S. in business administration from Stanford University. This article also benefited from
the work of the Perform team, a group of consultants and outside experts from a wide range of disciplines and practices.

22
Fall ’95
 STRATEGY
terms. With this type of accountability,
it is inevitable that management will
attempt to influence financial results
directly. This can produce highly dys-
functional outcomes. As a result, it
is vital to shift the emphasis of com-
mitments from narrow financial goals
to operational drivers. With targets
expressed as operational measures, a
meaningful operational analysis can
follow. Without this shift, performance
measurement is a marginal activity.
3. They must be able to focus their
analysis on an understanding of
root causes.
4 . They must reward good decision-
making, not just good results.
High-performance management sys-
tems have another function. They
must facilitate what we call multidi-
mensional connectedness within
companies. By connectedness we
mean these systems must create
links between:
➢ Strategy and ongoing management
decisions and actions.
➢ The full potential of the business
and the satisfying of goals that result
from the conventional planning/bud-
geting process.
➢ Management commitments and
the management decisions that
deliver them.
➢ Top management and the line-
responsible management team.
• MANAGEMENT • COMPETITION
➢ The functional and the operating
units that form the line-responsible
management team.
➢ The line-responsible management
team and the finance and control
community.
➢ The managing operational capabili-
ties, as the cause, and financial perfor-
mance, as the result.
➢ The time when new insights
about the future are systematically
acquired and the time decisions to
adjust are made.
PERFORM, a model-based management
system, incorporates a number of
effective tools and processes that
deliver into line managers’ hands the
capabilities to identify and achieve the
full near-to-intermediate-term potential
of the business; it is also designed to
enable companies to achieve greater
levels of connectedness.
The key to doing this is to create
a business model that explicitly links
operating decisions to financial per-
formance. As a result, the system
gives senior management the under-
standing and leverage to create a true
performance-focused organization. In
addition, it upgrades the model as
the business evolves and it communi-
cates and explains the model to all
levels of management.
PERFORM permits managers to
measure actual performance against
the true potential of the business,
23
Issue 1
EXHIBIT I
A S T R AT E G I C V I E W
OF “ M E A S U R E M E N T ”
....................
W H AT DO I MEASURE?
➢ If our objective is to get to the future, and
➢ If our business mission, vision and strategy
describe that future, and
➢ If we believe that performance measurement
influences what we achieve,
➢ Then the performance measurements should
be linked directly to the business strategy.
H OW DO I USE T H E M E A S U R E M E N T S
TO GET RESULT S ?
➢ Measurement itself is inert.The impact is
derived from the way it is embedded into
management processes.
➢ If used properly, performance measurement
can be a powerful instrument for change.
Source: Norman Chambers, Managing Director
Brown & Root Energy Services, Europe and Africa
helping managers directly assess
tradeoffs between short-run and long-
run financial returns when making
critical operating decisions. It cap-
tures learning across business units
and enables managers to emulate the
successes of the best performers.
And it provides a balanced mix
between peer pressure and “stretch”
performance incentives to facilitate
managers behaving like owners.
The starting point for a PERFORM
system is the creation of a new set of
measures to connect business goals
to each line manager’s accountability.
The process involves four steps:
1 . Understanding the true financial
potential of the business in the near
 STRATEGY • MANAGEMENT • COMPETITION

E X H I B I T 11
THE FOUR CRITICAL ELEMENTS OF A PERFORMANCE-
F O C U S E D M A N AG E M E N T S YS T E M

.......................................

to intermediate term through rigor-
ous modeling.
2. Using the results of the modeling to
set “achievable excellence” targets that
reflect substantial “stretch” and yet are
fully accepted by line management.
3. Creating planning, budgeting and
reporting systems that reward the
desired behaviors and facilitate a con-
tinuing stream of management deci-
sions and actions geared to achieve
aggressive (but attainable) goals.
4. Tying accountability for achievement
of the goals directly to tangible rewards.
Exhibit II presents a sche-
matic overview of these four critical
elements of PERFORM. This article
illustrates the concepts behind a
PERFORM system currently in opera-
tion at a major bank holding company.
The first element in the PERFORM
system is to gain an understanding of
the company’s performance potential.
Management typically has an intuitive
or implicit understanding of what dri-
ves actual and potential performance.
In some cases, management has been
able to quantify its understanding
quite precisely. For example, most air-
line executives know exactly how
much aircraft utilization and passen-
ger load factors influence financial
performance.
But in many other cases, this
understanding is either unquan-
tified (though perhaps directionally
correct) or based on an outdated
history or on misleading anecdotal
evidence. In particular, camouflaged
or counterintuitive effects often
escape notice or precise assess-
ment. For example, in banking, the
hidden impact of loan pricing deci-
sions on credit quality and operat-
ing expenses can undermine loan
profitability models based on net
interest margins.

24
Fall ’95
 STRATEGY • MANAGEMENT • COMPETITION

An understanding of performance
potential, based on rigorous analysis
of demand and supply-side drivers,
depends on four ingredients:
➢ An explicit framework — an inte-
grated set of hypotheses that
describes how market, structural and
managerially controllable factors
affect performance in the business.
Exhibit III illustrates such a frame-
work for one division of the bank.
➢ Systematic, accurately collected
supporting data that can be used to
test the hypotheses contained in the
framework. For branch banking, the
retail deposit database includes inter-
nally generated cost and revenue
data, bank trade group data, syndicat-
ed market research and demograph-
ics, tax collection statistics and sur-
vey data on customers and competi-
tors. Cost and revenue attribution
must flow from the business frame-
work, and therefore may require new
measures of resource use or revenue
generation. Exhibit IV illustrates 83
variables tested for profit impact.
➢ R i gorous testing — statistical
analysis, internal and external
benchmarking, modeling and sim-
ulation — to verify and refine every
element of the framework to show
how operational factors connect to
financial results. The retail deposit

EXHIBIT III
AN EXAMPLE OF A P RO P O S E D F R A M E WORK HYPOT H E S I Z I N G
A CONCISE MODEL OF THE DRIVERS OF DEPOSIT
P RO F I TABILITY IN RETAIL BANKING
.......................................

25
Issue 1
 STRATEGY • MANAGEMENT • COMPETITION

EXHIBIT IV
T H I S F R A M E WORK LEADS TO T H E F O L L OWING SET OF VA R I A B L E S F O R
WHICH T E S T DATA MUST BE COLLECTED
............................................. ➢ Continuous adaptation
VA R I A B L E S TESTED — RETAIL DEPOSIT LINE OF BU S I N E S S of the framework as busi-
DRIVERS GRO U P DRIVERS T E S T E D ness conditions evolve
(83 variables tested)
and better data and test-
➢ Resident Population (9) ing mechanisms become
M a r ket Size
➢ Working Population (3)
MARKET available. For example, the
FAC TO R S company illustrated here
➢ Age (16)
is now enhancing the retail
➢ Income Level (13)
D e m og r aphic ➢ Savings Level (15) deposit model to account
➢ Education Level (1) for growing competition
➢ Ethnicity (2) from mutual funds.

➢ Branch share of Specific

Management must
Competitors (4)
Competition ➢ Bank Share of Specific harness the model-based
Competitors (4) insights into true perfor-
➢ Intensity of Competition (2)
S T RU C T U R A L mance potential to identi-
FAC TO R S fy performance-driving
➢ Number of Branches (1)
business decisions and
➢ Branch Share (2)
➢ Bank Share (2) to set goals and commit-

Branch Distribution ➢ Branch Share Relative ments. Four ingredients

A . T. M . Distribution
CONTRO L L A B L E
FAC TO R S
C ross-Selling
profitability model tested the im-
pact of these 83 variables in a popu-
lation of 250 branches to arrive at
7 key drivers of financial perfor-
to Market Leader (2)
➢ Bank Share Relative to
Market Leader (2)
➢ Branch Capacity (1)
➢ Number of A.T.M.’s (1)
➢ Share of A.T.M.’s (1)
➢ Cross-Sell of Term
Products (1)
➢ Cross-Sell of Retirement Products
to Checking Account Customers (1)
mance. Exhibit V illustrates how
only 4 factors account for 76 per-
cent of the variation in a key
deposit category.
are required for this sec-
ond element:
➢ Up and down buy-in
to frameworks and mod-
els to insure that senior
executives and front-line
managers build their per-
formance expectations
from the same causal
understanding. Both senior
and junior executives must
agree to use the models as the basis
for the business planning process.
➢ Technical models converted to con-

26
Fall ’95
 STRATEGY • MANAGEMENT • COMPETITION

EXHIBIT V

BRANCH BANKING PERFORMANCE MODEL: M A R K E T AND

cise, easily understood performance- S T RUCTURAL DRIVERS OF RETIREMENT ACCOUNT BALANCES
assessment and opportunity-identifi-
cation tools that enable managers to

AC T UAL RETIREMENT ACCOUNT BALANCES

view, evaluate and determine how to
improve their own position in the Key Drivers in the
P redictive Model
dimensions that really matter in their
➢ Absolute Number
part of the business. Exhibit VI illus- (Dollars in Millions)
of Branches
trates the range of performance across ➢ Relative Share of
Branches
branches when the structural market
➢ Market Propensity
and controllable factors are modeled. to Save
➢ Age Distribution
At the bank, each branch manager of Population

received a package comparing the

Explanatory power
unit’s actual performance to the levels of key drivers = 76%
of variation between
projected by the bank’s performance districts.

models. Since the models normalize

for differing market and structural
conditions, managers receive an objec-
tive assessment of how they can
improve their own unit’s performance.
As illustrated in Exhibit VII, this ap-
proach yields tremendous leverage
to improve branch performance with
very high support levels among the
branch managers.
PREDICTED RETIREMENT ACCOUNT BALANCES
(Dollars in Millions)
....................................
EXHIBIT V I
ONCE THE RELIABILITY OF THE DRIVER MODELS IS ESTA B L I S H E D,
THE MODELS CAN BE USED TO PREDICT NORMAL AC H I E V E M E N T,
GIVEN MARKET, S T RU C T U R A L , AND CONTRO L L A B L E FAC TO R S
BRANCH PERFORMANCE COMPA R I S O N S

Actual performance for

➢ A decision-driven planning process these two branches is
significantly different with
that uses the performance models to one achieving twice the
performance of the other.
focus planning activity on the most crit-
AC T UA L P E R F O R M A N C E
(I n d ex of Profit Measure s)

ical business decisions. Decisions are

linked to performance targets, which
in turn must be linked to action plans
designed to produce the intended
results. Further, the action plans must Given the market conditions,
expected performance is the
specify which known performance same for both branches.
levers will be pulled to generate
improvement and provide measur-
able targets to evaluate progress. PREDICTED PERFORMANCE
GIVEN MARKET CONDITIONS

27
Issue 1
 STRATEGY • MANAGEMENT • COMPETITION

EXHIBIT VII
T H I S A P P ROACH CAN THEN LEAD TO E S TABLISHING V E RY AGGRESSIVE GOA L S
FOR BRANCH DISTRICTS, BASED ON SOLID MODELING RESULT S observed, “This is

................................................. the first time since

I have been here
R E TAIL DEPOSITS PERFORMANCE DRIVERS
that we feel confi-
District A
To p dent that we are
Perfo r m a n c e First-Ye a r
Curre n t P rojected (same market Branch going to make our
Position Position conditions) Goals numbers and that
we know how to do
TOTA L B A L A N C E S
(in Millions of Dollars) 93.50 127.20 169.30 105.00 it without any gim-
➢ Checking Deposits 41.60 58.20 77.60 48.00 micks.” Exhibit IX
➢ S avings Deposits 31.80 42.40 54.50 35.00 illustrates the dra-
➢ Retirement matic potential for
Account Deposits 20.10 25.60 37.20 22.00
performance
improvement in
Ave r ag e Balance Size $5,064.00 $6,187.00 $7,811.00 $5,300.00
(Checking and Savings other parts of the
per household) bank, based on the
Retirement Account PERFORM models.
Ave r ag e Balance $4,259.00 $4,466.00 $4,748.00 $4,400.00

The third ele-

Total Number of ment in PERFORM
Deposit Households 14,943 17,333 19,815 15,500
is the formal sys-
tems to facilitate
Number of
achieving plan
Teller Transactions 196,280 211,644 185,621 190,000
(Given number of accounts goals and continu-
and account mix) ous improvement.
Teller Productivity 0.88 0.90 0.98 0.92 The necessary ingre-
(Staffing Model Indicator)
dients include:

Exhibit VIII demonstrates this step
for “Branch A” in the bank.
➢ F i r m c o m m i t m e n t from managers
to planned results, based on genuine
understanding and acceptance of
what it will take to deliver them. At
the bank, branch managers using
PERFORM for the first time volun-
tarily increased their performance
commitments midway through their
fiscal year. At Branch A (Exhibit
VIII), management committed itself
to major performance increases
with virtually no resistance. At
another division, one manager
➢ Decision-support
tools to help man-
agers prioritize needs, evaluate
potential courses of action and
assess the impact of operating deci-
sions on financial performance.
At the bank, this includes several
spreadsheets tied to customer
databases to facilitate analys-
is of cross-selling and segment-tar-

28
Fall ’95
 STRATEGY • MANAGEMENT
EXHIBIT VIII
THIS ENABLES RIGOROUS ACTION PLANNING W I T H A CLEAR
F E E D B ACK LOOP ON RESULTS OF PLANNED AC T I O N S
........................................................
BRANCH A – ACTION MAT R I X
O P P O RT U N I T I E S P ROGRAMS/
TAC T I C S
➢ Conduct additional ➢ Direct Marketing
cross-sell Program
• Telephone
• Mail
➢ In-branch program
➢ Increase penetra- ➢ Private banking
tion of high value clients referrals
segments ➢ More district
involvement
➢ Special pricing
➢ Ethnic appeal
➢ Increase customer ➢ Promotion (fliers)
retention/reduce ➢ Signage
customer attrition
➢ Thank new
customers program
(e.g. call to say
thank you)
➢ Reduce transaction ➢ Card issuance
intensity through program
higher A.T.M. usage ➢ Customer education
and card issue
➢ Improve teller ➢ Teller staffing model
productivity ➢ Cross-utilization
of tellers and cus-
tomer service reps
➢ Continuous
improvement
• COMPETITION
AC T I O N S S TA F F I N G
I M PAC T
➢ Focus on personal loan customers first ➢ 1000 calls x 1 hour
➢ Develop a value proposition and script the phone per contact x 500
calls (e.g. why sell first bank plan) hours + 12.5 days +
250 days per year =
➢ Develop inventory of product management ideas 1/2 F.T.E. (which
➢ Screen the account prior to calling could come from
teller productivity
➢ Conduct telemarketing and/or direct mail improvement)
➢ Determine resource impact (internal staff and time ➢ Screen customer
requirements or outsource to telemarketing) database and devel-
➢ If in branch, have dedicated reps to conduct calling op program 1/4 F.T.E.
or share among all reps?
➢ Evaluate support from Division and H.Q. assistance
➢ Call other branches for approaches that work
(i.e., best practice models)
➢ Determine how the program will be monitored
➢ Evaluate branch location for specific opportunities ➢ Requires 1/2 F.T.E.
➢ Develop and prioritize programs
➢ Assign/hire staff
➢ Create and monitor “calling” programs
➢ Lost customer analysis (e.g. call up old customers ➢ Requires 1/2 F.T.E.
and ask why they left)
➢ Identify customers at risk
➢ Develop programs
➢ Assign staff
➢ Execute and monitor
➢ Investigate customer use by segment ➢ Requires 1.4 F.T.E.
➢ Target high-payoff segments
➢ Analyze teller productivity at each branch ➢ Requires 1.5 F.T.E.
➢ Experiment with new schedules, reallocation, etc.
29
Issue 1
 STRATEGY • MANAGEMENT • COMPETITION

EXHIBIT IX
BASED ON THE PERFORM MODELS,THE RANGE OF INDIVIDUAL PERFORMANCE, R E L AT I V E TO NORMAL,
CAN BE V E RY B ROAD INDEED
........................................................
CONTRO L L A B L E
P R I M A RY PERFORMANCE
LINE OF KEY MARKET K E Y S T RU C T U R A L
CONTRO L L A B L E VA R I AT I ON *
BUSINESS FAC TO R S FAC TO R S
LEVERS
B OT TOM 5 TOP 5

Retail Deposit ➢ Employment income ➢ Number of ➢ Customer capture

➢ Savings level branches ➢ Cross-selling
➢ Age ➢ Branch share ➢ Balance capture
➢ Retirement ➢ Number of A.T.M.’s ➢ A.T.M. card issuance (27%) 39%
contributions ➢ A.T.M. share ➢ Teller productivity
➢ Share of rival
banks

Mort g age ➢ Population per ➢ Numbers of ➢ Productivity

branch personal lenders ➢ Cross-selling
➢ Home ownership ➢ Bank share relative ➢ Resource allocation (37%) 39%
➢ Employment income to market leader
➢ Pipeline
management

Other Retail ➢ Living and working ➢ Number of ➢ Product focus

Lending population personal loan ➢ Cross-selling
managers (35%) 60%
➢ Resource allocation
➢ Branch share

C o m m e rcial ➢ Market commercial ➢ Loan capacity ➢ Cross-selling

Deposit deposit to commer- ➢ Branch capacity ➢ Balance capture
cial loan ratio (33%) 54%
➢ Product focus
➢ Resource allocation

C o m m e rcial ➢ To be determined ➢ Segment focus ➢ Yield management

Lending ➢ Number of lenders ➢ Cross-selling
(47%) 105%
➢ Product focus
➢ Lender productivity

* Below or above base level determined by market and structural conditions.

geting opportunities. The spread-
sheets translate the value of im-
proved customer penetration into
balances, revenues and profit
contribution. Exhibit X illustrates
such a report.
➢ Identification and sharing of best
practices and assessment of their
potential value across the business.
At the bank, the management infor-
mation system is now set up to iden-
tify the top five performers on each
critical performance yardstick and
calculate the potential performance
improvement if all units achieve
best-practices levels. Exhibit IX
illustrates the dramatic improve-
ment potential if “bottom 5 perform-

30
Fall ’95
 STRATEGY • MANAGEMENT • COMPETITION

EXHIBIT X
ONE GOOD EXAMPLE OF A FORMAL MANAGEMENT REPORT DESIGNED TO FAC I L I TAT E
P RO G R E S S TOWARD AC H I E VABLE EXCELLENCE IS A COMPA R AT I V E “ B E S T P R AC T I C E S ” S U M M A RY
..................................................
C RO S S - S E L L I N G
P RO G R A M S A B C D E F G H
Vo l u m e N u m b e r Ave r ag e
Impact of of D e p.
Achiev i n g Accounts B a l a n c e Vo l u m e
Best Best to Be S h a re Pe r Impact of
Branch Pe rcent Practices Practices Goal C ross- House- Achieving
R E TA I L D E P O S I T Number of Total (%) ($000) ( Ta r get %) Sold hold Goal (000)
...................................................
Formula B-[(B-D)/2] A/Bx(B-F) (GxH)/1,000
...................................................
Cross-selling retail deposit
products to retail lending
households:

➢ Number of mortgage 187 7.5% 5.3% 240 6.4% 27.4 4,354 119.4
households without
deposit business

➢ Number of personal loans 394 11.9% 6.0% 708 9.0% 97.7 3,609 352.5
households without
deposit business

➢ Number of other loan 298 15.6% 14.5% 220 15.0% 10.5 10,111 106.2
households without
deposit business*

...................................................
Cross-selling retail deposit
products to retail deposit
relationships:

➢ Number of single-service 5,397 40.1% 38.9% 2,438 40.0% 13.4 15,123 203.2
checking account
households

➢ Number of single-service 524 26.2% 22.4% 481 24.3% 38.0 6,334 240.1
retirement account
households

➢ Number of single-service 802 42.0% 35.9% 1,013 39.1% 58.3 8,696 506.6
savings account
households

* These loans include demand loans and personal lines of credit.

R E S U LT: By getting half of the way to the Best Practice benchmark in cross-selling to Retail Lending Households and
Retail Deposit Relationships, the deposit base will increase by $1,528,000.

31
Issue 1
 STRATEGY • MANAGEMENT • COMPETITION

ers” could learn to match “top 5 into a 10-page performance gauge ➢ Appropriate measures consistent
performers.” that managers actually demand with what managers can genuinely in-
to see as soon as fluence and adjusted to account for
➢ Peer empowe r m e n t it is released. exogenous factors. One company that
IN ONE DIVISION,
and pressure to stimu- already had a broad formula for evalu-
late continuous self- MANAGERS ➢ R apid self-corre c- ating managers that included customer
examination for im- tion when needed to satisfaction, market image, team lead-
DECIDED TO HELP
provement opportuni- remain on course. ership and profit contribution simply
ties. In one division A PEER BECAUSE At the bank, devia- replaced the existing profit contribution
of the bank, managers tion from planned measure with a PERFORM-based stan-
THEY REALIZED
decided to help a peer performance trig- dard of actual profit versus potential.
because they realized THAT IMPROVING gers a set of tiered
that improving his HIS PERFOR- responses, beginning ➢ Discipline in application to ensure
performance would with immediate flag- that measures are applied consistently
lift their entire divi-
MANCE WOULD ging of the situation and fairly and that exceptions are
sion. Virtually all the HELP THEM and moving to sug- granted only when genuinely merited
“bottom performers” gested self-help pro- by atypical circumstance or strategic
AS WELL
began to seek advice grams for the manag- necessity. The bank discovered that
on how to improve er involved. Senior a previously targeted “worst per-
because they realized that measuring management inter- former” was actually
their performance against market- vention is a last doing exceptionally
adjusted potential removed the resort for intractable
EVEN WHEN well when judged by
excuse that “external factors’’ were problems that front- COMPANIES HAVE PERFORM-based mea-

responsible for their condition. line managers cannot
address themselves.
➢ F ocused monitoring and feedback
to evaluate decision-making effective- The fourth ele-
ness and foster adjustment to chang- ment of PERFORM
ing conditions or assumptions. A is rewarding per-
powerful advantage of PERFORM is formance. Even
that by concentrating management when companies
attention on the key drivers of per- already have so-
formance, managers can run the phisticated reward
business with streamlined informa- systems in place,
tion. The bank was able to transform PERFORM can help
sures. The only fair
SOPHISTICATED
and sensible course
REWARD was to acknowledge
the previous system’s
SYSTEMS IN
inability to assess the
PLACE, PERFORM manager’s true perfor-
mance and correct it.
CAN HELP
Exhibit XI illustrates
GOOD SYSTEMS how perception of per-
GET BETTER formance can change
under PERFORM.

hundreds of pages of monthly good systems get better on four ➢ Tight linkag e to rew a rd and recog -
reports that managers rarely read dimensions: nition systems to provide meaningful

32
Fall ’95
 STRATEGY • MANAGEMENT • COMPETITION

EXHIBIT XI
PERFORM OFTEN REVEALS A DIFFERENT PERSPECTIVE
ON HIGH V E R S U S L OW P E R F O R M E R S
...............................

acknowledgment of true outstanding
performance. This does not necessar-
ily mean that compensation must
revolve around incentive-based pay.
The issue is how to incent maximum
performance within the confines of
corporate culture. The levers can
focus on compensation levels and
composition or on non-financial
rewards like career development
opportunities and peer recognition.
PERFORM points out clearly where
individual performance has a sub-
stantial impact on bottom-line prof-
itability and therefore affords an
opportunity to provide meaningful
rewards to outstanding performers.
➢ Self-development opportunities
based on substantive and explicit
performance feedback. PERFORM

continued on page 36

33
Issue 1
 STRATEGY
PERFORM IN ACTION
.....................................
P E R F O R M is typically imple-
mented when senior manage m e n t
loses patience with the continu i n g
cycle of “ n e gotiated” financial tar-
gets that have no clear link to what
is really achiev a ble in the business
units nor to the operational drivers
that produce the results.
The first step is to develop a
plausible descriptive “model” of
the business unit.What are the key
business drivers? How do they
interrelate to produce financial
results? Exhibit III illustrates this
step for consumer deposits in the
retail banking division of a major
bank holding company.
The second step is to formally
identify and define all the possibl e
variables that might drive the
descriptive model.The intent here
is to be as inclusive as possibl e.
Exhibit IV illustrates this step for
the descriptive model in Exhibit III.
H e re, 83 possible drivers (variables)
we re identified for further analysis.
The third step is careful, fo r-
mal statistical analysis of all these
v a r i a bles, and their interrelation-
• MANAGEMENT • COMPETITION
ships, as drivers of the level of
consumer deposit profitability.
T h e goal is to find as small a set
of drivers as possible to explain as
m uch as possible of the variation
in each of the key elements of the
overall model. In Exhibit V, it is
shown that 76 percent of the vari-
ation in one segment of retail
deposits — retirement accounts
— is explained by the combina-
tion of only four drivers: nu m b e r
of branches, m a r ket share of
branches, m a r ket propensity to
s ave and ag e distribution.T h e re is
c e rt a i n ly a high degree of com-
mon sense in concluding that the
s i ze of retirement account bal-
ances is driven by variables like
these. But the power of P E R F O R M
is to show just how much of the
variation is caused by such a small
subset of the 83 variables and
their interactions.
The next step is to pull
t og ether the best results from the
intermediate modeling stag es to
see how much of the overall varia-
tion in branch profitability can be
explained by this set of specific
component models, of which
34
Fall ’95
Exhibit IV is one ex a m p l e. I n
Exhibit VI, a s u m m a ry model is
illustrated. H e re the tight scatter
of individual branches along the
p rediction line makes it clear that
the P E R F O R M models do capture
most of the underlying variation in
branch profitability.
N ow the performance of indi-
vidual branches can be compare d
after controlling for the particular
business conditions faced by each.
Exhibit VI illustrates two
branches that face comparabl e
business conditions but produce
quite diffe rent financial results.
The stag e is set to focus the plan-
ning effort in each branch around
the demonstrated potential fo r
p rofit with best-practices manag e-
ment of controllable factors, g i ve n
the business conditions faced by
the branch.
Exhibit VII illustrates a diag -
nostic scorecard for one “under-
performing” branch.This exhibit
illustrates the branch’s position on
s everal key variables that drive
retail deposit profitability. The first
column in Exhibit VII shows the
 STRATEGY
actual results for the branch.T h e
n ext column shows the predicted
results given the business condi-
tions for the branch.The third col-
umn shows “best practices” results
for other branches, g i ven the spe-
cific business conditions.
It is now ve ry hard for the
branch manager to reject the idea
that the branch is underperforming
and really should, and must, do bet-
ter.The final column illustrates the
n ext step in PERFORM — conve rting
the modeling results into specific goals
for the branch. Exhibit VII illustrates
the one-year targets for Branch A on
this set of key controllable drivers.
Notice that significant prog ress is
planned, but that the targets are still
quite modest in relation to best
practices. Branch A now knows what
factors must be improved, knows
what constitutes “achiev a ble excel-
lence” for each factor and knows
that the targeted improvement is
well within achievable limits.There is
still “negotiation” involved in setting
the one-year targets in the last col-
u m n . But now the negotiation is
firmly grounded in an explicit model
of the underlying causal relation-
• MANAGEMENT • COMPETITION
.....................................
ships, with no obfuscation about
“ h ow good is good enough.”
It is now time for conve rt i n g
the one-year targets into action
plans.The next step is to lay
out the programs/tactics/oppor-
tunities and staffing assignments
directed at achieving the one-
year targets. A g a i n , comparisons
with best practices across the
branch network are now explicit
and tangibl e. Exhibit VIII illus-
trates some of the specific action
p rog r a m s for Branch A that
support the “ s t retch” targe t s
f ro m Exhibit VII. The first seg-
ment of Exhibit VIII deals with one
of the key themes for improve d
p rofitability that the P E R F O R M
models have identified —
m o re intensive “ c ross selling”
of services to customers who
use only part of the branch’s
service mix.
Exhibit IX illustrates the
dramatic improvement in prof-
itability that can be achieve d
a c ross various segments of branch
operations, g i ven the key m a r ke t
and structural factors of a branch,
by just focusing action prog r a m s
35
Issue 1
a round the small set of key con-
t rollable drivers.
Once the new year has begun
and the action programs are
under way, the next key step in
P E R F O R M is to provide re g u l a r
feedback to branch manag e m e n t
about the success or failure of
the improvement efforts. Mile-
stone reporting on the results of
key action programs is necessary
to ke e p m a n ag ement attention
focused on the commitments.
Exhibit X illustrates a mile-
stone report for Branch A on
c ross-selling success.The report
a l s o s h ow s t h e p re d i c t e d i m-
p a c t on branch deposits if the
planned cross-selling prog r a m s
a re successful.
Notice that this report focuses
on success in achieving the mod-
eled drivers of profitability rather
than on the financial results them-
selves.That makes it much more
actionable and much more effective
as a feedback mechanism.
As we have said, understand
the key drivers, m a n ag e them and
the results will follow.
 STRATEGY • MANAGEMENT • COMPETITION

identifies weaknesses and strengths
in performance based on the key dri-
vers that are critical to the business.
It thus provides the basis for showing
managers how they can be more suc-
cessful. It also shows top management
where wholesale upgrades of skills
may be necessary. For example, at the
bank, the entire branch management
corps had grown up in a culture that
stressed only cost control. To exploit
the leverage from increased cross-sell-
ing and customer penetration identi-
fied through PERFORM, the bank
designed a new marketing course for
all branch managers.
THE BENEFITS OF PERFORMANCE-
FOCUSED MANAG E M E N T.
Companies can expect to realize four
specific benefits from performance-
focused management systems: 1)
the dimensions outlined earlier.
Another way to think about the
benefits is in time-phased stages from
near to longer term:
1 . Add deeper and more actionable
understanding of business perfor-
mance based on well-accepted analyt-
ical models.
2 . Heighten confidence that line and
staff decisions will be focused on the
right performance levers.
3 . Improve consistency and timeli-
ness of decisions.
4 . Enhance a continuous improve-
ment culture through
formal processes.
THE GOAL OF
5 . Provide the method
lation process in three important
ways. First, it will help to point out
clearly the performance limitations
imbedded in current strategies.
Second, it will demonstrate which
structural drivers in the current strat-
egy are limiting performance poten-
tial the most. And third, it can
demonstrate new ways to restructure
the business to enhance performance
potential. Thus, although the system
is primarily for strategy implementa-
tion, it can also play an important
role in the ongoing process of recali-
brating existing strategies.
Is PERFORM’s impact limited by
a short-term bias? The goal of the
system is to maximally improve near-
to-intermediate-term
financial perfor-
mance. In this sense,
PERFORM demon-

almost immediately, higher earnings to most quickly benefit

THE PERFORM strates a short-term
and cash flow based on a better under- from future innovation SYSTEM IS TO “bias.” But careful
standing of the most important operat- and new best-prac- attention to near- and
IMPROVE NEAR-
ing levers; 2) higher financial targets tices information. intermediate-term
for subsequent years; 3) more effective TO-IMMEDIATE- financial results is
utilization of the organization’s physi- Is PERFORM de- not an unusual trait
TERM FINANCIAL
cal and human resources, and 4) more void of a strategic among effective man-
rapid response to changing market dimension? Yes, in the PERFORMANCE agers. In fact, it is
conditions and operating perfor- sense that it does not very common. Short-
mance. However, as is perhaps to be d e a l d i re c t l y w i t h run results are not the
expected from a process that alters strategy formulation. Better strategy sole concern of managers, but they
the fabric of organizational interac- is not a direct output. The manage- are important. PERFORM is a powerful
tion, the benefits companies perceive ment system does assume that cur- management tool precisely because it
most sharply are qualitative, reflected rent strategy is a given. But PERFORM does emphasize financial performance
in greater “connectedness” across all does interact with the strategy formu- and deals explicitly with the business

36
Fall ’95
 STRATEGY
drivers that produce financial perfor-
mance. This is hardly a dysfunctional
bias in any meaningful sense.
A CONTEXT FOR
IMPLEMENTING PERFORM
Five conditions are necessary for
successful establishment of a
PERFORM management system.
First, the business must have fully
accepted the belief that effective
strategy derives from “capabilities”
much more than from product or
market “positioning.” The transition
from positioning-based strategic
planning to capabilities-based strate-
gic management is perhaps the most
basic change in strategic thinking
over the past 10 years. It is appropri-
ate that capabilities-based strategy
dominates the marketplace for ideas
today. Top management must believe
this, too.
Second, not only must there be a
commitment to capabilities-based
strategy, there must also be in place
a well-conceived specific strategy for
driving the intermediate-term trans-
formation of the business toward sus-
tained higher levels of performance.
T h i rd, the business must have high
potential for short-term growth in net
income from more effective conver-
sion of strategic initiatives into line
• MANAGEMENT • COMPETITION
decisions. Potential net income must F ourt h, buy-in and commitment to at
run substantially ahead of normal least threshold performance must be
expected shareholder present all along the
returns. Dialogue be- line organization.
tween top management OPEN DIALOGUE, What secures the
and the line organiza- achievement of the
tion needs to result in
BASED ON track record and,
a “connected” under- THE PERFORM therefore, becomes
standing of what is pos- the basis for top
SYSTEM, CAN
sible if the business can management dele-
perform the best it can BRING TOP MAN- gating the authority
be. When top manage- to execute it is
AGEMENT AND
ment and the line active use of the
become comfortable THE LINE TEAM system. PERFORM
with this understand- systems not only
INTO AGREEMENT
ing, “stretch” planning drive the determina-
g o e s a w a y. S t r e t c h AS TO WHAT TO tion of potential per-
goals/targets from the DO AND WHY formance, they also
t o p a re re p l a c e d b y greatly reduce the
an understanding from time gap between
within the line of the upper limit of systematically acquiring new insight
potential performance. Because this about the future and deciding how
level of potential performance is very to adjust. The ability of the line-
high relative to past expectations, responsible team to use the system
top-down planning can focus on set- well is what allows top management
ting the lower limit according to what the confidence to pro-actively set
is required to meet shareholders’ shareholders’ expectations for
expectations for superior returns. superior returns while knowing
This lower limit becomes an inviolate they will usually be met or even
threshold that the line-responsible exceeded. In the worst case, there
team commits to meet or exceed. will be cogent early warning of truly
Because the threshold is based on unavoidable shortfalls. When this
rigorous determination of competi- happens, open dialogue, based on
tively driven expectations for returns, the PERFORM system, can quickly
the team can readily see its validity bring top management and the line
and buy into the commitment without team into agreement as to what to
coercion or “bargaining.” do and why.
37
Issue 1
 STRATEGY • MANAGEMENT • COMPETITION

Fifth and finally, the company must down and bottom-up plan. That com- mitment could usually be achieved
already be committed to significant, mitment leads top management to either naturally or through iteration
ongoing “change” as vest the line team of predetermined bottom-up actions
the normal situation, with authority and and their investment consequences.
now and in the future. MEANINGFUL responsibility to This is not the world in which most
Meaningful change CHANGE execute the plan. businesses compete today. In the
is neither continuous Measurements hold current environment, it is not com-
nor incremental. It
IS NEITHER those responsible petition for position itself, but for
often appears that CONTINUOUS accountable. change in position that predominates.
way from the outside Incentives and As a result, successful competitors
NOR
for successful compa- rewards insure the focus their strategy on building and
nies with well-estab- INCREMENTAL commitment is deploying the critical capabilities
lished strategies and attended to. that will allow them to do this best.
deeply rooted momen- Management must This environment is just not congru-
tum. The reality is that somewhere in be prepared to acknowledge that a ent with traditional, bottom-up plan-
virtually all organizations a step net income growth ning that focuses on
improvement in capabilities perfor- model based on dis- position, long-cycle
mance is being implemented almost continuous, non-incre-
IN THE CURRENT future developments,
all the time. Breaking constraints is a mental change in capa- ENVIRONMENT, capital investment
discontinuous activity. The conse- bilities w i l l conflict and incremental
IT IS NOT COM-
quence, once the constraint is bro- with these elements of change in net income.
ken, is almost always a jump to a dif- conventional operat- PETITION FOR Top management
ferent level of performance. For such ing control systems. must accept the
POSITION ITSELF,
companies, net income growth is dri- The most obvious way reality of this new
ven more by discoveries and changes to resolve the conflict BUT FOR CHANGE environment before
that take place well down within the between the two performance-focused
IN POSITION,
business than by decisions at the top modes of operation is management systems
about discrete investment projects. to make one dominant THAT DOMINATES can be successfully
over the other. implemented.
F ROM “COMMAND/CONTRO L” TO When strategy was mostly When the context is appropriate
“CHANGE-DRIVING” MODE focused on position and the objec- and where traditional management
This change-driving mode is at odds tive of a business could largely be systems are a key “inhibitor,”
with the operating-control mode of realized as the direct consequence of PERFORM can be a powerful “enabler”

most companies’ management sys-
tems. Conventional operating-control
systems are based on a commitment
by the business to an agreed top-
specific investment decisions, the
conflict between top-down and bot-
tom-up planning was not intrinsically
great. Legitimate agreement and com-
of business change precisely be-
cause it explicitly connects business
goals and drivers with potential and
actual performance. SB
&

38
Fall ’95
 STRATEGY
P E R F O R M AND THE BALANCED SCORECARD
.....................................
The Balanced Scorecard , a
performance and accounting sys-
tem developed by Robert S. K ap l a n
of the Harv a rd Business School
and David P. Norton, a consultant,
has become popular because it
extends management report i n g
b eyond a narrow, financial focus
while avoiding the common pitfalls
of an ad hoc measures ap p roach.
Despite its appeal, t h e
Balanced Scorecard ap p roach does
not go far enough to make it fully
useful as a manag ement tool. I n
fact, its ap p roach involves a serious
f l aw that negates much of the
p romised benefit: it has no mecha-
nism for maximizing near- and
intermediate-term financial per-
fo r m a n c e. In other words, while it
does measure variables that are
i m p o rtant in achieving a compa-
ny ’s strategic objectives, it does
not explicitly link them to each
other or to the company ’s financial
m e a s u rement system.
As a manag erial tool, t h e
Balanced Scorecard has four seri-
ous limitations.
• MANAGEMENT • COMPETITION
First, it is a “scorecard” and
not a decision tool.While it focuses
on measures across four critical
aspects of business positioning (cus-
tomers, shareholders, internal
p rocesses and value creation), i t
does not focus on how to achieve
those results. Scorecards are unde-
niably important elements in assess-
ing management performance.
But they are not tools to enhance
performance. Focusing on score-
cards can lead to lack of focus on
the underlying actions that produce
a good score. A tennis player who
watched the scoreboard intently,
instead of the ball, the court and
the opponent, would not win a
g a m e, m uch less a match, no matter
h ow well designed the scoreboard .
Second, scorecards clearly
reflect a top-down focus on the
business.The measures empha-
sized are the summaries that are
most relevant at top manag e m e n t
l evels.While it is true that this
focus avoids the pitfalls of the
p u re ly bottom-up perspective,
p u re ly top-down is no less a pro b-
l e m .The trick is to blend top-dow n
39
Issue 1
and bottom-up perspectives, not
focus solely on one or the other.
T h i rd , the Balanced Scorecard
does not provide guidance on how
g ood a score is possible for any of
the measures. External bench-
marking is as far as Mr. K aplan and
M r. Norton take the question of
“ h ow good is good enough.” But a
scorecard is much more valuabl e
when the scores can be related to
achiev a ble excellence.
Finally, the lack of direct and
explicit links between the financial
and non-financial segments of the
Balanced Scorecard relegates the
non-financial segments to “the back
of the bus” whenever they are in
conflict with the financial segments.
In fact, M r. K aplan and Mr. Norton
acknowledge that “the alleged [sic]
linkage between improved operat-
ing performance and financial suc-
cess is actually quite tenuous and
uncertain.” T h ey see this as a pro b-
lem that must be accepted, rather
than one that can be solved.
Reprint No. 95402