Strategy and Metrics: Chicken or Egg?

Logically, strategy must precede metrics.

However, in many companies, metrics develop a life of their own and begin to dictate strategy.

Because of reward and incentive systems based on key performance metrics, managers all too often manage metrics such as ROMI rather than managing the business. For example, when profits or returns are limited under adverse economic conditions, companies often cut back on marketing investments in order to produce acceptable performance (ROMI’s). Ironically, for strong companies, this may be the best time to go on an offensive because less robust competitors may be weaker still.

Using the same metrics to both measure past performance and to resource the future can have disastrous results:

• The best way to kill new product innovations that have long-run payoffs is to use short-term, backward-looking metrics such as margins, turnover and return on assets that favor incumbent products thus starving innovations of badly need growth funds.
• Blurred insights can lead to questionable decisions. For example, higher short-run sales response elasticity for price-promotions has led to a systematic decrease in the share of marketing mix budgets allocated to advertising in the long run.
• Because marketing activities are listed as expenses rather than investments, they must typically “pay” for themselves within a year. Ironically, market-based assets such as customers and brands are the only assets that appreciate, and not depreciate.

If strategy is to precede metrics, knowledge of the competitive environment and company objectives must precede strategy development. Short-cycle environments require fast-cycle capabilities such as flexibility and agility. Product-markets where customer benefits are more intangible (e.g., fashion and branded goods) require different types of support.