Tracking KPIs (key performance indicators) is a real competitive advantage for a small business. No business magically drifts into a better version of itself and KPIs can help to ensure your team is executing on your strategy and driving the results you expect.
But what about strategy? But when we talk to small businesses about strategy, the concept can be confusing and strategic planning can sound like a time consuming process to time crunched CEOs.For that reason, many small businesses just don’t take the time to clarify their strategy and further link their KPIs or metrics to that strategy.
There is a lot of measurement going on, but no real understanding if they are making the strategic moves that will help them to keep winning in the marketplace long-term.
Let’s define what we mean by strategy, then we’ll discuss how to measure the success of that strategy via KPIs.
What Is Strategy?
To answer this question, I am going to refer to the classic HBR article by Michael Porter of the same title, “What is Strategy”. If you want to dive deeper, I suggest you ready it.
In the article, Porter makes three points about strategy:
- Strategy is the creation of a unique and valuable position, involving a different set of activities.
- Strategy requires you make trade-offs in competing, choosing what NOT to do.
- Strategy involves creating “fit” among a company's activities.
For the purposes of this blog post, I am going to focus on Porter’s points #1 and #2.
Strategy involves a different set of activities which are unique and create value.
Often when a small business begins thinking “strategically”, they can confuse strategy that with setting goals. There is a part of strategy which involves forward thinking about what you are going to do with the business, but deciding to grow or increase revenue is not a strategy.
Alternatively, deciding to develop a product or service which is unique because of A, B & C and you’ve found that A,B and C adds a great deal of value to the customer - that’s what Porter would define as a strategy.
The “group of activities” describes how you will create a unique value for your customers. This takes a bit of thinking, but mapping out which activities your business performs that sets you apart from your competition and drives the most value is the essence of your strategy.
You can see how really dialing in those unique value creation activities can help you to widen the gap between your business and a competitor.
Once those activities are defined, your selected KPIs should measure the value that you are creating. This can be done using leading indicators (how well you are executing on those value driving activities) and lagging the actual financial results of the business. Often business start measuring the lagging indicators (revenue, net income profit, gross margin) without really understanding what activities are driving those results.
Your true differentiation is made up of (1) the choice of activities (2) how those activities are performed. These activities are the basic units of competitive advantage
Strategy is about choosing and performing a different set of activities than rivals are performing to deliver a unique value to your customers.
What If I Don’t Know My Core Strategic Activities?
These activities may not be obvious to you, so Porter helps to identify a company's unique activities by asking yourself the following questions:
- Which of your products or services are the most distinctive?
- Which of your products or services are the most profitable?
- Which of your customers are the most satisfied? Why?
- Which customers or channels are the most profitable?
- Which activities in our value chain are the most different and effective?
Working through each of these questions can help you to define your strategic advantage and possibly double down on those activities.
Isn’t Just Being More Efficient A Good Strategy?
Porter is adamant on the point that just being more efficient is not a strategy. Being more efficient than your competitors is not something that can exist long-term. Porter’s article was written almost 20 years ago and his point is even more true today. With software eating the world, business cannot just compete on being more efficient that their rivals.
According to Porter, “The productivity frontier is constantly shifting outward as new technologies and management approaches are developed. Few companies have competed successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day.”
Strategy requires you make trade-offs in competing, choosing what NOT to do.
Making trade-offs is something that is incredibly hard for small businesses to do.
- Saying no to that one customer that is just not a good fit.
- Saying no to that one product line that brings in a bunch of revenue, but is actually not profitable.
- Saying no to that particular market that you just do not have the resources to compete in.
Small business people often chase revenue vs. being strategic about their decisions.
How do you decide what NOT to do?
Back to Porter’s questions. Ask them again in light of choosing what not to do.
- Which of your products or services are the least distinctive?
- Which of your products or services are the least profitable?
- Which of your customers are the least satisfied? Why?
- Which customers or channels are the least profitable?
- Which activities in our value chain are the least different and effective?
After answering these questions, figure out where you are not delivering value to the customer and stop doing those activities.
Hopefully this post has opened your eyes to what strategy is and what it is not.
Your next step is to look at the KPI's you are currently measuring and see if any of them help you to determine if you are executing on your strategy in a proactive way.