Let WWHTBT Be Your Guide
Last week, a board director asked a good question during the review of a business with which I was working. Both he and the management team found my answer helpful and clarifying. So, I decided to dedicate a Playing to Win/Practitioner Insights (PTW/PI) piece to his question and my answer. It is called Strategy and Non-Financial KPIs: Let WWHTBT be Your Guide. And as always, you can find all the previous PTW/PI here.
The Director’s Question
The director was very favorably disposed toward strategy direction that the management team laid out, and he wanted to make sure that its goals and pathways to them would be guided and measured against Key Performance Indications (KPIs). In particular, he was interested in what non-financial KPIs we would set and use.
It was a good question because in most companies, most of the time, KPIs are financial — that is, they are derived from the financial statements of the company. Sales growth. Return on equity. Free cash flow. Inventory turns.
I believe there are two reasons that they predominate. First, they are dead easy to produce. In fact, they are a found resource. The CFO is already obligated to generate them to complete the mandatory financial reporting materials, so the KPI-user can simply pluck the numbers off an existing financial report to calculate the KPI in question — which is typically a simple arithmetic task, like divide profit from the income statement by equity from the balance sheet to get ROE. Second, they are all numerical and thus the kind of quantitative variables with which managers are most comfortable.
Non-financial KPIs typically require data to be collected specifically for that purpose, and they might not be completely quantitative and (apparently) objective. Plus, there really isn’t as standard a list of them as there is with the financial KPI. That leaves a very good question: how can you think systematically about non-financial KPI?
Let WWHTBT be Your Guide
The answer is to let What Would Have to be True (WWHTBT) be your guide. If you have done strategy properly using the Strategic Choice Structuring Process, you will have generated multiple strategy possibilities and reverse-engineered the logic of each by asking WWHTBT about the industry, channel, customers, capabilities, costs, and competitors. Thereafter you would have identified barriers-to-choice, designed and carried out tests, and concluded by making your strategy choice.
To set non-financial KPIs, you need to go back to the WWHTBT chart for your eventual choice. It lays out the critical things that would have to either remain true or become true for your strategy choice to be successful. That is, your performance is dependent on those elements being/becoming true. Thus, by definition, there can’t be any more important KPIs than ones based on the WWHTBT. If they aren’t true, your strategy will fail, so it is of central importance to track your progress on these elements.
Olay Masstige Strategy Example
To make this concrete, I will use the Olay masstige strategy, with which many people are familiar because it was used as a core strategy example in the Playing to Win book and in a related Harvard Business Review article. The P&G beauty team considered many strategy possibilities to turnaround the ailing Oil of Olay skin care brand and in due course chose what became known as the masstige strategy, which looked like the following:
It chose to stay in the mass channels (e.g. Walmart, CVS, Kroger) but create a prestige-like shopping experience of the kind that a consumer would find in the beauty care floor of department stores or Sephora. It also focused on the 25–49 demographic rather than the typical 50+ demographic on which skin care companies focused. And the prestige-like experience entailed moving dramatically upmarket in product, price and promotion. For example, on price the first product, Olay Total Effects, went to market at $18.99 versus the traditional Oil of Olay at $4.99.
And the WWHTBT chart for the Olay masstige strategy is as follows:
Notice there are nine elements that would have to be true (with one each in segmentation, structure, channel, end-consumer, and costs plus two under each of capabilities and prediction). Obviously, some traditional financial KPIs would make total sense in the context of the WWHTBT. For example, relative to the costs point, total delivered cost versus the benchmark in the strategy would make sense. And a sales growth KPI consistent with segmentation and end-consumer WWHTBTs would also make sense and be valuable to set and track.
But the WWHTBT also suggest additional important non-financial KPI. If we take segmentation, end-consumer, and the prestige-like positioning under capabilities together, the masstige strategy is not going to produce the outcomes it seeks without generating trial. Consumers are going to have to try this entirely new product — Olay Total Effects — if they are going to have a chance of becoming consistent users of it. So, a reasonable and helpful KPI would be rate of trial among target customers. Let’s say the strategy depends on getting to a 10% rate of trial within our target consumer segment the end of the first year and 15% by two years out. That would be a valuable KPI.
Getting the data to measure this KPI is not easy or straightforward. It requires doing consumer research and/or buying retail scanner data. But that is what it sometimes takes to generate a useful non-financial KPI for your strategy. In this case, it is critical because if the current approaches are not driving sufficient trial, the company can adjust its approach.
A second non-financial KPI could relate to the channel and capability (the second element concerning building retailer partnerships) categories. The KPI could specify level of retail penetration. How fast would we aim to grow Target penetration from the Target pilot stores to all (then) 1000 Target stores? And how fast would we need to bring doors of other retailers into our retail distribution to achieve our strategy goals? This is an easier KPI to measure. The company would know how many stores are carrying Olay Total Effects. It would just have to make those numbers available to the folks running and measuring the business.
A third non-financial KPI could be based on the structure and prediction categories. It is a somewhat different kind of KPI in that the Olay business would have little control over the outcome. The KPI would measure the degree to which this new sub-category of mass skincare evolves in a way that is consistent with our strategic needs. To what extent are mass competitors, like J&J’s Neutrogena (which eventually did follow but only about a decade later), mimicking our strategy? To what extent are prestige channel competitors, like Estée Lauder (the most likely) starting to enter mass distribution (they still haven’t)? This is, of course, hard for the Olay business to control. But companies can operate in ways that discourage rather than encourage replication of their strategy, and it is a KPI. In essence, this KPI would serve as an early warning indicator of problems with the strategy and hence worth monitoring.
Leveraging Barriers-to-Choice Too
When thinking about on which elements of WWHTBT to focus your non-financial KPI, think first about the barriers-to-choice (BTC) that you identified for the possibility that you eventually chose. These were the WWHTBT elements about which you most worried relative to choosing that possibility. Since they are the most worrisome, they are most important on which to measure progress.
In the case of Olay, the most worrisome was the end-consumer BTC, and the second biggest was the channel BTC. The team mitigated the concern on the first with extensive consumer research before making the choice. But having the trial KPI in place after the choice is prudent and helpful. Similarly, the second BTC was mitigated by getting Target to agree to a pilot in a subset of its stores before P&G proceeded with the choice. But having the doors of distribution KPI to ensure that the team focused on building distribution at the necessary rate is also prudent.
Practitioner Insights
KPIs are an important feature of strategy. You need to have indications of whether your strategy is producing the results you intend or not. If you don’t have good measures, you will be flying blind. For me, the most important KPIs are the ones that give you an early warning that something is amiss — e.g. in the Olay example, insufficient trial (though that ended up never being a problem).
In my experience, those early warning indicators are often the non-financial KPIs. The financial KPIs are typically trailing edge indicators — it is often too late to do anything about them when they are missed. That is one reason why I always try to set both financial and non-financial KPIs.
I feel it is both lazy and a disservice to strategy to simply trot out the usual financial KPIs — and use them primarily to set incentive compensation systems. That isn’t management of strategy!
As you contemplate which more customized non-financial KPIs to utilize, use WWHTBT as your guide. If you consider WWHTBT carefully, you can devise non-financial KPI that help you assess the ongoing validity of the logic of your strategy. And within WWHTBT, if you focus on the BTC, you will direct your KPI design energy toward the aspects of your strategy that are most critical to track and measure.
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As a reminder, I am doing a PTW/PI podcast series with friend Tiffani Bova. The eleventh in the series will be on LinkedIn on Wednesday, August 6th at 12 noon EST and 9am PST. I will provide the link during the week before it. I look forward to seeing you there.