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Do You Know What Really Drives Your Business's Performance?

Book Description

Managerial decisions are based on assumptions about the relationships between different aspects of performance. Investments in employees, for example, are often predicated on the assumption that well-rewarded and engaged employees deliver higher levels of service, resulting in customer loyalty that enhances financial performance. However, as author Rhian Silvestro observes, managers are frequently unable to justify the assumptions underlying their competitive strategies with data from their own organizations. As a result, they risk developing wrongheaded strategies that can lead them astray. Over the past 30 years, she notes, researchers have developed tools designed to help managers understand the drivers of performance in their businesses. But in many cases, managers make assumptions about presumed links that they haven’t fully tested. One study found that only 21% of managers who said they implemented strategy maps had tested the links within their own organizations; many of those who had tested the links found their early assumptions were flawed. This article emerged from research related to the “service profit chain,” a well-known body of research focused on the drivers of performance in service industries that was developed by James L. Heskett, W. Earl Sasser Jr., and Leonard A. Schlesinger. The service profit chain proposes a mirror effect between employee satisfaction and loyalty on the one hand, and customer satisfaction and loyalty on the other, which in turn drives financial performance. However, in analyzing data from two British retail chains — a superstore chain and a home improvement store chain — the author found that the assumptions contained in the model were not always supported by the empirical evidence from the two retailing organizations. “Although intuitively appealing,” the author writes, “strategy maps and models such as the service profit chain have a common pitfall: They encourage managers to embrace assumptions about the drivers of financial performance that may not stand up to close scrutiny in their own organizations.” At the superstore chain, for example, rather than finding a positive relationship between employee satisfaction and productivity and profit, she found negative correlations. She found further negative correlations between employee satisfaction and sales growth, and between employee loyalty and both profit and productivity. While the service profit chain posits that the most productive, profitable, and highest-growth stores would be the ones where employees are likely to be most satisfied and loyal, that was not the case at the superstore chain Silvestro studied: The most productive, profitable, and highest-growth stores were those where employees were least satisfied and least loyal. The author argues that “performance topology mapping,” a method that helps managers visualize and explore the relationships between the various aspects of business performance, can be helpful in seeing performance relationships. Done properly, topology maps can reveal drivers of performance and pathways that may be unique to the way a business is set up. Managers can then use the new insights into performance relationships to develop better, smarter strategies.