Tracking strategy benefits separately from the run-rate

A profit and loss statement cannot tell you whether the strategy is working. It adds up what the business would have done anyway, what last year's initiatives still deliver, and what this year's initiatives added. Tracking strategy benefits means pulling apart what the P&L reports as one number.

It needs a momentum line for the business as it was. A line for each initiative, with an owner and a target set in its own drivers. And a handful of leading indicators that move before the financials do.

Without this, every strategy review collapses into a budget review. Someone asks "are the choices working?" and hears "we are two percent behind plan". That answers a different question, and usually points to a different cause.

Why the P&L is the wrong scoreboard

The monthly P&L measures the past, and it measures everything at once. A strong market can hide a failing initiative. A weak one can hide a succeeding one.

When the number is good, the strategy gets the credit. When it is bad, the strategy gets the blame. Neither is evidence.

The other problem is timing. Most strategic initiatives change the financials a year or two after they change the business. A new segment shows up first in enquiries and win rates, then in revenue, then in margin. A scoreboard that only reads margin reads the strategy eighteen months late. By then it is too late to fix anything.

Observable example: A manufacturer's strategy rests on a price rise in its core segment. Six months in, revenue is up and the executive is pleased.

But volume has fallen more than the plan assumed. Two large customers have moved a share of their spend. The P&L says the initiative worked. The drivers say it is unravelling, and the P&L will show it next year.

Split the variance

First, explain the gap between plan and actual in parts. For each period, ask these questions. What would the business have delivered on its own momentum? What are initiatives started in earlier years still contributing? What have this year's initiatives added?

Whatever is left is noise or something unexplained. Name it as such, and keep it out of the other lines.

The momentum line is the momentum case tracked monthly. It takes the last three years' trend in revenue and margin and projects it forward. This projection is the honest baseline.

Sometimes the business is ahead of plan only because momentum was stronger than the plan assumed. Then the initiatives have added nothing yet, and it is better to know.

The discipline is uncomfortable. It makes initiative owners answer for their initiative alone, and the weather stops counting for or against them.

Set targets in drivers, not only in dollars

Every strategic initiative should carry three kinds of target. Timing: what is delivered by when. Drivers: the operating measure the initiative is meant to move. Economics: what that movement is worth.

A price-rise initiative has two driver targets: realised price by segment, and volume retention. Its economic target follows from both. A new-segment initiative has driver targets for enquiries, win rate and share, before it has a revenue target.

Driver targets do two things a dollar target cannot. They can be read early, months before the money. And they tell you why an initiative is off track, which a dollar miss never does.

Each initiative has one accountable owner: a named person. Build its economics up from its drivers, so the initiatives add up to the strategy's overall targets. If they add up to less than the plan needs, the gap shows on day one.

Choose a handful of leading indicators

Beyond the initiatives, the strategy as a whole needs three to five measures. They should show it working before the financials say so. They are specific to the choices made.

A strategy built on a segment shift needs mix by segment. One built on service advantage needs retention and a service measure customers would recognise. One built on capability needs capability milestones: people hired, systems live, first customers served.

Each indicator has an owner, a target and a reporting rhythm. It sits beside the P&L in the monthly pack. Nobody opens a separate strategy report.

Example: A distributor's strategy is to win the specification segment, where its advantage is technical support. Its leading indicators are specifications won per month, the share of quotes from specifiers, and technical-support hours per order. Revenue from the segment is a lagging measure, and the pack reports it too. The monthly conversation is about the first three.

The monthly page

Put it all on one page each month. The momentum line against actual. Each initiative's driver targets and status, with its owner's name. The leading indicators. And the P&L reconciliation, showing how much of the result came from momentum, prior initiatives and this year's.

The strategy review reads this page. The operating review reads the P&L. They are different meetings with different questions.

The five stages of measuring strategic progress

Whether strategic progress is measured is one of the practices in the execution-and-adaptation dimension of a Stages of Excellence strategy assessment. The five stages read:

• Lagging: The only scoreboard is the monthly P&L, which measures the past.
• Basic: Strategic KPIs were defined once, with no named owners, and quietly dropped when reporting got hard.
• Competent: A handful of strategic measures (e.g. share, mix shift, capability milestones etc.) are reported alongside financials, each with an accountable owner.
• Advanced: Leading indicators track whether the strategy is working before the financials say so.
• Leading: The scoreboard changes behaviour: people act on strategic measures with the same urgency as cash, and pay follows them.

Most businesses are at the first or second stage. The move to the third is the monthly page above, run on the systems you already have. It takes named owners, and measures kept when they turn.

Frequently asked questions

Isn't this a balanced scorecard? The difference is the split. A scorecard adds non-financial measures beside the financials. This separates what the initiatives added from what the business did anyway. A scorecard does not answer that question.

How many initiatives can be tracked this way? As many as the strategy has, which should be a handful. If tracking them is unmanageable, fix the initiative list.

What if the momentum line is itself uncertain? It is, so state it as a range. Even a rough momentum line beats none. Without one, the strategy gets the credit for the market.

How soon should leading indicators move? Within a quarter or two of an initiative starting. If a leading indicator has not moved in two quarters, either the initiative is not working or the indicator is wrong.

Who owns the page? Finance builds it and the chief executive reads it first. If finance cannot produce the split, the business does not yet know its own momentum. Fix that first.

• Can your P&L tell you whether the strategy is working? Take the check.
• The Stages of Excellence in strategy
• What is a momentum case?