• Strategy
  • McKinsey & Co.

Building the Healthy Corporation

It is difficult, but vital, for managers to strike a balance between the short and long terms.

Another set of metrics should highlight a company’s prospects for maintaining and improving its rate of growth and returns on capital over the next one to five years. (The time frame ought to be longer for industries, such as pharmaceuticals, that have long product cycles and must obviously focus on the number of profitable new products in the pipeline.) Other medium-term metrics should be monitored as well — for example, metrics comparing a company’s product launches with those of competitors (perhaps the amount of time needed to reach peak sales). For an online retailer, customer satisfaction and brand strength might be the most important drivers of medium-term health.

For the longer term, companies should develop metrics assessing their ability to sustain earnings from their current activities and to identify and exploit new areas where they could grow. They must monitor any threats — new technologies, new customer preferences, new ways of serving customers — to their current businesses. And to ensure that they have enough growth opportunities to create value when those businesses inevitably mature, they must monitor the number of new initiatives under way (as well as estimate the size of the relevant product markets) and develop metrics that track the initiatives’ progress.

Ultimately, it is people who make companies deliver, so metrics should show how well a business retains key employees and the true depth of its management talent. Again, what’s important varies by industry. Pharmaceutical companies, for instance, need scientific innovators but relatively few managers. Companies expanding overseas need people who can work in new countries and negotiate with governments. (Richard Dobbs and Timothy Koller, “Measuring Long-term Performance,” The McKinsey Quarterly, 2005 special edition: Value and Performance, pp. 16–27.)

Constant fine-tuning is needed to come up with the right mix of metrics. For a typical business unit, top management and the board should monitor no more than three to five metrics, representing different areas of the business for each time frame. To make sure that the metrics are appropriate, the finance department or the performance-management group should regularly reexamine the way the company creates value.

Companies must avoid the erroneous thinking that too often juxtaposes “hard” metrics for performance with “soft” ones for health. They can and should attach hard numbers to health metrics, such as the motivation and capabilities of their employees. Similarly, they can and should track their current performance with softer metrics, such as the quality of their latest earnings or of their relationships with opinion formers.

Communication. The next step is for companies to change the nature of their dialogue with key stakeholders, particularly the capital markets and employees. For the capital markets, that means first identifying investors who will support a given strategy and then attracting them. (Kevin P. Coyne and Jonathan W. Witter, “What Makes Your Stock Price Go Up and Down,” The McKinsey Quarterly, 2002 number 2, pp. 28–39.) Talking about corporate health to court hedge fund managers pursuing the next bid, for example, is pointless.

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