GUEST POST from Geoffrey A. Moore
In a recent blog, I argued that management needs to be accountable not only for delivering current performance but also for investing in power initiatives that will fuel future performance. Compensation systems that focus solely on the former too often result in a hollowing out of the enterprise, as we have seen with any number of iconic companies that have “performed” their way to the sidelines.
But this begs a key question—how do you measure power? Specifically, what kind of metrics could supply a stable foundation for management accountability and executive compensation?
In my book Escape Velocity, when discussing managing for shareholder value, we introduced a framework called the Hierarchy of Powers. The idea is that investors, who are buying a share of your enterprise’s future performance, value your company based on how much power they think it has relative to other investments they could be making. In this context, we claimed there were five classes of power that got evaluated in the following order of priority:
- Category Power. Is your core business in a category that is growing, stable, or declining? This, we claimed, is the single biggest predictor of future performance.
- Company Power. Within that category, where is your company in the pecking order of companies? If you are number one, that is a huge advantage. If you are number two, it also provides tailwinds. After that, there are no more tailwinds to be had.
- Market Power. For companies that focus on one or more vertical markets, is your company the default choice for major prospects and customers in that segment? Wherever this is the case, it gives a material boost to your sales momentum and thus your company’s valuation.
- Offer Power. Do you get preference and/or premium pricing due to the differentiation of your offer? Do you win the lion’s share of any competitive bake-offs?
- Execution Power. Do you have a history of meeting or beating guidance on a consistent basis?
The model has stood up well over the years, but there is still the question of how to ensure accountability for investing in power when so much of our attention (and compensation) is focused on creating the next quarter’s performance. To that end, my colleague Philip Lay and I have been sorting through objective measures that signal material gains in power, ones that executive teams could readily track, and compensation programs could use to calibrate bonuses.
Here’s what we propose should be the top two metrics for each class of power:
Category Power. The focus here is on portfolio valuation—how many categories does the enterprise participate in, and how is each category faring. Meaningful changes in category power typically come through M&A, often supplementing organic innovation that is looking to scale quickly. Top two metrics for each category assessed:
- Category Maturity Life Cycle status. The key stages are secular growth, cyclical growth, stagnant, and declining.
- Technology Adoption Life Cycle status. This model focuses specifically on the period of secular growth, breaking it up into the following stages: Early Market, Chasm, Beachhead, Bowling Alley, Tornado, and Main Street. The two big valuation changers are winning a beachhead market segment in the Bowling Alley and participating with meaningful share in the Tornado.
Company Power. In high-growth categories, the focus is on bookings growth and competitive win rates. In mature categories, it is on the stability of the installed base as well as bargaining power both with suppliers and with customers. The top two metrics are:
- Market share within each category. By far the most important metric, as market ecosystems organize around and give preference to the category leader.
- Balanced mix of power and performance categories. For global enterprises, in particular, portfolio balance creates optionality to deal with both bull and bear markets.
Market Power. In emerging categories, dominating a target market segment, as opposed to merely participating in it, is critical to crossing the chasm and creating a sustainable franchise. In mature categories, target market segment focus is key to creating above-market growth. The top two metrics are:
- Segment share. The most important metric because ecosystems that serve market segments organize around a segment leader only when it has dominant segment share.
- Growth rates within target market segments. This is particularly important in any economic downturn that impacts different market segments to highly varying extents.
Offer Power. This metric and the next are closely aligned with delivering performance in the current fiscal year. That said, they still signal successful investments in power. The top two power metrics are:
- Magic quadrant status. This is the most widely circulated third-party measure of offer power.
- Win/loss record in head-to-head competitions. This is the most credible measure of offer power.
Execution Power. This really is the land of performance, but there is still power in reputation. Top two metrics are:
- History of “meeting or beating” commits, be they forecast or, release dates. This is what gives confidence to customers and partners to give your team the nod.
- Customer success metrics. These include Net Expansion Rate, Net Retention Rate, and Promoter Score, all of which validate that you are keeping your sales promises.
Guidelines for Using the Metrics
Metrics are a device to ensure visibility and accountability, and nowhere is this more important than when dealing with something as abstract as power. The key is to associate the right metrics with the right people, the ones who can have the most impact on the level of power in question. This works out as follows:
- Top Executives: Category Power, Company Power. The two key levers here are using M&A to strategic advantage and using the annual budgeting process to allocate resources asymmetrically to achieve strategic objectives.
- Middle Management: Market Power, Offer Power. The two key levers here are using market segmentation to strategic advantage and allocating the resources under your control asymmetrically to achieve dominant shares in target market segments.
- Front Line: Execution Power. The key lever here is to align and focus the resources under your control or influence them in order to deliver the performance you have committed to.
For purposes of compensation, promotion, and overall alignment, these metrics align well with OKR objectives and can be used wherever OKRs are focused on increasing power. Again, the goal is not to replace performance metrics but rather to complement them.
That’s what Philip and I think. What do you think?
Image Credit: Unsplash
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