In times of market uncertainty, it is tempting for business leaders to focus on costs, margins and core operations – defensive tactics to preserve the business for the return of favourable conditions. But, while these are clearly important concerns, they do not on their own form a coherent strategy.
On the one hand, it may not be clear when those better times have arrived – in the UK, mixed economic signals have held back investment even as the economy has grown. On the other hand, it may not always be clear how best to define and implement those defensive tactics.
Globalised, highly competitive markets change so rapidly that simply consolidating past gains cannot form the basis of a successful strategy. Instead, business leaders must work proactively to optimise performance in any circumstances.
To do that, it is important to validate and improve understanding of what drives success in a business. A powerful way of doing so is to create a Business Driver Diagram.
Most businesses must deal with time lags between upstream causes and their downstream financial effects. For example, there is a lag between increasing our sales activity and receiving new orders, a lag as manufactured products are distributed to the customer and yet another between sales and cash collection.
Managing these relationships and the delays inherent in them is key to an effective response to changes in the trading environment, and a Business Driver Diagram is an effective tool for doing so. The simplified example below shows a Business Driver Diagram for a generalised engineering business.
Here, it is clear that ‘Profit before tax’ is the net effect of a chain of preceding causes. The diagram shows that order intake, and the factors that influence it, will give a much more timely warning of underlying issues than the more prevalent metrics of profit or sales.
Once we have mapped the timings as well as the relationships themselves, it is possible to create a much more accurate forecast than would otherwise have been possible. Armed with that forecast, we can then work on optimising the upstream indicators – those within our control – in order to improve the eventual results.
This may seem obvious, but it is surprising how many corporations fail to monitor leading indicators across their subsidiaries. Often this is because there is a lack of consistent definitions that can be used across the organisation.
A Business Driver Diagram provides those definitions. It also affords a coherent framework for the inclusion of non-financial key performance indicators into the company’s management reporting by putting them in context of the outcomes the business is seeking to achieve. That is an effective way of both modelling the impact of external pressures, and defining an appropriate response.
In addition, a Business Driver Diagram can also ensure that general managers as well as financially qualified professionals participate fully in the discussion about business performance. That, in turn, makes it considerably easier to drive a positive response to external events.