Surprisingly few executives use data from their own organizations to test their assumptions about what factors drive financial performance. By gaining new insights into performance relationships within their own companies, managers can develop smarter strategies.
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. Some of the core assumptions about what drives financial performance have become so widely accepted that they are often viewed as facts. However, managers are frequently unable to justify the assumptions underlying their competitive strategies with data from their own organizations. The danger is that unless the core assumptions are sound and relevant to your own circumstances, you run the risk of developing wrongheaded strategies that will lead you astray.
Over the past 30 years, researchers have developed a considerable body of literature and tools to help managers understand the drivers of performance in their businesses. For example, academics and consultants such as Robert S. Kaplan and David P. Norton, the developers of “the balanced scorecard,” have encouraged managers to hypothesize causal links and to develop strategy maps to identify the key drivers of financial performance in their organizations.1 The problem is that developing strategy maps on the basis of managerial hypotheses means the maps are constrained by managers’ prior views of what drives performance. Managers often make assumptions about the relationship between, for example, customer loyalty and profitability, even when the presumed links haven’t been fully tested.2 Indeed, one study found that only 21% of managers who said they implemented strategy maps had actually tested the links within their own organizations, and many of those who had tested the links found their early assumptions were flawed.3 Failure to test such hypotheses means that critical assumptions go unchallenged, leading to misguided strategies.
Research related to the “service profit chain,” a well-known body of research focused on the drivers of performance in service industries, forms the foundation of our research. Developed by Harvard Business School professors 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.