By Robert W. Bradford, President and CEO
Recently, I discussed a simple test to tell whether an objective you set for your organization is truly strategic, and highlighted a common type of non-strategic objective, the incremental objective. Today, I’d like to cover a similar type of objective that is unfortunately very common – the accounting-driven objective. Many management gurus will tell you that profit is the only measure of whether you are managing well, but the reality is much deeper than this. This is because profit is merely a simple way to measure whether you did the right things well after the fact. Before the fact, you can’t always tell if you are doing the right thing with accounting – you can only guess (even if it is a very educated guess). This is, essentially, one of the main problems with accounting-driven objectives. They are objectives that, strictly speaking, only measure the accounting outcome of your endeavor, and not whether anything real was accomplished.
Take, for example, a company I worked with many years ago who set a very simple objective: increase profit by 20% next year. On the surface, this looks like a great objective – it is a result, it is measurable, and it is achievable. The objective has three key problems, however:
- It’s just too big – a bit like “Achieve world peace” – and there are a nearly infinite number of ways to get it done.
- It’s possible to achieve with no strategic improvement at all.
- Most managers would have no clue how to tackle writing the action plan for this.
In the following year, the company did improve their profits by 20%. What bothered me was that about 10% of this profit improvement came from disposing of an outmoded asset. Now, this was a great thing to do, no question – but it had no other strategic benefit, other than the financial improvement. The next year we introduced a great new product line that disrupted the company’s industry and put them on track to a dominant market share position, and we could have started on that a year earlier if we had put that objective in the place of the accounting-driven one.
Remember, accounting is simply a way to measure how you managed financially with an activity. It is possible to do a great job on the operational objective – such as introducing a new product – and still have dismal financial performance, perhaps because of a mistake in pricing or distribution arrangements. The best strategic objectives measure both whether something happened and the positive intended result of that event. If you focus too much on the measurement, you run the risk of doing strategically inappropriate activities for short-term financial improvements.
Have you had this experience with accounting driven objectives? A disciplined examination of your objectives can prevent this frustration in the future. A good way to test for this is to ask “What is the core strategic benefit of this objective?” If the answer is simply a financial measurement, you may need to take a step back and define the objective in terms of non-financial strategic benefits.
If you are interested in hearing more about setting objectives and executing to achieve your strategy please listen to our webinar on Strategy Execution by clicking here.