article thumbnail

Performance Measurement

Strategy Driven

Supplementing profits with ROIC and revenue growth is a step in the right direction to ensure that the profits a business earns are actually creating value, not simply over-consuming capital that another company could better deploy. However, profits, ROIC, and revenue growth are backward looking.

ROIC 62
article thumbnail

CEOs Don’t Care Enough About Capital Allocation

Harvard Business Review

The results can be impressive: if your firm’s return on invested capital is 8% and you have an 8% cost of capital, a 1% improvement in ROIC will increase firm value by 19%. There are just two ways to increase ROIC: improve operating profit (by increasing revenues or cutting costs) or invest capital more wisely.

CEO 8
Insiders

Sign Up for our Newsletter

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

article thumbnail

Untangling Skill and Luck

Harvard Business Review

Take, for instance, a group of companies that currently have high returns on invested capital (ROIC). If you follow that group over time, you would see their ROICs revert back toward the cost of capital. In determining the ultimate amount of pay, the vagaries of the market overwhelmed the performance of the executives.

Skills 16
article thumbnail

How Companies Can Use Investors to Their Advantage

Harvard Business Review

Nikon, the legendary Japanese camera maker, provides a textbook study in how smart managers can work with strategic investors to transform a struggling business. It also called for streamlining headquarters and cutting executive management’s compensation. Heini Wehrle/BIA/Minden Pictures/Getty Images.

article thumbnail

Five Common Strategy Mistakes

Harvard Business Review

I just finished a two-year project looking at Michael Porter's most important insights for managers. Here are five more traps I've seen managers fall into over and over again. Confusing marketing with strategy. But as important as it is to have insight into customers' needs, don't confuse marketing with strategy.

article thumbnail

Don’t Turn Your Sales Team Loose Without a Strategy

Harvard Business Review

When formulating a strategy, markets and segments are important categories to consider. But a market never buys anything. This is ineffective deal management, and it eventually leads to loss of positioning with customers, and, over time, the nurturing of “commodity competencies.” Only customers buy.

article thumbnail

What If Companies Managed People as Carefully as They Manage Money?

Harvard Business Review

Today’s executives spend a lot of time managing the balance sheet, despite the fact that it doesn’t represent their company’s scarcest resource. Financial capital is abundant but carefully managed; human capital is scarce but not carefully managed. How can we manage human capital better? Measure it.