COBS for Strategic Performance Analysis and Strategic Health

This serves as a follow up for the Shortest Strategy Textbook for those who want more depth on Strategic Performance Analysis.

The goal of strategic performance analysis (SPA) is to predict future financial performance. It requires distinguishing between current financial and future strategic health. This cannot be done by extrapolation from the past or solely focusing on financials. Most times current and future performance are quite different. The same stands for financial and strategic health. SPA and avoiding a permanent closing of a business could be served by COBS. C.O.B.S. stands for Context, Outlook, Benchmark, and Spin.

Context is about figuring out ALL the soft and hard metrics that matter. To provide context, examine performance from ALL angles that matter to your company. Many metrics seemingly big or small, soft or quantitative, can matter and will differ by company. For a pharmaceutical company, it could be the expiration date of patent-protected drugs and drugs under development. For a university, it may be enrollments, rankings, and recruiting. For an investment bank, it could be the happiness of a single rain-maker. Most of the time, however, there will be numerous indicators of performance, quantitative and qualitative that you should pour over. Overlooking a single one can lead to big trouble. Two experienced Harvard MBA leveraged themselves to the till to buy a company. They then struggled to get off the ground. Why? They assumed business will keep coming but didn’t keep a close check on future services booked. They planned to use the company cash to decrease their leverage but the owner used all the company cash ahead of closing to pay all the company bills. Then they found a stack of bills marked disputed in a drawer. They could have avoided the pain with a more in-depth SPA.

Outlook is about peering into the future using metrics identified. To know your company’s outlook, project all performance metrics into the future. Predict future financial performance or strategic health. Keep in mind that projection is not extrapolation. A company entering a new business or country will see a significant rise in capital investments. Revenues may or may not rise in the short to medium term. The entry of new competitors may put pressure on the margins. It could also curtail sales. A presidential tweet could change everything. Projection requires a GREAT understanding of the dynamics within and outside the firm.

Benchmark is about comparing the above metrics to others’ to calibrate. Examine the change over time of each metric. Benchmark to the results of other divisions within your company, other companies and the economies as a whole. Compare what you have to your own goals, the forecasts you made, as well as analysts’ and investors’ expectations. Don’t forget to compare to the maximum potential in an area. Your job may be on the line even if your division’s ROA is 20% -when everyone else’s is 25%. In the best of worlds, it will be higher than last year’s and that in other divisions. Comparisons provide contrast and help see things under new lights.

Spin is about recalibrating your data after correcting for bias. People have all kinds of biases even when they do not have conflicts of interests. When you add the two, you know yourself and nearly all the data you use is biased. Company financial data are biased towards the past and generally making the company look good. Founders tend to be optimistic about their company’s future. Funds shorting a company stock are more likely to give a negative outlook about the firm. The same for disgruntled employees. And at times, the media echoes certain news, negative or positive, overwhelming other important news. We cannot take out bias but we cannot ignore it either. Never use sources of data without knowing the bias of the source. Research the author and the source too, not just the data. Distinguish Spin from reality.

Many of us have a natural tendency to project from the past and some of the first data or seemingly salient data collected. Resist that urge and use COBS to peer into a future that could be worlds apart from current financial performance. Focus on understanding the strategic health of the company.

This COBS SPA Analysis spreadsheet that you can copy gives you a way of laying out the data to better visualize it.

This text can be used freely by referring the readers to the following:

Chacar, Aya S. (2019). COBS for Strategic Performance Analysis and Strategic Health. LinkedIn. https://www.dhirubhai.net/pulse/cobs-strategic-performance-analysis-health-chacar-??-??-???-?????/

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