Strategy assessment: Quality, value and momentum
This week I watched a webinar. I don’t really want to tell you about it though.
Sometimes we come across something that is so amazing that we just have to tell others. We Tweet about it, email co-workers, and tell our families. There’s no holding back the passion. Because the content is remarkably funny, interesting, tasty or valuable, we want others to share it.
When scarcity comes into consideration there is a temptation to hold back on the sharing. We may not be so inclined to share the knowledge that there is one last biscuit in the pack. After all we want the benefit. Sharing would deprive us of this benefit.
Let me don some sackcloth and ash to repent of my selfishness. The webinar I watched was hosted by Ed Croft of Stockopedia on their new StockRank system. Stockopedia provide data on UK, European and US stocks. Their new StockRank system analyses company results to determine the quality, value and momentum of that company’s price.
The back tested results of StockRank as a predictor of future share performance have been impressive (watch the webinar for more details). So impressive that if too many investors use it and buy only highly ranked stocks, the price multiples of those stocks will be driven northward which in turn erodes potential future growth.
Quality, Value and Momentum (QVM) measure a company’s results across three important factors. The Quality score relates to the performance of the business judged by consistently strong returns on invested capital, hitting profit targets and appropriate gearing. Value relates to the current share price in relation to the financial performance of the business. Finally Momentum relates to the positive movements of the share price and the earnings of the business. The scores are judged comparatively to the rest of the market to give a ranking of up to 100.
Application of QVM in strategy assessment
If QVM is an appropriate measurement for measuring business performance, it stands to reason in my mind that the same framework can be used in measuring the performance of a business strategy. After all financial results are simply a product of business strategy.
When assessing business strategy, QVM becomes:
- Quality – a measure of the completeness, clarity and communication of the strategy
- Value – examination of the realised returns against original expectations and the entire business case itself
- Momentum – the progress and pace of strategic execution
Turning each of these areas into a numeric value requires a combination of likert (strongly agree to strongly disagree) based surveys and financial ratios. A numeric rank should then be derived for each element by assessing the result against the maximum obtainable score or expected score against the actual result.
In it’s simplest form you could ask three questions and apportion a score against the result:
- Is the business strategy well defined and easy to understand?
- Is there a strong business case for the strategy or has it returned good financial results?
- Is the business making progress against the strategy?
QVM diagnostic options
QVM doesn’t consider every dimension a business may wish to review in assessing a business strategy. However it does consider important dimensions of the strategy that can be reviewed alongside other performance frameworks.
The following examples show what conclusions can be drawn from the data:
Blue sky dreams
Strategy is well written but has a poor business case and no execution. Potentially this is a new strategy and may require assessment against business case to ensure that the cost of execution will lead to an adequate return.
Accidental business success
Strong business case but ultimately the strategy suffers from poor communication and nothing has happened yet. Improve the business cases documentation to make it clearer and begin communicating more frequently. Ensure resource is available to execute the strategy.
Forward motion, poor direction
Success is occurring but is not aligned with an overall strategy or business case. Align the activity and progress with a strategy and business case taking care not to kill off the positive energy.
Despite a lack of a clear or complete strategy, progress is being made with a tangible financial return. Learn from the activity that is occurring and bring it together into a strategy that aligns other areas of the business.
All talk, no trousers
The business strategy is well documented and has a strong business case behind it. However there is little or no momentum in executing the strategy.
The business results of the strategy are poor even though the strategy is well formed and progress has been made in executing it. Symptom of the business case being inappropriate.
Sound business strategy that the business has made progress upon and is seeing the financial results.
Failing on all fronts.
I’m going to build upon this idea in assessing digital strategy. Specifically I want to address what questions need to be asked in assessing digital business strategy.
The original Stockopedia webinar is below: