556  Strategic Management: Analytics Short-Term Value Drivers  Short-term value drivers are the immediate driv- ers of ROIC and growth. They are typically the easiest to quantify and moni- tor frequently (monthly or quarterly). They are indicators of whether current growth and ROIC can be sustained, will improve, or will decline over the short term. They might include cost per unit for a manufacturing company or same-store sales growth for a retailer. Following the growth and ROIC framework in Exhibit 29.4, short-term value drivers fall into three categories: 1. Sales productivity refers to drivers of recent sales growth, such as price and quantity sold, market share, the company’s ability to charge higher prices relative to peers (or charge a premium for its product or services), sales force productivity, and for retailers, same-store sales growth ver- sus new-store growth. 2. Operating-cost productivity includes drivers of unit costs, such as the component costs for building an automobile or delivering a package. UPS, for example, is well known for charting the optimal delivery path of its drivers to enhance their productivity and for developing well- defined standards on how to deliver packages. 3. Capital productivity measures how well a company uses its working capi- tal (inventories, receivables, and payables) and its property, plant, and equipment. Dell revolutionized the personal-computer business in the 1990s by building to order so it could minimize inventories. Because the company kept inventory levels so low and had few receivables to boot, it could on occasion operate with negative working capital. Exhibit 29.4  Value Driver Tree with Three Horizons Short-term value drivers Financial value drivers Medium-term value drivers Long-term value drivers Intrinsic value Revenue growth Cost of capital (WACC) Return on capital (ROIC) Sales productivity Commercial health Operating-cost productivity Cost structure health Strategic health • Core business • Growth opportunities Organizational health Capital productivity Asset health Applying Value Drivers to Monitor Performance  557 When assessing drivers of short-term corporate performance, separate the effects of forces outside management’s control (both good and bad) from things management can influence. For instance, executives of upstream oil companies shouldn’t get much credit for higher profits that result from higher oil prices, nor should real estate executives be credited for higher real estate prices (and the resulting higher commissions). Oil company performance should be evaluated with an emphasis on new reserves and production growth, exploration costs, and drilling costs. Real estate brokerages should be evaluated primarily on the number of sales, not whether housing prices are increasing or decreasing. Medium-Term Value Drivers  Medium-term value drivers look forward to indicate whether a company can maintain and improve its growth and ROIC over the next one to five years (or longer for companies such as pharmaceuti- cal manufacturers that have long product cycles). In most cases, there is no clear mathematical relation between these drivers and financial performance in terms of ROIC and growth. These drivers may also be harder to translate into metrics than short-term drivers and are more likely to be measured or assessed annually or over even longer periods. The medium-term value drivers fall into three categories: 1. Commercial health indicates whether the company can sustain or improve its current revenue growth. Drivers in this category include the company’s product pipeline quality (talent and technology to bring new products to market over the medium term), brand strength (investment in brand build- ing), and customer satisfaction. Commercial-health metrics vary widely by industry and over time. In branded consumer product sectors, such as packaged food and personal products, minimizing the use of scarce resources and trading fairly with suppliers are becoming more relevant as health indicators of a company’s product line in some categories. For a pharmaceutical company, the obvious priority is its product pipeline. For a telecom service provider, customer satisfaction and brand strength may be the most important components of medium-term commercial health. For a consumer electronics company, multiyear price trends for its indi- vidual products are an important indicator, as steadily declining prices often indicate lack of innovation compared with competitors. 2. Cost structure health is a company’s ability to manage its costs relative to competitors over three to five years. For an automotive manufacturer, the number of shared platforms and components across its model range is an important driver. Insights in cost health drivers often follow from programs such as Six Sigma, a method to reduce costs continually and maintain a cost advantage relative to competitors across most of the company’s businesses.