Monitoring Results  567
The setting of targets must shift at some organizational level below divi-
sions or business units. At some point, accurately allocating key components 
of invested capital and costs may become impossible. When that occurs, per-
formance targets are best set in terms of particular elements of sales, oper-
ating, or capital productivity metrics instead of return on capital itself (see 
Exhibit 29.4). For example, most consumer electronics companies have con-
centrated their manufacturing, R&D, and brand-advertising activities in a 
handful of locations. The invested capital and costs of these centralized ac-
tivities are largely independent of what happens in individual product and 
market segments (say, single-serve coffee machines in Southern California). 
Although some companies allocate the centralized capital and costs to indi-
vidual segments by their sales volumes or sales revenues, this has little eco-
nomic relevance.11 Furthermore, segment managers have little or no control 
over the efficiency of the centralized activities. In situations like these, it is 
more effective to set targets for underlying value drivers such as market share 
growth, gross margin, and inventory levels rather than return on capital. Of 
course, companies should ensure that the targets are consistent with driving 
aggregate return on invested capital of the business units and divisions en-
compassing the segments. At some point, expansion of market share and sales 
will require additional production capacity. Once that point is reached, the 
associated investments and operating costs need to be factored in for target 
setting in individual business segments.
Choosing the right performance metrics lays the groundwork for discover-
ing new insights into how a company might improve its performance in the 
future. For instance, a hypothetical pharmaceutical company has the key value 
drivers shown in Exhibit 29.11. For each of these value drivers, the exhibit 
shows the company’s current performance relative to best- and worst-in-class 
benchmarks, its targets for each driver, and the potential value impact from 
meeting its targets. The greatest value creation would come from three areas: 
accelerating the rate of release of new products from 0.5 to 0.8 per year, reduc-
ing from six years to four the time it takes for a new drug to reach 80 percent of 
peak sales, and cutting the cost of goods sold from 26 percent to 23 percent of 
sales. Some of the value drivers (such as new-drug development) are long-term, 
whereas others (such as reducing cost of goods sold) have a shorter-term focus.
Monitoring Results
Focusing on the right performance metrics can reveal what may be driving 
underperformance. A consumer goods company we know illustrates the im-
portance of having a tailored set of key value metrics. For several years, a 
11 For example, declining sales in one segment would imply increasing capital allocated to other seg-
ments even if their sales would be unchanged.

Exhibit 29.11  Key Value Drivers: Pharmaceutical Company
Worst in
peer group
Best in
peer group
Current position
All arrows represent an equivalent implementation effort
5
23
26
50
40
10
0.5
0.8
6
4
35
0.1
14
7
25%
50%
35%
6%
1.0
9
3
70%
10%
14%
3%
Performance and targets
25
Value driver
15.3
4.5
9.8
2.3
6.3
11.3
4.8
Potential increase in value,
€ billion
Top-line growth
• Rate of release of major products, per year
• Optimizing product life cycle 
 
— Time to market, years
 
— Time to 80% of peak sales, years
• Market share in high-value segments, %
Efficiency/effectiveness
• Research and development effectiveness
 
— Sales of nonmajor products as % of
 total sales
• Optimizing industrial operations
 
— Cost of goods sold as % of sales
• Optimize general and administrative costs as % 
of sales
 
568