The Gallup Path to Business Performance

Through research examining the linkages between key elements of a healthy business, Gallup has developed a model that describes the path between the individual contribution of every employee and the ultimate business outcome of any company -- an increase in overall company value. For publicly traded companies, this is, of course, best measured by increase in stock price and market valuation.

Real Profit Increase Drives Stock Increase

Many variables influence the market value of a company, including external variables beyond a company's control. But of the variables a company can control, real profit increase is the most important driver of stock increase. We emphasise "real," because there are many maneuvers a company can take to drive short-term profitability. Some are solid operational initiatives, such as improving process efficiency or cutting costs. Others are generously described as creative accounting, such as write-downs, aggressive one-time charges, or forcing orders for products at the end-of-period to overstate revenue. However, only sustained profit increase from normal operations can drive a sustained increase in stock value.

Sustainable Growth Drives Real Profit Increase

Real profit increase can only be driven by sustainable growth. Sustainable growth is quite different from "bought growth." A company can buy growth through a variety of techniques: acquiring another company's revenue stream, slashing prices, or, a perennial favorite among fast-growing restaurant or retail chains, opening as many new locations as possible as quickly as possible. All of these techniques create a welcome spike in your revenue, but none of them addresses the issue of sustaining that revenue -- in fact, some of them actively undermine it. Sustainable growth is not measured by a short-lived revenue spike. Rather, sustainable growth is measured by metrics such as revenue per store, or revenue per product, or number of services used per customer. These metrics reveal whether or not your revenue stream is robust, whether it will last.

Engaged Customers Drive Sustainable Growth

The most critical driver of sustainable growth is an expanding base of engaged customers. In some industries it is also critical to have a growing base of engaged customers who are willing to pay a premium price. It is even better if these engaged customers become advocates, thereby creating a large, vocal, and unpaid sales force.

Customers can be persuaded to try a product or service through effective sales and marketing communications, but true customer engagement can be created only by treating customers to a superior product and superior service. At Gallup we refer to the sales and marketing communications as the "brand promise," and the quality of the products and services as the "brand experience." A company will be able to create a growing number of engaged customers only if its brand experience matches or exceeds its brand promise.

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Engaged Employees Drive Customer Engagement

Jack Welch, the CEO of General Electric, once said, "Any company trying to compete … must figure out a way to engage the mind of every employee." This is especially true in service industries, where nearly all of the company's value is delivered to customers by individual employees. But even in pure manufacturing environments, quality products are unlikely to be produced without engaged and committed employees.

A "fully engaged" employee, by our definition, is one who can answer all the questions in the Gallup Q ¹² with a strong affirmative. These question items were identified through extensive research that correlates employee attitudes to five outcome measures: employee retention, productivity, customer satisfaction/engagement, safety, and profitability. While The Path only illustrates the link between engaged employees and customer engagement, there are often very direct links between an increase in the number of engaged employees and profit, either indirectly through an increase in productivity, or directly through major decreases in employee turnover.

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The Right People in the Right Roles With the Right Managers Drive Employee Engagement

At the entry point of The Path, the first steps must be performed almost perfectly or the remaining linkages to customer engagement, revenue growth, and profit will not occur. First, you must identify the employee's individual strengths. You must position that individual to perform a role that capitalises on these strengths. Failure to meet these two requirements cannot be corrected by either the employee's motivation or expert coaching. When we refer to "strengths" we are referring to a person's ability to provide consistent, near-perfect performance in a given activity. And the key to building a strength is to identify a person's dominant themes of talent, then refine them with knowledge and skills. We believe that, when selecting employees, companies have spent far too much time and money focusing on the skills and knowledge of employees and not nearly enough on their talents, which are the basis of strength and success. Truth be told, most companies trip themselves up right at the start of this path because they have no accurate way of knowing how much talent they are bringing in, nor how well that talent is positioned.

Learn more about Gallup's solutions that help organizations address challenges through talent-based hiring and strengths-based development.

Having successfully taken these first two steps, you arrive at The Path's most critical juncture. You must find a way to engage these talented employees. Again, there are many ways to do this -- pay them more, provide more generous benefits -- but these are low-character solutions. The only way to engage talented employees successfully is to select and develop great managers. Great managers can select the best people, set accurate expectations for them, motivate them, and develop them. Companies that are unable to create this kind of environment will be forced off The Path. They will lose more talented people than they keep. They will miscast, overpromote, undervalue, and otherwise misuse those talented employees who do stay. Lacking talented people in the right roles, this company will have to revert to less robust routes to performance -- an overreliance on marketing, an unquestioned fondness for acquisition, a frantic push for "bought" growth. Pressed by high character competition, these routes will serve this company poorly. And, in the end, lacking great managers to keep it on the right path, this company will lose.

Learn more about Gallup's solutions for selecting and developing great managers.