Aligning Management and Operations through ROIC Trees and KPIs
What Is ROIC-Driven Management?
Managing a Business’s “Earning Power” Over the Mid to Long Term
ROIC-Driven Management is a management approach that evaluates how efficiently the capital invested in a business generates profit—and uses that insight to steer the company.
In other words, it continuously asks:
- How effectively are people, facilities, inventory, IT, and other forms of capital
- Being converted into sustainable earning power?
This represents a fundamental shift:
- From management focused only on sales and profit
- To management that clearly understands which businesses create how much value
That perspective is the essence of ROIC-driven management.
The Basic ROIC Formula
A Simple Measure of True Business Performance
ROIC = NOPAT ÷ Invested Capital
NOPAT (Net Operating Profit After Tax)
NOPAT measures how much profit the core business generates after tax.
- It excludes the effects of financing structure such as debt and interest
- It reveals the pure operating performance of the business
NOPAT = Operating Profit × (1 − Effective Tax Rate)
Invested Capital
Invested capital represents the actual funds used to generate profits, including:
- Production equipment and facilities
- Inventory
- Accounts receivable
- Human capital investments
- IT and digital investments
There are two commonly used expressions, but the meaning is the same:
- Invested Capital = Working Capital + Operating Fixed Assets
- Invested Capital = Interest-Bearing Debt + Equity − Excess Cash
Why ROIC Matters Now?
What ROE Cannot Capture About True Corporate Value
The purpose of a publicly listed company is to:
- Create value for society
- Generate profits sustainably
- Return value to stakeholders
- Increase enterprise value over the long term
Traditionally, ROE (Return on Equity) has been widely used as an evaluation metric.
However, ROE can be artificially improved—for example, by share buybacks that reduce equity.
Even if profits do not increase, ROE can appear to improve.
That does not represent the sustainable value creation investors seek.
ROIC is fundamentally different.
- Numerator: After-tax operating profit generated by the business
- Denominator: Capital actually required to run the business
Even if a company repurchases shares using debt, interest-bearing liabilities are still included in invested capital.
The denominator cannot be manipulated.
ROIC directly shows how effectively capital entrusted by shareholders and lenders is creating value.
The Relationship Between ROIC and Enterprise Value
Enterprise Value Depends on Whether ROIC Continues to Exceed the Cost of Capital
Enterprise value depends on how long a company can sustain the following condition:
ROIC > WACC
WACC (Weighted Average Cost of Capital) represents the minimum return required by investors—the hurdle rate for capital providers.
When ROIC exceeds WACC:
- The company is increasing entrusted capital at a rate above the market average
- Investors view the company as a reliable and attractive destination for capital
This is the foundation of long-term enterprise value creation.
How to Use ROIC
ROIC Trees and KPI-Driven Management
ROIC is not only an investor metric.
From a management perspective, it serves two key purposes:
- Evaluating business profitability (portfolio management)
- Serving as a roadmap for management transformation by breaking ROIC down into actionable drivers
This article focuses on the second use case.
By decomposing ROIC into a tree structure, management metrics and operational KPIs become directly connected.
As a result, it becomes clear:
- Which business processes
- Through which KPIs
- Influence enterprise value
By running a PDCA cycle across management KPIs and operational KPIs, companies can achieve consistent, ROIC-based enterprise and business management.
The Key to KPI Execution: Clear Accountability
The most critical success factor in operating a ROIC tree is clarifying KPI ownership.
- Management KPIs: Owned by corporate executives and business unit leaders
- Operational KPIs: Owned by functional and departmental managers
- Frontline teams: Execute daily actions that move the KPIs
When roles are clearly defined:
- KPIs stop being “someone else’s numbers”
- They become personal, actionable objectives
This alignment creates organizational momentum toward improving business and enterprise value.
References:
When defining business KPIs, you may also find it helpful to refer to our related articles on the value of SAP in the sales and procurement domains.
The Business Value of the Order-to-Cash (O2C) Process
SAP’s O2C: Driving Sales Excellence and Sustainable Growth
The Business Value of the Source-to-Pay (S2P) Process
The Importance of S2P for Automotive Parts Manufacturers
SAP as the Infrastructure for ROIC-Driven Management
To leverage ROIC for management transformation, a platform is required that can:
- Visualize ROIC-linked KPIs accurately
- Provide timely, reliable data
When systems are fragmented and data is collected through Excel “bucket relays,” organizations face:
- Delayed decision-making due to slow data availability
- Poor decisions caused by low data accuracy
- KPIs that fail to translate into improvement actions
SAP addresses these challenges by:
- Generating KPIs directly from real transactional data
- Linking them seamlessly to the ROIC tree
With SAP:
- Executives gain a quantitative, real-time view of business performance
- Middle management drills down from KPIs to document-level details and translates decisions into operational instructions
- Frontline teams execute concrete improvement actions
All within a single, integrated framework.
Executive Dashboards with SAP
Using SAP Analytics Cloud (SAC) as a core platform, organizations can build executive dashboards that visualize:
- ROIC
- Value Driver Trees
- KPI relationships across management and operations
Below is a conceptual usage image. (from SAP Help Portal)
(Links and demo videos are provided in the reference section below.)
Summary
- ROIC-driven management focuses on managing a business’s earning power over the mid to long term
- ROIC measures how effectively capital from stakeholders creates value
- ROIC trees connect management and operations through a consistent KPI structure
- SAP provides the optimal integrated infrastructure to support ROIC-driven management
Coming Next
In the next article, we will explore the value of SAP implementation from the perspective of operational departments, diving deeper into on-the-ground benefits.
Reference Links
Global (English)
SAP Analytics Cloud – How to Plan with Value Driver Trees
Includes instructional videos on how to build Value Driver Trees.
Set Up Value Driver Trees for Planning | SAP Help Portal
SAP-Related YouTube Channels / Partner Content
While not official SAP channels, these videos demonstrate Value Driver Trees in SAP Analytics Cloud in alignment with SAP best practices.
Value Driver Tree in SAP Analytics Cloud | ZaranTech
SAP Analytics Cloud (SAC): The Value Driver Tree
A blog explaining Value Driver Tree concepts and operational value in SAC.
SAP Analytics Cloud (SAC): The value driver tree: All info here
SAP Analytics Cloud – Value Driver Tree (Playlists / Training)
A curated playlist of multiple SAC Value Driver Tree demos.
(5) SAP Analytics Cloud – Value Driver Tree – YouTube
Japan (Japanese)
SAP Analytics Cloud – Value Driver Tree Overview (SAP Community)
Explains the structure and use of KPI trees for management metrics such as ROIC.
入門！SAP Analytics Cloud for Planning / バリュードライバーツリー解説（SAP Community）
Value Driver Tree Documentation (Japanese)
Official SAP Help Portal documentation on creating and using Value Driver Trees in Planning.
バリュードライバツリーを使用した計画と分析 | SAP Help Portal
A collection of tutorials covering SAC planning and analytics features.
ビデオチュートリアル | SAP Help Portal
Related Videos (Japan)
SAP Analytics Cloud – Analytics Support Demo (SAP Japan Official)
SAP Analytics Cloud – 分析支援デモ（YouTube）
Disclaimer
Parts of this article were developed with reference to generative AI suggestions and were reviewed, refined, and supplemented based on the author’s professional expertise and judgment.
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