In Good to Great, Jim Collins argues that businesses should find and track a single number (KPI) that more than any other, mirrors sustained success in terms of robust cash flow and profitability.
Typically a ratio expressed as profit per X, doggedly pursuing growth in this single number will result in continued improvement in company performance. Collins refers to this as the company's economic engine.
The number should be an activity-based ratio, not simply revenue, profit, or numbers of employees. Ratios can combine multiple factors, are inherently comparative, always quantitative, unambiguous, and generally easier to act on than single values.
Some examples from Good to Great, along with the company's rationale are:
- Circuit City - profit per geographic region (captures local economies of scale)
- Walgreen Drugs - profit per customer visit (focuses on convenient store sites)
- Gillette - profit per customer (focuses on repeat purchases)
- Pitney-Bowes - profit per customer (focuses on cross-selling and up-selling)
- Wells Fargo - profit per employee (recognizes they offer commodity services)
- Abbott Laboratories - profit per employee (measures cost-effective health care)
All six of these companies, as well as the other five companies selected in Good to Great, designed their business strategies to grow their economic engines, sustaining above-market returns relative to their competitors as a result.
Croll and Yoskovitz, in their book Lean Analytics, present a similar concept in OMTM (One Metric That Matters). Note that while their book is full of metrics for many aspects of a growing business, they recognize the importance of knowing and focusing primarily on the OMTM.
This is not to detract from the need to set KPIs for different aspects of company operations. Rather, it's ensuring that the entire KPI set is subordinate to this one number that truly drives company performance. In other words, it means the entire company is focused on the one right thing at the right time, with the right mindset.
Returning to Collins, Know Your Economic Engine is one of three components defining the Hedgehog Concept, which is his term for what you should be single-mindedly focused on to achieve success.
The other two are Know Your Passion and Know What You Can Be The Best At. Understanding and pursuing these three concepts together was shown convincingly by Collins to lead to companies consistently out-performing their competition.
Do you know these three pieces for your company?