In the last post we looked at the Hedgehog Concept, and how it could be used to develop the vision, or Big Hairy Audacious Goal for your business. One of the elements of the hedgehog concept is the economic engine. Lets consider how we can start linking KPI to your economic engine to drive your business forward.
How to identify your single key measure
Is the key measure financial or non financial?
In Good to Great, Jim Collins looked at the key financial ratio that drives the economic engine, for example profit per X. This is great while we are building the vision. We need to know what really drives the bottom line.
There are two problems with financial measures though, one is that they are only available at the end of the month or quarter, second is that they are always looking backward well after the event, so the opportunity to make some timely interventions to change things has often passed. These kind of measures lead us to do too little too late.
We need to think one step back from finance. What is it that drives the key financial ratio? Whats really at the centre of our business that drives value?
What does the customer value most?
So, at this point, you might be tempted to think about the things that your business does well, or where the core strengths of the business lie. The features and benefits the customer gets from doing business with you, and from your product or service. You might think you have a great product, but what is it that the customer truly values?
In the last post I mentioned the British Airways example. They provided a very high quality customer experience, great levels of service, and promoted themselves as a premium brand. However, the realisation that the thing that really mattered to the customer was getting to his destination on time made all the difference. Once the focus of the business changed to making sure that as many aircraft as possible took off on time the business really moved forward.
Am I passionate about becoming the best at this one thing?
Before we move forward take a moment and check that the non financial metric you are considering aligns with the rest of your hedgehog concept. If it does, then great, if not then we need to reconsider either the metric driving our economic engine, or the rest of the hedgehog concept.
How to develop other KPI to support the main measure
I can’t control everything about this measure
No, it’s unusual if you are able to. British Airways can’t make every flight take off on time, there are lots of things they have no control over. They can influence quite a number of things though, and when a flight is late there’s lots they can do to make the delay as short as possible. When everything snarls up at the airport, passengers notice when BA cope with the situation better than anyone else.
Identify what you can control
Take your single KPI and make it the centre of a mind map. What are all the things that contribute to achieving the main KPI. Which things do you need more of, or less of? Take the mind map back two or three levels, and look at what in turn drives the things we have just identified. Doing this we can quickly build a picture of what drives value in the business. Once you have identified a reasonable number of these business value drivers you need to identify which are the most important. Rank each driver either High Medium or Low for the extent to which you can influence it. Some things you will have little control over, others might be totally in your gift to change.
Identify what makes the biggest difference
Some value drivers will have greater effect than others, so think too about what impact a small change in each one might have. Again rank this high, medium or low. A core set of drivers should start to emerge, the high highs, those you can both influence and that have most impact. These are the basis of the metrics to help drive the business forward.
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