What is your X-Factor?
In Good to Great, Jim Collins offers this insight,
The essential strategic difference between the good-to-great and comparison companies lay in two fundamental distinctions. First, the good-to-great companies founded their strategies on a deep understanding along three key dimensions; what we came to call the three circles. Second, the good-to-great companies translated that understanding into a simple, crystalline concept that guided all their efforts … one particularly provocative form of economic insight that every good-to-great company attained is the notion of a single ‘economic denominator.’
Think about this economic denominator Collins refers to in terms of the following question: If you could pick just one factor; a “profit per x” ratio, to systematically increase over time, what ‘x’ would have the greatest and most sustainable impact on your economic engine?
Think of it as your single, overarching KPI.
Really digging in to understand the economics of your company will get you thinking differently, rather than simply choosing what seems like the most obvious answer to this question. In fact, the exercise of thinking strategically about your economic denominator, or profit per x, should cause heated debate and disagreement within your team.
But, once a single metric is agreed to, and becomes the factor by which all significant, strategic decisions are measured, your team will be enabled to improve its discipline and focus, as well as decrease the likelihood of spending on initiatives that end in failure or don’t align with your strategy.
The key to being successful in this process is to be honest with yourself. Face the hard reality of your situation. Don’t just decide on a denominator, try to figure out what is going to be the strategy to increase it.
If you do the work, having a deep understanding of your unique economic denominator can provide an advantage to your business even during an economic downturn. In fact, it can help a business succeed even if it’s in a dying sector.
What makes this strategic metric so powerful is that it is specific to your business. A ratio from the list of examples below that is absolutely right for one company could be absolutely wrong for yours. It must represent your company’s unique approach to scaling the business.
Here are some examples to spark your imagination and get you and your team thinking about a unique economic denominator for your company:
Profit/customer visit or interaction
Profit/customer
Profit/employee
Profit/location
Profit/geographic region
Profit/part manufactured
Profit/division
Profit/sale
Profit/purchase
Profit/life of customer
Profit/plant
Profit/brand
Profit/local population
Profit/invoice
Profit/market segment
Profit/store
Profit/square foot
Profit/fixed cost
Profit/recurring revenue client
Profit/seat
Profit/plane
Profit/product line
Keep the following criteria in mind when deciding your profit per x denominator:
Ensure it has a positive impact on revenue, and is cost-effective
More ‘x’ must be desirable.
It must be tightly aligned with your long-term vision.
It must be unique within your industry.
As noted, it’s critical your metric is tightly aligned with your long-term vision. Many companies make the mistake of pulling a random number out of thin air, or aligning it to a vague statement of aspiration. Your strategy and profit per x must support each other. In fact, your strategy should be measured in the same units as ‘x’.
The last point on the list—It must be unique within your industry—is the primary reason your profit per x denominator is so crucial when developing your strategy. If the key driver in your economic engine is the same as your competition, and you are all focused on pursuing the same outcomes from the same market, you are likely to be viewed as a commodity, rather than differentiated from your competition.
Not many companies invest the time and effort required for this exercise to be successful. Why? Because it’s difficult. It’s difficult to determine your unique economic denominator in the first place.
As mentioned above, it’ll be the source of many debates and disagreements. And once you do agree on your unique metric, it’s difficult to manage. Without the discipline to continually review and monitor it, it won’t provide valid insight.
So, not surprisingly, it’s something few businesses do. It’s why there are few great companies. Great businesses do what good and mediocre businesses fail to do.
Are you and your team up to the task? Are you willing to dig deep and discover your unique economic denominator; your x-factor? If you do, you might discover that it’s exactly this kind of focus that drives your company to the rank of greatness.