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Find Your Economic Denominator Profit per X

Posted by Douglas A Wick on Mon, Nov 4, 2013

Simple ideas. 

It’s remarkable when you begin to break down strategies and the foundational elements that help growth companies exert influence and even dominate their markets how simple their ideas to achieve this can be.  Simple, but not necessarily easy to identify. 

In Good to Great, Jim Collins points this out with 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 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-hence the term Hedgehog Concept.”

In Discover Your X Factor (#9-24-13) Newsletter #145 we discuss a client who through the Cash Conversion Cycle at a Mastering the Rockefeller Habits Four Decision Workshop discovered his X Factor.  A frustrating part of his business, collecting monthly credit card fees from his customers, turned out to be the source of significant impact, eventually leading to not only his X Factor (10X advantage over his competition) but also yield the economic indicator which would drive his business. 

In this specific case my client’s X-Factor provided insight into his profit per X.  Profit per X is the critical economic indicator in the Hedgehog Concept.  ba4c hedgehog concept Jim Collins good to great resized 600Again from Good to Great: “What drives your economic engine? All the good-to-great companies attained piercing insight into how to most effectively generate sustained and robust cash flow and profitability. In particular, they discovered the single denominator-profit per x-that had the greatest impact on their economics. (It would be cash flow per x in the social sector.)”

Imagine a number that could help you determine your strategy on where to put additional locations.  Imagine a number that you could consistently review that would always tell you whether you are trending forward or backward?  Imagine one number that could be precisely what drives your business?   That’s what profit per X is.  What could that mean for growing your business?

Here’s the insight from Good to Great: “…one particularly provocative form of economic insight that every good-to-great company attained, the notion of a single "economic denominator." Think about it in terms of the following question: If you could pick one and only one ratio-profit per x (or, in the social sector, cash flow per x) - to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine? We learned that this single question leads to profound insight into the inner workings of an organization's economics.  Recall how Walgreens switched its focus from profit per store to profit per customer visit. Convenient locations are expensive, but by increasing profit per customer visit, Walgreens was able to increase convenience (nine stores in a mile!) and simultaneously increase profitability across its entire system. The standard metric of profit per store would have run contrary to the convenience concept. (The quickest way to increase profit per store is to decrease the number of stores and put them in less expensive locations. This would have destroyed the convenience concept.)”

Without this insight, would Walgreens have ever had the audacity to put nine stores within one square mile of each other as they’ve done in San Francisco?  When my client discovered his profit per X (again closely related to his X factor) he suddenly had enormous insight in what to focus on with his business.  He had a rallying cry to focus his managers on.  Each of them knew that if they continued to improve his profit per X they would be contributing handsomely to the growth of his business.  The whole idea of what to do in a business changes with this insight.  Suddenly everyone is focusing on exactly what needs to be accomplished in order to succeed.

Not many companies put a great deal of energy toward this exercise. Why?  Because it is difficult to determine.  Once you decide what it is you need to measure and monitor it to make sure it is driving your economic engine.  And it can change as the market changes.  Banking deregulation changed the profit per X for Wells Fargo. 

Good to Great points out:  “The denominator can be quite subtle, sometimes even unobvious. The key is to use the question of the denominator to gain understanding and insight into your economic model.” Click here to receive the Good to Great Profit Per X examples.

Even if you have your economic indicator determined it won’t provide insight unless you remain disciplined to review and monitor it.  Fannie Mae’s profit per mortgage risk level is a good example of failure to follow your profit per X.

Discovering and sticking with your Economic Denominator/Profit Per X requires discipline. 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.  Looking for best business practices and a coach that will make you accountable to achieving them?  Register now to attend Mastering the Rockefeller Habits Four Decision Workshop.

Profit Per X is an element of Strategy.  Strategy is one of the Four Decisions you need to get right or risk leaving significant revenues, profits, and time on the table. Profit Per X/Economic Indicator is one of the three critical elements to the Hedgehog Concept. 

We’re going to explore the elements of strategy further including Verne Harnish’s Seven Strata of Strategy.  Next blog we’ll dive into the Hedgehog concept to determine why it’s an idea you should understand and practice its fundamental philosophy. 

Topics: Good to Great, strategy, Profit per X, Hedgehog Concept, Seven Strata of Strategy

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The Strategic Discipline Blog focuses on midsize business owners with a ravenous appetite to improve his or her leadership skills and business results.

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