It is the hardest questions that participants ask during a Business Acumen learning journey where we teach
strategic thinking and financial management skills. “We just created our winning aspiration and strategy for our simulated company, but how do we know what financial metrics to choose and follow so we know if we are achieving success?”
The first and most obvious response is that it depends on the winning aspiration you are choosing to execute. In business, there are only three different aspirations or value propositions a company can choose and all the research shows that the most successful companies are the ones that choose one value proposition, stick with it, and execute it flawlessly.
Here are a few examples of winning aspirations participants get confused over:
- “Our winning aspiration is to be the most innovative pharmaceutical company on the planet meeting the unmet medical needs of patients around the world…”
- “Our winning aspiration is to provide every traveler with the highest level of service and comfort when they check into our hotels…”
- Our winning aspiration is to create the most efficient, cost-effective, and sustainable packaging on the planet…”
In these examples, there are three different aspirations, there different approaches, one overarching desire to be the best in their markets. The biggest misunderstanding on all of business is to assume that the financial metrics are the same. They are not!
Certainly, everyone is going to measure revenues, expenses, and profits. Those are the foundational elements of the Profit & Loss statement, and the first thing people think about when they evaluate the success of a business. However, true business acumen is understanding the metrics that matter that drive revenues, expenses, and profits.
The table below presents an overview of the key metrics each type of value proposition should drive:
|
Value Proposition |
Financial Metrics that Matter |
Significant Drivers to P&L |
Comments |
|
Product Leadership |
|
High prices at high units sold will drive top line revenues.
Profit doesn’t matter right away. |
Product leadership is making sure you are investing the most in R&D and bringing the most innovative, best products to market. The most important metrics include the R&D spend, the quality ratings, and number of new products launched. |
|
Customer Intimacy (Highest levels of customization and service) |
|
Very High prices at moderate volumes will drive top line revenues. Profits matter right away to be able to provide more service. |
Customer intimacy is making sure you are investing in service, customization, and understanding your customer’s needs better than they understand them themselves. |
|
Operational Excellence (Low price to customers) |
|
Low prices at high volumes will drive top line revenues. Profit matters right away to be able to afford expenses and more products. |
Operational excellence is making sure you do everything possible to take costs out of the system to offer customers the lowest possible prices. |
In summary, making decisions to drive financial metrics is a huge mistake. Making decisions to properly execute your value proposition and ability to win is the only way to drive the financial metrics that matter. Understanding the right metrics that matter in support of your winning aspiration is the key to Business Acumen mastery.
