However, we know that once you start a road trip, you may encounter unforeseen problems and opportunities. There may be construction detours, heavy rains that force you off the freeway or you remember this is a bluebonnet season and take a farm road to enjoy the view.
It is a bad plan that admits of no modification. We live in a dynamic world. Our customers change, their wants and desires change, and our competitors’ strategies change in response to our entry. Flexibility and mid-course correction based on new information are the hallmark of a good planning process.
In order to know if you are on track, you need sign posts. In business, they are known as Key Performance Indicators or KPIs. KPIs are used to assess the present state of the business and to prescribe a course of action.
The adage “What gets measured, gets done” is true. KPIs focus attention on the tasks and processes deemed most critical to the success of the business. KPIs are like levers you can pull to move the organization in new and different directions.
Accordingly, choosing the right KPIs is reliant upon having a good understanding of what is important to the organization. ‘What is important’ often depends on the department measuring the performance – the KPIs useful to finance will be quite different than the KPIs assigned to sales, for example.
Because of the need to develop a good understanding of what is important, performance indicator selection is often closely associated with the use of various techniques to assess the present state of the business, and its key activities. A very common way for choosing KPIs is to apply a management framework such as the balanced scorecard.
A company’s top management will analyze many areas of business operations, including:
FINANCIAL: Measures the economic impact of actions on growth and profitability
CUSTOMER: Measures the ability of an organization to provide quality goods and services that meet customer expectations
INTERNAL BUSINESS PROCESSES: Measures the internal business processes that create customer and shareholder satisfaction (project management, total quality management, Six Sigma).
LEARNING AND GROWTH: Measures the organizational environment that fosters change, innovation, information sharing and growth (staff morale, training, knowledge sharing).
View some examples of KPI’s used in various functions within a company.
FINANCIAL RATIOS: At times, it is more informative to look at ratios of two numbers and compare them to benchmarks in your industry.
Here are formulas for many standard ratios.
You should have a handful of KPIs that are appropriate for your own business and use them to measure the actual progress at least on a quarterly basis and make mid-course corrections if necessary.
Here are a few examples:
Possible Corrective Actions
If the key factors are better than expected, corrective action may still be required in the form of more rapid growth or raising prices.
There may be times when midcourse corrections are not easy or quick. You may find that you have focused on a wrong niche or a wrong location or a better financed competitor is trying to run you out of business. Targeting a new market niche or moving to a different location may not be easy, cheap or quick, but it must be considered as soon as possible before you run out of cash.
Proper preparation prevents poor performance but rigid adherence to a plan made obsolete by events is worse than no plan. A plan is as good as its underlying assumptions; all of which could change as you get new information. Flexibility and mid-course correction based on new information are the hallmark of a good planning process. Appropriate Score Card is a way to respond rapidly to an ever changing environment.