Principles in Brief

As Einstein observed: “Not everything that counts can be counted, and not everything that can be counted counts.” That is why we strive to measure things that matter – things that lead to profitable action – even when it is difficult to do so. And it is why we avoid relying on measures that do not provide insights leading to improvements and innovations.

It is essential for us to have measures that help us understand reality and properly focus our efforts. Such measures include profit/loss and return on capital consumed. Rather than relying on averages or total profitability, we need to know the profitability of business strategies, customers, products, services, plants, production units, suppliers and activities. Our measures need to provide the information required for marginal analysis. The goal is not precision, but knowledge regarding future changes and opportunities to improve.

Other important areas to measure include:

• Culture- Progress in applying Principle Based Management™, including the effectiveness of supervisors.
• Opportunity cost- An activity is truly profitable only when it is more profitable than the most profitable opportunity foregone.
• Stewardship and compliance- Performance in eliminating the conditions and events that have harmed or could harm people or the environment and in complying with all applicable laws and regulations – all classified by seriousness.
• What each customer values- Not only what the customer values as a company but also what its relevant decision makers value.
• Price-setting mechanisms- Based on various supply and demand scenarios that cause marginal competitors to increase or decrease production or prices.
• Our competitive position- Where we stand in the value we create for our customers and the costs of providing it vs. present and future competitors.
• The value and cost of activities- Benchmark vs. the best in the world regardless of industry.
• Allocation and profitability of overhead costs- Whether costs are allocated according to the businesses that drive them and are profitable to each business.

Knowing what drives profitability is important. If we are doing well, is it because of favorable market conditions or our competitive advantage? Given that we tend to work on what gets measured, it is essential that we measure the right things – especially if rewards and recognition are involved. Measuring and rewarding revenue will drive more revenue. Focusing on costs will drive cost reduction. Using either as the primary measure of success will destroy rather than create value.

It is imperative for every business, facility, unit and team to continually evaluate its measures. This requires critical thinking to determine whether each measure is driving mutually beneficial outcomes. All employees need to know which parts of their work are profitable, based on measures that help them understand what to start, stop, change or improve.