Competitive advantage - juggling six balls

Business performance management opinion column by Verne Harnish

Four times the revenue growth, 12 times the stock performance, and more than 700 times the profit growth over an 11-year period.

What competitive advantage led to this huge margin in performance of one group of companies over another in similar industries? In a landmark study of more than 200 firms by Harvard professors John Kotter and James Heskett, it was found that companies that equally focus on three key stakeholders (customers, employees, and shareholders) dramatically outperform companies that emphasise one over the others.

This means companies exclaiming that the customer is number one; or that employees are the most important asset; or that the main focus of business is making money for the shareholders/owners; will be at a significant competitive disadvantage over those firms that see and treat all three key relationships as equally important.

Process/activities

These three groups of people, in any business, are then engaged in only three main activities or processes: making or buying stuff, selling it, and keeping track of the transactions. I refer to this as the ‘process’ or ‘activity’ side of the business where the focus is on doing things better, faster, and cheaper (less costly, for those that cringe when they hear the word ‘cheap’).

It’s these three fundamental activities that determine the profitability of the business. Simply put, making and buying stuff generates costs. In turn, selling this stuff generates revenue. And, again, if you structure the business model correctly, you’ll have quite a bit of profit left over when you subtract one from the other.

Like with the balance sheet, this triumvirate of basic processes provides you with a greatly simplified lens through which to understand and view your income or profit & loss statement.

The juggling act

What you’re left with is a model of business where you have three groups of people with whom you have to maintain a positive reputation; and three groups of activities you have to keep productive. Like the tradeoffs between the balance sheet and the P&L, it’s this reputation/ productivity balance that is the essence of business. We want to make our customers, employees, and shareholders increasingly happier, which should lead to a more valuable company; but we can’t give away the store in the process.

What the firm needs, then, are some key metrics that measure reputation and productivity on a daily or weekly basis. This brings us back to the six main areas of business we need to juggle and the challenge of finding easily measurable key performance indicators (KPIs) that let us know how we’re progressing (visit kpilibrary.com for additional ideas).

Once you have KPIs for each of the individual areas, you can create formulas that let you combine the ‘people’ metrics into an overall ‘reputation score’; and combine the ‘process’ metrics into an overall ‘productivity score’. With these two numbers, you’ll be 90 per cent ahead of those driving their business without a proper set of gauges – a key (and balanced) competitive advantage.

As accountants and business advisers, we have all had experience with a broad spectrum of business growth tools and techniques. I’ve worked with one company that has grown as a direct result of putting plans in place, and aiming for a set of KPIs that set them apart from their competitors.

Prosperity Advisers is an east coast Chartered Accounting and financial advisory firm with more than 100 people at offices in Sydney, Newcastle and Brisbane, and it is a great example of a business that continuously juggle the six balls successfully.

The staff prides itself on operating the practice as a business and, accordingly, relate very well to the broad range of business clients who confront the same challenges as they do on a day-to-day basis. The management understand the fundamental drivers that make businesses tick and has most importantly been able to build a framework that is logical, effective and easy to understand and implement. Something as simple as a new approach to a directional meeting can have remarkable benefits.

Prosperity Advisers practices daily huddles and it starts first thing each morning with the director group of around a dozen people. They phone-in for each meeting across three offices, whether they are in transit or interstate. The meeting enables the team to recap on the salient issues of the previous day, identify priorities and bottlenecks, and where they can help each other out with resourcing, technical expertise or market intelligence.

The meetings may only be around 15 minutes but they enable the directors to then, in turn, meet with their teams with a clear understanding of the firm’s priorities and issues for the day. While it may sound like yet another meeting, meetings of this nature actually save a significant amount of time. In one single brief session the company can update everybody on key issues without the need to have dozens of drop-in discussions or emails throughout the day.

Sometimes, a new view on a traditional business mechanic can really make all the difference. 

Verne Harnish writes for Forbes magazine. He is speaking at The National Growth Summit 2012 at Sydney Convention Centre on 14 and 15 March.

Article last updated 28 March 2012