Picking the right ratio to measure performance.

• Author: Motley, L. Biff
• Position: Customer Satisfaction

Excellent performance and productivity is measured and managed best through a careful understanding of the economics of an enterprise as reflected in a simple numerator and denominator. Some examples of useful "numerator/denominator" metrics are: sales per employee, profit per employee, loan originations per lender, earnings per share, etc. There are many of these. In fact, in the view of some there are too many, especially in banking where we are known to be overly prolific with quantitative measures.

In his recent book, "Good to Great," Stanford Business School Professor Jim Collins makes the point that one distinguishing feature of great American companies is that they have a very keen understanding of what drives their businesses- and are able to capture this on the basis of one simple and insightful ratio. For example, Circuit City, the highly regarded purveyor of consumer electronics, places great emphasis on the ratio of "profit per region." While the retailer also looks at "profit per store," like competitors, the move to "profit per region" better optimizes the distribution cost/revenue relationship and brings about the correct number of stores in a specific local market area.

Selected key metrics

Likewise, Gillette shifted its emphasis from "profit per division" to "profit per customer," which better reflects the economics of the company's business model of selling multiple products with varying margins and "repeatability purchase patterns." Kimberley-Clark uses the measure "profit per brand" to reflect the power of their killer category brands, such as Kleenex, and their strategy of extending that brand to new product derivatives such as travel Kleenex, Kleenex moist wipes, Kleenex towelettes, etc. Phillip Morris uses a similar brand-focused ratio.

Walgreens is considered by many to be peerless in the drug/convenience store business, and, judging by its stock performance over the past 15 years, it is hard to argue the point. The key metric is not "profit per store," like most of their competitors in both the drug and convenience categories. Rather, Walgreens looks at "profit per customer visit" as the critical, single view. In the company's view this ratio better reflects the relationship between being ubiquitously convenient and selling enough high-margin...