Management fundamentals for the success of any business
Know the main reason for the existence of any business and why this is essential for managing results, such as defining indicators, goals and problem solving.
What should guide management decisions
Regardless of the number of employees, size of revenue generated, the business segment or whether it is public or private, the reason any organization exists is to satisfy the needs of its stakeholders (interested parties), which are divided into 4 groups:
Shareholders (Owners and/or investors);
This being the reason for the existence of any business, its management must be aimed at ensuring the satisfaction of these groups, and the best way to do this is through the consolidation of indicators and targets related to each one of them.
In addition, it is essential to ensure that the company is highly assertive in analyzing its results and is able to define actions that really solve its problems.
For this reason, in this post we are going to talk about aspects and good practices related to the creation of indicators and targets and how to efficiently analyze the results, bringing the main concepts about the PDCA Cycle. Very important knowledge for any manager who wants his business to be successful.
This text aims to bring general aspects about these subjects, so if you want to go deeper into a topic, we recommend that you access the respective link throughout the post.
How to set indicators and targets
As the name implies, the indicators "indicate" something, they serve to signal whether the company or area is on the right path.
Without indicators it is impossible to know what we need to do to improve and too many indicators can confuse and divert the focus from what is really important.
For this reason, it is fundamental that we only measure what will help us to make relevant decisions for the improvement and growth of the business.
1. Define the main indicators
As we mentioned before, the main indicators of the organization must be related to the 4 groups. Therefore, macro indicators that better signal their satisfaction are indispensable, such as:
Shareholders: EBITDA (Earnings Before Interests, Taxes, Depreciation and Amortization) and Revenue Growth;
Customers: NPS (Net Promoter Score) and Churn;
Employees: eNPS (Employee Net Promoter Score) and Turnover;
Society: Number of plastic bags distributed, amount of CO2 emitted in the production process.
Not all of these indicators apply to any business, churn, for example, refers to the percentage of customers who canceled their accounts for products or services with recurring payments. Therefore, it applies a lot to SaaS companies.
For each business, the metrics that make the most sense should be evaluated and there are methodologies that can help with this.
In addition to the focus on the 4 groups mentioned above, another reference is the Balanced Scorecard (BSC) methodology, developed by Harvard Business School professors and which is based on 4 perspectives: finance, customers, internal processes and learning and growth.
Note that among the 4 perspectives, two of them refer directly to shareholders and customers and the other two focus on operational improvement and knowledge growth. Also fundamental points that can indirectly impact positively the satisfaction of any of the groups.
2. Unfold the key indicators
Having defined the main indicators, the next step is to break them down into smaller parts. For example, in the case of revenue, we can break it down into the revenue obtained by each of the products sold. Subsequently, we can break down the revenue by product through the respective volume sold and average price.
This unfolding is nothing more than consolidating the main indicator in an equation.
By doing these breakdowns, we managed to have visibility of what makes up each of our main metrics, making it much easier to define achievable goals later on.
It is much easier to define an assertive revenue target for the company by defining the sales expectation per product than simply estimating a direct absolute value.
3. Set the goals
With the main indicators unfolded, we can now define the respective targets. In this example, the most detailed level is the sales volume per product and its respective average sales price.
By defining these values, we will mathematically have the target value per product and, consequently, the overall revenue target.
But how to define these goals? There are basically two ways:
Internal Benchmarking: Historical data of the company's own results are used for comparison. Relating to the example, we can analyze the sales history of the products and define an average value to be achieved.
External Benchmarking: Data from competitors' results are used for comparison. If we have performance references from other companies, we can define goals based on them.
Having the indicators and targets defined, it is important to ensure that we can properly measure them. It's no use having an excellent breakdown of goals if we can't assess whether we're doing well or badly.
How to improve results through the PDCA cycle
After defining the macro indicators, deploying them and ensuring that it is possible to measure them correctly, it is time to apply a method that optimizes problem solving. One such method is the PDCA Cycle.
We will not talk in detail about PDCA in this text, but rather about its purpose, importance and main stages.
What is the PDCA Cycle
The PDCA is basically a structured way of solving the organization's results problems. In theory it is quite simple, but in practice not so much.
Even having the knowledge of the methodology, several companies or areas find it difficult to apply it in their day-to-day lives, however, those that manage to, come out ahead of their competitors.
Steps of the PDCA Cycle
The acronym PDCA refers to the following steps:
As much as it has 4 major steps, the PDCA cycle actually has 8 steps. We will bring some details about the 4 steps related to planning.
The planning stage begins with the identification of the problem and ends with the planning of the necessary actions to solve it:
Problem identification: To solve a problem, the first step is to identify it. As much as it is something obvious, it is not always simple for companies to make this identification. It is important to bear in mind that a problem is an undesired result, the difference between the current result and what you would like to be;
Breakdown of the problem: This step is where the identified problem is broken down into smaller parts, in the same way as we did in the previous recipe example, where we broke down the indicator to the salesperson level;
Cause analysis: Step to understand the parts of the process that are causing these specific problems. There can be multiple causes and the most important thing in this exercise is to come to the conclusion of the root cause;
Definition of the action plan: With the root causes found, this is the time to consolidate the actions that will prevent this from happening again.
After these 4 steps, there are 4 more distributed over the other 3 steps:
Do: Perform the actions defined in the planning stage;
Check: Check the results and evaluate how far we are from the goals;
Act: Carry out countermeasures to reach the target of indicators not reached and standardize actions that were successful.
Applying this cycle consistently will definitely help you and your team improve your results.
Management should focus on stakeholder satisfaction
It is worth noting that the starting point of this post was the purpose of any organization's existence, the groups of people who need to be happy with the generation of value and business decisions.
If the indicators, targets and operational improvements do not have any benefit linked to these groups of people, it is very likely that you are using your time in the wrong way.
Brazilian graduated in Civil Engineering from the Federal University of Santa Maria (UFSM). Worked as a management consultant at Falconi on projects in the public sector, automotive retail, healthcare and pharmaceuticals, focusing on the application of PDCA to improve operating results. He is currently working as a Mkt Ops Business Analyst at RD Station, the largest SaaS company in Latin America.