Numbers Don’t Live in Void
Without context, not all numbers are as exciting as 42, which is famously known as the ultimate answer to the meaning of life in the book
“The Hitchhiker’s Guide to the Galaxy.”
Similarly, It would be difficult to assess whether a score of 23 points earned by your friend’s daughter in a game is good or bad without additional context.
If you are asked to buy “some stock” that is trading at $30 without any additional information, you would decline the offer. This decision is based on the lack of context and relevant information required to evaluate the stock’s potential value. Without sufficient details such as the company’s financial performance, industry trends, or other key factors, it is not possible to make an informed decision about investing in the stock.
- What was the stock’s price yesterday
- What was the stock’s price a year ago, three years ago
- What does that price look like as compared with its earnings
- How does the price compare to your broker’s buy recommendations
- How does the price compare to the dividend distributed by the company in the past
Numbers require context to have meaning and significance, as they do not exist in isolation. Context provides the necessary information to evaluate and interpret the value of a number accurately. For example, with additional contexts, such as the type of stock, its financial performance, and industry trends, the number $30 would make more sense in terms of evaluating its potential value.
Additionally, prior knowledge and experience can also help provide context for a number. For instance, if I inform you that the “some stock” which was previously trading at $30 is now trading at $24, you could infer that the stock’s value has dropped by 20%. This understanding is based on the previous knowledge of the stock’s earlier price, and therefore, it highlights the importance of having context and prior knowledge while interpreting numbers.
(To understand a KPI in a better context, we need it to be compared with a target value, some normal expected value, and the value it has shown in the past.)
Ways to Compare a KPI
Numbers can be seen and compared in many ways – sometimes by showing trends along with time, sometimes by dividing it with other numbers and looking at it as a ratio or percentage.
Here are some more common ways to compare numbers in business dashboards:
- As a percentage of the target
- Trend analysis over time
- See as growth from previous periods
- Segment by geography and compare
- Segment by product and compare
- Segment by the customer and compare
- Compare against internal best-in-class and understand the reason behind the gap
- Compare against the industry average and see where you stand
- Compare against industry best in class and analyze the gap in best-practices
Comparing KPI with Target (Variance Analysis)
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The most common method to compare KPI is to express it as a percentage by dividing it by its target. However, in cases where the KPI is additive in nature, it is also crucial to consider the absolute variance to provide a comprehensive analysis.
Expanding on the comparison, it is also valuable to identify the major contributors to the positive and negative variance in the KPI. This approach provides a more comprehensive view of the KPIs performance against its target and offers insights into areas that require attention. While this type of comparison may not be sufficient for conducting a root-cause analysis, it serves as an excellent starting point for identifying potential issues.
Dividing KPI by another KPI (Normalization)
The art of turning oranges 🍊 into apples 🍎
Absolute values alone are insufficient for making a meaningful “apple-to-apple” comparison. For instance, if Product A has a profitability of 30% compared to only 15% for Product B, Product A would be more interesting to pursue for generating profits. To facilitate an apple-to-apple comparison between products, it’s essential to include profit margin along with absolute profit when creating a dashboard for the Business Strategy team.
A helpful resource to understand the importance of contextualizing data is the book Factfulness by Prof. Hans Rosling. He emphasizes the significance of measuring CO2 emissions per capita, rather than measuring total CO2 emissions in millions of tons when comparing emissions across different countries. Regrettably, he is no longer with us, particularly during these challenging times when the world could greatly benefit from the insights of a public health expert like him.
Comparing KPI against Time (Trend Analysis)
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Comparing against time can be more complex than comparing against a target, as there may be multiple options for comparing over time:
- Should I see a daily trend? How to treat the dip in sales every Sunday?
- Should I see a weekly trend? How to treat the slow sales at the start of the month and high volumes towards the end?
- Should I see a monthly trend? How to interpret the sales dip during the off-season from Jan to Mar?
- Should I see an annual sales trend? How far going back into history would be relevant?
- It is the middle of the month right now. Should I compare with a daily average of the full last month or only till mid of the month?
While there is no one-size-fits-all approach to comparisons, there are some fundamental guidelines that can be followed to make trend analysis work for specific requirements. When it comes to most large companies, the following types of time-based comparisons are typically relevant.
A daily trend
These time-based comparisons are commonly used in operational dashboards, where they are typically accompanied by metrics such as average daily sales by day, a reference line for the daily target, a cumulative sales trend compared to the previous month’s cumulative sales trend, and the percent achievement of the monthly target.
A Monthly trend
These kinds of comparisons are relevant not only in operational dashboards but also in executive dashboards. In addition to the measures mentioned earlier, executive dashboards may include monthly target references, month-on-month growth from the same period of the previous year, and actual values from the same month of the previous year as references.
A quarterly trend
Executive review dashboards, particularly in finance-related areas, usually present quarterly results compared to the target and the corresponding quarter of the previous year.
An Annual Trend
My favorite kind of chart is the finance and manufacturing industry. In manufacturing sometimes even the trend of 5 years is shown because it is hard to change things in a large plant within a short period and sometimes changes and their effects take 2 to 3 years to complete and show the effect. Such long horizons do not need to show comparison against targets because no one remembers or cares for what were our targets 5 years ago. Only a year over the change in the actual value matters here.
Comparing Products
“A product is something made in a factory; a brand is something that is bought by the customer. A product can be copied by a competitor; a brand is unique. A product can be quickly outdated; a successful brand is timeless.” 💎
– Stephen King
Assuming that everything goes according to plan, the sales trajectory of a newly launched product typically follows a similar pattern:
As a brand manager in a consumer goods company, monitoring the performance of a newly launched product is crucial. To measure its success, you may want to track metrics such as penetration in target stores, repeat purchase rate, and revenue generated. However, it’s important to keep in mind that initial projections may not be entirely accurate, especially in the first few months of the product’s launch.
Since this is a new product, there is no historical data to compare it with. Instead, a better approach would be to compare its performance with that of a similar product that was launched two years ago. If possible, you can reach out to the manager who launched the old product and gather relevant data to plot against the newly launched product. This can provide valuable insights into the performance of the new product and help you make data-driven decisions to improve its success.
Take early cues from what the data tells you with that kind of comparison. I am sure, this one extra curve plotted on your chart will add a lot of value to your NPD product launch dashboards.
Comparing Geographies (Best-in-class ranking)
When comparing sales between different geographies, it’s important to consider the size and population of each area. Instead of comparing absolute sales revenue, it’s more useful to compare sales growth rates. This helps to normalize the data and provide more accurate comparisons.
Another challenge with comparing sales geographies is that they often undergo restructuring, with cities and regions shifting from one area to another. To ensure accurate comparisons, historical sales data from the affected cities should be reported under their current region, even if they were previously part of a different region. This is necessary to ensure that comparisons are made between comparable areas and to avoid skewing growth rates in either region. Without proper accounting for these changes, growth rates can be misrepresented, and it becomes difficult to make data-driven decisions.
Comparing Your Business with Industry (Benchmarking)
Optimize with internal comparisons, strive for excellence with external comparisons📏
No matter how different two leading organizations might be within the same industry, they always share a few traits. Those traits could be better the use of technology, a competitive advantage, or anything else. Unfortunately, these efficiencies are closely guarded secrets. However, also, publicly-traded large companies are required to share a fair amount of data with the public.
With some smart work, combined with a solid market intelligence, you can take your top competitors’ data and build a solid competition intelligence system that can be used by your management, and marketing team to come up with innovations and strategies which will help you in the long run.
If your competitor’s revenue has grown by 10% while the profit increased by 15%, where did that additional 5% efficiency come from? Is it because of fixed cost utilization by your competitor or something else which might be hidden under financial ratios? Such bench-marking will always help you to ask these kinds of questions and look for an answer.