Performance difference is the elusive part of creating wins for leadership. Part of my job is to study companies. It is the most fun and rewarding work I can imagine. I get a front-row seat on businesses that make everything from baby diapers to insurance products to skyscrapers and everywhere in between. As a result, I have the best job in the world. As part of that mission, I have the chance to observe the commonalities of a diverse range of firms. The one that stands out to me these days is something I call “the 1% difference”. In other words, what does 1% more of some particular driver mean to a company? The answer can be astonishingly insightful, yet I see few companies engaged in calculating it.
Let me illustrate with a practical example.
We were speaking to a huge, global chemical producer. That company operates over 30 process plants around the world. The business is characterized by very high fixed costs of production assets. Very few greenfield plants are being built in the West, which means they are all getting older day by day. Another equally important aspect of life in chemical manufacturing is the harshness of the environment—noisy, corrosive, excessive vibration, extreme cold, and heat. Under these conditions breakdowns of equipment are commonplace. Put all of this together, and you have an industry in tension-tension between the harsh environment and the economic need for every little increase in production from aging plants.
So I asked the question: what is an extra performance difference of 1% in this company’s overall plant uptime worth to them?
They did not know. “A lot” was the answer I received. So many things hinged on plant uptime that it surprised me to find out that the company did not financially and operationally measure such a vital statistic. However, they are not alone. I have repeated some variation of this question to companies all over, and the answer is mostly the same:
Performance Difference by Industry
Healthcare:
What is the effect on the contribution margin of 1% more patient volume in the cardiology service line?
Energy:
How much more production can I realize with a 1% increase in the capital budget for Basin X?
Retail:
What is the net profit effect of a 1% price increase on our Fall jacket line, given the price sensitivity of our customers?
So, why is this such an elusive number?
I believe the answer is that everyone in the company universally adopts a mental model of “a lot” and uses that to blindly drive that metric higher. In chemicals higher uptime is always better, so why bother to measure it?…just do it!
Any good managerial accountant will tell you: marginal costs behave quite differently from aggregated costs. Consequently, the calculus of marginal expenses can lead to some surprising (but insightful) results, and when we bring this to bear on the issue of a particularly important driver to the business, we gain a visceral understanding of the responsiveness of the companies at the edges. That will, in turn, reveal a range of strategies that might not have had priority or visibility otherwise. Calculating the 1% performance difference is quite plainly a healthy exercise for any company.
First, start by asking the 1% question. Then, if you don’t receive a satisfactory answer, move toward a model that calculates the 1% performance difference. Most noteworthy, the model does not have to be complex to be insightful. It is not about accuracy per se as the process and journey to get to the 1% is just as important as the results.
Finally, go out and make a difference in your company. A 1% difference is all that it takes.
About the Author
George Danner is an Author, CEO, Data Analyst, Futurist and Keynote Speaker. For more information on booking George for your next conference keynote, please visit: https://georgedanner.com/book-george-danner/
