As I often say in class, information that we use to make decisions falls into three categories:
1) Lagging indicators: Often highly accurate and precise, but give us data only about the past;
2) Current indicators: Tell us where we are at the moment – for example, what inventory turns are right now;
3) Leading indicators: Give us information (albeit subjective information) about where we might be headed. Leading indicators belong in every company’s strategic toolkit, but all too often they are completely overlooked.
A really good recent example of a company that effectively acted on leading indicators was noted in the Wall Street Journal of January 14, 2008. The Journal mentions how YRC Worldwide, a global transportation company, noted that the size of shipments it was handling for customers was declining as was the size of those shipments. Anticipating a major retail slowdown, which would have harmed their business, the executive team laid off staff, took about 12% of its vehicles out of commission and otherwise prepared for a much slower season than normal.
In my experience, such bold action is often not taken in time. Why? Companies don’t get the data for starters. Or they get it and don’t know what to do with it. Or even worse, they get it, know what to do with it, but don’t believe it (sub-prime, anyone?). Or worst of all is to avoid taking action in the futile hope that all will recover on its own.
So, questions to ponder: Are you getting enough data on leading indicators to inform your decision making? And if you get it, are you regularly spending time to make sense of it?