The skeleton of a discovery driven plan has to do with the key metrics that you use to make assumptions, and which drive the relationships among the elements featured in your plan. It is often difficult, though, for aspiring entrepreneurs to come up with relevant key metrics. In a really new business (think the early days of the Internet) nobody even knew what the relevant key metrics were going to be! To help out, in our first book The Entrepreneurial Mindset, we published a set of questions that you can ask to consider what key metrics might be useful.
Keep reading to get the full list.
Key Metrics: Some places to start
1. Industry benchmarks. In established industries, time and experience have created a consensus about what the current critical metrics are. These become industry benchmarks. In other countries and for new businesses, it’s harder to determine what the critical metrics are or should be. For instance, nobody knows yet what the critical benchmarks should be for many e-commerce businesses (should the model be a transaction based model? An advertising model? Will customers prefer fixed prices, or dynamic pricing?) Although this can be confusing and frustrating, it also creates the opportunity to take advantage of the uncertainty by creating a convincing set of key metrics.
2. Analyses of your own company data. Analyze your recent income statements and balance sheets and use sensitivity analyses to build a picture of which variables most influence your firms profit and profit growth.
3. Analyst reports evaluating other firms in the target industry. You may want to get investment bank and stock market analysts’ reports about the target competitors or the target industry and look at the metrics that they use to evaluate company and industry performance. Cues as to the key industry profit metrics will appear in their comments about the reasons for industry profits.
4. Commercial bankers who specialize in loans to the target industry often keep ratios that they use to assess the riskiness of their loans to firms. They also have industry level data that you can use as benchmarks. So do factors, and sometimes even suppliers.
5. If there is an industry association check to see if it maintains firm and industry level metric databanks. Also scan the association publications and target industry publications for indicators.
6. Data may also be available in publications like Value Line, Compustat and other online data services. The Wharton School has a user-friendly financial analysis service (WRDS) with many on-line databases
7. New industry and competitive information is also being loaded on the World Wide Web at industry specific sites, such as E-Steel, investment sites such as those run by E*Trade and information oriented sites such as Hoovers.com.
8. You can get insights by scanning business publications and the business section of major newspapers and periodicals, notably The Economist. In particular look for commentaries about why the target industry is cooking – key cues to what the industry profit drivers are.
9. The business sections of libraries and bookstores, and specific web-sites that cover business (such as Hoovers.com) will often discuss how to evaluate the numbers..
10. Periodically, industry reports from Federal or International agencies (like the UN or World Bank) on specific industries are published.
11. Don’t forget to take advantage of the vast information available through search engines.
12. Finally, many guides to smart investing discuss how to dissect an industry or company’s numbers at length. You won’t go wrong with classics such as Benjamin Graham’s The Intelligent Investor (Graham, 2006, originally 1973).