TABLE 4.10.

SUMMARY JOB AID—ECONOMIC LOGIC

How the organization gets profit and growth

Definition Examples

Cost Structure Ask: Which is more of an issue for you: fixed or variable costs?
What are the key ones you focus on?
What are you doing to manage these key costs?

Fixed vs. Variable Fixed = Costs that are always incurred regardless of what
the business is doing.
Variable = Costs that change with the volume of business
that is available.
Organizations that have high fixed costs with relatively low
variable costs:
Organizations that have high variable costs, with relatively
low fixed costs:
Turbulence (rapid change) in the environment increases an
organization’s risk. Many businesses are trying to reduce
risk by switching fixed costs to variable ones.
Facilities, equipment, permanent staff
Short-term rentals, raw materials, merchan-
dise, temporary staff
Airlines, hospitals, refineries
Retail stores, general contractors, small con-
sulting firms
Downsizing, outsourcing, subcontracting,
leasing
 TABLE 4.10. SUMMARY JOB AID—ECONOMIC LOGIC (Continued )
Possibilities Definition Examples Businesses

Financial Focus Ask: Which is more of a cost issue for you: COGS or SG&A,or it is both?
Cost of goods sold The direct amount it costs to Companies that focus McDonald’s
produce a product/service: here are concerned with Wal-Mart
Inbound freight process and supply
Production costs chain redesign for
Materials optimal efficiency and
Manufacturing facilities lowest cost.
Manufacturing labor

Sales, general, and The costs a company has that are
administration expenses not directly related to
producing a product, including
the costs of running the
business as a whole, e.g.:
Sales/marketing costs
Distribution
Management
Human resources/ training
Companies that focus Just about all
here are concerned with of them
reducing fixed costs
in administrative areas
through outsourcing
and downsizing.

(Continued )
 TABLE 4.10. SUMMARY JOB AID—ECONOMIC LOGIC (Continued )
Definition Examples Businesses

Profit Source Ask: How does the company analyze where its profits come from?
Profit margins by product sector: Apparel Gap
Which product in inventory (e.g.,
desktop computers or laptops or Electronics Best Buy
monitors or printers or “extras”) Dell
produces greatest profits?
Profit margin by customer type: Retail Best Buy
new versus return
Nordstroms
Profit margin by market channel Pharmacy chain Walgreens
type: urban store versus suburban
store versus Internet; large store
versus smaller store
Profit margin by geographical region Retail Target
McDonalds

The Financial Picture: Ask: What are the key metrics your organization looks at to determine how well its Customer
Measures Logic is working?
1. Profit (overall, by market segment, by customer, by 8. Profitability:
product type) Return on investment (return on
assets, return on sales, and return
2. Costs (per unit versus competitors) on equity)
3. Cash flow (length of “cash-to-cash” cycle) Operating margin
Gross margin
4. Reinvestment (percentage, where) Net margin
5. Return on investment (benefits/costs) 9. Solvency:
6. Return on capital employed [revenue/organization Current ratio
asset (employees, etc.)] Total debt versus total assets
Debt to equity ratio
7. Earnings per share/price to earnings ratio Efficiency
Asset turnover (receivables turn,
payables turn, and inventory turn)
Collection period
© Lynn Kearny 2009. Reprinted with permission of Lynn Kearny.
 MEASURES WORKSHEET

Performance
Logic Measures Target Current Gap Interventions Measured Results
Problems

Economic

Strategy

Customer

Product

Process

Structural

• What specific measures does the organization use for each type of logic? Write them in column 2.
• What is the target for each measure? Write it in column 3.
• What is the current number for each measure? Write it in column 4.
• What is the gap between target and current number for each measure? Write it in column 5.
• Those measures with the greatest and most critical gaps are the focus of the performance problem analysis and intervention
selection that take place next in the performance improvement process.

© Lynn Kearny 2009. Reprinted with permission of Lynn Kearny.

 INTERNAL SCAN WORKSHEET
Assess and fill in the logic the business appears to be using.

ECONOMIC LOGIC STRATEGY LOGIC CUSTOMER LOGIC PRODUCT LOGIC PROCESS LOGIC STRUCTURAL LOGIC

• Do the logics in the six columns support each other or are they contradictory?
• If they are contradictory, does this have some bearing on the problem you were asked to solve?
• How can you test your assessment that these are the business logic(s) the company is using?
• Now review the logic in the light of your environmental scan. Do the six logics seem to be consistent with external realities?

© Lynn Kearny 2009. Reprinted with permission of Lynn Kearny.