Metrics Chapter 8 McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 8: Metrics Questions answered in this chapter: Why should senior managers be concerned about metrics? How can the health of online firms be assessed? What are the steps to implement the Performance Dashboard? What external sources of metrics information can firms use to chart their progress?

Why Senior Managers Should Be Concerned About Metrics Five ways in which metrics can have a positive effect on the growth and vitality of the organization: Help define the Business Model. Help communicate strategy. Help track Performance. Help increase accountability. Help Align Objectives.

Current Challenges to Specifying Metrics for Online Businesses Reasons why some firms have not made an explicit commitment to metrics: Companies’ strategies change rapidly. Measurement is Resource Intensive. Soft Metrics are not valued by the investment community. Meaningful metrics change on Internet time.

Assessing the Health of Online Firms The Balanced Scorecard: Introduced by Kaplan and Norton in response to their perception that managers overwhelmingly focus on short term financial performance. They argued that firms must balance their financial perspective by analyzing other domains of the business,including internal business processes and customer responses. They introduced 4 categories of metrics:Financial, Customer, Internal Business Systems, and Learning and Growth.

Assessing the Health of Online Firms (cont’d) Financial Metrics: They are designed to assess the financial performance of the company. Typical financial measures include revenue, revenue growth, gross margins, operating income, net margin, earnings per share and cash flow. Customer Metrics: Customer metrics are intended to assess the management of customer relationships by the firm. These measures typically focus on a set of core measurements, including market share, customer acquisition, satisfaction, and customer profitability.

Exhibit 8-1: The Balanced Scorecard – Strategy Into Operational Terms FINANCIAL To succeed financially, how should we appear to our shareholders? CUSTOMER To succeed financially, how should we appear to our shareholders? INTERNAL BUSINESS PROCESS To satisfy our shareholders and customers, what businesses must we excel at? Vision and Strategy LEARNING AND GROWTH To succeed financially, how should we appear to our shareholders? Source: Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review 74 (January-February, 1996): 76.

Assessing the Health of Online Firms (cont’d) Internal Business Process Metrics: These focus on operations inside the company. Kaplan and Norton divided them into three groups: Innovation Operations Postsale service Learning and Growth Metrics: These broadly cover employee, information systems, and motivation metrics.

Limitations of the Balanced Scorecard No clear definition of strategy or business models. Unclear location of organizational capabilities or resources in the framework. Unclear where partnerships reside in the framework.

Exhibit 8-2: The Performance Dashboard Market Opportunity Business Model Customer Branding and Marketing Strategy Implementation Metrics Market Opportunity Business Model Branding and Marketing Implementation Customer

The Performance Dashboard The Performance Dashboard is intended to reflect the health of a business. We first address the limitations of the Balanced Scorecard through features of the Performance Dashboard. The Strategy Framework drives the necessary metrics. Resources are featured in the resource system of the business model. Partnerships are featured in the resource system of the business model.

Components of the Performance Dashboard The Performance Dashboard is composed of five categories of metrics: Market Opportunity Metrics: Market opportunity metrics assess the degree to which the firm can accurately gauge the market opportunity. Generic indicators include the ability of the firm to include the most attractive segments, the ability of the firm to understand and map the competitors’ strategy evolution and the ability of the firm to track the evolution of target segment needs.

Components of the Performance Dashboard (cont’d) Business Model Metrics: Business model metrics capture the subcomponents of the business model: the value proposition, egg diagram, resource system, and financial metrics. Value proposition or Cluster Benefits: The value proposition is composed of three parts: target segment, benefits offered, and capabilities that drive the benefits. Metrics for this assessment would focus on customer perceptions of the benefits that a given site offers relative to competitors.

Components of the Performance Dashboard (cont’d) Online Offering Metrics: Metrics should reflect the entire decision process from pre- purchase to post purchase. Offering metrics focus more on the nuts-and-bolts features, attributes and functionality of the site. Resource System Metrics: The resource system is based on the benefits offered to consumers. From these benefits, the firm would analyze the capabilities that are necessary to supply the benefits. Financial Metrics: Captures the revenues, costs, profits, and balance-sheet metrics of the firm

Components of the Performance Dashboard (cont’d) Marketing and Branding Metrics Marketing and Branding Metrics: These focus on marketing communications and branding effectiveness. Implementation Metrics Implementation Metrics: These focus on the effectiveness of a company’s human resources program as well as its processes, organizational structure, systems (including information, incentives, and rewards), coordination mechanisms, culture and management style, and technology systems.

Components of the Performance Dashboard (cont’d) Customer Metrics Customer Interface Metrics: Measures the customer’s experience with the technology interface; that is, the customer’s response to the 7C’s of the interface. Customer Outcome Metrics: This captures output metrics such as overall costs of satisfaction, average order size, and customer profitability.

Exhibit 8-3: Life Cycle of a Company STARTUP/ BETA CUSTOMER ACQUISITION MONETIZATION MATURITY 6 Months- 1 Year 1 Year - 2 Years 2 Years - 5 years > 5 Years Strategy Develop a platform for rapid growth by building a strong team and creating a flexible site. Build market share as quickly as possible by aggressively spending on partnerships and promotion. Increase revenues and customer lock-in by developing new revenue streams. Control costs and optimize marketing expenditures to achieve profitable growth. * At time of writing (February 2001)

Implementing the Performance Dashboard Step One: Articulate Business Strategy Step Two: Translate the Strategy into Desired Outcomes Step Three: Choose Metrics Step Four: Link Metrics to Leading and Lagging Indicators Step Five: Calculate Current and target Performance

Exhibit 8-4: Blueprint for the Performance Dashboard Step One: Articulate business strategy Step Two: Translate strategy into desired outcomes Step Three: Choose metrics Step Four: Link metrics to leading and lagging indicators Step Five: Calculate current and target performance Market Opportunity Opportunity size? Competitive environment? Market Opportunity Market size and growth Average age and income Competitor concentration Business Model Unique value proposition? Capabilities vs. competition? Business Model Customer-perceived benefits Exclusive partnerships More invested in technology vs. competition For each metric, determine the metrics that it affects and that affect it Map the linked set of metrics, indicating leading and lagging indicators Ensure that there is a balance between leading and lagging indicators For each metric, calculate current level of performance Determine target level required to meet outcomes described in Step Two Ensure that targets are consistent Marketing How to develop brand? Marketing Customer brand awareness Define goals and value proposition Develop resource system required to deliver the strategy Implementation System uptime percentage Number of IT staff Percent of inaccurate orders Implementation How to go to market? Customer How to acquire customers? How will customers change? What is customer experience? Customer Market share Purchases per year Success rate Service request frequency

Exhibit 8-5: Metrics for Seamless Online / Offline Customer Purchase Process AWARENESS Awareness of online offering vs. offline offering Perceived benefits of Web vs. offline offering KNOWLEDGE Prepurchase Available offering information online vs. offline Currency of information online vs. offline EVALUATION OF ALTERNATIVES PURCHASE Security and privacy associated with purchasing online vs. offline Purchase SATISFACTION Response time online vs. offline Customer loyalty and incentive programs online vs. offline LOYALTY Postpurchase DISPOSAL Exchange policies online vs. offline

Exhibit 8-6: Metrics for Seamless Internal Business Processes and Operations Ability to open accounts online and offline Ability to access accounts online and offline Integrated customer databases Information Sharing Seamless order processing Seamless order tracking Integrated inventory systems Fulfillment Systems

External Sources of Metrics Information Firms are likely to track their value proposition versus competition, customer satisfaction with the site, site usability and financial outcomes. Online Information: Market Research: Online market research firms collect primarily customer data through online surveys or customer submissions. Analyst Reports: Analyst reports are data sources that blend primary market data on a particular topic with an analyst’s view of the market. Financial Information: These data sources principally provide statutory filings of financial information on particular companies or aggregated financial data across industries. The data collected generally includes income statement, balance sheet and statement of cash flow information.

Exhibit 8-7: BizRate—QVC

Exhibit 8-8: Forrester

Exhibit 8-9: Mapping Internet Research Onto the Performance Dashboard Financial Information Market Research Analyst Market Implementation Customer Financial

Marketwatch.com Metrics Application Step one: Articulate the Marketwatch.com Strategy Value proposition: “To be a leading Web-based provider of comprehensive, real-time business news, financial programming and analytic tools.” Marketwatch.com Offer: The aim is to deliver three key benefits to users: real-time information, comprehensive and in-depth analysis and tools and multimedia access. Resource System: Consists of three layers. Core benefits delivered to users as described in the company’s offer. Capabilities that must be in place to deliver the core benefits. The activities and resources that need to be retained to deliver these capabilities.

Exhibit 8-10: MarketWatch.com Strategy “To be a leading provider of comprehensive, real-time business news, financial programming, and analytic tools.” 1. Value Proposition 3. Resource System 2. Marketspace Offering

Marketwatch.com Metrics(cont’d) Steps Two and Three: Translate Strategy into Outcomes and Metrics. An effective way is by asking key questions for each of the five categories. Market Opportunity: Is the opportunity significant? How intense is the competition? Business Model: How unique is the Markwetwatch.com value proposition relative to competitors? Are the Marketwatch.com resources and Partnerships significantly better than competition’s? How sustainable is the Marketwatch.com’s value proposition relative to the competition’s? Will MarketWatch.com be able to maintain profitability?

Exhibit 8-11: MarketWatch.com Desired Outcome Summary Market Opportunity Significant opportunity Moderate degree of competition Implementation Business Model Best-in-class IT infrastructure Better value proposition than competitors Better capabilities than competitors Revenue and profit Strategy Marketing and Branding Customer Better brand awareness than competition User acquisition User online behavior User satisfaction and loyalty

Marketwatch.com Metrics(cont’d) Marketing and Branding: How effective and efficient is the Marketwatch.com’s marketing efforts at attracting new users? How is the MarketWatch.com brand perceived in the market? Implementation: Does Marketwatch.com have an infrastructure that enables it to reliably distribute financial content across multiple platforms?

Marketwatch.com Metrics(cont’d) Customer: What is the perception of the online user experience? How satisfied and loyal is the user base?

Marketwatch.com Metrics(cont’d) Step Four: Link Metrics to leading and Lagging indicators. The fundamental question is “How do we link the metrics to each other?” Knowledge of this interrelation will help management understand which groups of leading indicators it needs to focus on in order to achieve its target performance on lagging indicators. A unique value proposition that is marketed successfully will lead to creation of a strong brand and high brand awareness among users. This will stimulate usage which will lead to an increase in ad revenue because there will be more users viewing more pages resulting in profitability.

Exhibit 8-12: Leading/Lagging Indicators for MarketWatch.com Market Opportunity Business Model Implementation and Branding Customer Interface Financial Competition underserving market Unique value proposition Build brand Brand awareness Usage Ad revenue Satisfaction and loyalty Attractive segments that company can serve well Attractive offering to users Develop improved offering to users Other revenue sources Profit System reliability Leverage capabilities to deliver offering Invest in IT infrastructure Optimized system costs

Marketwatch.com Metrics(cont’d) Step Five- Calculate Current and Target Performance. A successful strategy needs to be implemented by setting targets and taking actions to reach those targets. In many cases, the target performance is to become the best performer in a metric.

Exhibit 8-13: MarketWatch.com Best-in-Class Metrics Source: comScore Media Metrix