What Management Is by Joan Magretta

Author:Joan Magretta
Language: eng
Format: epub
Publisher: Free Press

Numbers No Organization Can Live Without

In chapter 2, we described business models as stories, and focused on narrative logic as the test of a good model. Does the story make sense? Is it based on a sound understanding of who the principal characters are and how those characters are likely to behave? Numbers take you an important step further. If the narrative makes sense, the numbers will add up.

If your story about who your customers are and what they value makes sense, it will show up in the top line, in your revenues. If your story about how you will create value makes sense, that will show up in your costs. If your story about how you are different from other alternatives makes sense, it will show up in your profits and in your ability to generate cash. Revenues, costs, profits, and cash flow are the numbers no organization can live without.

The real story behind many of the failed ventures in the first wave of e-commerce is that this basic business math was missing. The grocery business, for example, has very thin margins to begin with. So, if customers won’t pay more for their purchases, and you’re adding costs in service and delivery without eliminating them anywhere else, there’s no way you can make the math work, as companies like Webvan discovered.

Both a firm grasp of the basics and the ability to make sense of numbers have become more critical than ever, because technology is continually increasing the amount of information at our disposal. With the advent of zip codes, area codes, credit card numbers, cookies, and so on, data collection and data mining have become professions. Computing power makes it feasible to match up numbers from different data sets. For example, a drug company today can learn precisely which doctors, by name, are prescribing which drugs.

Not only do managers have more data at their disposal than ever before, they have it faster, in so-called real time. Instead of getting information after the fact—often long after—you get it in time to intervene. You get to fix things on the fly. Real-time data about airline bookings, for example, allows sophisticated software to adjust fares just in time to fill seats that otherwise would have flown empty. Load management, as it is called, can make the difference between whether an airline makes money or loses it.

With so much data coming at you so fast, it is more important than ever not to get lost in the numbers, to keep a clear head about what you’re trying to do, and which numbers can help you find your way or stay on course. Without measurement, progress would be impossible. That said, however, managers have also been prone to periodic bouts of hubris, becoming so enamored of the quantitative tools they devise that they forget that tools are only aids to judgment. Even the best stopwatch won’t tell you what time it is, let alone how you should be spending your time.

Consider the legacy of the Whiz Kids.

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