This is “How Management Control Affects Resources”, section 3.2 from the book Business Strategy (v. 1.0).
This book is licensed under a Creative Commons by-nc-sa 3.0 license. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms.
This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book.
Normally, the author and publisher would be credited here. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Additionally, per the publisher's request, their name has been removed in some passages. More information is available on this project's attribution page.
For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. You may also download a PDF copy of this book (4 MB) or just this chapter (760 KB), suitable for printing or most e-readers, or a .zip file containing this book's HTML files (for use in a web browser offline).
Why are we so concerned about this “bathtub behavior” that all resources follow? Remember the problem we set out to solve, namely, what determines performance through time and how can management affect performance in the future. The logic is simple:
Consider your restaurant and see how these connections work (Figure 3.4 "How Changing Customer Numbers Drives Performance Over Time (for clarity, some items are not shown)"). In Chapter 2 "Resources: Vital Drivers of Performance" we looked at how the number of meals sold and the operating profits had changed during the previous 12 months and showed how these figures were driven by the number of customers and staff. Following the same logic, we next need to know what happened to customers and staff to bring about the performance history in Figure 2.1 "The Explanation for Restaurant Sales and Labor Costs" and the inflows and outflows to these two resources.
It is crucial to explain why the resource of customers developed over time as it did, and the only way to do this is to understand the flows (Figure 3.5 "The Net Flow of Customers Into and Out of Your Regular Customer Group").
Figure 3.4 How Changing Customer Numbers Drives Performance Over Time (for clarity, some items are not shown)
Figure 3.2 "Working Out Growth and Loss of Customers Through Time" and Figure 3.3 "The Change in Customer Numbers Over Time" label the flows entering and leaving the customer resource as “Customers won/lost during the month.” This is always the relationship between resources and the flows that fill or drain them: Whatever the resource in the tank, the flows are “[resource] per [time period].”
There is never any exception to this rule!
Figure 3.5 The Net Flow of Customers Into and Out of Your Regular Customer Group
You can put flesh on these bones. By asking your customers if and when they have previously visited, you get a good idea of the inflow rate. Although you cannot easily ask how many people become ex-customers each month (because they are not there to be asked!), you can work out what the outflow must have been to reconcile with the net change each month (Figure 3.6 "The Separate Flows of Customers Into and Out of Your Regular Customer Group").
Figure 3.6 The Separate Flows of Customers Into and Out of Your Regular Customer Group
If your restaurant experienced only the flows shown in Figure 3.5 "The Net Flow of Customers Into and Out of Your Regular Customer Group", you might be tempted to take the complacent view that nothing much is happening. Apart from the two puzzling spikes of customer gains around month 7 and losses around month 11, everything seems to be ticking along steadily enough.
But appearances are misleading. During the middle period, turbulent activity is taking place, with lots of customers arriving and many others leaving. In fact, customer churn is so rapid that by months 9 and 10, you are almost certainly losing many of the customers that your marketing efforts brought in just a short time before.
The factors driving resource gains are typically quite different from those driving losses, so you stand little chance of solving these challenges without distinguishing between the two flows.
Always try to identify resource “gain” and “loss” rates separately.