[FoRK] RPE and understanding company performance

Dave Kammeyer kammeyer at kammeyer.org
Fri Jun 18 09:35:54 PDT 2010


On Thu, Jun 17, 2010 at 11:14 PM, Jeff Bone <jbone at place.org> wrote:
>
> You know, I've long been obsessed with EPE as a key indicator of...  something important about how different companies go about their business.  Wish more people paid attention to this metric and what it *means* --- particularly in terms of how to get things done.

My take on what it measures is that it's the average degree of
differentiation or uniqueness of strategy in a business.  In the
Mcdonald's example, Mcdonald's generates some of its profits from the
fact that it has a consistent product across lots of outlets, which
people are familiar with, and that it has created procedures to
produce the product at low cost. The other part of its profit is
actually following those procedures and providing the product.  The
first part is highly differentiated, and the second is not.

That doesn't mean though, that higher EPE is necessarily better, and a
lot of companies get into the trap of assuming that higher EPE is
necessarily better.  This metric is what started the outsourcing trend
in the nineties.  A company can get higher EPE by outsourcing
everything but the CEO, but it has less control of its operations that
way, and may be less profitable if outsourcing is less efficient than
doing the job in-house.

High EPE may also be indicative of a less stable business.  High EPE
means that the market will be attractive for competitors to attack.
There must therefore be some reason why the company is able to
maintain high EPE -- some competitive advantage.  If that advantage is
breached, the company could go from very profitable to out of business
quickly.  A low EPE business generally would be harder to attack
directly, because it requires capital and time to build up a large
organization that competes with it.  Of course, low EPE can be
disrupted, e.g. Amazon attacks Borders.

-Dave



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