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By Charles L. Colby, Founder and Chief Methodologist, Rockbridge Associates, Inc.
We all use indexes in our everyday lives to compare, contrast and judge anything from our blood pressure to the stock market. Managers rely on many common indexes to gauge important trends like consumer confidence and quality. By employing sound methods, researchers can also develop powerful indexes to help managers make timely decisions for their own organizations.
A properly developed index serves as a solid management tool because it has two useful properties that relate to validity and reliability. First, the index is able to predict and explain outcomes important to the business. For example, a sound service quality index will predict customer retention, sales and share of wallet. Second, the index is stable, meaning that it changes and varies due to real world factors and not just randomness in how people answer questions. For example, a service quality index should vary because of changes made in the delivery and not a random fluctuation.
While many indexes are reported in the public domain (see inset), many are proprietary and used for decision-making within a company. For example, a number of Rockbridge clients rely on a service quality index to evaluate their performance in meeting customer needs in key business areas. Other clients rely on a brand health index to monitor trends in how they are perceived in the marketplace.
Examples of Public Indexes: Many well known indexes are promoted in the public domain, such as the American Customer Satisfaction Index (ACSI) by the University of Michigan, and the Consumer Confidence Index by the Conference Board. Rockbridge compiles and tracks two public indexes, the Technology Readiness Index and the Small Business Success Index.
The Technology Readiness Index (Techqual™) (www.technoreadymarketing.com) - in partnership with the Center for Excellence in Service at the Robert H. Smith School of Business and A. Parasuraman, the index monitors technology receptiveness in the U.S. Population. The baseline index was set to 100 in 1999, and was 103.3 a decade later, indicating a lack of change in beliefs. The full index is based on 36 positive and negative belief statements about technology.
The Small Business Success Index™(SBSI) (www.growsmartbusiness.com)- conducted for Network Solutions, LLC and the Robert H. Smith School of Business, the index monitors the competitive health of America's small businesses. The index is based on 28 self-reported ratings of success in areas like capital access, marketing, workforce, etc. The index in June 2009 was 75 out of 100, indicating a "solid C" in competitive success.
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Indexes can convey important information depending on the context in which they are read. A baseline is the index level at a critical time juncture such as the first time it is measured, or a period when a strategy is overhauled. In either case, the issue of interest is the level of change. For example, a company may quantify its level of service using a composite of various ratings of performance in a baseline study, and then monitor changes every year against the baseline as part of a process of continuing improvement.
A benchmark is an external comparison measure, such as the average index within an industry or the level of performance of best-in-class competitors. For example, a company may quantify the strength of its brand with an equity index and apply the measure against competitors to determine its relative strength. Benchmark measures will identify opportunities for "leapfrogs" by highlighting industry-wide weaknesses that equate to unfulfilled latent needs.
An index can also serve as a barometer by calibrating it to have meaning even if it is not trended or compared against a benchmark. For example, the Small Business Success Index™(see inset) can be interpreted through the actual values that range from 0 to 100. By comparing index levels with other measures in the same survey, we know that small businesses with a value of 85 or above tend to have more satisfied owners and be growing, while those with values below 65 tend to be failing. Similarly, we have developed brand health indexes that show whether a brand is gaining positive momentum, negative momentum or is stable.
A meaningful index is developed through a rigorous process. Ideally, an index development process will start with exploratory research that identifies a wide range of potential measures that capture the construct of interest. Next, a baseline survey is conducted in which opinions are quantified for a large list of attributes that could potentially explain the core construct. An index is more valuable if it can be decomposed into diagnostic dimensions, so factor analysis is used to statistically determine empirical groupings of survey attributes. For example, in our work on our Techqual™ Index (see inset), we identified four dimensions that explain the construct of technology readiness: innovativeness, optimism, discomfort, and insecurity.
In the next stage of development, attributes within each dimension are selected based on how well they contribute to explaining the underlying construct and correlate with other measures that the index should predict. While the process for selecting index attributes takes some art, the list is checked for statistical reliability using a standard measure such as Cronbach's Alpha, and for validity by correlating it with other items in the baseline survey. For example, in developing a green technology adoption index, Rockbridge correlated the index with self-reported behaviors such as recycling and buying green technology. Once the index measures are determined, individual measures are combined to create a meaningful metric. For example, the Small Business Success Index™ weights six dimension by their relative correlation with a measure of owner satisfaction.
Developing a meaningful index requires time and resources in order to implement the steps described. In the long run, the process saves time and resources by providing a powerful but accessible metric that guides management decision-making.
For more information about developing and using indexes, contact Gina Woodall, SVP at 703-757-5213 ext. 11 or gwoodall@rockresearch.com, or Charles Colby, President, at 703.757.5213 ext. 12 or ccolby@rockresearch.com.
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