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This microbook is a summary/original review based on the book: What the CEO Wants You To Know: How Your Company Really Works
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Are you the CEO of a company and wondering how to create a profitable business? Or are you simply interested in learning about business theory? Either way, in “What the CEO Wants You To Know,” Ram Charan will answer your questions. He introduces the idea of business acumen as a central aspect of leadership and explains the basic building blocks of business: cash generation, return on assets, growth, and customers. So get ready to learn how to create and lead a successful business!
What does Jack Welch, the CEO of General Electric (GE), have in common with a street vendor? It is not just that they both run a business. No matter who you talk to - whether it is a street vendor in Barcelona or Hong Kong or the CEO of a large company - they all speak the universal language of business.
When it comes to running a business, both CEOs and street vendors around the globe think very much alike. And indeed, many CEOs have their roots in much simpler businesses. Jac Nasser, the CEO of Ford, started out in his small family business.
Great CEOs have business acumen. They understand how business works and what they need to do to become successful. The best CEOs are like the best teacher you ever had: They can take the extraordinarily complex world of business and simplify it so that everyone at their company understands it.
Chances are that you have worked in one department of your company for most of your career. Sales, production, and finance are business functions, but are also sometimes called chimneys, or silos, because you climb them without ever seeing the full picture.
When everyone at a company understands the basic building blocks of business, people will derive greater satisfaction from their jobs and feel more connected to them. The entire company is affected by such a development; you develop profitable growth, which means both the top line growth (sales) and the bottom line growth (profits) increase.
Understanding business is really not that difficult. To develop business acumen, the author writes, you simply need to understand the basic building blocks of business and how they are connected. Think of it like learning chemistry. Once you understand that the basic building blocks of an atom are protons, electrons, and neutrons, you have all you need to solve any problem in chemistry. When you understand the language of business, you will be able to see the company as a whole and be in a better position to make informed decisions at every level.
So what are these building blocks of business? There are three parts that have to do with making money: cash generation, return on assets (which combines margin and velocity), and growth. The final building block is customers. It really is that simple, no matter the size of your business!
Let’s look at cash generation first. This is the difference between the inflow and the outflow of cash in your business. An inflow of cash is often created through sales, while an outflow can take the form of salaries, taxes, and paying suppliers. For a street vendor, who pays and sells on the same day, income and cash are the same. This concept works much differently in a larger company.
In large companies, a credit is often extended. This means that they have accounts receivable and accounts payable or, money owed to them and money they owe. If you do not work in the finance department of your company, it can be easy to lose sight of cash – but do not forget that everything you do on a daily basis either costs or generates money.
Making money is not as simple as making a profit - there is more to it than that. Whatever size your company is, you are growing it with someone else’s money, the investment capital. This can be used to create inventory (products) or to buy equipment, for example. These are assets: the things you have invested in. One important part of making money is to understand your return on assets. This is a combination of profit margin and velocity.
The profit margin is the amount of money the company earns after having paid all the expenses, including taxes. Velocity refers to speed, turnover, or movement, and in the context of business, it describes the movement of products through the factory to becoming finished products, and then from the shelf to the customer.
If you multiply margin and velocity, you can calculate your return. It does not have to be precise, but by looking at the return on assets you can get a feeling for how your business is doing. A great business has a return on assets higher than 10%.
For your company to prosper, you need growth. If you do not grow, you will eventually be taken over by your competition and you will cease to make any profits at all.
Apart from creating more profit, growth has a few other positive effects as well: it attracts new people with innovative ideas to your business and creates new opportunities. Nevertheless, you should not simply grow for growth’s sake. Growth needs to happen profitably and sustainably: it needs to be accompanied by improved margins and velocity.
It can be tempting to let early success get to your head. Let’s look at the example of a young entrepreneur who did just that. He had built a business installing beverage equipment and was obsessed with growth. He started expanding the company even though his profit margin was so slim that it did not cover the interest payments or the money he had borrowed. Eventually, he went bankrupt.
The final building block of business is customers. You need to know your customers well in order to run a profitable business. That is easy for street vendors, but the CEOs of large companies can often lose direct contact with customers as they climb the corporate ladder.
A good CEO never does that. CEOs such as Walmart’s Sam Walton or Ford’s Jac Nasser always keep in touch with their customer base. Walton regularly visited his retail stores while Nasser still travels around the world to see how consumers are using Ford cars and trucks. You need to stay involved with your customers to learn what they want and to constantly evolve as a business. Never rely on clinical data alone.
Now you know the basic building blocks of any business. But the larger the business, the more complex it gets. A street vendor may have an easy time deciding what his business priorities are, but how does this work in larger companies?
An exceptional business leader knows how to scan the environment and identify emerging patterns and trends. This is where you use your business acumen to identify those trends. The author says that you must always consider the external and internal variables, and look at present status and future projections. That way, you will be able to see how these variables might come together in the future. Ask yourself, “How might the fundamentals of money making work together given your ideas about patterns and trends?”
Let’s look at Dell as an example. They have always made low inventory their business priority – after all, Dell is in the quickly evolving PC industry, so having products sitting on shelves is a big risk. Also, prices for PC parts are always falling, so by maintaining low stock, Dell can continually develop PCs at lower prices for the customer.
General Electric’s CEO Jack Welsh also used his business acumen to identify outside trends and eventually created enormous value for the GE shareholders. During the Cold War, he had the option to either expand on his aerospace business or sell it. After evaluating projected growth, return on assets and cash generation, Welsh decided it was best to sell. He sold it to Martin Marietta, who eventually became Lockheed Martin, the largest defense contractor in the world. GE then sold its shares in Lockheed Martin at a tremendous price.
Your business acumen allows you to reduce complexity to simplicity. And that is helpful even when you are not the CEO, as this skill allows you to make the correct decisions every day.
Business acumen alone will not get you far. To become a successful CEO, you also need great judgement of people. At your company, you need to put the right people into the right positions, and then synchronize their efforts with your business priorities.
The author writes that you need to create “Social Operating Mechanisms.” Take Walmart as an example. In the early 1990s, 30 regional managers would go into nine Walmart stores and six competitor stores, twice a week. They would buy a basket of goods and compare the prices, to make sure that Walmart was keeping its promise of offering lower prices than anywhere else.
By having no information filters between the regional managers and the stores, Walmart could ensure timely quality management. On top of that, CEO Sam Walton would conduct a four-hour meeting session once a week with around 50 managers, including the regional managers who had visited the stores. These meetings ensured that every participant was getting a full picture of the business, meaning that important decisions such as moving inventory could be made immediately.
To create functional Social Operating Mechanisms at your company, you need to first sort out your business priorities. Then, make sure you have systems in place that enable a flow of information and get the right people talking. Meetings are a popular way of synchronizing people’s work, but they are usually weak functions in Social Operating Mechanisms. Often, meetings are characterized by fragmented dialogue and a lack of leadership – sometimes, they are even used to blame others, rather than getting work done.
To create Social Operating Mechanisms that work, you will have to be more creative than that. Maybe a conference call or short meetings that bring together the right people are better solutions for you?
A great CEO is defined by his business acumen and his good judgment of people. Anyone can develop business acumen by learning about the basic building blocks of business: three blocks for generating money (cash generation, return on assets, and growth) and the final block, customers. These four blocks define any business, large or small. By knowing what these mean and how they connect, you can solve even the most complex business problem.
CEOs and leaders around the world are fans of “What the CEO Wants You To Know.” Dave Robino, vice chairman of Gateway Computer, says, “Reading this book is like putting on a pair of glasses - suddenly the guts of the business are crystal clear.”
Look at the kind of industry your business operates in and adapt your business priorities accordingly.
Ram Charan is an Indian-American consultant, speaker, and writer. He owns the business management consulting company Charan Associates in Dallas, Texas and has consulted for companies such... (Read more)
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