What the Best CEOs and Street Vendors Share
When it comes to running a business, street vendors and the CEOs of the world’s largest and most successful companies think exactly the same way. The complexities of their businesses are different; their approach is not. Anyone who figures out a clear way to make money has business acumen, or what some people call ‘street smarts’.
4 Things Every Company Needs to Master
It all starts here. If you don’t have a customer, you don’t have a business.
At your company, you may talk about the people who buy your products as “customers.” But they may not be the people who ultimately use the product—the “consumers.” It’s important to understand both. When P&G develops new products, it tries to understand the needs and wants of the consumer, but many of its processes—logistics, discounts, merchandising—are geared to serve customers such as Target.
As you think about both consumers and customers, keep it simple and specific. What are consumers buying? It might not be the physical product alone. Maybe they’re buying reliability, trustworthiness, convenience, service, or the entire customer experience, whether in the store or online.
#2 Cash Generation
Cash generation is one of several important indications of your company’s moneymaking ability.
Don’t lose sight of cash generation—the difference between all the cash that flows into the business and all the cash that flows out in a given time period.
An astute businessperson wants to know: Does the business generate enough cash? What are the sources of its cash generation? How is the cash being used? Businesspeople who fail to ask these questions and/or don’t figure out the answers eventually stumble.
Cash generation can be a problem for even the largest companies for any number of reasons: margins are too low, expenses are too high, or it takes too long to collect receivables, for example. The automobile industry has a history of having problems with cash generation. Chrysler ran out of cash in the early 1980s; Volkswagen did, too, in the late 1980s. And the classic example is probably GM, which was forced to file for bankruptcy in 2009. When you don’t have enough cash and you can’t borrow, you go bankrupt.
Running out of cash is also a common problem for start-ups in Silicon Valley and elsewhere. It takes longer to get the product into the marketplace than expected, or the costs of getting under way are substantially higher than budgeted.
No matter what kind of organization you work for—a for-profit company, a nonprofit, or a government agency—understanding where the cash comes from and where it goes is important. All people in an organization, not just those in finance, need to know how their job affects cash generation (or consumption) if their career is going to thrive.
#3 Gross Margin and Return on Invested Capital
A key part of cash generation is understanding gross margin.
Gross margin is calculated by taking the total sales for the company and subtracting the costs directly associated with making or buying it. Those are things such as the cost of the material used to create the products along with the direct labor costs.
In the early days of the personal computer, the PC industry enjoyed gross margins approaching 38 percent. Then came the era of intense competition. The price of a PC fell dramatically, which shaved gross margins dramatically to 12 percent. To survive, PC makers had to change their entire business approach. IBM got out of that business, and Dell went private, which relieved it of the pressure from shareholders to deliver quarterly earnings as it shifted its strategy.
Another key part of cash generation is understanding return on invested capital. Return on invested capital is calculated by taking the net income and dividing it by total capital – your money plus any money you’ve borrowed. Keeping track of this number is critical because there is often a perfect correlation between how well a company uses its capital and how its CEO is perceived.
Today, no growth means lagging behind in a world that grows every day. Either you are growing or you are dying.
But growth for its own sake doesn’t do any good. Growth has to be both profitable and sustainable. Sometimes senior management inadvertently encourages unprofitable growth by giving the sales force the wrong incentives.
One $16 million injection molding company rewarded its sales reps based on how many dollars’ worth of plastic caps they sold; they were not accountable for profits. Everyone was excited when the company landed $4 million of new sales from two major customers, but these large contracts were on slim margins, not enough to generate the cash needed to fund the sales.
This Is What the Best CEOs Do
Superior CEOs use their business acumen to test the logic of their priorities and the path they are setting the business on. They consider what will happen to the company’s moneymaking as a result by revisiting the basics—customers, cash, return on invested capital, and growth—as they shape the future.
Take, for example, Steve Jobs and the invention of the personal computer. The necessary components—the monitor, disk drives, mouse, keyboard, microprocessors, software, and printer—all existed in the mid-1970s. The seeds had been planted, yet Apple caught the office-automation giants like Wang and Digital Equipment off guard when it introduced its first computer in 1976.
Jobs, working with Steve Wozniak, had the ability to see the moneymaking potential of a machine that promised independence and freedom. No venture capitalists were needed to get Apple off the ground. It made money in its first month and hit a billion dollars in sales within ten years. Today revenues are well over $200 billion and the company’s net profit margins average 20 percent.
Execution In a Nutshell
Here’s a quick primer on how to work efficiently:
- Be totally clear on what you want to accomplish.
- Break goals down into time segments (“We will have this done in a week; that in a month”) and milestones (“We know we will be halfway there when we do X”).
- If you run into an obstacle, ask for help.
- Constantly monitor progress, and follow through.
That last one may be the most difficult thing to do. Bright people hate following through. For one thing, they believe it is micromanaging. For another, they think it is somehow demeaning to their subordinates to check up on their work.
But you have to follow through to make sure that what you said is clear and that progress is being made.
The Right People in the Right Jobs
Every business needs the right people in the right jobs. The modern corporation is built on the idea of “professionals” who use their particular talents to help the business succeed. No matter what the job, if the person making decisions is.
Leaders who deliver results consistently over a long period of time are the ones who recognize what an individual can do best. They link the business need and the person’s natural talent. They take the time and effort to place individuals where their strengths can have the most impact.
If you were Sam Walton and you were trying to build your business, how would you select people to run your stores? You would look for employees who truly want to understand the customer and who are fixated on selling reliable goods at a price lower than the competition’s. Making money in the retail business means managing margin and inventory velocity and growing volume. If you can’t find people who understand that, you will never achieve your dream of becoming a retailing giant.
Sam Walton carefully selected people who met those criteria, and he developed and trained them. Employees were taught to watch revenues, price, inventories, and customers like the proverbial hawk. And they had considerable autonomy to make decisions and take action.
You want to also consider the mindset of the other person. Does he or she have an inner drive to succeed? Is the person open to change?
For example, you want to know the mindset of a plant manager. If he’s used to two inventory turns a month and you tell him you’re going to thirty turns, how will he react?
People who do well in a job also need attention. A true leader expands such employees’ capacity by helping them channel their talents and develop their abilities so they can advance to the next level.
Perhaps you think you give people feedback when you do their annual performance review. In reality, performance reviews are rarely used to develop people. Most of the time they’re simply a way to communicate a salary change based on last year’s performance, or they’re used to justify a promotion. That is not the way to help people grow and develop.
So what is the right way? Building on the person’s strengths with feedback that is honest and direct. No sugarcoating. Use every encounter as an opportunity to coach. The sooner the better.
Your Part in the Big Picture
Link your own priorities to the big picture.
If you’re in human resources, for example, you can help people break out of their silos, and coordinate efforts with people elsewhere in the company to help ensure that the company has the right people in the right jobs.
If you work in information technology, maybe you can create links with customers and suppliers so your company can collaborate more easily.
An in-house attorney can help by keeping up to date with legislative changes globally and staying alert for new opportunities that might arise as a result.
Those in finance can assist with many kinds of decisions—whether to add capacity, how to improve pricing for better margins, where best to deploy cash, and the like—by providing accurate and timely information.
Maybe you can break new ground by coming up with a novel idea that relates to the overall business. Maybe you can help by simply reframing an issue, bringing the underlying assumptions to the surface, and challenging them.
What does it mean to reframe an issue? Here’s an example.
Say you work for a car company and there is a need to cut costs on next year’s model. Put on your businessperson’s hat and ask, “Are there features that customers don’t care much about and that can be eliminated to reduce cost?”
Instead, you can ask what customer needs are not being met. If you can meet them, would that create value, allowing you to raise prices? If so, how would that affect volume and utilization of manufacturing capacity?
Don’t be afraid to take a step back to get a total picture of your business. You always want to look at things from different vantage points to try to broaden the range of moneymaking options. Apply your common sense. And your business sense. You will be surprised how many good ideas you can generate.
It’s Your Turn
Don’t let what you read become just another intellectual exercise. Be prepared to answer this question:
What are you going to do to help your company’s moneymaking efforts in the next 60 to 90 days?
Let the excitement begin!