What the CEO Wants You to Know : How Your Company Really Works

The universal laws of business success . . . no matter whether you are selling fruit from a stand or running a Fortune 500 company. Have you ever noticed that the business savvy of the world's best CEOs seems like a kind of street smarts? They sense where the opportunities are and how to take advantage of them. And their companies make money consistently, year after year. How different is it to run a big company than to sell fruit from a cart or run a small shop in a village? In essence, not very, according to Ram Charan. From his childhood in India, where he worked in his family's shoe shop, to his education at Harvard Business School and his daily work advising many of the world's best CEOs, Ram understands business as few can. The best CEOs have a knack for bringing the most complex business down to the fundamentals -- the same fundamentals of the family shoe shop. They have business acumen -- the ability to focus on the basics and make money for the company. " "What the CEO Wants You to Know captures these insights and explains in clear, simple language how to do what great CEOs do instinctively and persistently: * Understand the basic building blocks of a business and use them to figure out how your company makes money and operates as a total business. * Decide what to do, despite the clutter of day-to-day business and the complexity of the real world. Many people spend more than a hundred thousand dollars on an MBA without learning to pull these pieces of the puzzle together. Many others lack a formal business education and feel shut out from the executive suite. What the CEO Wants You to Know takes the mystery out of business and shows the secrets of success used by business legends like Jack Welch of GE.

Chapter 1

What Jack Welch and Street Vendors Share

The Essence of Business Thinking

Chances are that sometime in your life you passed through a city or town where people were selling goods from tables and carts right there on the street. Anywhere you go in the world, you can find street vendors hawking their wares. In Chicago, Mexico City, São Paulo, Bombay, Barcelona, San Francisco, New York. Anywhere.

If you bought something, you probably made your purchase quickly and went on your way. It didn't occur to you to talk to the street vendors about business. After all, what they do is very simple. What could you possibly learn from them?

But if you did talk with street vendors about how they make a living, you would notice something surprising. No matter where they live, what they sell, or what culture they come from, they talk about-and think about-their business in remarkably similar ways. They speak a universal language of business. They practice a universal law of business.

Even more surprising is that the street vendor's language is the same as Jack Welch's language (he's the chief executive officer of General Electric Company, named the best manager of the century by Fortune magazine) and Michael Dell's language (you've heard of Dell Computer) and Jac Nasser's language (CEO of Ford). It's the same as Jorma Ollila's (CEO of the Finnish company Nokia) and Nobuyuki Idei's (CEO of Sony).

In other words, when it comes to running a business successfully, the street vendor and the CEOs of some of the world's largest and most successful companies talk and think very much alike. There are differences, of course, between running a huge corporation and a small shop, and we'll get to those, but the fundamentals, or basics, of business are the same. People like Jack Welch, Michael Dell, and Jac Nasser manage and lead large numbers of people in huge, global organizations. They are often referred to as managers or leaders, but they think of themselves as businesspeople first, not unlike street vendors.

I know because I've been permitted to observe some of these business leaders and others like them firsthand. For more than three decades, I have had the privilege of working one-on-one with some of the most successful business leaders in the world, including Larry Bossidy, formerly of AlliedSignal; Dick Brown of EDS; John Cleghorn of Royal Bank of Canada; Chad Holliday of DuPont; Jac Nasser of Ford; John Reed, formerly of Citigroup; and Jack Welch of GE. I have seen the way their minds work, the way they cut through the largest and most complex issues to the fundamentals of business.

I learned those fundamentals as a child growing up in a small agricultural town in northern India. There I watched my father and uncle struggle to make a living selling shoes from their small shop, a joint family enterprise. With no experience and no formal training, they competed head to head against others in the town who were also trying to eke out a living. My family learned, and over time they built a name brand and earned the trust of the local farmers, who were their customers. Other shops have come and gone, but ours has flourished, and my nephews continue to run the shop to this day.

That shoe shop paid for my education and allowed me to venture far beyond my roots. At the age of nineteen, with an engineering degree in hand, I took a job at a gas utility company in Sydney, Australia. The CEO discovered that I had a nose for business, and I soon found myself devising marketing plans and pricing strategies instead of designing pipeline networks. My interest in business proved to be irrepressible, and that CEO encouraged me to go to Harvard Business School, where I earned an MBA and a doctorate, and where I later taught. Since then, I have had the opportunity to advise dozens of CEOs around the world and to teach business to thousands more.

In my early days of consulting, as I worked with businesses of different sizes, in different industries and different cultures, I was struck by the similarities among successful business leaders. I saw that regardless of the size or type of business, a good CEO had a way of bringing the most complex business down to the fundamentals-the same fundamentals I learned in the family shoe shop.

My experiences over the past few decades have convinced me beyond doubt that the same universal principles, or laws, underlie every business, from the street vendor's business, to the shoe shop, to the businesses run from the executive suites of the Fortune 50. The most successful business leaders never lose sight of the basics. Their intense focus on the fundamentals of business is, in fact, the secret to their success. Like the street vendor, they have a keen sense of how a business makes money. This ability to apply the universal laws of business is what I call business acumen.

Remember Your Roots

Many successful CEOs have had experiences early in their lives similar to that of a street vendor, giving root to their business thinking. Jac Nasser of Ford first made his living in his family's small business. Think of the challenges a small business owner faces. He has to decide what customers to try to attract and how to draw them in, what items to provide and how to price them, what raw ingredients to buy and how much to pay for them, what kind of atmosphere to offer and how to create it, and he has to put in long, long hours. If he makes a profit, saves some money, and has the right people around him, he can grow the business. Every decision matters.

The family business is where Jac Nasser learned the universal language of business and first tested his business acumen. He now speaks the same language at Ford, the second-largest automotive company in the world.

Do you speak the universal language of business? Do you understand the fundamental laws that underlie every business? Do you have business acumen?

Chances are, you've built your career in one area of your company, such as sales, finance, or production. These areas, generally known as business functions, are sometimes also called chimneys or silos. That's because most people take their first job at a corporation in one business function and move up within that function as they get promoted. Thus it appears as if they're moving vertically through a chimney or silo.

Such career tracks tend to narrow your perspective and influence the decisions and trade-offs you make every day. What's best for your department or function is not necessarily best for the company as a whole. You may be a top-notch professional-good at marketing or engineering or financial analysis-but are you really a businessperson? Regardless of your job, department, or chimney, you need to develop your business acumen.

As you learn to see your company as a total business and make decisions that enhance its overall performance, you will help make meetings less bureaucratic, more focused on the business issues. Time will go quickly, as it does when discussions are constructive and energizing. You'll get more excited about your job because you'll see that your suggestions and decisions help the business grow and prosper. You'll have a greater sense of purpose, and your capacity will increase.

Developing your business acumen will make you feel rejuvenated, like when you were a kid having fun making money for the first time-or like Michael Dell, who instinctively focused on the right things and created tremendous value for shareholders. Fifteen years ago, he was running a mail-order computer business out of his college dorm room. In June 2000, Dell Computer was worth some $130 billion.

When you learn to speak the universal language of business, you can have meaningful discussions with anyone in the company, at any level. You'll tear down the walls that separate you, a functional chimney person, from those well-dressed senior executives and MBAs who speak a language you may not understand. You'll feel more connected to your company and your work. And the range of opportunities open to you will expand.

Use this book to learn the language of business. Then put the book aside and practice until the fundamentals of business become instinctive, as they are for the street vendor. You'll discover the common sense of business, and you'll be on your way to developing business acumen.

The Street Vendor's Skill

How does a street vendor hawking fruits and vegetables in a small Indian town make a living? Someone with a $75,000 education and an MBA might say "Anticipate demand." But the street vendor in India doesn't know the buzz words. He just has to figure out what to buy that morning-what quantity, what quality, and what assortment of fruits and vegetables-based on what he thinks he can sell that day (his sales forecast).

Then he has to figure out what prices to charge and be nimble enough to adjust prices as needed during the day. He doesn't want to carry the fruit (the inventory) home with him. If it begins to decay, it will be of

less value tomorrow. Another reason why the vendor doesn't want anything left over is that he needs the cash. All day long he has to weigh whether to cut prices, when to cut them, and by how much. If he is indecisive or makes a wrong trade-off, he may lose out.

It is no different in companies. Say the Federal Reserve (the Fed) increases interest rates. Demand for automobiles might suddenly drop, and automotive companies might not be able to adjust their production levels quickly enough. They might end up with more inventory than they need. It would then take heroic efforts to dispose of the inventory and collect the cash. That's when consumers would start seeing TV commercials telling them that one of the car companies is offering cash rebates. Rebates and increased spending on advertising hurt profits. Also, such selling approaches can begin to cheapen the image of the brand. Companies sometimes endure those negative effects because they need the cash.

Each morning, the street vendor sets up his cart. He puts the best-looking fruit in the front (retailers call this merchandising). He watches the competition-what they're selling and for how much. And the whole time, he's thinking about not just today but also tomorrow.

If he has trouble selling his produce, he might have to cut the price (increase the value to the customer) or rearrange the display or yell louder (advertise) to attract attention to his stand. Maybe tomorrow he'll find a better price at which to buy or he'll change the assortment of fruits and vegetables (the product mix). If something doesn't work, he adjusts.

How does he know if he's doing well? If he has cash in his pocket at the end of the day. Everyone understands cash, money in the pocket. Every language has a word for this. The street vendor constantly thinks about cash-does he have enough cash, how can he get more cash, will he continue to be able to generate cash?

What happens to the street vendor who doesn't have cash at the end of the day? It's misery all over. The tension in the family is almost unbearable. The wage earner loses face. And yes, it's true; in India, his family may not have enough to eat. Such circumstances put the mind into sharp focus. But whether the street vendor realizes it or not, his subconscious is pondering something deeper. How will he buy goods for the next day? He needs cash to stay in business.

So do companies. You hear all the time about companies that are strapped for cash. They may have produced too many things that didn't sell and the cash got absorbed in inventories. Or they invested money in a plant that's too big and the company can't generate enough money from it. Or the company sold its products on credit to distributors or retailers and got paid late or not at all. When companies can't generate enough cash, they often borrow it. If they borrow heavily and don't correct the problem that created the need in the first place, they have trouble repaying the loans. Some end up filing for bankruptcy, so-called Chapter 11.

Back to the street vendor. How vendors buy fruit varies from country to country. In India, when personal cash savings are hard to accumulate, the vendor may borrow cash to purchase fruit in order to make some more money. To make a living, he has to make enough money to pay back what he borrowed, with some left over.

Every time he sells a melon, he makes just a little bit of money. His profit, the difference between what he pays for the fruit and what he sells it for, is very low. His profit margin-the cash he gets to keep as a percentage of the total cash he takes in-is around 5 percent. (Different companies have different terminology for this basic idea. Some call it return on sales or operating margin. You need to know what it is called in your company. But what's important is the idea, which I'll explain more fully later.)

Let's say our street vendor borrows 400 rupees (Rs 400, which is about $10). He uses the money as a deposit on Rs 4,000 worth of fruit. The fruit is his only asset. If he sells all Rs 4,000 worth of fruit at a 2 percent profit margin (after deducting all expenses and his salary), he will make a profit of Rs 80. In other words, he used his Rs 400 asset to make Rs 80, so his return on assets is 20 percent.

Can the street vendor raise his prices to make more profit? Only so much. If his price is too high, his customers will go to another vendor. Can he find a way to pay less for the fruit? If he buys fruit that's overripe, his customers will know the difference. Maybe some kinds of fruit are more profitable than others. Should he sell only the most profitable ones?

In the automotive business in the early 1990s, Ford gained a decisive financial advantage over General Motors by changing its product mix ahead of the competition. Ford was quick to recognize the American consumer's increasing desire for sport utility vehicles and light trucks. While continuing to offer a full range of vehicles, Ford shifted some of its production from cars to SUVs and trucks, which are more profitable than cars. It won the leading market share in North America in these product areas, despite the fact that GM is bigger.

The street vendor has many realities to deal with. If he makes the wrong judgment repeatedly, he will find it hard to make a living. If he doesn't give his customers a fair deal, they will not return and he will develop a bad reputation. If, on the other hand, he gives people a good deal every time, he builds their trust and loyalty to his brand. He has to be consumer focused.