Today we’re pleased to feature an essay from Ram Charan, author of Leaders at all Levels. Here, Charan discusses the impact profit and loss has on the balance sheet and overall health of an organization, especially when a leader is in tune with those numbers. An intuitive feel for business is evident in good leaders, whether seasoned or rookie, and it is the ability to harness that acumen that makes the difference, especially when it comes to adding value to the organization or when promotion opportunities are at hand.
Business Acumen
By Ram Charan
Every successful businessperson, whether a street vendor or the CEO of a global empire, has a basic understanding of how the business makes money. The essence of making money is managing the profit and loss (P&L) as well as the balance sheet of a business in the context of the external world. Let there be no mistake, profit and loss is a much broader concept than profit or loss. Managing the profit and loss within a business requires that a person take in myriad factors and pieces of information — much of which is incomplete or distorted — that contribute to either a profit or a loss, connect those various conflicting things, and make the trade-offs among them with the clear goal of making money and generating cash on a sustained basis. The leader must also know how profits and losses interact with the company’s balance sheet, which indicates the health of the company.
This cognitive ability to conceptualize the working of the business is present and highly developed in every successful CEO I have known. It is the CEO nucleus defined in Chapter 2: “the intuitive ability to comprehend the total picture of a business and how it makes money in the language of a street vendor.”
We can’t expect a thirty-year-old leader to have the business acumen of a forty-five-year-old, but an intuitive feel for business is evident at an early age if we bother to look for it. These are the people who intuitively understand the connections between customers, profits, money they borrow, and money they take in. This business acumen is evident even in the simplest contexts, such as that of a small shop with a well-defined customer base and a handful of competitors. You see it in shopkeepers who mark the prices down in the right increments at the right time, buy the right merchandise, and create the right shopping experience, constantly making adjustments to keep the cash flowing. They have a knack for making the right trade-offs and decisions, and the business prospers.
You also can see it in some leaders at the lowest organizational levels and in the earliest stages of their careers in a big company. They have a sense of how their company makes money, what it really offers customers, and how it compares with the competition. Given the chance to run even a tiny P&L center, they have the ability to weigh multiple factors, from changes in the external environment to internal constraints, in deciding how to position the business and expand its money making. They understand the relationships between the variables, do the mental processing to determine which are most important, and make decisions that deliver clear, measurable business results.
As the scope of a leader’s job increases, so do the number of variables and the uncertainty about them. The complexity grows exponentially. The leader needs greater mental breadth and depth to make the connections between the complexities of the outside world and the intricacies of money making. She also needs incisiveness to cut through that complexity to the shopkeeper fundamentals. When leaders are unable to make good decisions, or any decisions at all, it may be that their business acumen is not expanding. They cannot be considered to have CEO potential. A sales manager who becomes the executive vice president of marketing and product development may face the problem of identifying the need for innovative products that will satisfy new customer needs. He has to balance the risks of developing those new products against the business’s growth, all of which requires a broader scope of thinking and acting. If he can’t do it, that’s a sign that his business acumen will not develop fast enough for him to become a successful CEO of a major company. Leaders who continue to develop their business acumen, or CEO nucleus, expand their capability, or their ability to add more value per increment of time by taking on more complexity, ambiguity, and uncertainty.
The search for business acumen will help keep other traits and skills in perspective. For instance, great communication skills help leaders motivate people, implement a strategy, and win over customers, investors, and the public. But business acumen defines the substance of the message being communicated. Some young leaders can excite and lead their group to deliver on stretch goals, but can they define where the group is going? Are they decisive, and can they sort through multiple alternatives to find the right pathway forward? Can they use their business acumen to choose the right goals and KPIs? With practice, any leader can improve, but some leaders are naturally better at it.
Copyright (c) 2008 Ram Charan from the book Leaders at All Levels by Ram Charan Published by Jossey-Bass; December 2007; $27.95US/$33.99CAN; 9780787985592
Ram Charan is the author or coauthor of many bestselling business books, including What the CEO Wants You to Know and Execution. For more than thirty-five years, he has worked behind the scenes at Fortune 100 companies like GE, Bank of America, DuPont, Thomson financial, Honeywell and Home Depot to help senior executives develop and implement strategic plans.
www.ram-charan.com

The News Hour with Jim Lehrer began a new series on America’s response to globalization last night, and their first installment focused on our home city of Milwaukee. We don’t see Milwaukee on television that often anymore, so it was kind of odd to turn on the news and see them tearing down the old tannery on Water Street. “Wonderful,” I thought to myself, “another uplifting story about the demise of the Upper Midwest and decline of manufacturing in America.”

After the shot of the tannery coming down, there were the requisite shots of other abandoned factories accompanied by stories of the thousands of jobs lost when they stopped churning out their truck frames, beer, and all the other things that made Milwaukee famous. And then something unexpected happened. A shot of a factory that’s not abandoned, a shot of sparks flying in front of welding masks.

News Hour Economics Correspondent Paul Solman had found Bucyrus, a manufacturer that is not only staying, but currently expanding inside America. This story wasn’t about the demise of manufacturing after all, but its unlikely comeback. It focuses on Bucyrus and Harley Davidson, and how the management and unions there are now working together to keep high-end manufacturing jobs here in the Industrial Midwest to produce high-end products. “In fact,” Solman reports, “Bucyrus is expanding right here in Milwaukee, increasing its manufacturing space by 50 percent, doubling its workforce, tripling its production.” After moving jobs overseas to China for years, Tim Sullivan–president and CEO of Bucyrus–is now bringing them back, explaining his philosophy of productivity this way:

The misconception really is that by paying a guy $22 bucks an hour, that’s not cost-effective. That’s the wrong way to look at it. You pay a guy $22 bucks an hour, you expect $22 bucks of good productivity out of him. If you pay a guy $10 bucks an hour, you’re going to get $10 bucks an hour.

I was 17 when I got my first job in Milwaukee. It was in a factory on the south side, where I packed bricks and cut the fiberglass used in steel furnaces. My three older brothers all worked for that same company around that time, but they worked on the road, traveling across the Midwest cleaning and repairing furnaces on weekends and holidays when the factories were shut down. They’d have to bust out the old brick in recently shut off–and therefore sweltering–steel furnaces with 50-pound jackhammers and lay in new brick. It wasn’t glamorous work, but it was honest, and it paid relatively well. None of them wanted to do that work forever, but more importantly, we didn’t think it was possible. None of us thought that the factories they were going out to were going to be around much longer. We were using the job to save some money, to move onto other things. With companies like Bucyrus, maybe that trend is reversing. Many of the workers there are making $100,000 a year or more.

As pointed out in the video (which I highly recommend by the way), that is more than a job, that’s a profession.

• Punched In>>The Wall Street Journal | Will Work for Fodder
  A certain winnowing process can also be usefully applied to “Punching In.” By all means, savor the reporting on offer, but don’t put too much stock in the big-picture conclusions — in other words, take the sort of approach that’s recommended for reading
  (tags: businessbooks)

If you’re looking for a gift guide for books to buy for presents, here are a few of the books the 8cr crew bought for the holidays. Feel free to add your best buys, too:



Proust Was a Neuroscientist by Jonah Lehrer





One Hundred Young Americans by Michael Franzini





Cradle to Cradle: Remaking the Way We Make Things by William McDonough, Michael Braungart





When You Were Me by Robert Rodi





The Omnivore’s Dilemma by Michael Pollan, Scott Brick





How to Be Idle by Tom Hodgkinson





Sublime Spaces & Visionary Worlds by Erika Doss, Ruth D. Kohler, Lisa Stone, Jane Bianco, Leslie Umberger (Editor)





The Last Tycoons by William D. Cohan

Business executives have justified their actions with a “when in China, do as the Chinese do” defense. To do business in China, these executives insist, they must comply with local laws. But China’s local laws often force executives to make moral and ethical choices that would be intolerable in the West.

The broader problem is that American business executives have little training in how to deal with ethics in a corrupt and totalitarian global business environment — blame U.S. business schools for that. As a result, moral horizons tend to be short, and executives who find themselves in the heat of a battle don’t know where to draw the line, which is what happened to Yahoo.

From Peter Navarro’s op-ed in the LA Times. Peter’s the author of The Coming China Wars.

• Punching In >> USA TODAY | Finding a job in retail may not be so simple
  Frankel went undercover to report on the corporate culture of some of the county’s leading retailers.ret
  (tags: retail careers organizational_development)