2001

About The Author Ram Charan

Born in India, in 1939. Worked
in his family’s shoe shop in
Hapur, India.
He earned a degree in
engineering from institute of
Technology, Banaras Hindu
University.
More than 30 years → coaching and advising →
Some of the world’s most successful biz, leaders,
from strategy to leadership development (fortune
500 company).
2
About The Author Ram Charan
Has taught at GE’s Crotonville Institute, and
MBA, doctoral and advanced mgt programs at
Harvard Bussiness School, Northwestern Univ.
Kellog School, Columbia, and Wharton.
He holds MBA (1965) and a doctorate (1967)
degrees from Harvard Bussiness School.

3
 Preface
 Think back for a moment to your school
days….

Remember the best teacher you ever had →

the ability to boil down the complex ideas of
a discipline → so that you really “Got It”. 4
 Preface
 The one thing I’ve noticed is that the best CEOs
– the ones whose Co make money year after
year – are like the best teacher you ever had.
 They are able to take the complexity mystery
ont of biz by focusing on the core
fundamentals. They make sure that everyone
in the CO understand these fundamentals.
 The CEO are more successful when everyone
knows how the business works.
5
 Preface
 So, people feel more connected to their work
and have greater satisfaction from their job.
 And as the company has profitable growth,
both sales (the “top line”) and profits (the
“bottom line”) increase year after year → there
are greater opportunities for people to expand
their careers and to make more money.

6
 Preface
• When you come right down to it -> business is
very simple. There are universal laws of business
that apply whether:
– You sell fruit from a stand or
– You are running a fortune 500 company

7
 Preface
 They have what I call Business Acumen = (ketajaman
berdagang, kelihaian berusaha) = the ability to
understand the building blocks of how a one person
operation or a very big business makes money.

 My goal in writing this book → is to give you the

benefit of my experiences over many years in seeing
how some of the most successful people in business
THINK and ACT → You will see the common core of
what they do to make their companies and their
employees world class winners.
8
 Preface
• The best CEOs and the man or woman running the
one person shop think = the same way.
• They know their cash situation,
– They know which items are profitable and which
are not,
– They understand the importance of keeping their
products moving off the shelf (inventory velocity)
and...
– They know their customers.
• What your CEO wants you to know is how these
fundamentals of business work in your company.
9
 Business Acumen

• What Jack Welch and Street Vendors Share:

- They speak a universal language of business.
- They practice a universal law of business.

10
 The Street Vendor’s Skill
 Selling fruits and vegetables to make a living!!
 He just has to figure out what to buy that morning → what
quantity, what quality, → he can sell that day (Sales
forecast).
 Then what prices to charge and enough to adjust price as
needed during the day. He doesn’t want to carry the fruit
(the inventory) home with him → the value will be less
tomorrow.
 He need 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.
11
The Street Vendor’s Skill
• Every morning…
• Put the best looking fruit (merchandising)
• He watch the competition (also thinking
tomorrow)
• If he has trouble selling his product → cut the
price (increase the value of the customer) or
• Re-arrange the display or yell louder
(advertise) to attract attention to his stand.

12
The Street Vendor’s Skill
 How does he know if he’s doing well?
• When he has cash in his pocket at the end of day.
• Every language has a word for this.
• How will he buy goods for the next day? He
needs cash to stay in business.
 When personal cash savings are hard to accumulate.
• The vendor may borrow cash to produce fruit in
order to make some more money.
• To make a living, he has to make enough money
to pay back what he borrowed (interest +
installment) → with some left over (profit margin)13
 Every business is the same inside
 What we learn from the street vendor?
 Running a one person business may seem simple
→ it requires many decisions.
 You probably are not a street vendor or a shop
keeper. But whether you are just beginning your
career or an executive at the top of a silo → there
is much you can learn from the street vendor →
who knows every aspect of his business →
product, sales, customer, profit margin, return on
assets, → HOW TO MAKE MONEY!!
14
Chimney or Silo Mentalities

MA ACC COL
PR
RKE OU LEC
OD
TIN FIN TIO
UCT NTI
G AN N
ION NG HR
CE
Etc

15
 Money making in business has 3 basic parts:

1. Cash Generation
2. Return on Assets (Margin and Velocity)
3. Growth
16
 1. Cash Generation
 Does the business generate enough cash?
 What are the sources of cash
generation?
 How is the cash being used?
 Any business person who fails to
ask these questions and figure
out the answers → eventually
stumbles (tersandung,
terhuyung-huyung)
17
 1. Cash Generation
 Cash Generation = the diff between all the cash
that flows into the biz and all the cash that
flows out of the biz in a given time period.
 If all the biz on a cash basis → cash and income
are one and the same.
 But must companies extend credit → so cash
and income are different.

18
 1. Cash Generation
 Cash gives you the ability to stay in biz → it’s a
co’s oxygen supply.
 Lack of cash, decreasing cash, or consumption
of cash -> spells trouble even if the other
elements of money making – such as profit
margin and asset velocity – look good.
 Exp : - Sales increase Collection
- Bad debts

19
 1. Cash Generation
 Do you know whether your company is a net
cash generator?
 If it’s not Generating Cash → is this because
your management is investing in activities to
grow the company, or because you have too
much inventory that you’re not selling?

20
 1. Cash Generation
Everybody counts...
 Account Receivable VS Account Payable
 Days of account Receivable VS Term of Payment?
 A sales Rep who negotiate a 30 days payment from
a customer VS 45 days is cash wise. -> the money
sooner → that better.
 A plant mgr whose poor scheduling results is
accumulation of a lot of inventory → consumes
cash.
 Exp. Amazon.com Cash
 Exp. Dellcomputer Machine
21
 2. Return on Assets
 You are using your own or someone’s money to
grow.
 You borrow from a bank or use your savings.
 The money → represent your investment or your
investment capital.
 Your investment then takes → inventory, plant
and equipment, account receivable.
 Tangible assets → you can see and touch.
 Fixed assets → big items – that are not expected
to be sold. 22
 2. Return on Assets
 Return on Assets (RoA) → are you making
enough of a return on those assets?
 Some people would rather talk about Return on
Investment (RoI) or Return on Equity (RoE).
→ these things are technical.
 You don’t need an MBA to understand RoA!
 Exp. street vendors selling…..

23
 2. Return on Assets
 The word velocity → idea of speed, turn over,
or movement.
 Think about raw materials moving through a
factory and becoming finished products → to
the shops → moving off the shelf → customer.
That’s velocity.

24
 2. Return on Assets
 Some people use the term inventory turns to
describe inventory velocity.
 How many times does the inventory turnover in
a year?
 Wal-mart has 360 inventory turns in toilet
tissue → that means the entire inventory of
toilet tissue is sold almost every day. Each day,
wal-mart gets back the money it spent on its
inventory plus some profit → that’s a terrific
use of shelf space. 25
 2. Return on Assets
 SO, THINGS MUST MOVE THROUGH A BIZ TO
THE CUSTOMER – THE FASTER, THE BETTER
(UNIVERSAL LAW OF BIZ).

Return = Margin x Velocity

or
R=MxV

26
2. Return on Assets

Total Sales
Inventory Velocity =
Inventory

Assets Velocity = Total Sales

Total Assets

27
 2. Return on Assets
 Is it better than last year and the year before?
 Is it better than it’s competitor? Should be?
 The best co, ROA > 10 percent after Tax.
 One truth about business is = ROA has to
greater than the cost of using your own and
other people’s money (bankers’ and
shareholders’), the cost of capital.

28
 3. Growth
 Growth is vital to prosperity.
 Every person, every company and every
national economy must grow.

29
 3. Growth
 If you don’t grow, means :
– Competitors will eventually overtake you.
– People will not have opportunity to be
promoted and move forward.
– Begin to cut costs, cut no. of employees, cut
layers.
– Best people will leave, people will suffer, and
eventually the co will go into a death spiral.
Exp. Westinghouse VS GE
Exp. Digital Equipment Corp (DEC)→ Compaq acquired it.
30
 3. Growth
 Growth has a psychological dimension.
 Growth energizes a business → attracts talented
people with fresh ideas → Creates new
opportunities.
 Exp: Top co’s easier to get the graduates from
the best schools and retaining their top
performers → like Cisco, Intel, Microsoft,
Oracle, Google.

31
 3. Growth
 Growth has to be profitable and sustainable.
 So, don’t use size as a measure of success.
 Pushing for more sales dollars → isn’t
necessarily good biz. You have to know how and
why you’re growing. And you have to consider
whether you are growing in a way that can
continue??
 Is your profit margin improving or getting
worse??
32
 Customer
 The street vendor knows his
customer well, simply by
watching them, he can detect whether they
like his fruit or are growing dissatisfied, and
whether their preferences are changing.
 CEOS with business acumen have the same
close connection with customers and that
the business can’t thrive W.O. Satisfying
them → it ’s Universal
33
 Customer
 Try to explore “what the customer needs and
wants”
Exp: Sam Walton (wal-mart) and
Jac Nasser (Ford)
Exp: Steve Job → Ipad, Iphone
(Customer willingness in the future → BW)

34
 Customer
 As You think about customer, keep it simple!!
It might not the physical product alone they are
buying. May be they’re buying:
– Reliability
– Convenience
– Service, or
– Trustworthiness
 Customers need a simple reason to buy from
you!!
35
 Figuring out Business Priorities

 A business priority = the most important

action that needs to be taken at a certain
point in time.

 Business acumen helps a CEO choose 3 or 4

business priorities that will retain customers
and achieve all the important money making
goals at the same time.
36
 Figuring out Business Priorities

 The best CEOs use their business acumen to

reduce complexity whether internal or
external→ to the basics of money making
– They enjoy the mental challenge
– Give them confidence that they are on the right
path
– Make them more decisive
– From complexity to simplicity

37
 Wealth is More than Making Money

 Seeing the business like an investor.

 The main task for the CEO of a publicly traded
company goes beyond money making.
 Shareholders (and employees who receive stock
options as part of their compensation) expect a CEO to
create wealth for them.
 Money making and wealth creation
are linked through what is known as the
Price Earnings Multiple = P.E Ratio
 P = Price of a share of stock
 E = Earning per share 38
 Wealth is More than Making Money

 If, P.E = 7 means → that for every dollar of earnings

per share, the price of stock is worth = 7x.
The higher P.E multiple → the more wealth is
created!!
 Basically, the P.E multiple represents expectation
about a company’s current and future money
making ability. It reflects the Quality of the
money making formula → the combination of
expected cash generation, margin, velocity, Return
on Assets, and profitable revenue growth in the
future. 39
 Wealth is More than Making Money

 P.E vary from industry to industry and company to

company, and they can change over time.
 Most often, it is based on a track record and on
investors’ confidence that mgt will be able to
sustain the money-making formula. (Investors hate
inconsistency and volatility)
Exp. Coca cola vs Pepsi
• Coke has been consistently higher than Pepsi for
more than 15 years. Average 4 points higher!!
 Doing the right things day in and day out builds
value. 40
Getting Things Done
Growing People Takes Courage

 Each of us can practice what CEOs with superb

biz. Acumen do, using the universal laws of biz,
and select the right business priorities.
 But understanding how to make money is one
thing. Making it happen, getting it done,
executing it is something else.
 Leaders have to deliver results day in, day out,
relentlessly and consistently over a long period
of time.
41
Getting Things Done
Growing People Takes Courage

 Delivering results is what gives an organization

energy, builds confidence and generates the
resources to go forward.
 A leader of the biz knows what to do.
A leader of people know how to get it done.
 Harness (memanfaatkan) the effort of other
people, expand their personal capacity and
synchronize their efforts to get results. If you do
all that → you get results → that’s what I call
an edge in execution. 42
Getting Things Done
Growing People Takes Courage

 It is this ability, in fact, that sets the

superstar CEOs apart from the rest. W.O it,
many talented CEOs, who have superb biz,
acumen ultimately fail in the job.
So, an edge in execution takes relentless
practice

43
The Right People in The Right Jobs

 Smart leaders : “Put people before numbers”

 If the person making decisions is not suited to
the job, the quality of the decisions is poor →
and the whole company suffers.
 If the person is well matched to the job →
he/she will get joy out of the work →
Individual’s capacity expands → the entire
business expands.

44
The Right People in The Right Jobs

 Matching the person to the jobs begins with

understanding what kinds of skills.
Attitudes and aptitudes are required to accomplish
the biz priorities
Exp: Intel, Andy Grove, Starbucks coffee shop
 Talent management → Sameness Vs Differentiation
 W.O the right people in the right jobs → a company
can’t grow and thrive (maju pesat, berkembang
dengan cepat).
45
Dealing with Mismatches

 Think about the people around you!!

how many are mismatched to the job in your
work environment??
 When the mismatch is coming, the person
tends to feel insecure but may not know what
to do and probably uncomfortable discussing it
at work.
She begins to complain and drain other
people’s energy.
46
Dealing with Mismatches

 The best business leaders have the confidence

to confront reality, take action and thereby plug
the energy drain.
 Dealing with mismatches gives you an edge in
execution.

47
Dealing with Mismatches

 Over the years I’ve asked many of them (CEOs I’ve

known) what was the greatest mistake they ever
made in the area of people??
The most common answer ? →
“Waiting too long” to remove a direct
report who was not matched to the
job.
 Why do people so often avoid the mismatch issue?
• Avoid the possibility of a conflict.
• Confronting and dealing with the mismatch releases
energy. 48
Coaching

 People who do well in a job also need

attention.
 A true leader of people expands their
capacity by helping them channel their
skills, develop their abilities and release
their positive energy.
 The feedback has to be honest and direct.
No Sugar Coating!!
49
Dealing with Mismatches

 Avoiding conflict hurts the business → it creates

more misery for the person and for those
around him.
 Many times when an unhappy (mismatched)
person is advised to leave the company → the
person is at first shocked or saddened. But
when he finds another co. where his talents
match, the energy comes alive. His wife and
children see it → happiness returns to his life →
it becomes rocket fuel to progress further. 50
Coaching

 You are helping him face his blind sides

and learn to do things better.
 Every encounter (pertemuan) is an
opportunity for coaching, and sooner is
better than later.
 Don’t forget…. When coaching… not only
focus on behavior, but the business side
also!!
51
 Good Luck!!
Improve your Business Acumen… Right Now!!

Grow your People

Grow your Business

Grow your Income

BW – 21 Sept
2011