Executive Fundamentals: Essential Principles for Developing Leaders

Executive Fundamentals: Essential Principles for Developing Leaders

by Nicholas A. Fischer, Daniel H. Shin

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Overview

What are the fundamental qualities of an exemplary executive? Do you possess them?

It’s often easy for executives or aspiring executives to know what they need to do. But it’s much harder to actually do what you know you’re supposed to. Executive effectiveness—or success in any endeavor or profession that requires a developed set of skills—is built upon well-developed fundamentals and serious repetitions of those fundamentals to create unconscious competence. Leadership is no different.

If you want to be good at something, you’ve got to earn it. Executive Fundamentals is an important, elegant guide designed to organize executive fundamentals into a general roadmap so that leaders at all levels can guide their development and take command of what they know they need to do—at any point in their careers. Purposefully brief, the book intersperses succinct and powerful quotes and information from stellar business books as counterpoints to the knowledge and experience presented by Fischer and Shin.

The authors include worksheets developed from their years in business that will make it as easy for you to put their advice into action as practicing your favorite golf swing or tennis stroke.

Product Details

ISBN-13: 9781632991812
Publisher: Greenleaf Book Group, LLC
Publication date: 06/11/2018
Pages: 148
Product dimensions: 5.50(w) x 8.50(h) x 0.34(d)

Read an Excerpt

CHAPTER 1

BUSINESS ACUMEN

"Knowledge has to be improved, challenged, and increased constantly, or it vanishes."

— PETER DRUCKER

Business acumen is the collective repository of all your business knowledge and experiences. It serves as the source of your ability to assess a given situation, coalesce a sea of information, and chart a navigable way forward. In other words, business acumen is what an executive point of view derives from.

It's a mistake to think an effective executive point of view can come from raw intelligence alone. Knowledge accumulated over time, combined with intelligence, can be developed into the ability to make sense of dynamic situations and translate that understanding into actionable perspectives.

A leader has to be able to think strategically and be able to understand economic, market, financial, and operational dynamics in varying contexts to know what needs to be done in any situation that may arise.

Business acumen comes from experienced-based learning — making decisions and taking actions in different situations, challenges, and contexts — but it also comes from knowledge-based learning developed through reading, thinking, and understanding.

Developing exceptional business acumen requires years of commitment to learning, applying, failing, and adapting. Through this process, a credible and sought-after executive point of view is developed. It's easy to spot someone who has it.

When I was part of a large national organization during a time of considerable challenges for our industry, one member of the executive team consistently demonstrated his exceptional business acumen. He improved employee morale and gave us all a strong sense that we would be successful, no matter what obstacles came our way. I remember one departmental all-hands meeting in which he presented his executive point of view on how we were going to move forward as a company. He was able to clearly articulate both what was similar and what was different about the current challenges relative to challenges faced historically and how our enterprise strategy was evolving as a result. Moreover, he outlined his view on which challenges were systemic and which were cyclical, and how we were evolving our operating model and financial strategy to adapt to our new environment. We all left the meeting energized and excited.

We think about business acumen as a function of five fundamentals:

1. Strategic thinking

2. Economic acumen

3. Financial acumen

4. Operational acumen

5. Market orientation

STRATEGIC THINKING

If the purpose of a business is to profitably create value for customers, then strategy is about the long-term choices that articulate how this is accomplished. Michael Porter, in his book Competitive Strategy, frames strategy as "deliberately choosing a different set of activities to deliver unique value." In their book Playing to Win, authors A. G. Lafley and Robert Martin go a step further and describe strategy as "an integrated set of five choices: a winning aspiration, where to play, how to win, core capabilities, and management systems."

Lafley and Martin define the meaning of a winning aspiration as the purpose and vision of your enterprise — it's who you are and what you stand for. Where to play tells you where your enterprise will compete — its geographies, its product categories, consumer segments, channels, and vertical stages of production. How to win defines your unique value proposition and the competitive advantage your enterprise will pursue. Core capabilities are what you need to excel given the choices being made, and management systems are the practices the management team implements to govern execution of the strategy.

Alan Mulally, one of America's most effective turnaround CEOs, outlines his leadership philosophy in his straightforward "Working Together Principles and Practices." One principle that is cited often is "compelling vision, comprehensive strategy, relentless implementation." Mulally demonstrates the power of going through the process of establishing a powerful vision and developing a strategy that serves as a road map outlining how the vision will be achieved; the vision and strategy give stakeholders a big-picture perspective and help them understand the interconnectedness of the enterprise. Aligning the organization around a comprehensive strategy was one of the key factors that enabled Mulally to lead Ford through a transformation that turned years of significant operating losses into sustained profitability — all the while navigating the Great Recession.

Moreover, alignment around clear strategic choices serves as the set of guardrails and filters through which all subsequent decisions are made. It aligns operational priorities, initiatives, and projects in a consistent, focused way. When an organization's decision-making, initiatives, and projects seem random and disparate, it's a clear indication that a cohesive strategy may not exist.

When we first implemented true enterprise vision-setting and strategy development, the organization we were with had been operating in pure execution mode. The executive team had been focused on "fire drills" and the immediate tasks at hand specific to their areas. This siloed operating model was leaving a lot of potential on the table. As finance leaders, we instituted a new business planning process that started with an annual strategy offsite to align the organization around a focused strategy. The attendees included not only our executive team, but all our key enterprise leaders as well. During the offsite, we set an enterprise vision, established long-term performance goals, and aligned around key strategic choices. Not only did working together in this way energize the group, but it also broke down all the preexisting departmental silos. To communicate our new strategy throughout the organization, we used posters and wallet-sized cards that articulated our vision, performance goals, and values, and distilled our strategic choices into a concise four-point plan that served as the guardrail for all subsequent planning decisions. The feedback from employees was overwhelmingly positive, and the entire executive team was aligned with the way forward — and their refreshed priorities reflected it.

ECONOMIC ACUMEN

If accounting is the language of business, economics is the framework of business, particularly in terms of managerial decision-making. Although many definitions of economics exist, Michael Baye's definition of economics as "the science of making decisions in the presence of scarce resources" is one of the more intuitive. More specifically, in Managerial Economics and Business Strategy, he defines managerial economics as "the study of how to direct scarce resources in the way that most efficiently achieves a managerial goal." Anyone who's gone through a corporate annual expense budgeting process would likely agree that the process of directing scarce resources to achieve company goals and objectives happens every year. Because consolidated expense budgets, more often than not, exceed what the business can afford, business unit and functional leaders have to evaluate the costs and benefits of their budget line items and make organizational trade-offs. When stakeholders are aligned and focused on the same outcomes, the process works effectively to prioritize where dollars are allocated.

In his book Executive Economics, Shlomo Maital explains, "Business decisions are built on three pillars — cost, value, and price," and "the job of managers is to build and run businesses by selling goods and services that provide value at a reasonable price for their customers at an acceptable cost to the business. If managers create more value at lower cost than their competitors, their businesses prosper and profit."

Cost, value, and pricing decisions can be considerably improved in any enterprise with the application of a few straightforward foundational principles of economics. Here are a few examples:

SUPPLY AND DEMAND

One of the most foundational decisions you'll have to make as a business manager is how much of a given product or service to supply to a market. If you supply too much relative to market demand, your business will become inefficient. It will also be less profitable due to the associated costs and the need to reduce prices. If you supply too little relative to market demand, your business will be forced to forego sales opportunities, and you will risk upsetting your customers.

When Ford's CEO Alan Mulally outlined his One Ford plan to turn around the struggling business in 2006, his first pillar was to "aggressively restructure to operate profitably at the current demand and changing model mix." Put simply, he wanted to make enough cars to satisfy demand but not fill dealers' lots with months of excess inventory. Additionally, a leader must understand demand elasticity when making pricing decisions. For example, if you lower prices, does the increase in volume provide enough benefit to offset the lost sales dollars from the lower prices?

ECONOMIC VS. ACCOUNTING PROFIT

When you are confronted with the need to decide whether to pursue a specific initiative, it may seem appealing to rely on simple accounting profit. But economic profit considers the implicit opportunity costs that can often be overlooked. Looking at decisions through the lens of economic profit and opportunity costs will lead to outcomes that do a better job of allocating your resources to the opportunities with the most efficient rates of return.

I remember one conversation with a key business leader. We were reviewing our historical financial statements, and he seemed surprisingly accepting of single-digit net profitability. In the context of our industry, which had been facing considerable challenges, I generally understood why he was satisfied with the fact that we were still, at the very least, making money. But then I explained to him that if we simply sold all the assets on our balance sheet and reinvested those proceeds in the stock market (which arguably would be less risky than operating as a going concern in our industry), we'd more than double the profit dollars we were currently generating. This was an oversimplified scenario, but he immediately got the point that, given our invested capital and the riskiness of our business, we needed to generate more profitability to justify staying in the business. In other words, that simple example got him thinking about opportunity costs and economic profit, without me having to brush the dust off my economics textbooks.

INCENTIVES

The ability to structure incentive programs around specific desired outcomes is one of the most critical managerial skills a leader might be called upon to use. Incentives considerably influence what your employees are working on and how hard they are working. When you, as a manager, combine the right goals, objectives, and incentives, work will get done effectively and efficiently.

When we wanted to improve our inventory management at a retailer I was working for, our first point of focus was to create the right incentive compensation program within our merchandising organization. Because our business had both high-turn, low-margin products and low-turn, high-margin products, we established an incentive compensation program using Gross Margin Return on Inventory as the primary bonus measure. For nonretailers, GMROI is a metric that levels the playing field across product categories with different economics. In other words, GMROI targets can be achieved by managing sales and inventory levels, gross margin, or a combination of both. Not surprisingly, once we instituted this change and set product GMROI goals, our buyers for our low-margin product categories started managing inventory levels much more strictly and began to hit their GMROI targets. This freed up millions of dollars of working capital that had been tied up in inventory, which made a big difference for our business.

MARGINAL ANALYSIS

One key component you'll want to consider when constructing a business case is marginal analysis. This involves evaluating the trade-offs in terms of the incremental benefit vs. the incremental costs of a decision.

For example, while working for a large organization, I led a team that evaluated the efficacy of our customer loyalty program. The program had become increasingly large and expensive, and we wanted to ensure that it was optimized to drive the maximum value in incremental sales with the lowest possible incremental expense. Customers joining the loyalty program received a co-branded credit card to make purchases. To understand incremental program sales, we had to find a way to differentiate between sales that would have happened anyway, just with another payment type, and sales that were truly incremental and a direct result of being a member of the program. Our analytics team used a method that allowed us to match loyalty customers with non-loyalty customers to compare spend levels over time. Customers with nearly identical characteristics (e.g., spend levels, age, demographics, etc.) were paired. The only difference was that one was a loyalty customer and one was not. As a control, we looked at spend levels of matched customers prior to the point when one became a loyalty member; not surprisingly, they were nearly the same. We then compared the spend levels after one became a loyalty member and considered the difference in spend levels to be incremental. This wasn't a perfect methodology; it was merely a way to estimate incremental program benefits so we could evolve the program and improve ROI.

COMPARATIVE ADVANTAGE

One of the most important decisions you'll have to make as a manager is deciding what you'll do in-house and what you will outsource. Understanding comparative advantage means understanding what capabilities should be outsourced, because the opportunity cost of doing them in-house is too high, or the quality of the in-house work is too low, or some combination of both factors.

While I was the financial leader of one company, we made the decision to outsource a considerable portion of our accounting operations. During the final sales call with the firm that would eventually become our outsource partner, the sales team focused almost exclusively on our expense savings if we chose to work with them. The savings were great, but I was sold after their implementation director walked me through their operating model, processes, and procedures. They had developed a process so effective and efficient that we would never have been able to replicate it internally without spending significantly more than we were spending at the time. Making this move allowed us to leverage the comparative advantage of our accounting operations outsource partner and reinvest the savings to build out other more strategic functions internally. These decisions allowed us to position the finance team as a strategic partner with key stakeholders and add a lot more value to the business.

FINANCIAL ACUMEN

In their book Financial Intelligence, authors Karen Berman, Joe Knight, and John Case state, "The art of accounting and finance is the art of using limited data to come as close as possible to an accurate description of how well a company is performing." The key here is to understand what's behind all the numbers. Well-constructed financial plans and budgets reflect all the planned strategic and operational decisions and expected outcomes of the business. When compared with actual financial results, the planned vs. actual variances serve as a primary tool to understand what's going on in your business, what's working, and what's not. Because financial plans reflect everything you think is going to happen in the business (key decisions, upcoming initiatives, market trends, competitive changes, etc.) and actual financial results reflect everything that actually happened in the business, there is seldom better scorecard for measuring business outcomes.

CASH AND CASH FLOW

Cash pays the bills, so it's not surprising a lack of cash is the primary driver of business failure. Kevin Cope discusses this concept in Seeing the Big Picture: Business Acumen to Build Your Credibility, Career, and Company. The business's cash position (cash on hand) and liquidity (ability to turn non-cash assets into cash quickly) are key factors in assessing how solvent the business is. The cash flow statement outlines the three key activities generating and using cash, and forecasting these statements can help you understand how your cash position is expected to change over time. To summarize:

• Operating cash flow is the cash generated and used in core operations of the business.

• Investing cash flow is the cash generated and used in the buying and selling of assets.

• Financing cash flow is the cash generated and used in receiving or paying back debt, issuing or buying back stock, and paying dividends.

(Continues…)


Excerpted from "Executive Fundamentals"
by .
Copyright © 2018 Nicholas A. Fischer and Daniel H. Shin.
Excerpted by permission of River Grove Books.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Table of Contents

INTRODUCTION,
YOU'VE GOT TO EARN IT,
PART I KNOWING WHAT TO DO,
CHAPTER 1 BUSINESS ACUMEN,
CHAPTER 2 MANAGEMENT ABILITY,
CHAPTER 3 LEADERSHIP ABILITY,
CHAPTER 4 EXECUTIVE INTELLIGENCE,
PART II DOING WHAT YOU KNOW,
CHAPTER 5 EXECUTIVE DEVELOPMENT,
CHAPTER 6 BRINGING IT ALL TOGETHER,
BIBLIOGRAPHY,
ABOUT THE AUTHORS,
INDEX,

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