What the CEO Wants You to Know
Mr Ram Charan, author, in discussion with Ms Sangeeta Shankaran Sumesh, Business & Leadership Coach; Mr Mukund Kasthuri, Regional Director-Asia, Flexco; and Mr Senthilkumar Sivaswamy, MD, Benteler Automotive.
Ms Sangeeta Shankaran Sumesh: The crux of the book is about three things: Understanding the building blocks of money-making; where should one focus for business growth; and how can one contribute to the business growth, irrespective of the department or function that one is in? According to the author, the most successful business leaders never lose sight of the basics. The ability to apply the universal laws of business is business acumen.
Money making has three parts: Cash Generation, return on assets (ROA) and growth. ROA is the combination of velocity and margin. To these three, add the customers and that becomes the core of any business. Velocity describes the speed, the turnover or the movement. When a company can’t generate enough cash, it tends to borrow, but if they borrow heavily and do not correct the problem, they have trouble in repaying the loans and can become bankrupt. Companies must focus more on productivity. CEOs with good business acumen have a close connection with their customers.
Customer vs. Consumer
There is a difference between consumer and customer. The CEO must try to understand the needs and the wants of the consumer because they are the ones who consume the product or service. Many of the processes like logistics, discounts, merchandising, shelving are geared towards customers, who are the intermediaries. When you don’t get the margins that you want, talk to your customers and understand what is missing and work on it.
Growth of a company has to be profitable and sustainable. A company may be growing in sales, which is great but if the margins are dipping, then it is not good. So, leaders need to be focused on consistent, predictable and profitable growth. Companies must also focus on adjacencies. Nike sell shoes, which is what they’re known for. They also sell athletic apparel. This is an example for adjacencies. It’s important for a CEO to understand the company’s total business and get a holistic picture of the company. A smart CEO always has three to five top business priorities, which helps in money making.
More than money making, the leader must look at the P/E ratio (price earnings ratio). It is the ratio of the share price of the company to company’s earnings per share. Higher the ratio, the more wealth you can create for your shareholders. By creating wealth, it’s not just the shareholders but also the employees get benefited.
A leader must harness the efforts of the people, expands their personal capacity and synchronise them, so the business gets the desired results. It’s important to have the right people in the right job. When there are differences of opinion, go ahead and confront people. People who do well in a job also need attention. We think that the people who are star performers don’t need coaching. But it is the other way around.
By coaching your team members, you help them to identify their blind spots and do things better. Feedback needs to be honest and direct. Coach people on the behavioral skills and also about the business aspect. To give the example of Walmart, Sam Walton, the founder, introduced a social operating mechanism (SOM). They would meet regularly and discuss, compare with competitors their pricing strategy, merchandising, consumer behavior and trends and talk about the best practices. If CEOs have to deliver, they have to master both the business side and managing the people.
Mr Mukund Kasthuri: Fifty percent of my time goes in talent management. It starts with having the right people on the bus. Then we need to ensure they have the behavioral capabilities related to that job and the right attitude. They must have initiative, hunger and passion for growth. Passion, focus and clear communication are the three aspects which will help one grow in an organization and not politics. Understanding the expectations of the job, clarifying beforehand, then going after those things and getting feedback at a regular frequency will help them to develop management or business acumen.
The customer is the one around which everything is centered. You have to create value for the customer. I can relate velocity to inventory turnover ratio in our business. We must have a ratio of 3 to 3.5, so we don’t have non-moving stock. What stock to keep is the biggest challenge most of the CEOs face. The business model has changed slightly from B2B to B2C. The CEOs need to be abreast with technology. They have to make the right investments to make sure that the return comes faster.
Mr Senthilkumar Sivaswamy: In our automotive industry also, velocity is the inventory turnover. We need working capital to run our business. For each product, parts or the models that we are manufacturing worldwide, we need working capital. Before starting the project, we have to look at our suppliers and their payment term. We need to decide the inventory and come up with the budget for the working capital. We need to optimize the inventory turnover, for the for the whole lifetime of the product. Last week, I was in our Jeep plant in Portugal where we use Just In Time (JIT) concept. Normally, our product involves 10 parts. But in the jeep plant, we’re doing the complete model and it involves nearly 200 to 300 parts. Some parts we do and some parts we buy. We have to optimize the flow of the material, so that we keep the inventory low, so our gross margin will increase. The gross margin is very important in keeping the profitability or the earnings of the company.
Ms Sangeetha: In a company that’s not asset heavy, how will you work on Return on Assets?
Mr Mukund: We set up a company in Dubai. We did not want to make heavy investments. So, we went with the lease model. We went for third party logistics, rented office space and wanted to keep everything on a very low variable rather than have a fixed cost model. We invested on people. People are also an asset and an investment. Coaching helps people to increase their capability. We must try to work on the strengths of the people, rather than trying to change them. In all the IT companies, people are the assets. To retain people, we must provide a very good workplace culture, give them the freedom to operate and remuneration, which is in line with market trends.
What are your thoughts on managing the working capital?
The best is to have negative working capital. We followed that model in India when we started the company. We get maximum credit from our suppliers and take advance from our customers. This is the best mechanism to operate on negative working capital, because cash is king.
What are some of the good initiatives for maximizing the shareholders’ value?
Mr Senthil: We manufacture automotive parts which are relevant for both IC engines as well as e-mobility. We see a jump in the sales of electric vehicles compared to last year in India. By 2030, there is a prediction that 80% of two wheelers and 30% of cars will be e-vehicles. In Europe also, it’s growing faster. In India, we need to develop the infrastructure. We now have a gap from our products. So, we need to find alternative products. We need to move from the IC engine parts to e-mobility. For example, we are now offering rotor shaft and the cooling plate for the battery. Since 2017, we are into e-mobility in a big way.
We have also formed a separate company where we develop the autonomous vehicle. Benteler will release soon the autonomous vehicle called ‘People Mover.’ We have got the order and we are working with more than 100 suppliers. We will be releasing the prototype in the US. We’ll be releasing it in the market in 2025. I mean to say that if there is a gap in our earnings, we need to stay relevant in the market and be customer centric. If there are no customers, we don’t get any revenue. We have to see the trend in the market. Everyone wants to join a company or be in a company which is growing. That gives them energy and it’s also a psychological thing. That is how we can really increase the shareholder value.
A smart CEO is always in touch with the customer. How different is it for a B2B business and a B2C business, being in touch with the customer, knowing their behavior, patterns and the trends?
Mr Mukund: We are in B2B segment. Our customers are our dealers and distributors. Our consumers are steel plants, power plants, cement plants or whoever is using the product. The CEO will not be successful, if he (she) sits in a boardroom. He must lead from the front and must have a plan to visit the actual users and find out what exactly they are looking for. If he understands that, he can go back to his engineering, tweak the product or go for new product development to retain the existing customers, before going after new customers. It’s far easier and cheaper to retain existing customers than to acquire new customers. Being in touch with the customer is basically the same, whether it is B2B or B2C.
How should a CEO educate his team on the importance of price earnings ratio?
Mr Senthil: Everyone in the company should know about their price earnings ratio. The team has to understand that the PE ratio is a combination of the profit margin that they are getting on the investment and the velocity. They must know how to increase the velocity, the gross margin and the return on investment. Otherwise, PE ratio will come down and eradicate the shareholder value.
What are some effective ways to design the priorities for the business?
Mr Mukund: The first thing we look at is profitable sales growth. It has to be sustainable and consistent. This is a must, whether you operate in an existing market or go into a new market. The next priority is to reduce expenses, so that the margins and operating income increase. The priority of the business is to retain customers who are giving a higher value. Ensure that you have the right people who can delegate and execute, depending on which position they are in, to drive the business. Inventory turns ratio is an enabler for increasing the margin. Each CEO has to break down a problem into smaller bits and then attack those smaller bits, rather than looking at the whole problem as a big one and getting overwhelmed. A CEO cannot do everything on his own. He needs the right team. Collaboration among people is a basis of business.
Q&A
How can organisations match the skills with the roles and how can they improve that?
Ms Sangeetha: It’s important to leverage on the strengths of the people. You don’t expect a fish to fly. We must find out whatever each person is capable of, their natural talent and the skill. It’s important to make use of that. The person is also happy and passionate doing it and you get the most out of your people. It creates a win-win. Even the best people need to be coached. When somebody is doing well, we don’t pay much attention to them. Coaching is not just performance review, but helping them people to scale up to the next level, identify their blind spots, encouraging them to deliver their best and maximise their potential.
In maximization of profit, in a scenario where there is one customer who is willing to pay 100 and a repeat customer who’s willing to pay only 80, what will be the recommended option?
Mr Mukund: It’s cheaper to retain an existing customer than to acquire a new one. I would go with the repeat customer. Of course, I would love to have a combination of 100 from a new customer and 80 from a repeat customer. The overall mix has to be profitable. If not, you need to learn how to exit.
What should the CEO focus on: Profit, process, people or product?
Mr Senthil: It should be all. First of all, it is profit. To increase that, he must increase the velocity and gross margin using the people. The CEO should be the leader of business and also the leader of people.
In spite of ensuring all the KPIs, employees face increasing demands from CEOs. How can the employee meet these expectations?
Mr Mukund: The biggest problem, I believe, is matching KRA (Key Result Areas) and KPI (Key Performance Indicator). It is in the job description where most companies go wrong. When employees don’t get recognised when they meet the KPIs, they get upset. It’s a question of balancing aspiration and reality. I think, the right feedback is not being given throughout the year for the employee to change. If he/she can course-correct, it should not happen just at the end of the year appraisal. Feedback is supposed to be a continuous process. The employee must touch base with the manager at least three, four times in a year, so that he has enough time to course correct.
Who is important- the customer or the consumer?
Ms Sangeetha: The CEO or the business has to cater to the needs of both. The consumers tell you what they want. You can know their behaviours and the trends in your business through the customers. So, both are important.
Mr Mukund: In America, the distribution is the key. So, the customer is more important there. In every other country, I would go with the consumer, because I can create the customer who is the middleman who takes it to the consumer. It depends on where you’re operating.
What makes a salesman to achieve the targets on a regular basis?
Ms Sangeetha: Whatever your customer needs, you must address that in your selling process. Then you can become a winning salesman.
Mr Senthil: The CEO must give incentives to the salesman who aligns with the priority of the company. If the salesperson is selling with a low margin and if it is not aligning with the priority of the company, it’s not good. If we increase the top line, the revenue is increasing. But we should see the bottom line as well. Sometimes if we increase the top line, then we tend to reward the sales team. If the sales is not generating cash, it’s not good for the company.
Mr Mukund: A successful salesperson must have focus and passion and must connect with the customer. If you want to be continuously successful, you have to go in front of the customers, engage with them and understand them. You’re the only person standing in front of the customers who shoot bullets at you. You must know how to protect yourself and convince them that you have the best product.
Which is the best approach for a CEO to choose a successor- from within the organization or from outside?
Ms Sangeetha: Ssuccession planning is very important and essential. There is no hard and fast rule. It can be internal or external, but the most important thing is having the right person in the right job with the right capabilities and business acumen. He must know the business priorities and have the right skills. That’s what matters.
Will there be a difference in the expectation from a CEO depending upon whether it’s a pyramid or flat organization?
Mr Mukund: I don’t think so. The business priorities and the requirements of the owners and the stakeholders are the same, irrespective of whether there is a pyramid structure or a flat structure.
