Scaling Up: How a Few Companies Make It…and Why the Rest Don’t (Rockefeller Habits 2.0)

Metadata

• Title: Scaling Up: How a Few Companies Make It…and Why the Rest Don’t (Rockefeller Habits 2.0)
• Author: Verne Harnish
• Book URL: https://amazon.com/dp/B00O5RR7QO?tag=malvaonlin-20
• Open in Kindle: kindle://book/?action=open&asin=B00O5RR7QO
• Last Updated on: Sunday, April 9, 2023

Highlights & Notes

If you want to teach people a new way of thinking, don’t bother trying to teach them. Instead, give them a tool, the use of which will lead to new ways of thinking. — R. Buckminster Fuller Designer, inventor, futurist

This sequence describes the life cycle of most businesses as they move up the S-shaped curve of growth. The key to scaling this curve: 1. Attracting and keeping the right People; 2. Creating a truly differentiated Strategy; 3. Driving flawless Execution; and 4. Having plenty of Cash to weather the storms.

1. Attracting and keeping the right People; 2. Creating a truly differentiated Strategy; 3. Driving flawless Execution; and 4. Having plenty of Cash to weather the storms.

To paraphrase Steve Jobs, “I’m always amazed how overnight successes take a helluva long time.” If you’ve been in business less than 25 years, you still have time to make it big; if it has been more than 25 years, and you’ve not scaled up, it’s never too late!

Dumbest in the Room Senior leaders know they have succeeded in building an organization that can scale — and is fun to run — when they are the dumbest people in the room! In turn, if they have all the answers (or act like they do), it guarantees organizational silence, exacerbates blindness (the CEO is always the last to know anyway), and means the senior team ends up carrying the entire load of the company on their backs. The best leaders have the right questions, but turn to their employees, customers, advisors, and the crowd to mine the answers. Every business is more valuable to the degree that it does not depend on its top leader. For more on these topics, read Margaret Heffernan’s book Willful Blindness: Why We Ignore the Obvious at Our Peril and Liz Wiseman’s Multipliers: How the Best Leaders Make Everyone Smarter.

The best leaders have the right questions, but turn to their employees, customers, advisors, and the crowd to mine the answers.

To scale up a business from a handful of employees to something significant (i.e., build a company that has a chance to both put a “dent in the universe” and dominate its industry), our tools and techniques focus on three deliverables: • Reduce by 80% the time it takes the top team to manage the business (operational activities) • Refocus the senior team on market-facing activities • Realign everyone else (onto the same page) to drive execution and results

Leadership: the inability to staff/grow enough leaders throughout the organization who have the capabilities to delegate and predict • Scalable infrastructure: the lack of systems and structures (physical and organizational) to handle the complexities in communication and decisions that come with growth • Market dynamics: the failure to address the increased competitive pressures that build (and erode margins) as you scale the business

Therefore, your team must use our tools to master four fundamentals: • In leading People, take a page from parenting: Establish a handful of rules, repeat yourself a lot, and act consistently with those rules. This is the role and power of Core Values. If discovered and used effectively, these values guide all the relationship decisions and systems in the company. • In setting Strategy, follow the definition from the great business strategist Gary Hamel. You don’t have a real strategy if it doesn’t pass two tests: First, what you’re planning to do really matters to enough customers; and second, it differentiates you from your competition. • In driving Execution, implement three key habits: Set a handful of Priorities (the fewer the better); gather quantitative and qualitative Data daily and review weekly to guide decisions; and establish an effective daily, weekly, monthly, quarterly, and annual meeting Rhythm to keep everyone in the loop. Those who pulse faster, grow faster. • In managing Cash, don’t run out of it! This means paying as much attention to how every decision affects cash flow as you would to revenue and profitability.

In leading People, take a page from parenting: Establish a handful of rules, repeat yourself a lot, and act consistently with those rules. This is the role and power of Core Values. If discovered and used effectively, these values guide all the relationship decisions and systems in the company.

First, what you’re planning to do really matters to enough customers; and second, it differentiates you from your competition.

In the end, it’s about keeping everyone focused on the summit (BHAG®) and then deciding the appropriate next step (quarterly Priority) while respecting the rules that keep you from being swept off the mountain (Values). Everything in between this quarter and the next 10 to 25 years is a WAG: a wild-ankle guess! There are no straight lines in nature or business.

WAG: a wild-ankle guess!

The key is keeping your eye on the prize and adjusting course accordingly.

“Routine sets you free” is a key driving principle behind our methodologies and tools.

Goals without routines are wishes; routines without goals are aimless. The most successful business leaders have a clear vision and the disciplines (routines) to make it a reality.

Disciplines: To effectively execute, there are three fundamental disciplines (routines): Set Priorities; gather quantitative and qualitative Data; and establish an effective meeting Rhythm. It’s in these meetings, debating the data (the brutal facts!), where the priorities emerge.

“We have the answers, all the answers; it’s the question we do not know.”

KEY QUESTION: Are the stakeholders (employees, customers, shareholders) happy and engaged in the business; and would you “rehire” all of them?

“Right people doing the right things right.”

The toughest decisions to make are when the company has outgrown some of these relationships and you need to make changes.

It starts with your own relationship goals and priorities, then being clear who are the leaders accountable for the main functions and processes that drive the business.

You want to delegate these functions to people who fit your culture and pass two tests: 1. They don’t need to be managed. 2. They regularly wow the team with their insights and output.

In retaining employees and keeping them engaged, we’ll cover the five activities of great (vs. good) managers: • Help people play to their strengths. • Don’t demotivate; dehassle. • Set clear expectations and give employees a clear line of sight. • Give recognition and show appreciation. • Hire fewer people, but pay them more

KEY QUESTION: Can you state your firm’s strategy simply — and is it driving sustainable growth in revenue and gross margins?

The seven components: 1. What word(s) do you own in the minds of your targeted customers (e.g., Google owns “search”)? 2. Who are your core customers, what three Brand Promises are you making them (e.g., Southwest Airlines promises Low Fares, Lots of Flights, Lots of Fun), and how do you know you’re keeping these promises (Kept Promise Indicators, a play on KPIs)? 3. What is your Brand Promise Guarantee (e.g., Oracle has been advertising the chance to win $10 million if its Exadata servers don’t outperform the competition by a factor of five)? 4. What is your One-PHRASE Strategy that likely upsets customers (Apple’s “closed system”) but is key to making a ton of money and blocking your competition? 5. What are the three to five Activities that fit Harvard strategist Michael Porter’s definition of the essence of differentiation (e.g., IKEA’s furniture needs assembly)? 6. What is your X-Factor — a 10 times to 100 times underlying advantage over the competition — that completely wipes out any and all rivals? 7. What are your Profit per X (economic driver) and BHAG® for the company? These come straight from Jim Collins.

QUESTION: Are all processes running without drama and driving industry-leading profitability?

You know you have execution issues if three things exist: 1. There is needless drama in the organization (e.g., something shipped out late; the invoice was wrong; someone missed a meeting; etc.). 2. Everyone seems to be working more hours, spinning his wheels, or spending too much time fixing things that should have been done right the first time. 3. Most important, the company is generating less than three times industry average profitability.

Companies can get by with sloppy execution if they have a killer strategy or highly dedicated people willing to work 18-hour days, eight days per week to cover up all the slop. Just recognize you’re wasting a lot of profitability and time (i.e., you’ll burn both cash and people in the process!)

Who, What, When (WWW): Improve the impact of your weekly meetings by taking a few minutes at the end and summarizing Who said they are going to do What, When. This isn’t about micromanagement; this is about excellent management and being clear in both communication and accountability.

WARNING: You’ll drive everyone in the organization crazy if you implement all of these habits at one time. The key is focusing on one or two each quarter, giving everyone roughly 24 to 36 months to install these simple, yet powerful, routines. Then it’s a process of continually refreshing them as the company scales up.

Patrick M. Lencioni’s The Five Dysfunctions of a Team: A Leadership Fable,

In essence, your executive team needs to have a level of trust that permits true debate and constructive conflict to occur.

scaling a firm is about taking one significant step at a time and then checking data and adjusting accordingly. It is about setting a quarterly goal, providing the company with a badly needed finish line every 90 days, vs. just running and running and running. It also affords everyone an opportunity to celebrate or commiserate — and have some fun along the way. This is the power of setting a Quarterly Theme,

If communication is the #1 challenge, then nailing down accountabilities as the company scales is #2. This needs to be clear both vertically (across functions) and horizontally (across processes) throughout the organization. And it really gets messy when the organization moves to discrete business units.

QUESTION: Do you have consistent sources of cash, ideally generated internally, to fuel the growth of your business?

Growth sucks cash. This is the first law of entrepreneurial gravity. And nothing ages a CEO and his or her team faster than being short of cash.

Jim Collins and Morten T. Hansen, in their best-selling book Great by Choice: Uncertainty, Chaos, and Luck — Why Some Thrive Despite Them All,

“Growth sucks cash — the first law of entrepreneurial gravity.”

The quickest action you can take is to have your CFO give you a modified cash flow statement every day detailing the cash that came in during the last 24 hours, the cash that flowed out, and some idea of how cash is looking over the next 30 to 90 days. This will keep cash top-of-mind and give you a great feel for how cash is flowing through the business.

It’s also critical to know your Cash Conversion Cycle (CCC). It’s a technical term for how long it takes, after you spend a dollar/euro/yen on rent, utilities, payroll, inventory, marketing, etc., for it to make its way through your business model and back into your pocket. So that you can see how to calculate this, we recommend that you read a classic Harvard Business Review article titled “How Fast Can Your Company Afford to Grow?” by Neil C. Churchill and John W. Mullins.

Cash Conversion Cycle (CCC).

Harvard Business Review article titled “How Fast Can Your Company Afford to Grow?” by Neil C. Churchill and John W. Mullins.

The 7 main financial levers available to managers to improve cash and returns in the business are: 1. Price: You can increase the price of your goods and services. 2.Volume: You can sell more units at the same price. 3. Cost of goods sold/direct costs: You can reduce the price you pay for your raw materials and direct labor. 4. Operating expenses: You can reduce your operating costs. 5. Accounts receivable: You can collect from your debtors faster. 6. Inventory/WIP (work in progress): You can reduce the amount of stock you have on hand. 7. Accounts payable: You can slow down the payment of creditors.

The goal is to reverse the first law of entrepreneurial gravity and develop a viable business model in which the faster you grow, the more cash you generate — through larger deposits, faster collections, shorter sales and delivery cycles, etc. Then you’ve built a company that can self-fund its own growth.

Handling a company’s growth successfully requires three things: an increasing number of capable leaders; a scalable infrastructure; and the ability to navigate certain market dynamics.

Scaling up successfully requires leaders who possess aptitudes for prediction, delegation, and repetition.

I’m tired of sailing my little boat Far inside of the harbor bar; I want to be out where the big ships float — Out on the deep where the Great Ones are! … And should my frail craft prove too slight For storms that sweep those wide seas o’er, Better go down in the stirring fight Than drowse to death by the sheltered shore! — Daisy Rinehart

Great execution won’t get you anywhere if your strategy is wrong.

(For more on this key point from the founders of Pizza Hut, Boston Chicken, Celestial Seasonings, and California Closets, read this Fortune article by Verne: http://tiny.cc/worth-repeating.)

You’re experiencing the growth paradox: the belief that as you scale the company — and increase your dream team, prospects, and resources — things should get easier, but they don’t. Things actually get harder and more complicated.

Expanding from three to four people grows the team only 33%, yet complexity may increase 400%. And the complexity just keeps growing exponentially. It’s why many business owners often long for the day when the company was just them and an assistant selling a single service.

Leadership: the inability to staff/grow enough leaders throughout the organization who have the capabilities to delegate and predict • Scalable infrastructure: the lack of systems and structures (physical and organizational) to handle the complexities in communication and decisions that come with growth • Market dynamics: the failure to address the increased competitive pressures that build (and erode margins) as you scale the business

“Valleys of Death” — those points in the company’s growth where you’re bigger, but not quite big enough to have the next level of talent and systems needed to scale the venture.

There are roughly 28 million firms in the US, of which only 4% ever reach more than $1millioninrevenue.Ofthosefirms,onlyaboutoneoutof10,or0.4$10 million in revenue, and only 17,000 companies surpass $50million.Finishingoutthelist,thetop2,500firmsintheUSarelargerthan$500 million, and the top 500 public and private firms exceed $5 billion. Data indicate that there are similar ratios in other countries.

One to three employees (the majority of home-based businesses) • Eight to 12 employees (a very efficient company with a leader and a bunch of helpers) • 40 to 70 employees (a senior team of five to seven people, leading teams of seven to 10 — in a company where you still know everyone’s name) • 350 to 500 employees (seven leaders, with seven middle managers each, running teams of seven to 10 — actually a very efficient company) • 2,500 to 3,500 employees (more multiples of seven to 10)

Larry E. Greiner’s classic Harvard Business Review article titled “Evolution and Revolution as Organizations Grow,” from July-August 1972 (updated in May 1998).

As goes the leadership team, so goes the rest of the company. Whatever challenges exist within the organization can be traced to the cohesion of the executive team and its capabilities in prediction, delegation, and repetition.

Leaders don’t have to be years ahead, just minutes ahead of the market, the competition, and those they lead. The key is frequent interaction with customers, competitors, and employees.

Letting go and trusting others to do things well is one of the more challenging aspects of being a leader of a growing organization.

To get to 10 employees, founders must delegate activities in which they are weak. To get to 50 employees, they have to delegate functions in which they are strong!

And many leaders confuse delegation with abdication. Abdication is blindly handing over a task to someone with no formal feedback mechanism. This is OK if it is not mission-critical, but all systems need a feedback loop, or they eventually drift out of control.

Abdication is blindly handing over a task to someone with no formal feedback mechanism. This is OK if it is not mission-critical, but all systems need a feedback loop, or they eventually drift out of control.

Successful delegation requires four components, assuming you have delegated a job to the right person or team: 1. Pinpoint what the person or team needs to accomplish (Priorities — One-Page Strategic Plan). 2. Create a measurement system for monitoring progress (Data — qualitative and quantitative key performance indicators). 3. Provide feedback to the team or person (Meeting Rhythm). 4. Give appropriately timed recognition and reward (because we’re dealing with people, not machines).

Repetition encompasses consistency. Finish what you start. Mean what you say. And don’t say one thing and do something else. Consistency is an important aspect of repetition.

• @sergeiw

We’ll reinforce the power of repetition throughout the book. Specifically, we will look at: 1. Core Values: the handful of rules defining the culture, which are reinforced through your People (HR) systems on a daily basis 2. Core Purpose: the top leader’s regular stump speech to keep everyone’s heart engaged in the business 3. Big Hairy Audacious Goal (BHAG®): the 10- to 25-year goal that provides constant context for all of the decisions made throughout the organization 4.Priorities/Themes: a handful of three- to five-year, one-year, and quarterly priorities, which require repeated review on a daily and weekly basis to keep them top-of-mind

1. Core Values: the handful of rules defining the culture, which are reinforced through your People (HR) systems on a daily basis 2. Core Purpose: the top leader’s regular stump speech to keep everyone’s heart engaged in the business 3. Big Hairy Audacious Goal (BHAG®): the 10- to 25-year goal that provides constant context for all of the decisions made throughout the organization 4.Priorities/Themes: a handful of three- to five-year, one-year, and quarterly priorities, which require repeated review on a daily and weekly basis to keep them top-of-mind

key function of leadership is delivering frequent messaging and metrics to reinforce these key attributes of the company and culture.

Just as living cells need to be near nutrients, companies need to be close to customers (in terms of locations, product groups, and customer segments). This drives how companies structure their organizations and establish accountabilities.

The market makes you look either smart or dumb. When it’s going your way, it covers up a lot of mistakes. When fortunes reverse, all your weaknesses seem to be exposed.

As the firm scales from $1millionto$10 million in revenue, the senior team tends to be focused externally on amassing new business. Yet this is precisely the time when a little more internal focus, to establish healthy organizational habits and a scalable infrastructure, would pay off in the long term.

Between startup and the first million or two in revenue, the key driver is revenue (sell like hell). The focus is on proving that a market exists for your services.

It’s between $1millionand$10 million that the team needs to focus on cash. Growth sucks cash, and since this is the first time the company will make a tenfold jump in size, the demands for cash will soar. In addition, at this stage of organizational development, the company is still trying to figure out its unique position in the marketplace, and these experiments (or mistakes) can be costly. This is when the cash model of the business needs to be worked out (e.g., “How is the business model going to generate sufficient cash for the company to keep growing?”). Will the business model generate its own cash internally; have sufficient lines of credit to sustain growth; and attract investors with deep-enough pockets to support it?

• @gabrielhdm

To prevent the erosion in your margins, it’s critical that you maintain a clear value proposition in the market. At the same time, the company must continually streamline and automate internal processes to reduce costs. Organizations successful at doing both will see their gross margins increase during this stage of growth, giving them the extra cash they need to fund infrastructure, training, marketing, R&D, etc.

Which brings us full circle to the main function of a business leader: to build a predictable revenue and profit engine in an unpredictable marketplace and world.

The spoils of victory go to those who maintain a steady pace, day in and day out, in all kinds of weather and storms. And it’s this predictability, driven by effective processes, that is ultimately the key to crafting an organization that attracts and keeps top talent; creates products and services that satisfy customer needs; and generates significant wealth.

QUESTION: Are all stakeholders (employees, customers, shareholders) happy and engaged in the business; and would you “rehire” all of them?

Are all stakeholders (employees, customers, shareholders) happy and engaged in the business; and would you “rehire” all of them?

So how do you know you need to make changes on the people side of the business, and in your life, as you scale up the venture? Two questions: 1. Are you happy? We’re not talking about some kind of monklike peace, even in misery. This is a more straightforward question. Do you enjoy coming to work? Or are you experiencing irreconcilable issues with business partners? Is there a specific executive not getting the job done? Is there a team member who disrupts everyone else? Is there a customer with too big a piece of your revenue? Is there a supplier not delivering? Is an investor or the bank making your life difficult? Are you having issues with a family member or friend? 2. Would you enthusiastically rehire everyone, knowing what you know today? This goes hand-in-hand with the questions above (except for family!) and includes not only employees but existing customers, suppliers, and other stakeholders in the business. It’s a painful question that requires one to face the brutal facts and make changes. It’s especially tough when the company has simply outgrown some earlier relationships.

ACTION: Is there a relationship that is draining you emotionally? If you need to deal with a contentious situation, we suggest you read Crucial Conversations: Tools for Talking When Stakes Are High, by Kerry Patterson, et al.

Crucial Conversations: Tools for Talking When Stakes Are High, by Kerry Patterson, et al.

Nothing is tougher and more time-consuming than having to replace people who haven’t kept up with the growth of the business.

“The bottleneck is always at the top of the bottle,” notes management guru Peter Drucker. Challenges within the company normally point to issues with, or among, the leaders. To address them, this chapter will focus on the leadership team.

As a company scales up, the toughest decisions involve people and their changing roles in the organization, especially within the leadership team. Loyalties, egos, and personal friendships make these decisions even more difficult when the company faces a situation in which it has outgrown some of its early leaders.

This is the main principle underpinning effective organizational design. Divide big teams into smaller ones aligned around projects, product lines, customer segments, geographical locations, etc., based on the idea of getting everyone in the organization into small teams and as close to his or her respective customers as possible.

Divide big teams into smaller ones aligned around projects, product lines, customer segments, geographical locations, etc., based on the idea of getting everyone in the organization into small teams and as close to his or her respective customers as possible.

Each cell within the organization must have someone clearly accountable for it. This doesn’t mean the person is boss and/or gets to make all the decisions. In fact, it’s important to delineate the differences between accountability, responsibility, and authority.

Accountability, Responsibility, and Authority Though spelled differently, these business terms are often haphazardly interchanged. Here are our definitions: Accountability: This belongs to the ONE person who has the “ability to count” — who is tracking the progress and giving voice (screaming loudly) when issues arise within a defined task, team, function, or division. It doesn’t mean he or she makes all the decisions (or even any decisions) — which is why people often talk about leaderless teams. However, someone must still be accountable. The rule: If more than one person is accountable, then no one is accountable, and that’s when things fall through the cracks. Responsibility: This falls to anyone with the “ability to respond” proactively to support the team. It includes all the people who touch a particular process or issue. Authority: This belongs to the person or team with the final decision-making power. “If more than one person is accountable, then no one is accountable.”

Accountability: This belongs to the ONE person who has the “ability to count” — who is tracking the progress and giving voice (screaming loudly) when issues arise within a defined task, team, function, or division. It doesn’t mean he or she makes all the decisions (or even any decisions) — which is why people often talk about leaderless teams. However, someone must still be accountable. The rule: If more than one person is accountable, then no one is accountable, and that’s when things fall through the cracks. Responsibility: This falls to anyone with the “ability to respond” proactively to support the team. It includes all the people who touch a particular process or issue. Authority: This belongs to the person or team with the final decision-making power.

Getting accountabilities clear throughout the organization is crucial.

Column 4 — Wealth Rather than viewing financial wealth as an end in itself (as a wise guru once told Verne, “All assets become liabilities!”), see it as a resource for supporting the rest of your personal plan. Besides determining how much money you want to set aside for retirement, set goals for the amount of money you want to donate to causes and communities that matter to you over the next several years. Decide how much money you need to support activities with your family and friends, investing in experiences in the coming 12 months that create lasting memories. And note any wealth-producing assets or cash-draining liabilities you need to address in the coming months.

Overall, focus on how your wealth will flow through you in the service of others, rather than hoarding it. This seems to attract more wealth — the natural law of reciprocity. Lynne Twist’s insightful book titled The Soul of Money: Transforming Your Relationship With Money and Life expounds upon this idea. We hope you find the OPPP a useful planning tool for your life. Let’s now turn our focus to the company.

An organization is simply an amplifier of what’s happening at the senior level of the company,

you want to delegate the functions listed on the FACe tool to leaders who pass two tests (including culture fit): 1. They don’t need to be managed. 2. They regularly wow the team with their insights and output.

The chart asks you to list one or two key performance indicators (KPIs) for each function. These KPIs represent the measurable activities each functional leader needs to perform on a day-to-day basis. The last column on the chart captures the outcomes expected for each function (i.e., who is accountable for revenue, gross margin, profit, cash, etc.). These outcomes normally represent line items on the financial statements.

These KPIs represent the measurable activities each functional leader needs to perform on a day-to-day basis.

When completed, this one-page accountability tool helps you diagnose where you have people and performance gaps on the leadership team.

As a general rule, you can move people up or over into these functional positions at any time. However, if you need to bring someone in from the outside to fill a senior leadership position, you should do this only once every six to nine months. It takes this length of time to find the right person, get him comfortable in the position, and transfer the DNA of the organization into his psyche. In turn, the new executive will need this amount of time to positively impact the organization enough to pay back his salary. Now you can afford to bring in another leader. The rule is to take it slow when bringing outsiders into senior leadership roles. The exception is when the company is venture-backed and/or growing 100% a year and needs to bring on three or four key executives within a short period of time.

WARNING: Whatever is the strength of a leader often becomes the weakness of the organization (e.g., if the founder is strong in marketing, the business may eventually find it’s weak in this functional area). Why? Because leaders have a tendency to hold on too tight, strangling the efforts of those around them. Or the leaders figure they can “watch over the details,” bringing in someone too junior to oversee the function vs. bringing on the powerhouse they really need. Instead, leaders must make a counterintuitive decision and find people who exceed their own capabilities in their area of strength, to prevent the company from stalling.

Whatever is the strength of a leader often becomes the weakness of the organization (e.g., if the founder is strong in marketing, the business may eventually find it’s weak in this functional area). Why? Because leaders have a tendency to hold on too tight, strangling the efforts of those around them. Or the leaders figure they can “watch over the details,” bringing in someone too junior to oversee the function vs. bringing on the powerhouse they really need. Instead, leaders must make a counterintuitive decision and find people who exceed their own capabilities in their area of strength, to prevent the company from stalling.

NOTE: When looking at business units farther down the first column, even though you might not have formal business units, you might organize discrete teams around customer groups, product lines, or locations. You can consider these quasi-business units.

When looking at business units farther down the first column, even though you might not have formal business units, you might organize discrete teams around customer groups, product lines, or locations. You can consider these quasi-business units.

Once the team has agreed on the people accountable for each function, consider the four questions summarized at the bottom of the form: 1. Do you have more than one person accountable for a function? The founder might be sharing accountability for sales with another executive, or partners might all be listed next to “head of company.” The rule is that only one person should be accountable; otherwise, there will be confusion. Having more than one name in a box is a red flag. 2. Does someone’s name show up in more boxes than everyone else’s? We recognize that in growth companies, leaders may wear multiple hats, but if one executive’s name shows up three or four times compared to everyone else’s one or two, that leader is either going to die young (a little dramatic) or one of the functions he or she owns will not be supported sufficiently. This is another red flag.

The rule of accountability means one person must ultimately take ownership, however, so the person to whom these people report has overall accountability.

CEOs often avoid these decisions because they involve executives who have become dear friends. We recognize that this is a touchy subject, but it must be faced if the organization is to grow. One option is for some of the early team members to help launch a new product or division. They are usually more comfortable in a start-up situation or working on a smaller team. And several of the early leaders might be relieved to have the burden of an increasingly important and complex function taken off their shoulders. You won’t know until you have these crucial conversations.

Key Performance Indicators: The 75 Measures Every Manager Needs to Know, by Bernard Marr.

WARNING: A common mistake is simply noting down KPIs that are representative of the daily and weekly activities of the person listed for a particular function. It’s critical to zero-base your KPI decisions. Do this by covering up the names listed in the “Person Accountable” column (metaphorically or physically) and then decide on KPIs for each function that align with the business model of the company. Then consider if the person in the job function has the skills and aptitude to deliver on those KPIs. A mismatch might indicate a potential problem.

the main job of the head of the company is to make sure she has the right people doing the right things right). And when many founders/CEOs realize this, they often bring in someone else to head the company so they can focus on R&D or marketing or customer advocacy. That’s why we emphasize separating titles from functions.

The Great Game of Business: The Only Sensible Way to Run a Company

This is a great exercise for the CFO or person in charge of accounting to lead. Go through your financial statements and decide who is accountable for each line item. Then pick the most important line items for each of the functions listed on your FACe tool and transfer the answers to the “Results/Outcomes” column.

Most organizations, at some point in time, develop detailed job descriptions for all the key roles in a company … a huge project. We are not big fans of job descriptions and prefer Topgrading’s Job Scorecards, which you’ll learn about in the next chapter.

Remember, your company is a living organism that needs to survive in an environment that’s always changing. To thrive, it has to be able to adapt. Charles Darwin found that survival is determined by the ability to adapt to circumstances.

Lean is an approach to process design focused on eliminating time wasted on activities that don’t add value for customers.

One of the keys to Lean is objectively modeling and measuring productivity and then using simple visual systems to eliminate costly mistakes.

“Lean describes waste as anything that happens in a company that a customer would not want to pay for,”

NOTE: Sim emphasizes that there were eight fewer people because of natural attrition. “We will never let go of a person because of Lean,” exclaims Sim. “Otherwise, Lean will die as an initiative. No one is going to implement stuff that will end up costing them their job.”

Case in point: Nurse Next Door’s payroll and billing accountant, Noreen, was working evenings and weekends before implementing Lean. A year later, with twice the payroll, she was accomplishing the job in half the time. When she mentioned in a huddle that she had nothing to do because of her success, the leadership team suggested she take some time off as an example and incentive for everyone else in the office to pursue Lean initiatives. Nurse Next Door is now teaching these Lean techniques to its franchise partners, so they can work on growing their businesses vs. doing payroll all day.

Parsons, like Sim, warns that Lean is not about reducing headcount. It’s about reducing waste. Redirect the time and energy your people get back from eliminating wasted efforts, devoting them to serving customers, making sales, and growing the business.

warns that Lean is not about reducing headcount. It’s about reducing waste. Redirect the time and energy your people get back from eliminating wasted efforts, devoting them to serving customers, making sales, and growing the business.

ACTION: Discuss and agree on the four to nine key processes in your organization.

The person to whom all these process leaders report is usually the head of operations (a COO type). Operations people are generally systems-focused. You want a head of operations who is obsessed with process mapping and improvement — or better yet, experienced in implementing Lean.

You want a head of operations who is obsessed with process mapping and improvement — or better yet, experienced in implementing Lean.

ACTION: For each key process you’ve identified, decide who within the organization will be accountable. These people are then accountable to the head of operations.

Identify a few KPIs to track each process. As with the FACe tool, the Process Accountability Chart (PACe) requires that each process have indicators (time, cost, or quality) that will signify its health. One of the most important KPIs for processes is time — in either number of days (to deliver) or number of hours (to produce). It applies to almost every industry, as customers normally want things better, faster, and cheaper, whether we’re talking about a product or service.

ACTION: List one to three KPIs for each process to measure its speed, quality, and cost.

Once you have completed your PACe, gather someone from every function that touches a specific process, including a few customers who are affected by the process (if possible). Using colored Post-it Notes to represent each function (sales is green, accounting is blue, etc.), map out the steps and decision points as the process currently flows. Then step back and begin streamlining the process, eliminating wasteful steps and removing obstacles.

It’s important to revisit and examine one process every 90 days as part of your quarterly planning process. Like hallway closets and garages, these processes get junked up and need to be recleaned periodically. With four to nine processes, each will get examined roughly every 12 to 24 months, which is sufficient to keep your company running drama-free.

ACTION: Assemble the appropriate people for each key process, and list, debate, and decide the steps and decision points for that process.

Checklists help] with memory recall and clearly set out the minimum necessary steps in a process.

… [Checklists] provide a kind of cognitive net. They catch mental flaws inherent in all of us — flaws of memory and attention and thoroughness.

Apple stores draw more people in one single quarter than visit Disney’s four major theme parks in one year.

to-remember steps of service training, the initial letters of which spell out APPLE: • Approach customers with a personalized warm welcome. • Probe politely to understand all the customers’ needs. • Present a solution for the customers to take home. • Listen for and resolve any issues or concerns. • End with a fond farewell and an invitation to return.

Approach customers with a personalized warm welcome. • Probe politely to understand all the customers’ needs. • Present a solution for the customers to take home. • Listen for and resolve any issues or concerns. • End with a fond farewell and an invitation to return.

In the meantime, if you’re experiencing some drama, maybe a simple checklist will help.

• @robertozj @sergeiw

To conclude, the strength of your People comes from the right leadership doing the right things right (FACe); and the right systems and processes supporting these people to keep the business flowing (PACe). With the combination of the right FACe and the right PACe, you have the key people and process ingredients for a great company.

Attracting and hiring A Players, at all levels of the organization, is as critical as landing the right customers. This requires the active participation of the marketing function in the recruiting process and the use of Topgrading methodology in the interviewing and selection process. With both, detailed in this chapter, your company will have a huge pool of candidates from which to choose enough “strange” people (who fit your differentiated strategy and culture) to scale up the business.

NOTE: The cost of a bad hire is 15x his or her annual salary, according to Topgrading, so it’s important to get the recruiting and selection process right.

The cost of a bad hire is 15x his or her annual salary, according to Topgrading, so it’s important to get the recruiting and selection process right.

A Job Scorecard details a person’s purpose for the job, the desired outcomes of this individual’s work, and the competencies — technical and cultural — required to execute it.

An A Player, by the Smarts’ definition, is someone in the top 10% of the available talent pool who is willing to accept your specific offer.

A central element of a Job Scorecard is the handful of specific and measurable outcomes that a potential hire needs to accomplish over the coming one to three years. While a job description tends to list what people will be doing (e.g., coaching sales reps, building client relationships), a Job Score-card describes the outcomes you want from such activities ($8 million in revenue, seven new S&P 500 clients, a 100% contract renewal rate among the customers the trash collector serves).

Another central element is the list of candidate competencies that align with your culture and strategy. As experienced leaders discover, it’s more important to hire for this kind of fit than for specific skills, so long as a person has the capacity to learn and grow (though it’s best if you can find someone who’s a match in both cultural values and skill set).

Change to Strange: Create a Great Organization by Building a Strange Workforce

“If your competitive advantage depends on your people creating something valuable and distinctive, then your workforce can’t be normal.” Therefore, if you want to have a differentiated strategy, you can’t hire, compensate, and have the same HR systems supporting the same people as your competition.

The best candidates are probably working somewhere else and need a reason to consider your organization. And because budgets are always tight in growing firms, you must find clever marketing approaches to attract the specific kind of “strange” talent you’re seeking.

And because budgets are always tight in growing firms, you must find clever marketing approaches to attract the specific kind of “strange” talent you’re seeking.

“One thing we learned while building Google is that it’s easier to find what you’re looking for if it comes looking for you. What we’re looking for are the best engineers in the world. And here you are.”

The ad, he notes, “is an example of how we give our company culture and value a high priority.”

book written by the CEO (something we strongly recommend); a regular column in the local biz journal; a popular blog; and/or regular LinkedIn Influencer posts are great recruiting (and marketing) tools and ways to grab attention in an industry.

The length of this interview offers several benefits: 1. A Players like a vigorous process and are leery of companies that make it too easy. 2. “Professional” interviewees can’t keep up the façade for hours. 3. Meanwhile, those who are not initially comfortable will have time to relax and open up. 4. Besides, what’s three to four hours now vs. thousands of hours of headaches if you hire the wrong person? NOTE: A three- to four-hour interview is appropriate for a middle or senior leader; one to two hours might be more suitable for entry-level or less experienced candidates with limited work history.

Nash believes that people who had to earn money for themselves as teenagers tend to be well-grounded, so the questions might include: “What did you spend money on as a teenager? How did you get that money?”

An interviewer might also ask questions like: “Do you discuss religion and politics with people? When was your last passionate debate? Who was it with? And what was it about? How did it turn out?” “If the answer to the last question was, ‘I’ll never respect that person again,’ we know the person isn’t open to different ideas,” says Nash.

The idea, writes Amazon CEO Jeff Bezos in his 2014 letter to shareholders, is “to encourage folks to take a moment and think about what they really want. In the long run, an employee staying somewhere they don’t want to be isn’t healthy for the employee or the company.”

EXECUTIVE SUMMARY: Once you’ve hired your team members, it takes great managers to keep them happy and engaged. Failing to develop these managers throughout the organization can become a major growth barrier. We identify five critical activities that distinguish great managers and the routines they use to educate their people — and we suggest that the term “manager” be replaced with the word “coach,” which more accurately describes the role. We’ll also share hard evidence that investments in training and coaching (vs. R&D and capital expenditures) provide you with the best returns available to your business.

Failing to develop these managers throughout the organization can become a major growth barrier.

People join companies. They leave managers. Therefore, to keep your team happy and engaged, you need one thing above all else: great managers — not free lunches or yoga classes!

failure to develop sufficient leadership is one of the three biggest barriers to growth.

on-one coaching (rather than superior technical knowledge) ranked as the #1 key to being a successful leader.

From our experience, great managers must focus those coaching sessions with their “direct supports” (a better term than “direct reports”) on five topics representing the five main activities of successful managers. In reverse order of importance: 5. Hire fewer people, but pay them more. 4. Give recognition, and show appreciation. 3. Set clear expectations, and give employees a clear line of sight. 2. Don’t demotivate; “dehassle.” 1. Help people play to their strengths.

five topics representing the five main activities of successful managers. In reverse order of importance: 5. Hire fewer people, but pay them more. 4. Give recognition, and show appreciation. 3. Set clear expectations, and give employees a clear line of sight. 2. Don’t demotivate; “dehassle.” 1. Help people play to their strengths.

Drive: The Surprising Truth About What Motivates Us,

The key to affording higher wages (we’re talking frontline employees, not senior leadership) is a lower total wage cost as a percent of revenue. You have to remain competitive, and the best companies know that one great person can replace three good ones. Through rigorous selection (i.e., Topgrading), they get the absolute best talent in the door, pay employees above-market rates, and then invest heavily in training and development to make them more productive.

You have to remain competitive, and the best companies know that one great person can replace three good ones.

“Do we want a whole bunch of low-paid dumb folk; or would we rather have a whole lot fewer, better-paid smart folk?”

Costco pays its employees roughly 70% more per hour than Sam’s Club, yet needs almost 40% fewer employees per dollar of revenue. And with a 6% employee turnover after one year vs. 21% for Sam’s, Costco saves a tremendous amount on recruiting, training, and development. In general, competing on low labor and training costs is a slippery road and usually not sustainable.

In general, competing on low labor and training costs is a slippery road and usually not sustainable.

Last, when it comes to the key people who absolutely drive performance, great managers simply do whatever it takes to keep them on board, including offering a customized compensation package. If one person wants less base and more incentive-based pay, so be it. If another wants more time off, let it happen. “Fairness” does not mean “sameness.” You need to be creative and flexible in order to keep your top talent happy, from a compensation-package perspective.

If one person wants less base and more incentive-based pay, so be it. If another wants more time off, let it happen. “Fairness” does not mean “sameness.” You need to be creative and flexible in order to keep your top talent happy, from a compensation-package perspective.

“The deepest principle of human nature is the craving to be appreciated,” wrote William James, the father of American psychology. It is impossible to be motivated and do great work if you don’t feel that somebody cares and appreciates what you do.

The way people want to receive recognition varies greatly: public vs. private, material vs. immaterial, from peers vs. from superiors, etc. Great managers test different approaches and observe reactions until they find the triggers that work best with each of their people.

Peak: How Great Companies Get Their Mojo from Maslow,

Can your employees explain how what they’re doing helps deliver on your company’s purpose, strategy, and Brand Promise?

Once people understand their role and contribution, great managers set clear and consistent expectations about the outcomes of their team’s work. By defining the what and not the how, great managers give employees the autonomy to find their own way of achieving these goals. Feeling the liberty to figure things out for themselves and apply their own style is very important for people, since autonomy is one of three main drivers of human motivation, as Dan Pink explains in Drive.

The #1 demotivator for talented people is having to put up with bozos, as Steve Jobs would call them. Nothing is more frustrating for A Players than having to work with B and C Players who slow them down and suck their energy. In that sense, “The best thing you can do for employees — a perk better than foosball or free sushi — is hire only ‘A’ players to work alongside them. Excellent colleagues trump everything else,”

Nothing is more frustrating for A Players than having to work with B and C Players who slow them down and suck their energy.

On the process side, do your people have the appropriate tools and resources they need to get the job accomplished? Are there lame policies and procedures frustrating your team? Do you need to bring in a Lean expert to help your people design new processes or streamline existing ones? Where might they be spinning their wheels because of unnecessary delays? Focus on ways to make your team’s job(s) easier — a great definition of an effective manager.

What ultimately sets great managers apart from the merely good ones is that they help their people play to their strengths.

A strength isn’t just something you’re good at; it’s only a strength if it literally gives you strength, gives you energy

In turn, a weakness, is something that, though you may be good at it, drains the life out of you.

To do this, Buckingham suggests taking a couple of weeks and documenting all those activities you either love or loathe. This is precisely what Melbourne has her programmers do regularly, noting all of the activities that drain their energy and keep these techies away from their primary strength: programming. She then eliminates those activities no one should have to do (they creep into every job) and then uses the remaining list to create a Job Scorecard for a new position — to be filled by a new chess piece that loves to do what others hate. Result: happier, more productive, and loyal programmers.

Scaling up a business requires both visionary leadership and great managers.

In order to keep your company competitive and your people loyal, you must grow them through education and coaching.

“Why don’t you throw people a party when they start, instead of when they leave?”

Onboarding needs to be a celebration, not paperwork. It should create emotional connections between the new recruit and a maximum number of team members.

Uncommon Service: How to Win by Putting Customers at the Core of Your Business,

All Growth Companies Are Training Companies

The only way to grow a company is to grow the people first.

the best growth firms are, first and foremost, training companies.

(we suggest 12 hours for the frontline; 25 hours for middle management; and 45 to 60 hours for senior leaders as a starting point).

Worried about spending all that money on training only to watch your people go elsewhere? The research definitively shows that training and development increases loyalty. Besides, what’s the alternative? Do you really want your people not to be the best-trained for the jobs they have to do?

And how much should you spend on training? It obviously depends, but 2% to 3% of your payroll is a good benchmark. Who should you spend it on? Senior leaders, middle managers, frontline employees? They all need training, but focus first on your middle management. In most growth companies, they have the hardest jobs and are critical to employee engagement and retention, yet get the least preparation for it.

As Google’s people analytics team discovered, one-on-one coaching is the #1 factor linked to great management.

Leadership and the One Minute Manager: Increasing Effectiveness Through Situational Leadership,

Use these conversations to review individual KPIs, Priorities, and Critical Numbers from column 7 of the OPSP at each meeting. Recognize good performance, analyze underperformance, and discuss activities needed to get back on track. Ask questions to put the focus on the process, rather than lamenting results. Also give feedback on adherence to Core Values and, if necessary, develop strategies to correct behavior. Don’t hold back. Timely feedback is the most effective. It is easier to digest and prevents the formation of bad habits.

And above all, make your coaching situational throughout the process. Again, read Blanchard’s book on Situational Leadership. We also recommend Beverly Kaye and Julie Winkle Giulioni’s book Help Them Grow or Watch Them Go: Career Conversations Employees Want. It is a great resource with many practical tips and hands-on guidelines on how to structure your one-on-one conversations. Add Brian Souza’s book The Weekly Coaching Conversation to help get your managers into the mindset required for great coaching. And last, read Chapters 5 and 6 in Marcus Buckingham and Curt Coffman’s First, Break All the Rules: What the World’s Greatest Managers Do Differently to learn more about strengths-based management and coaching.

Help Them Grow or Watch Them Go: Career Conversations Employees Want.

The Weekly Coaching Conversation

First, Break All the Rules: What the World’s Greatest Managers Do Differently

“Great coaches consistently get the most out of their people, because they consistently put the most into their people,”

“When all is said and done and we’ve completed this journey we call life, what will matter most is not what we have achieved — but rather who we have become.”

With this in mind, we finish this chapter with a plea: People are not resources that you consume. So rethink the name of the department that takes care of them. Call it Talent Development, Human Relations, People Support, or whatever fits your culture — anything but Human Resources.

People are not resources that you consume. So rethink the name of the department that takes care of them. Call it Talent Development, Human Relations, People Support, or whatever fits your culture — anything but Human Resources.

KEY QUESTION: Can you state your firm’s strategy simply — and is it driving sustainable growth in revenue and gross margins?

Successful athletes know the power of having a strong core, no matter what the sport. Growth firms require a similar core to maintain a strong culture. This chapter will discuss the practical role of Core Values, Purpose, and Competencies when scaling up a business. It will explain how to articulate the Core so it’s more than just a list posted on the wall. We will outline eight ways to use your Core to drive the people (HR) systems in the company, using the case study of Appletree Answers.

Successful athletes need a strong core — or midsection — to provide overall stability, power, and control. The same is true for growth firms. Without a strong core, the organization risks instability from cultural challenges, loss of focus, disengagement, and lack of heart as it scales up. It will experience the proverbial wheels flying off as the business speeds down the highway. And just as a strong center is based on having stronger lower-back muscles, oblique muscles, and abdominal muscles, there are three equivalent muscles at the center of the organization: Values, Purpose, and Competencies.

And just as a strong center is based on having stronger lower-back muscles, oblique muscles, and abdominal muscles, there are three equivalent muscles at the center of the organization: Values, Purpose, and Competencies.

Core Values are the rules and boundaries that define the company’s culture and personality, and provide a final “Should/Shouldn’t” test for all the behaviors and decisions by everyone in the firm. It’s especially important that top managers lead by example, making sure their behaviors and decisions align with the Values.

When Values fully permeate the company, the leadership team can avoid being sucked into many of the day-to-day operational issues. The rule becomes, “If you think you need to ask me permission for something, just consult the Core Values!” This gives management the confidence to delegate important tasks. They can trust that employees will know the right things to do when faced with a decision or an ethical dilemma.

Discerning the Core Values is a DISCOVERY process, not the creation of a wish list of nice-to-haves.

“Discerning the Core Values is a discovery process.”

To give you the flavor of the Core Values of a growth company, here are Gazelles’: • Practice what we preach • Nothing less than ecstatic customers • First class for less • Honor intellectual capitalists • Everyone an entrepreneur • Never, ever, ever give up

“Building Your Company’s Vision,” by James C. Collins and Jerry I. Porras.

If the Core Values are the soul of the organization, the core Purpose (some call it “mission”) gives it heart. The Purpose answers the ageless question “Why?” Why does what we do matter, and what difference are we making in the world? Why would our customers or the world miss us if we weren’t around?

“A powerful Purpose tends to revolve around a single word or idea.”

We find that a powerful Purpose tends to revolve around a single word or idea: • 3M: Innovation • Disney: Happiness • Wal-Mart: Robin Hood Even Starbucks’ heritage was built on the idea of being an escape — a third place — between work and home.

This central word or idea is then expanded into a phrase or two, but is most easily remembered and acted upon when it has a single word or idea at its core. To discern this Purpose, gather a team together and start with the question, “What do we do?” (You might answer: “We’re a school.” “We sell overpriced coffee.” “We host a CRM system.”) Then ask “Why?” several times (a technique known as the five whys). Why does this matter, or what difference can we make? Keep asking until you get to your version of “Save the world,” and then back up one step.

At Gazelles, we are an executive education and coaching company. Why does this matter? In the end, it’s all about freedom. It’s freeing leadership teams from the day-to-day so they can get out and grow the firm. It’s about helping entrepreneurs, who launched a business for the freedom and independence it promised, to deal with the new constraints of their own creation. And ultimately, we see ourselves as freedom fighters. “A country with gazelles excels” is our motto. There cannot be a truly free society without growth firms underpinning a healthy economy and generating jobs. You don’t have to buy into this, but this is why we wake up and keep plugging away.

A Core Competency has three attributes, according to Prahalad and Hamel: 1. It is not easy for competitors to imitate. 2. It can be reused widely for many products and markets. 3. It must contribute to the benefits the end customer experiences and the value of the product or service to customers.

“Don’t define Core Competencies too narrowly.”

It’s equally important for a company to understand what it is inherently incapable of doing, or its core weaknesses. 3M has never been effective at selling direct to consumers, so it has developed a core strength of working effectively with distribution partners. In turn, it has divested itself of certain product lines that the market has forced into direct channels.

As we’ll discuss later in the “Strategy” section, your organization’s Core Competencies provide boundaries for determining what product and service offerings you should pursue. They are also foundational in helping you determine how to differentiate the company in the marketplace. Once you articulate your Values, Purpose, and Competencies, put them to work in creating an engaged and focused team.

“What CEOs don’t realize is the access you have that other people don’t, and how you can create opportunities for people you never would have thought of,” says Ratliff.

Integrity matters • Think like a customer • Spirited fun • Be quick, but don’t hurry (borrowed from legendary basketball coach John Wooden) • Employees are critical • Small details are huge • Take care of each other

It is worth noting that Appletree renamed its HR Department the Employee Experience Department. “The #1 goal of HR was to create better employee experiences, and we wanted them to focus on that,” says Ratliff.

Each winner received a T-shirt imprinted with the corresponding Core Value.

“Every time you praise or reprimand someone, tie it back to a Core Value or Purpose.”

EXECUTIVE SUMMARY: Without a powerful, industry-dominating strategy, you’ll spend the next several years generating very little traction in the marketplace. To address this challenge, we’ve integrated several of the best-known strategic concepts into one comprehensive framework — called The 7 Strata of Strategy — for scaling up your business. It provides an agenda for the strategic thinking team to create and maintain a competition-crushing, differentiated approach to a specific market. There are recommended resources to bolster your team’s understanding of each stratum. It’s hard work, which is why we suggest you assign this effort to a handful of leaders.

When you nail your strategy, top-line revenue growth and fat margins come almost effortlessly.

“More companies die from indigestion than starvation.”

We strongly suggest dividing up the workload and having each executive team member read one of the recommended books or articles and then brief the rest of the executives. Strategy is what a senior team should be spending the bulk of its time on, anyway — not fighting fires on a day-to-day basis, which is best left to the middle managers.

NOTE: If this work were easy, every company would have a killer strategy. The process can be very uncomfortable for CEOs, who might feel they should already have all the answers. After all, it’s the CEO’s primary job to set and drive the strategy of the business. At the same time, it’s a very messy and creative process requiring lots of learning and talk time with a myriad number of customers, advisors, and team members. This can be particularly difficult for engineering types who want to follow a sequential process to finding the right answers. It just doesn’t happen that way.

The first step in completing the 7 Strata and working through the 4Ps or 4Es of marketing is designating a strategic thinking team. Select no more than three to five people to meet for an hour or so each week to discuss each of the Strata and other issues of strategic importance.

Select no more than three to five people to meet for an hour or so each week to discuss each of the Strata and other issues of strategic importance. It’s not sufficient to schedule strategic thinking time once every quarter or year. It’s all about iterations: making a few decisions, testing them, and coming back to the table the following week for discussion.

The council doesn’t accomplish its work in isolation. The council members are expected to spend time each week talking with customers and employees and checking out competitors, extracting insights and ideas to fuel their strategic thinking.

In the end, strategic decisions need to be made, and it’s the job of the CEO to make them. Yet it’s advisable to recruit several pairs of eyes (and to have frequent contact with the market) to help you navigate.

Lords of Strategy: The Secret Intellectual History of the New Corporate World

Here are the 7 Strata: 1. Words You Own (Mindshare) 2. Sandbox and Brand Promises 3. Brand Promise Guarantee (Catalytic Mechanism) 4. One-PHRASE Strategy (Key to Making Money) 5. Differentiating Activities (3 to 5 Hows) 6. X-Factor (10x – 100x Underlying Advantage) 7. Profit per X (Economic Engine) and BHAG® (10- to 25-year goal)

NOTE: Most strategy frameworks include some kind of competitive analysis. As you work through the 7 Strata, it’s illuminating for the team to discuss how the competition might fill in each level — and to do the same for firms you highly respect outside your industry. This will give you additional insight into the market, the competition, and ways to differentiate your strategy

Most strategy frameworks include some kind of competitive analysis. As you work through the 7 Strata, it’s illuminating for the team to discuss how the competition might fill in each level — and to do the same for firms you highly respect outside your industry. This will give you additional insight into the market, the competition, and ways to differentiate your strategy.

Words You Own (Mindshare) KEY RESOURCE: Search Engine (Google, Bing) tools

It’s a fun and useful exercise to think of well-known brands (and your competition) and discern the words they own. In the end, that’s what branding is all about: owning a small piece of the mind-space within a company’s targeted market, whether that’s in a local neighborhood, an industry segment, or the world. If you want to hurt a competitor, steal its word, as Google did with Yahoo, becoming the “search” engine of choice.

branding is all about: owning a small piece of the mind-space within a company’s targeted market, whether that’s in a local neighborhood, an industry segment, or the world. If you want to hurt a competitor, steal its word, as Google did with Yahoo, becoming the “search” engine of choice.

Since 87% of ALL customers (business, consumer, and government) search the Internet to find options for purchasing products and services, you need to dominate these search engines. The key is owning words that matter — the ones people think about and use to search for your products and services. “The key is owning words that matter.”

These search engines are useful tools for discerning your company’s or competitors’ success at owning a certain set of words. Take a moment to search the words or phrases you think you should own in the minds of your customers, and see how high your company ranks — or whether your lesser competitors are outranking you. Then go to the Google AdWords Keyword Planner to see how many times someone has searched for your target word or phrase. More important, this tool will show you what related words are searched and with what frequency, both locally and globally. This will help you refine the words you choose to dominate.

The New Rules of Marketing & PR: How to Use Social Media, Online Video, Mobile Applications, Blogs, News Releases, and Viral Marketing to Reach Buyers Directly. As author David Meerman Scott

“You are what you publish.” Hire writers and videographers to create case studies, white papers, and videos that naturally catch the attention of the search engines (and media) and educate the customers about the words you want to own. Videos and images have dominated over text ever since Google purchased YouTube.

People don’t want to be sold; they want to be educated.

For more on how to use content to drive revenue, read Joe Pulizzi’s highly insightful Epic Content Marketing: How to Tell a Different Story, Break through the Clutter, and Win More Customers by Marketing Less.

Epic Content Marketing: How to Tell a Different Story, Break through the Clutter, and Win More Customers by Marketing Less.

If you focus on only one of the 7 Strata, this first one is the most important in driving revenue. The rest help you defend your niche, simplify execution,…

NOTE: Owning a word or two also applies to your personal brand (e.g., Tim Ferriss owns the term “4-Hour.”) Here’s a link to a piece Verne wrote as a LinkedIn Influencer titled “Your Career Success Hinges on One…

The key is picking a niche and owning (or creating) the words in the minds of the people you…

Sandbox and Brand Promises KEY RESOURCES: Robert H. Bloom and Dave Conti’s book The Inside Advantage: The Strategy That Unlocks the Hidden Growth in Your Business, and Rick Kash and David Calhoun’s book How Companies Win: Profiting From Demand-Driven Business Models No Matter…

Robert H. Bloom and Dave Conti’s book The Inside Advantage: The Strategy That Unlocks the Hidden Growth in Your Business, and Rick Kash and David Calhoun’s book How…

1. Who/Where are your (juicy red) core customers? 2. What are you really selling them? 3. What are your three Brand Promises? 4. What methods do you use to measure whether you’re keeping those promises? (We call these the Kept…

Who/Where are your (juicy red) core customers? 2. What are you really selling them? 3. What are your three Brand Promises? 4. What methods do you use to measure whether you’re keeping those promises? (We call these the Kept…

implore companies to get crystal clear about Who and Where their juicy red core customer is — the customer from whom the business can mine the most profit over time. Their warning is…

Kash and Calhoun, authors of How Companies Win, further suggest that there is a niche within any industry that represents no more than 10% of the total customers but holds a disproportionate percentage of the profit — what are termed profit pools. For instance, in the dog food industry, Kash’s team segmented the market based on the relationship between an owner and her dog (vs. the size of the dog) and found a group of owners they labeled “performance fuelers.” These are owners who are active — biking, hiking, jogging, and running — and want their dog with them. Though they represent only 7% of all dog owners, they account for more than 25%…

Once you know more specifically Who they are, it’s much easier to know Where to find them. The performance fuelers can be reached locally on a few key trails and via…

Brand Promises: Debby the Do-It-Yourselfer wants laminate flooring, and BuildDirect grabs her attention. So why should she buy from BuildDirect vs. its competitors? There have to be some compelling reasons that are evident from the moment she visits BuildDirect’s website. We call these reasons the Brand Promises. Most companies have three main Brand Promises, with one promise that leads the list.

The key is to define the company’s Brand Promises quantitatively so they can be measured and monitored.

WARNING: Refrain from using the words “quality,” “value,” or “service” as Brand Promises. They are too vague. Their definitions may vary, depending on the group of customers you’re facing. McDonald’s delivers what Verne considers high value and service if it’s noon on Saturday and he and his wife are looking for a place where they can grab a quick bite with their four children without standing in a long line, and get a few minutes of peace while their two youngest play in the indoor playground. However, as a place to go on a date night, McDonald’s has little value to them. McDonald’s has defined its three measurable brand (value) promises as speed, consistency, and fun for kids. Getting clear about this and then delivering on these promises (including sending specific updates on these KPIs to its franchise owners daily) helped it pull off one of the most respected modern business turnarounds.

KPIs (Kept Promise Indicators): A promise has no weight if you don’t keep it, resulting in lost customers and negative word-of-mouth publicity. Thus, it’s critical that you know how to measure daily whether you’re keeping your promises.

KEY RESOURCE: Jim Collins’ Harvard Business Review article “Turning Goals Into Results: The Power of Catalytic Mechanisms”

It needs to hurt to break a promise; otherwise, it’s too easy to let the moment pass. This is why Collins labeled what we call a Brand Promise Guarantee “a catalytic mechanism.” By promising to refund 100% of a RedBalloon gift voucher’s cost if the customer can find the experience for a cheaper price, the company’s guarantee puts heat on Simson’s team to keep their pricing promise.

The Brand Promise Guarantee also reduces customers’ fear of buying from you.

One-PHRASE Strategy (Key to Making Money) KEY RESOURCE: Frances Frei and Anne Morriss’ book Uncommon Service: How to Win by Putting Customers at the Core of Your Business

Uncommon Service: How to Win by Putting Customers at the Core of Your Business

Do you dare to be bad? Even risk alienating or upsetting a large segment of potential customers? This is precisely what highly profitable and successful companies do, according to Frances Frei, a leading strategy professor at Harvard Business School, and Anne Morriss.

The first three Strata — owning mindshare, making and keeping promises, and backing them up with a guarantee — are expensive to accomplish. Making matters worse, in trying to address ever-increasing customer demands, the marketplace ends up “want, want, wanting” your margins away as the competition ramps up the “feature set and added services” war. This is why it’s critical to identify your One-PHRASE Strategy. This phrase represents the key lever in your business model that drives profitability and helps you choose which customer desires to meet and which ones to ignore.

Frei and Morriss’ overarching point is that great brands don’t try to please everyone. They focus on being the absolute best at meeting the needs/wants of a small but fanatical group of customers, and then dare to be the absolute worst at everything else. In turn, competitors, in striving to be the best in everything for everyone, actually achieve greatness in nothing — and end up as just average players in the industry.

It takes real guts to ignore or even alienate 93% of customers, focusing instead on the 7% of the market that is fanatical about you and willing to put up with the trade-offs.

Differentiating Activities (3 to 5 Hows) KEY RESOURCE: Michael E. Porter’s classic 1996 Harvard Business Review article titled “What Is Strategy?”

NOTE: This is the first time the term “differentiation” has been used. Competitors can pursue owning the same words, make the same Brand Promises, and offer the same guarantees. However, it’s HOW you deliver on your promises where differentiation occurs. Adds Kevin Daum, author of ROAR! Get Heard in the Sales and Marketing Jungle: A Business Fable, “a true differentiator can only be defined as something your competitor won’t do or can’t do without great effort or expense. Often these can take years to develop since if it can be done cheaply, easily and quickly it provides little or no competitive advantage.”

This is the first time the term “differentiation” has been used. Competitors can pursue owning the same words, make the same Brand Promises, and offer the same guarantees. However, it’s HOW you deliver on your promises where differentiation occurs. Adds Kevin Daum, author of ROAR! Get Heard in the Sales and Marketing Jungle: A Business Fable, “a true differentiator can only be defined as something your competitor won’t do or can’t do without great effort or expense. Often these can take years to develop since if it can be done cheaply, easily and quickly it provides little or no competitive advantage.”

The key is to choose HOW you go about delivering your products and services in your industry in ways that are nearly impossible for your competition to copy.

establish a set of activities — “how” you run the business — that is different from the norms of the industry, helps you drive profitability, and blocks the competition.

“A company can outperform rivals only if it can establish a difference that it can preserve.”

KEY RESOURCE: Verne’s Fortune article titled “The X-Factor”: http://tiny.cc/the-X-Factor

Verne’s Fortune article titled “The X-Factor”: http://tiny.cc/the-X-Factor

So how do you figure out an X-Factor? Start by asking: What is the one thing I hate most about my industry? What is driving me nuts? What is the choke point constraining the company? It could be a massive cost factor. It could be a massive time factor. The challenge is that you’re often too close to the situation and as blind as everyone else to the real problems that have been accepted as industry norms.

Profit per X (Economic Engine) and BHAG® (10- to 25-Year Goal) KEY RESOURCE: Jim Collins’ Hedgehog Concept in Good to Great: Why Some Companies Make the Leap… And Others Don’t

The Profit per X metric represents the underlying economic engine of the business and provides the leaders with a single KPI they can track maniacally to monitor the progress of the business (a great luxury to have).

And we’ve discovered that the best unit of measure for the BHAG® is the X from the Profit per X.

NOTE: Your BHAG® should be measured in the same units as the X. This is a key point. Since Southwest Airlines is focused on profit per plane, it made sense that the company set a long-term goal to have X number of planes in the air. The Profit per X and the BHAG® need to align very tightly.

Your BHAG® should be measured in the same units as the X. This is a key point. Since Southwest Airlines is focused on profit per plane, it made sense that the company set a long-term goal to have X number of planes in the air. The Profit per X and the BHAG® need to align very tightly.

It’s very difficult work, and your strategic thinking team may feel both lost and outright dumbfounded in the beginning, but trust the process. Keep meeting each week and talking through the ideas, and answers will come to you.

We encourage team members to post this Vision Summary in their cubicles, their offices, or the cabs of their sanitation trucks as visual reminders of the organization’s strategic plan and their part in making it a reality.

Many people have dreams. However, a vision is a dream with a plan:

“Get it down; then get it right” is our mantra. A good plan now is better than a great plan too late. “Get it down; then get it right.”

Jim Collins discovered that enduring companies operate with a dual dynamic that he labeled “preserve the core/stimulate progress.” This duality is built into the OPSP. The first three columns describe the core, which holds steady over time. The balance of the plan, as you move right, becomes more dynamic, stimulating progress to meet the trends, opportunities, and challenges of the marketplace.

The OPSP is for internal consumption. It’s designed to help a team get the technical aspects of the strategic plan correct vs. craft marketing messages (e.g., taglines). However, once you construct the plan, it will be faster and less costly, if you are using an outside marketing or ad agency, to create the external messaging to communicate your vision to employees, customers, and the broader community.

The “Organization Name” line can be used to signify whether the strategic vision applies only to a division or department within a firm. At JSJ, each of the six companies will list its respective name (e.g., “Sparks, a JSJ Business”).

Under the Purpose on the OPSP, you’ll see an “Actions” section. It’s easy for companies to create a list of Core Values, Purpose, and BHAG®, and then forget them. This “Actions” box is meant to drive a quarterly conversation about what’s necessary, in the short run, to keep these long-term Vision items alive in the company and generate a handful of actions to bolster these core elements.

For a moving example, watch this five-minute 25th-anniversary tribute to Southwest Airlines’ employees featuring then-President, CEO, and Chairman Herb Kelleher: http://tiny.cc/Southwest-tribute

Once you’ve decided on the financial targets, Sandbox, and Brand Promises, choose the three to five Key Thrusts/Capabilities the company must pursue over the next three to five years. These might include a number of important acquisitions or the launch of a new product or service line. They might also represent a dramatic refocus of the core business, like Steve Jobs’ decision, when he became Apple’s CEO in 1997, to pull it out of all of its current business lines and focus on producing just two desktops and two laptops.

To support the company’s efforts, assemble a board of advisors. Recruit the smartest people you can find to advise you on each Key Thrust/Capability. It’s always helpful to learn from those who have already been Where you’re about to go.

It’s always helpful to learn from those who have already been Where you’re about to go.

In general, you’ll pick a Critical Number that will address either an opportunity or a challenge on the People/Balance Sheet side of the business (e.g., reduce employee turnover, improve customer service scores, or dramatically reduce a credit line with the bank) or the Process/Profit & Loss side (e.g., improve gross margins, reduce production cycle time, or increase sales close ratios).

Last, move to the middle of the column and ask, “What are a handful of Key Initiatives we must complete this year to achieve our financial outcomes and hit our Critical Number?”

These are NOT a random set of priorities. Choose them to achieve the Critical Number.

Column 5 mirrors column 4, only it details How you’re going to contribute this quarter to accomplishing the one-year goals, driven by the Critical Number and Rocks for the next 90 days. Given this short time frame, management should have sufficient clarity and foresight to set financial outcomes precisely (at the top of the column) and a Critical Number (at the bottom of the column) that the company can achieve.

KEY: The quarterly Critical Number represents a key step in achieving the annual Critical Number. For instance, Verne’s brother-in-law worked for a company that set a specific cash target for the year. He then chose a Critical Number in process improvement for the quarter. The goal was to reduce the dollars spent on parts to repair machines, therefore saving significant money for his division and contributing to the cash goal.

Last, choose a handful of Rocks* — priorities that must be accomplished to achieve the quarterly financial outcomes and Critical Number. Again, less is more. Finally, place the initials of the person accountable for each Rock in the small corresponding “Who” box.

Think of these Rocks as a series of three to five simultaneous 13-week sprints that provide focus and direction to the rest of the organization.

One of the keys to keeping people engaged is making a connection between their day-to-day efforts and the goals and vision of the company.

To complete the top portion of the OPSP, choose one or two KPIs you can track weekly to monitor the company’s Reputation with all the stakeholders and the Productivity of the three main processes. Here are some suggestions: Employees: Happiness and engagement scores (TINYpulse and Atlassian have simple systems for tracking these) Customers: Kept Promise Indicators and Net Promoter System scores Shareholders: Cash and company valuation Make/Buy: Speed of processes (Lean), costs, and quality measurements Sell: Close ratios, sales cycle, and revenue metrics Recordkeeping: Relevance, speed, and accuracy of data

Customers: Cash from anyone who pays you   minus (-) Employees: Cash to anyone you pay (“employ”),   such as traditional employees, contractors, suppliers, partners, etc.   equals (=) Shareholders: What is left to pay back investors, banks, sweat equity, etc.

The balance sheet simply documents who owes you, whom you owe, and what is left over. It also notes how much cash you have. The goal is to generate sufficient cash to fuel growth as the company faces the First Law of Business Dynamics: Growth sucks cash!

“The First Law of Business Dynamics: Growth sucks cash!”

Make/Buy: The processes that generate expenses Sell: The processes that generate revenue Recordkeeping: The processes for tracking all of these transactions

“The Second Law of Business Dynamics: Buy low, sell high!”

The profit & loss (P&L) statement simply documents the revenue and expenses and determines if there is a profit. The goal is to abide by the Second Law of Business Dynamics: Buy low, sell high!

You need data detailing the profitability of every customer, product, service, salesperson, location, etc., so you can see where the business is making a profit and where it is not.

In the end, the financial goals of the company are to collect cash from customers fast enough to pay everyone it needs to employ and to reward the shareholders — and to sell things for more than they cost in order to generate a sufficient profit. Leaders must manage this balance between generating Cash and Profit, which mirrors the equilibrium between keeping the People happy and the Processes productive.

NOTE: You can download a detailed bonus chapter on how to prepare for and run a strategic planning offsite, including a sample of a completed OPSP, from scalingup.com.

To mirror JSJ’s routine, there are four main activities in preparing for a strategic planning session (quarterly or annual): 1. Managers at all levels gather feedback from employees and customers. 2. Middle management completes a SWOT analysis and submits a Top 3 Priority list. 3. Senior leadership completes a SWT analysis and submits a Top 3 Priority list. 4. Everyone aims to keep learning and growing as a team.

there are four main activities in preparing for a strategic planning session (quarterly or annual): 1. Managers at all levels gather feedback from employees and customers. 2. Middle management completes a SWOT analysis and submits a Top 3 Priority list. 3. Senior leadership completes a SWT analysis and submits a Top 3 Priority list. 4. Everyone aims to keep learning and growing as a team.

The first preparatory activity is to send out a short Start/Stop/Keep survey to all the employees: 1. What do you think [company name] should start doing? 2. What do you think [company name] should stop doing? 3. What do you think [company name] should keep doing?

1. What do you think [company name] should start doing? 2. What do you think [company name] should stop doing? 3. What do you think [company name] should keep doing?

For senior leaders, we propose replacing the SWOT with the SWT: an updated approach that identifies inherent Strengths and Weaknesses within their firms while exploring broader external Trends beyond their own industry or geography.

As we’ve mentioned several times, the strategic planning process comprises two distinct activities: strategic thinking and execution planning. Strategic thinking is coming up with a few big-picture ideas. Execution planning is figuring out how to make them happen.

Strategic thinking is coming up with a few big-picture ideas. Execution planning is figuring out how to make them happen.

Forget about the competitor down the street. Is there a company on the other side of the globe that might put you out of business? Is there a new technology coming onto the start-up scene that could lead to an overnight change in the way all companies must do business? How is robotics changing the very nature of work? These are the kinds of questions the strategic thinking team must explore.

Choose four to six trends most likely to shake up your industry and business, and list them on the bottom of the OPSP.

In summary, to feed the strategic planning process properly, the key is using different techniques to mine ideas from all levels of the organization. With frontline employees and customers, ask the Start/Stop/Keep questions. With middle management, require a standard SWOT and inquire about their top three priorities for the quarter or year. And demand that the senior team go deeper and broader using the SWT.

KEY QUESTION: Are all processes running without drama and driving industry-leading profitability?

Are all processes running without drama and driving industry-leading profitability?

It may be the things you take for granted that can hurt you the most. A Checklist is a good way of reminding you what’s missing.”

“Greatness is not a function of circumstance. Greatness, it turns out, is largely a matter of conscious choice, and discipline.”

1. Priorities: Less is more in driving focus and alignment. 2. Data: Qualitative and quantitative feedback provides clarity and foresight. 3. Meeting Rhythm: Give yourself the time to make better/faster decisions.

EXECUTIVE SUMMARY: “The main thing is to keep the main thing the main thing,” noted the late Stephen R. Covey, author of The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change. Individuals or organizations with too many priorities have no priorities and risk spinning their wheels and accomplishing nothing of significance. In turn, laser-focusing everyone on a single priority — today, this week, this quarter, this year, and the next decade — creates clarity and power throughout the organization.

Individuals or organizations with too many priorities have no priorities and risk spinning their wheels and accomplishing nothing of significance. In turn, laser-focusing everyone on a single priority — today, this week, this quarter, this year, and the next decade — creates clarity and power throughout the organization.

As the above examples demonstrate, priority-setting is as applicable today as it was 100 years ago, and as critical in the short run as in the long term. The key is sequencing a series of #1 priorities that keep everyone focused and heading in the same general direction together.

Throughout the book, we have emphasized setting priorities (that includes deciding which of the 4 Decisions to focus on first and which box on the FACe chart needs to be updated next). On the One-Page Strategic Plan (OPSP), there is a progression of #1 priorities: 1. Core Purpose: the one word/idea/speech driving the business 2. BHAG®: the one 10- to 25-year goal for the company 3. Profit per X: the one overarching KPI representing the core economic engine of the enterprise 4. Brand Promise: the one most important measurable promise (of three) representing the brand 5. The Critical Number: the one key driver for the year and the quarter

And in chapter on “The Meeting Rhythm,” we’ll continue this focus on priorities, imploring the team to pick one key topic to discuss/solve at the weekly meeting and one big issue/opportunity to address at the monthly management meeting. Again, it’s just a matter of sequencing these initiatives so they align and build upon each other. This way, you can tackle the hundreds of decisions and activities that need to be addressed without overwhelming and defocusing the team. As the well-known analogy suggests, you can only eat an elephant one bite at a time. The same is true with scaling up a business.

To simplify our methodology, there are two main vision decisions: the BHAG® (Everest) and the measurable next step (one with a 90-day to one-year focus).

The quarterly or annual Critical Number is the main short-term priority anchoring the execution planning side.

So, what is the most important and measurable choke point you need to fix/control in your business this coming year? Figure it out. Then give your team a chance to win gold, silver, or bronze rewards (Super Green, Green, or Red at the bottom of column 4 of the OPSP).

Within each theme, the company lists smaller “Rocks” (column 5 of the OPSP) that need to be addressed in order to achieve the company’s big goal for the next 13 weeks, helping to focus everyone on execution.

If the organization misses the mark, you have three options: 1. Repeat the Critical Number in the next quarter if it’s still crucial that the organization achieve the target. We’ve seen this when a quality or a customer service score needs to be reached. 2. Move on to another Critical Number if you sense that enough momentum was created with the previous target to keep the organization trending in the right direction. 3. Do a root-cause analysis to uncover the reasons your organization didn’t achieve your Critical Number. Choose one of those reasons to fix in the next quarter. For instance, The City Bin Co.’s “180 to One” theme addressed an organizational health issue. Browne felt team members needed to step back and gain more empathy for each other’s situations so they would be ready to work as one to achieve the next target.

At the same time, no one’s paycheck should suffer because the senior team chose an overly aggressive goal or one that the team was not prepared to achieve. Pick celebrations and rewards that are mostly for fun.

Pick celebrations and rewards that are mostly for fun.

WARNING: The Critical Number, like the rest of the organization’s strategy, cannot be set in isolation from the realities of the company and the marketplace. Employees and customers will think the senior team was smoking something if they come down from the mountaintop with “the tablets” pronouncing the latest strategic plan without having completed the necessary preparation. And as Jack Stack strongly suggests, it’s best if the Critical Number is benchmarked against an external standard (e.g., “If that company can achieve 12 inventory turns, why can’t we?”), so employees don’t think the senior team was just making stuff up!

The Critical Number, like the rest of the organization’s strategy, cannot be set in isolation from the realities of the company and the marketplace. Employees and customers will think the senior team was smoking something if they come down from the mountaintop with “the tablets” pronouncing the latest strategic plan without having completed the necessary preparation. And as Jack Stack strongly suggests, it’s best if the Critical Number is benchmarked against an external standard (e.g., “If that company can achieve 12 inventory turns, why can’t we?”), so employees don’t think the senior team was just making stuff up!

As at ProService, you should delegate the actual creation of the theme to a nonexecutive team. Almost every company has a team member who is skilled in using a computer to create videos, posters, and other themed collateral. The senior team doesn’t need another job, and it’s best if an employee-run team drives the theme activities.

you should delegate the actual creation of the theme to a nonexecutive team. Almost every company has a team member who is skilled in using a computer to create videos, posters, and other themed collateral. The senior team doesn’t need another job, and it’s best if an employee-run team drives the theme activities.

ask the most powerful question a leader can pose when a team has successfully completed anything: “How did you do it?” Stand up and say “Congratulations. We said we would do X, and we did it!! How did you do it?” Then pick someone who you know contributed to reaching the Critical Number, and have that person share his or her story.

Bringing Out the Best in People: How to Apply the Astonishing Power of Positive Reinforcement (a foundational business book that all leaders should read).

EXECUTIVE SUMMARY: The fundamental job of a leader is prediction, according to the late business consultant W. Edwards Deming. At the heart of a leader’s ability to predict is data — and lots of it. Big data analysis has become mainstream and within reach of companies of all sizes. Yet leaders also need plain old human-gathered intelligence to get a gut feel for the market and what is happening in the company, so that they can make the right decisions. Talking weekly with customers and employees and then discussing what’s been learned at the executive huddle is critical. And engaging all of your employees in data collection, with a middle-management team leading them, spreads out the work so the senior team doesn’t get buried.

The way in which businesses use data to make decisions — to predict — is undergoing the most radical change since the beginning of commerce. For more on this transformation, read Big Data: A Revolution That Will Transform How We Live, Work, and Think by Oxford professor Viktor Mayer-Schönberger and Kenneth Cukier, data editor of The Economist.

“Learn fast; act fast.”

Two lessons: 1. Senior leaders need to be in the market 80% of the week, either figuratively or literally. 2. This routine must start on day one and continue through half a trillion in revenue!

1. Senior leaders need to be in the market 80% of the week, either figuratively or literally. 2. This routine must start on day one and continue through half a trillion in revenue!

However, quantitative metrics alone provide an incomplete view. Qualitative insights from conversations with the market and observations of customers and competitors fill out the data set needed to guide decisions. Input from advisors, experts, and “the crowd” also contribute. Piling all of this data into computers and our brains and engaging in healthy, frequent debate helps leaders make decisions — regarding hiring, product, marketing, etc. — with a high degree of confidence.

WARNING: If talking with customers and employees routinely is so powerful, why do leaders stop doing it? It’s because they continue to hear the same recurring issues or praise over and over — and have to take time from their busy schedules to listen to stories that seem to have zero relevance to their businesses. However, it takes only one or two key ideas to fuel a business model. So hang in there, embrace the human aspects of these conversations, and relish the moment the light bulb goes on — it will!!

At a minimum, we recommend that all executives (and middle managers) have a Start/Stop/Keep conversation with at least one employee weekly.

Here are three simple questions that we recommend you use when holding these conversations: • What should we start doing? • What should we stop doing? • What should we keep doing?

What should we start doing? • What should we stop doing? • What should we keep doing?

We encourage leaders to pay particular attention to the “stop doing” responses. They are likely destroying the motivation of the employees, as we discussed in “The Team” chapter.

Collect weekly input from employees about obstacles and opportunities. To keep this from turning into a collection of gripes, provide some prompts. Ask employees to submit suggestions that will: 1. Increase revenue. 2. Reduce costs. 3. Make something easier/better for the customers or employees.

Gathering employees’ feedback and ideas will backfire on the company if management doesn’t close the loop and act on their suggestions. At a minimum, let an employee know why an idea can’t be implemented.

The biggest obstacle is finding the time. The senior team doesn’t need any more to-do’s. Therefore, we strongly recommend holding a middle-management team accountable for responding to employees’ feedback on all obstacles and opportunities. This is an excellent executive-development opportunity for a group of up-and-coming managers as they gather and react to the suggestions and work cross-functionally to implement them.

And just as you probably track the number of days you take to pay your vendors (accounts payable days) or to get paid (accounts receivable days), we suggest that you track the number of days it takes to implement the ideas gathered from your employees.

We implore all executives and middle managers to have a 4 Questions (4Q) conversation with at least one end user weekly. Particularly in business-to-business situations, you may have to bypass your distribution channels and purchasing agents (with permission) and talk directly with those benefiting from your products and services.

The 4Q refers to the four questions that we suggest leaders ask customers in person (not on a survey): 1. How are you doing? 2. What’s going on in your industry/neighborhood? 3. What do you hear about our competitors? 4. How are we doing?

In a business-to-business environment, have all senior leaders connect with their counterparts at customers’ companies (e.g., your CFO should talk with the client’s CFO). Communicating with other specialists in their area will allow them to pick up insights others will miss.

At rapidly growing companies, the team is often so busy chasing new opportunities that the existing clients feel ignored. If companies were able to hold on to the customers they now lose from neglect, it would fuel at least half of their growth.

Today, Hardy reports that as consumers spend more time on social media, it can be challenging to get feedback through phone calls. “We were at a point where we were leaving 40 messages and not getting as much feedback. It was unproductive,” he says. Now Coastal.com uses Survey Monkey to get feedback immediately after a purchase, using the NPS. The company also relies on comments through Facebook, which can be left easily and quickly. “We try to figure out hot spots from the comments we get through social media,” says Hardy.

Share insights from conversations with customers at the executive team’s weekly huddle. Don’t bog down the process with a bunch of written reports.

At the “good” companies, the executive team spent zero time discussing what it was hearing from customers at its weekly meeting. The only time a customer’s name came up was if there was a crisis. (Think about your own weekly meeting!) In contrast, the “great” companies — which, like Enterprise Rent-A-Car, were growing considerably faster — spent roughly 20% of their leadership team’s meeting discussing feedback from customers.

Whichever competitor has the most market intelligence, and uses it, wins.

It’s particularly important to encourage all your salespeople, distributors, and independent reps (in all of your sales channels) to gather and report market intelligence. Require all of them to call in daily to a voice mailbox and leave a three-minute update on any positive sales results. (Salespeople like to share good news.) Ask them to provide feedback from customers and about competitors and report on barriers they are facing in making sales. Do not ask them to put this information in writing, or it won’t happen. (The only written report is the one you threaten to make them write if they don’t call in daily!) Most Internet-based phone systems have the capability of converting voice messages into text messages, so you will have your salespeople’s thoughts in writing without having to listen to a bunch of voice mails.

In turn, each team and person needs individual quarterly goals that align with the plan.

Did I Have a Great Day or Week? Every member of the team, from the senior leadership to staffers, needs to be able to answer objectively the question, “Did I have a great day or week?” The key: Each person must report on one or two KPIs weekly.

Some companies use a whiteboard that gets updated daily or weekly (and discussed at meetings), and some print charts from spreadsheets and post them on the wall. Still others have dashboard systems, like Align, to automatically generate live data. You will succeed only if every team member in your company looks at the information and makes adjustments or decisions based on their KPIs weekly.

“You can’t manage a secret. When you do this every week, you can’t hide.” Clearly, the charts were telling the truth, and through this rigorous discipline, Mulally and the leadership team drove changes that without a doubt drove profits.

One Critical Number and 3 to 5 Rocks Everyone is busy. The magic of the Scaling Up process is getting everyone in the company to accomplish one additional thing that is aligned with the company’s focus every 90 days (i.e., each employee has one Critical Number that aligns with the company’s Critical Number for the quarter, illustrating that there is a clear line of sight). If you have 10 employees, you can get 10 more things accomplished; if you have 1,000 employees, you can get even more done. And like the company, all employees or teams need to set a handful of priorities (known as rocks) that will help them achieve their Critical Number (i.e., each individual/team should have three to five rocks that align with those of the company).

Everyone is busy. The magic of the Scaling Up process is getting everyone in the company to accomplish one additional thing that is aligned with the company’s focus every 90 days (i.e., each employee has one Critical Number that aligns with the company’s Critical Number for the quarter, illustrating that there is a clear line of sight). If you have 10 employees, you can get 10 more things accomplished; if you have 1,000 employees, you can get even more done.

Peer Coach All executives and middle managers should have a coach (or peer coach) holding them accountable for behavioral changes.

All executives and middle managers should have a coach (or peer coach) holding them accountable for behavioral changes.

In sports, the team gets to practice 90% of the time and perform 10%. In business, it’s the opposite: We’re lucky if we get 10% of the time to practice through executive training and development.

At a minimum, have your metrics, goals, and plans up big and visible in a place where you host the various weekly meetings (i.e., establish a “situation room” for weekly meetings, whether they’re physical or virtual. In the case of a virtual meeting, the “room” might be a particular conference line).

Make sure that the Core Values, Purpose, and Priorities are posted throughout the company.

have a system in place for tracking and managing the cascading Priorities and KPIs.

EXECUTIVE SUMMARY: To move faster, pulse faster. At the heart of a team’s performance is a rhythm of well-run daily, weekly, monthly, quarterly, and annual meetings. These meetings bring focus and alignment, provide an opportunity to solve problems more quickly, and ultimately save time. They also address the #1 challenge people face when they work together: communications. In this chapter, we outline specific agendas and recommendations on who should attend meetings. The monthly meeting is a KEY routine for developing middle managers into mini-CEOs so they are capable of running the business (execution), freeing up senior leaders to focus on strategy. We’ll also look at the #1 roadblock to effective meetings: generalities.

Titan: The Life of John D. Rockefeller,

Great Music vs. Noise Great growth firms are a lot like great jazz bands. While jazz is improvisational and entrepreneurial-like, the discipline underlying it allows even musicians who have never played together before to perform a rocking jam session. This requires four things: 1. Assembling talented musicians: They play a variety of instruments, creating a unique sound. 2. Knowing the rules: All jazz musicians must master a handful of fundamentals (the Core). 3. Performing the same song: This is the equivalent of the One-Page Strategic Plan (OPSP). 4. Playing to the same beat: What the drummer communicates to the band, the meeting rhythm does for the organization (alignment).

Imagine if all members of your team could independently and confidently wing it in their roles in a way you knew would be consistent with the company culture and objectives.

Managing Up: How to Forge an Effective Relationship With Those Above You, by Rosanne Badowski.

As the diagram above indicates, this rhythm of meetings shouldn’t require more than 10% of a standard 40-, 50-, or 60-hour workweek for the senior leadership; 5% to 7% for middle managers, and 3% for frontline staff.

Having more frequent routines makes it easier to attain goals. This is why the daily, weekly, and monthly meetings are critical. They drive the deliverables outlined in the less frequent meetings, with each meeting building upon the next. Plus, teams need regular, face-to-face huddles to discuss new opportunities, strategic concerns, and bottlenecks as they arise. How many hours is it going to take to hammer out a set of goals for a new year, if the annual meeting is the first time anybody has talked about where the market is going or dealt with the tactical issues that come up weekly?

Since the advent of texting, speaking has gone out of style. It is coming back with technologies like Siri and Cortana, that are getting us engaged once again in talking (and hearing) — which our brain loves!

Three Powerful Advantages to Meeting Regularly The two main arguments we hear for not meeting regularly, especially for the daily huddle: 1. We don’t have the time. 2. We see each other all day anyway.

Casual encounters fail to take advantage of the three most powerful tools a leader has in getting team performance: 1. Peer pressure 2. Collective intelligence 3. Clear communication

Meeting as a group, in contrast, takes the heat off the leader and creates peer pressure that increases the rate of deliverables. What a shame to have a high-powered executive or middle-management team that doesn’t take even 15 minutes each day or an hour a week to focus its collective intelligence on the opportunities at hand. Last, holding a team meeting means that everyone is hearing the same information. You don’t have to repeat the same message three or four times in one-on-ones or casual conversations.

NOTE: Examine the meeting rhythm above in reverse order to see how the more frequent gatherings draw context and continuity from the longer and more strategic planning sessions. Specifically: • The annual sets the strategic direction and priorities for the year and beyond. • The quarterly breaks these longer-term priorities into bite-sized priorities that the company can digest. • The monthly addresses the bigger issues or opportunities that surface around the strategic direction. • The weekly keeps the priorities top-of-mind and drives discussions around input from customers, employees, and competitors, which feeds back into the quarterly and annual planning processes. • The daily huddle tracks progress and brings out sticking points that are blocking execution of the strategic direction.

If the daily huddle is so powerful, why do organizations start and then stop it? In a word, generalities! As teams tell stories and share information, it’s critical that they include specifics. We need to hear names, numbers, dates, issues, and concerns if our brain is going to make the kinds of connections that make this process powerful. For instance, if one colleague asks, “What’s up tomorrow?” a response like, “I have a meeting with a client” is too vague. More specific and useful is, “I’m meeting with Acme CEO Bob Smith at 10 a.m. to discuss co-hosting a 60-person ‘Mastering the Rockefeller Habits’ workshop in Cincinnati in the middle of November.”

In general, frontline employees will be in only one daily huddle, and anyone in management will be in two: one with their direct reports and one with their peers and leader.

Daily huddles keep projects between companies/suppliers/customers on time and on budget. Let’s say you’re working with an IT service provider to install a new CRM system, or with a construction company to build a new facility. Choose someone from your team to interface with a contact on the supplier’s team and walk through the same three agenda items listed below. This will keep communication flowing and guarantee your project will get more attention and action.

Who Runs the Meeting — Pick someone who is naturally structured and disciplined (that might not be the CEO) to keep meetings running on time. The leader should use a countdown stopwatch to make sure that no part of the agenda runs away with the meeting. The person running the meeting also has the important job of saying, “Please take it offline” whenever people get off on a tangent that doesn’t require everybody’s attention.

The Agenda — The agenda should be the same every day, and it’s just three items long, with five minutes maximum per item: 1. What’s up (in the next 24 hours)? 2. What are the daily metrics? (All companies should have some.) 3. Where are you stuck?

WARNING: Avoid checking up on whether someone did something the previous day. Team members will start feeling like they are being micromanaged. In general, looking forward is great management; looking backward is micromanagement.

Avoid checking up on whether someone did something the previous day. Team members will start feeling like they are being micromanaged. In general, looking forward is great management; looking backward is micromanagement.

NOTE: Team members should share a “stuck” even if they don’t think there’s anyone on the team who can help them resolve it. Verbalizing the issue is likely to spur unexpected action to help them.

WARNING: Anytime somebody goes two days without reporting a sticking point, you can bet there’s a bigger problem lurking. Busy, productive people who are doing anything of consequence get stuck pretty regularly. The only people who don’t get stuck are those who aren’t doing anything or are so stuck that don’t know it!! So, challenge the team member who reports, “Everything is fine!”

WARNING: Important as they are, conversations about bottlenecks shouldn’t be allowed to drift into problem-solving. It’s okay if somebody wants to reply to a “stuck” by saying, “Call so-and-so,” or, “I’ll get on that right away” (if he or she is the “stuck”!), but take anything more than that offline. Remember: The daily meeting needs to be kept short.

If the daily huddles are functioning well, they will lead to immediate action on scores of issues that would otherwise clog up the weekly meeting. You don’t want to spend the weekly meeting poring over updates. Everyone should be well-informed via the daily huddles. You also don’t want to address the dozens of issues that have accumulated over the week. The idea of the weekly meeting is to keep everyone laser-focused on the #1 priority — and the big rocks supporting that mission. You want to tap the collective intelligence of the team for 30 to 60 minutes on one or two important topics. This affords the group an opportunity to resolve 50 to 100 important things in a year.

HINT: Does your organization spread out its functional meetings throughout the week, thinking that it’s best not to take up too much of any one day? If so, let us suggest that you do just the opposite. Pick one morning or afternoon, and host ALL of your functional and project meetings back-to-back. This allows everyone to get in a meeting mindset and flow, and frees senior management to spend the rest of the week out in the marketplace. We picked up this idea from Rick Kay and his team at OTG Software.

Does your organization spread out its functional meetings throughout the week, thinking that it’s best not to take up too much of any one day? If so, let us suggest that you do just the opposite. Pick one morning or afternoon, and host ALL of your functional and project meetings back-to-back. This allows everyone to get in a meeting mindset and flow, and frees senior management to spend the rest of the week out in the marketplace. We picked up this idea from Rick Kay and his team at OTG Software.

We highly recommend that you adopt this best practice, dedicating several hours a week to get in the flow and work on the business, project by project, function by function. Then you’re finished except for a daily, 15-minute touch point.

Schedule the meeting for the same time, same place each week. Set aside 30 minutes for frontline employees, 60 to 90 minutes for middle and executive teams.

NOTE: Draw a line in your mind. This first 25 minutes warms up the brain and allows you to share enough internal and external data to help the team see patterns and trends in the performance of the company. The next 35 to 65 minutes are designated for putting the team’s collective intelligence to work and making important decisions.

HINT: It’s ideal if the series of weekly meetings ends before lunch (like OTG’s) or happy hour, so the executives can have a more informal setting in which to discuss issues that surface during the structured part of the meetings. That informal time is often when real decisions are fleshed out. HINT: For those of you who participate in some kind of CEO forum, the weekly meeting is structured a lot like a mini-forum meeting, with a formal check-in, updates, forum topic, and one-phrase close.

Weekly CEO One-Pager Many CEOs also send out a weekly one-pager to all employees updating them on the status of the #1 priority and other significant developments inside the company and the industry. Employees want to hear from their top leader and appreciate the sense of being on the inside provided by this kind of report.

Unless the senior team instills its DNA— namely, the knowledge and values required to make good decisions — in everyone from the middle managers on down, the top leaders will find themselves increasingly overwhelmed by the demands of a growing business.

WARNING: One of the biggest mistakes a CEO can make, in the spirit of transparency and openness, is to share important changes and information with all the employees before briefing the middle managers and supervisors. Frontline employees, after hearing about a change, will go to their immediate supervisor for clarification and details, inquiring, “How is this going to specifically affect me?” If the managers have not been briefed ahead of time, the CEO has put them in an awkward situation. They have no choice but to respond, “I don’t know. I’m hearing this for the first time myself.” So, brief ALL managers first, and create a legion of allies for the changes you want to make.

So, brief ALL managers first, and create a legion of allies for the changes you want to make.

QUESTION: Do you have consistent sources of cash, ideally generated internally, to fuel the growth of your business?

Do you have consistent sources of cash, ideally generated internally, to fuel the growth of your business?

Great companies, by choice, keep three to 10 times more cash reserves than their competitors,

EXECUTIVE SUMMARY: Cash is the oxygen that fuels growth. And the cash conversion cycle (CCC) is a key performance indicator (KPI) that measures how long it takes for a dollar spent on anything (rent, utilities, marketing, payroll, etc.) to make its way through your business and back into your pocket. In this chapter, we’ll share several ways that companies have dramatically improved their CCC using the one-page Cash Acceleration Strategies (CASh) tool, allowing them to fund growth with internally generated cash and freeing them from the grasp of banks and/or investors. We suggest that you brainstorm ways to improve cash flow at each 90-day planning session and pick a related initiative as one of your handful of priorities each quarter. Constantly improving the cash flow of the company — and better understanding how cash moves through the business — is a powerful driver for improving the firm as a whole.

Cash is the oxygen that fuels growth. And the cash conversion cycle (CCC) is a key performance indicator (KPI) that measures how long it takes for a dollar spent on anything (rent, utilities, marketing, payroll, etc.) to make its way through your business and back into your pocket.

To tackle the cash conversion cycle, start by reading “How Fast Can Your Company Afford to Grow?” a Harvard Business Review article by Neil C. Churchill and John W. Mullins.

NOTE: Just as we were going to press, John Mullins published a new book that Verne endorsed, titled The Customer-Funded Business: Start, Finance, or Grow Your Company with Your Customers’ Cash. The title says it all! Read it for an advanced look at the cash side of your business and for ways to get your customers to fund growth, like Costco did.

John Mullins published a new book that Verne endorsed, titled The Customer-Funded Business: Start, Finance, or Grow Your Company with Your Customers’ Cash.

We encourage management teams to set aside an hour or more each month to brainstorm ways to improve each of these cash cycle components. This is a powerful exercise to do with the broader middle-management team at a half- to full-day monthly management meeting. It will give everyone a better understanding of how cash flows through the business and how each function can contribute positively.

• If invoices are recurring, obtain recurring credit card authorization from your customers to automate on-time payments.

Pay many of your own expenses with a credit card so you can play the float. Get your own customers to pay by credit card, so they can pay you quickly even if their cash flow is slow.

• Shorten cycles for delivery of your product or service. All of you have some kind of “work in progress.” The faster you complete projects, the faster you get paid.

Offer a product or service so valuable that you have some leverage with your customers to get them to pay sooner. • Remember, improving margins and profit improves cash.

NOTE: Have your CFO give you a cash report every day, like Verne’s does. The CFO should summarize the sources and amounts of cash that came in and out of the business during the last 24 hours, along with anticipated cash flow for the coming month. It keeps cash top-of-mind and allows you to react quickly — within days vs. months — if it’s heading in the wrong direction. Observing the sources of cash flowing in and out on a daily basis also gives real insight into your business’s financial model.

1. Shorten cycle times. 2. Eliminate mistakes. 3. Change the business model.

Also specify a due date (May 31, for example) on the invoice rather than include the standard “due in 30 days.”

Eliminate Mistakes Nothing infuriates customers more than a mistake. It is the #1 reason they are slow to pay. And incomplete orders, invoicing errors, and missed deadlines are not only costly but also drag down the very processes you want to speed up, snarling cash flow.

Nothing infuriates customers more than a mistake. It is the #1 reason they are slow to pay. And incomplete orders, invoicing errors, and missed deadlines are not only costly but also drag down the very processes you want to speed up, snarling cash flow.

For sources of cash other than loans or investors, we refer you to a Fortune Small Business article Verne wrote titled “Finding Money You Didn’t Know You Had”: http://tiny.cc/finding-money

Completing Your Cash Acceleration Strategies (CASh) Tool 1. Read the Harvard Business Review article by Neil C. Churchill and John W. Mullins titled “How Fast Can Your Company Afford to Grow?” 2. Calculate your existing CCC in days. 3. Calculate the amount of cash required to fund each additional day of CCC. 4. Brainstorm ways to improve your CCC and the 7 financial levers highlighted in the last chapter of this “Cash” section using the one-page CASh tool. Be sure to explore ways in all three general categories — shortening cycle times, eliminating mistakes, and changing the business model — for each segment of the CCC. 5. Choose one cash-improvement initiative every 90 days as one of your quarterly priorities (Rocks).

If the #1 weakness of growth firms is marketing, the #2 problem is accounting.

Hiring just one additional person to either support the CFO or carry some of this executive’s workload enables him or her to provide the following: 1. Better cash and cash-flow management 2. Waterfall graphs, which we will explain shortly, to share more granular accounting data for better decision-making 3. Trend analysis and early-warning systems to support better prediction 4. Two sets of books — for the right reasons!

A key accounting activity is to slice and dice a company’s financial data as granularly as possible. This lets the leadership team view the gross margin, profit, and cash flow by categories, such as individual customer, location, product line, salesperson, etc. Accountants do this by creating a series of waterfall graphs

Any loss leaders you might need — and these should be kept to a minimum — should be treated as a marketing expense in your accounting.

any data more than a week old is history and is not useful for making the fast decisions necessitated by our highly connected global economy.

all CFOs to read Thomas A. Stewart’s classic book Intellectual Capital: The New Wealth of Organizations.

His approach focuses on four keys to running a wealth-building business: 1. Clear the distortions. 2. Set appropriate profit targets. 3. Use labor efficiency to drive profitability. 4. Understand the 4 Forces of Cash Flow.

The next major accounting distortion is centered around revenue. Revenue is vanity (and the weakest number) when it comes to your P&L. Focus instead on a redefined version of gross margin. Crabtree calculates gross margin to be revenue minus all NONLABOR direct costs. This definition of gross margin gives you the true economic top line of the business.

Instead of obsessing about revenue, shift the internal discussions to generating gross margin, the real top line of the business. (Talk about revenue with outsiders if you want.) And note: The focus is more on gross margin dollars than gross margin as a percentage.

WARNING: Since gross margin dollars more accurately measure sales performance, you should never base sales compensation on revenue unless your cost of goods sold does not vary from sale to sale. You will be paying commissions on revenue while allowing your salespeople to set the price!

As a general rule, once your gross margin percentage gets below 40% you should relate profit to gross margin, so you can generate an apples-to-apples comparison with other industries.

• At 5% pretax profit, your business is on life support. • At 10% pretax profit, the business is doing well but has some untapped potential. • At 15% pretax profit, the business is in great shape. • Anything above 15% indicates that you should earn it while you can. The market will figure out what’s going on, competition will show up, and you will eventually get pushed back.

Now we can get to the #1 driver of profitability — labor efficiency — a measure of the productivity of each dollar we spend on labor. Notice that we do not discuss total labor costs, but rather the productivity of a dollar of labor. Instead of seeing labor costs as a percentage of something (revenue, gross margin, etc.), we want to view labor as something you can leverage. You just need to know the multiplier (e.g., for every $1youspendonlabor,youget$3 back). The theory is that as long as you can keep applying productive labor (be it salespeople, programmers, or call center reps) at the right multiple, the only bottleneck is lacking enough of the right people to keep growing.

The three segments of labor efficiency we want you to focus on are: • Direct labor efficiency: gross margin dollars divided by direct labor cost • Sales labor efficiency: contribution margin dollars divided by sales labor cost • Management labor efficiency: contribution margin dollars divided by management labor cost

• Direct labor efficiency: gross margin dollars divided by direct labor cost • Sales labor efficiency: contribution margin dollars divided by sales labor cost • Management labor efficiency: contribution margin dollars divided by management labor cost

Contribution margin is defined as gross margin minus direct labor. This is what most accountants refer to as gross profit, but it mixes labor costs with nonlabor costs and masks the productivity of labor.

The typical frustrated entrepreneur wants to fill every role as soon as possible. However, unless you have sufficient capital to cover the losses until sales catch up with salaries, this is a deadly move. Taking it slow is especially critical when adding highly paid senior leaders to the team. Add one key role at a time. Get profitable with that executive before you add the next one or add support personnel. Once you’ve scaled up the business sufficiently to have a full leadership team, management LER really starts to improve as revenue grows. You need only add supporting staff at this point.

If you do not pay any taxes, you either have not created any wealth or you have cheated, and both scenarios are bad.

Debt is generally not your friend. If not managed properly, debt will enslave your business and keep it from reaching its full potential. Once you have set aside your tax money, eliminate debt on your line of credit and remain current on any term loans. Lines of credit are like crack cocaine for businesses because it’s too easy to draw on them to solve cash-flow issues, rather than make the hard decisions that lead to improved profitability.

Meeting your core capital target means having two months of operating expenses in cash, after you have set aside money to pay your taxes and assuming that you have nothing drawn on your line of credit. In our opinion, any company that can meet this criterion is considered fully capitalized and can start harvesting profits for either further growth opportunities or distribution to shareholders for wealth diversification. If business owners harvest profits before debt is cleared, they risk putting the business into an undercapitalized situation. This is a problem that plagues many growth companies.

The definition of two months of operating expenses includes all normal operating expenses on which you do not get terms. As a rule, the only costs you exclude will be your cost of goods sold, since businesses typically get terms of 30+ days.

Here is the often-overlooked nugget in all of this: If you run a business at 10% profit that has hit its core capital target, you now have a business that is producing a MINIMUM return on equity of 50% PER YEAR! Investors would kill for a rate of return of 20% year after year, and yours is running somewhere between 50% and 100% per year. This is the true secret of building wealth within a privately held business.

You need a nice premium on a sale to replace an asset that’s earning 50%+ per year.

“Revenue is vanity, profit is sanity, and cash flow is king.”

Cash flow is the change in cash and debt balances across a given period.

This question highlights the only two uses for cash flow: 1. Cash is used to invest in growth, or 2. Cash is used to fund management-influenced waste.

So, how can we tell whether Gary is doing a good job with the $26.9 million that he has received to run his business? The operations should be producing a satisfactory profit given the assets being deployed. This return on net assets (return on capital) is represented as follows: EBIT/net operating assets = return on net assets (EBIT: earnings before interest and taxes) This is arguably the most useful ratio for measuring management effectiveness. The ratio brings into consideration both the P&L of the business (which provides the EBIT) and the balance sheet.

What is a good return? Well, the answer is a relative one, as it will depend on the alternative investment choices available to investors. To keep it simple, however, midsize businesses should target at minimum a 30% return on net assets.

To keep it simple, however, midsize businesses should target at minimum a 30% return on net assets.

As a business owner, you should also consider that equity is the most expensive source of funding and that it is usually cheaper to source debt financing, keeping in mind Greg Crabtree’s caveats in the previous chapter. Either way, to improve returns, it is mission-critical over time that management grow EBIT faster than the investment in net operating assets.

to improve returns, it is mission-critical over time that management grow EBIT faster than the investment in net operating assets.

“Midsize businesses should target at minimum a 30% return on net assets.”

Generally, businesses need strategies that focus performance between B and C, where you are increasing EBIT faster than you are growing net assets and, consequently are growing returns.

Because your working capital requires cash, banks will often calculate one additional working capital ratio, known as working capital days. This ratio measures the total days’ worth of working capital required by the business and is calculated as (AR + Inventory - AP)/sales x 100.

Another useful measure of cash flow is marginal cash flow. This ratio calculates the amount of cash retained by the business’s working capital machine and compares it to the amount of cash the business produces at the gross margin level.

If we consider both ratios as cents from every dollar of revenue, we see that Gary’s business produced a gross margin of 31 cents for every $1ofrevenue.Wealsoseethatthebusinessrequires41centsofworkingcapitalforevery$1 of revenue. This means that for every $1ofsales,thebusinessrequires10centsmoreworkingcapitalthanitactuallyproducesingrossmargin.In60$1 of product, he went backward in cash. This is what we meant earlier when we said he was “growing broke.”

Managers adjust the 4 drivers by tweaking the 7 main financial levers available to them to improve cash and returns in the business: 1. Price: You can increase the price of your goods and services. 2. Volume: You can sell more units at the same price. 3. Cost of goods sold (COGS)/direct costs: You can reduce the price you pay for your raw materials and direct labor. 4. Operating expenses: You can reduce your operating costs. 5. Accounts receivable: You can collect from your debtors faster. 6. Inventory/work in progress: You can reduce the amount of stock you have on hand. 7. Accounts payable: You can slow down the payment of creditors.

1. Price: You can increase the price of your goods and services. 2. Volume: You can sell more units at the same price. 3. Cost of goods sold (COGS)/direct costs: You can reduce the price you pay for your raw materials and direct labor. 4. Operating expenses: You can reduce your operating costs. 5. Accounts receivable: You can collect from your debtors faster. 6. Inventory/work in progress: You can reduce the amount of stock you have on hand. 7. Accounts payable: You can slow down the payment of creditors.

As mentioned in the beginning of this section, you can get by with decent People, Strategy, and Execution, but not if you run out of Cash. All growth firms hit bumps in the road (or craters!). Having sufficient cash is key to surviving another day. We hope the ideas, tools, and techniques covered in this section help you through the rough times and fuel your good times as you scale up your business.

It generally takes two to three years for all the tools, techniques, and habits to become part of the company’s DNA, and another two to three years to truly master the use of them.

It is critical to pick someone to drive overall implementation of the Rockefeller Habits. For many founders, it might be best to give this accountability to your #2 in command.

Success belongs to those who have these two attributes: • An insatiable desire to learn • An unquenchable bias for action Those who win are constantly looking for better ways to do things and to improve. They don’t sit back and let others pass them by. They use their tools and resources to attack issues and make things happen. It’s that simple. Want to succeed with this book and your business? Keep on learning and acting as you scale up.