Thursday, January 15, 2009

Leadership during Tough Times – Cash & Customers

Business Guru Ram Charan in his latest book “Leadership in the Era of Economic Uncertainty: The New Rules for Getting the Right Things Done in Difficult Times” has extolled the importance of cash & cash management during tough economic times.

Apart from Cash, there is one more key component for success during tough times – customers. Put together, I call it “Focus on Cash & Customers as the key to success”.

Cash is king. No doubt about it. Without customers, there will be no cash and without cash, company will die. Thus the mantra ““Focus on Cash & Customers as the key to success”.

Many companies have lost their entrepreneurial sprit

All businesses are stated by entrepreneurs who have a definite idea of meeting the customer needs and know how to make money by doing so. Entrepreneurs always have their minds & hearts set on creating customer satisfaction profitably. As a startups the founders know the importance of cash and they tend to have a maniacal focus on cash.

As the company grows, the need for capital increase, which forces the company to seek outside investments. The new investors have different objectives than the original entrepreneurs. Thus slowly the founders make way for professional management. Thus with growth, companies tend to lose its entrepreneurial shine. Focus on customer gets replaced by focus on Wall Street. Focus on cash gets replaced by focus on EPS.

During tough economic times, companies that have a close connection to customers are the ones that survive and those companies that can focus on cash and the customer will thrive.

To illustrate take a look at some of the struggling companies today: Nortel, Mervyn’s & Motorola. If these companies were to disappear tomorrow, not many would shed a tear. For most customers, these vendors have become irrelevant. This is a real case of losing customer focus and thus stumbling for a big fall.

On the other hand look at Apple, Intel, Wal-Mart, & Costco. These companies have lots of loyal customers and customers feel the need for these vendors.

Basics of Business

To understand the importance of Cash & customers, one need not go to fancy B-school. Even running a corner coffee shop will teach this basic lesson.

Years ago, I knew a businessman whose nickname was “Cash”. He ran a small business (roughly ~$1-2 million) of supplying computer parts/peripherals in Bangalore. Given this of business, most of the sales was on credit – thus putting an enormous strain on this working capital. As I knew him well, he shared his thoughts on the business. At all points of time, he exactly knew his cash position, his cash requirements for the week, and the expected cash flow for the week. He also knew which customer owed him how much and when to approach the customer for the cash. His maniacal focus on cash led to the nick name “Cash”.

In today’s Wall Street driven companies, I have not seen such an entrepreneurial focus either on customers or cash. Managers in these large companies are more focused on process (rather than customer interests), managers are driven by different sets of expectations – net sales, product development, efficient operations etc. Thus losing focus on the basics of business.

Even in my current organization, I once asked for financial data regarding my product line. I wanted to know the income from sales and the net costs associated with the product. In most large organizations such data is hard to come by. Similarly in my company also the data was either not available or the process based bureaucracy prevents such data being shared. Therefore as a product manager, I cannot exactly say how profitable is my product? Instead I have to rely on an educated guess. Given such an environment, it is hard to make information based decisions.

In one situation I have seen a complete breakdown of customer focus. Customer on one hand wanted a new version of the software released with a set of features, but since we do not have the financial information to make a decision, we negotiated to a smaller set of requirements based on the engineering resources we were willing to deploy. The account manager who is responsible for the sale was interested in seeing the product release as a milestone and not the features/customer needs. Corporate businesses have developed tones of management mumbo-jumbo to mask the internal failures and show a failure as a success. In the bigger scheme of things, a large fortune-500 company lost focus on the customer thus antagonizing the customer.

Large companies can afford to lose a customer once a while and still prosper as new customers are added continuously. BUT during tough times adding new customers becomes tricky and thus losing existing customers can quickly snowball into a disaster. So chasing short term revenue at the cost of long term customer relationship will only lead to failure.

Closing thoughts

Economic recession is merely an indication of changing times which causes hardships. It is vital to keep focus on the basics of business at all times – even more so during tough times. This even means disregarding the advice from the Wall Street when necessary. Costco resisted the demands to increase its prices when commodities price soared in mid-2008, thus earning customer loyalty instead of focusing on quarterly results.

The best way to survive and thrive during tough economic times is to build an entrepreneurial culture which encourages managers to focus on cash & customers, and then allowing them to make decisions. Managers & leaders from various departments are perfectly capable of making the right decision if they have the right guidance and information.
Always remember that it is the customer who provides the vital cash needed for the company’s survival, so focus on the customer such that your cash position is comfortable.

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