Know Nothings

By Ram Charan

When a slowdown in the economy looms, the instinctive reaction of far too many people is fear. Managers fear that expenses are too high and cut costs and jobs. Employees fear the ax. The result is tunnel vision: What matters is my job, my department. Kicking into survivor mode makes it tough for employees to think about the big picture.

Yet big-picture thinking can lead to actions that will help a company survive, even prosper, when the economy is in the doldrums. Unfortunately, few companies know how to refocus to take advantage of this opportunity. Instead, a knowledge vacuum occurs, because workers don't have the information they need to improve their company's performance. I've advised hundreds of companies, and never have I seen a situation in which the employees did not want to know more about how the company really works: How do we make money? Are we profitable? Why? Why not? They want to know. They feel it's their company.

Too often the company's senior managers are mired in the complexity of a business and believe there's no way that the average Joe could really understand what is going on. After all, that's why they are paid the big bucks. This is, of course, ridiculous and one reason I wrote What the CEO Wants You to Know. Even worse, many execs themselves have a hard time cutting through to the fundamentals.

Managers must make sure that every employee understands the basic building blocks of how his or her business works. Here's an example. Last summer Bruce Nelson took over as CEO of Office Depot, the world's largest seller of office supplies. In analyzing the fundamentals, he quickly discovered that gross margin and inventory velocity were slipping. Not good.

But he didn't keep these problems to himself. At a gathering of some 3,000 store managers, merchandising professionals and sales representatives, he conducted a very informative and influential discussion on what they could do to improve these two fundamentals. These folks know best what customers are buying. Nelson's emphasizing just how important their individual store performance is to the overall corporate performance brought home some key points. If you change your mix of merchandise and emphasize high-margin products that turn rapidly, comp sales (same-store sales compared with last year) will improve. Not only will you and your store perform better but so will the total business of the company.

Most people understand the concept of margin--the money they pocket after all expenses have been paid. But velocity--the speed at which things move through the company to the customer--is often missed. I cannot think of any company whose performance would not improve by increasing the rate of inventory turn. And, by the way, the concept of velocity applies as well to services as it does to products.

Employees are probably not going to realize that all the fundamentals--cash, margin, velocity and growth--are important unless somebody tells them. And I'm not talking about throwing out a few ideas. These concepts have to be explained in the context of the entire business--how these building blocks fit together. Every great manager is in some respects a great teacher. Do you understand the fundamentals of the business well enough to explain them to everyone at every level? If not, you're throwing away a cost-free opportunity for prospering in what could prove to be a very difficult economic climate.

Ram Charan is a leading management consultant and author