# What the CEO Wants You to Know  ## Metadata - Author: [[Ram Charan]] - Full Title: What the CEO Wants You to Know - Category: #books ## Highlights - The one thing I’ve noticed in all that time is that the best CEOs are like the best teachers. They are able to take the complexity and mystery out of business by focusing on the moneymaking fundamentals. And they make sure that everyone in the company, not just their executive colleagues, understands those building blocks of business. ([Location 58](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=58)) - Tags: [[blue]] - Every organization must serve its customers, manage its cash effectively, use its assets wisely, and constantly improve and grow. ([Location 71](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=71)) - Tags: [[blue]] - They know their cash situation. They know which are their most profitable items. They understand the importance of keeping their products moving off the shelves, and they know their customers because satisfying customers is what ultimately keeps you in business. ([Location 104](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=104)) - Tags: [[blue]] - In the coming years, every corporate purchaser will say, “You want me to buy what you are selling? Fine. Here are the very specific, quantifiable outcomes I want. Prove to me that you are going to deliver them and I’ll buy. If you can’t, I won’t.” If you are selling or providing services to people who have this attitude, you have to understand your business and theirs in order to make the sale. ([Location 121](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=121)) - Tags: [[blue]] - When it comes to running a business, street vendors and the CEOs of the world’s largest and most successful companies think exactly the same way. The complexities of their businesses are different; their approach is not. ([Location 178](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=178)) - Tags: [[blue]] - You hear all the time about companies that are strapped for cash. Maybe they produced too many things that didn’t sell and the cash got tied up in inventory. Or they invested money in a plant that’s too big and the company can’t generate enough money from it. Or the company sold its products on credit to distributors or retailers and got paid late or not at all. When companies can’t generate enough cash, they often borrow it, increasing their costs, since they have to pay interest on the loans. If they borrow heavily and don’t correct the problem that created the cash shortage, they will have trouble repaying the loans. Some end up bankrupt because they lost sight of this business fundamental. ([Location 267](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=267)) - Tags: [[blue]] - Moneymaking in business has four parts: satisfying customer needs better than the competition, generating cash, producing a sufficient return on the money invested in the business (your capital), and growing profitably. ([Location 323](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=323)) - Tags: [[blue]] - Customers, cash generation, return on invested capital, and growth. Everything about a business flows from this nucleus. Is the business attracting and retaining customers? Does the business generate cash and earn a good return on the money invested in the business? Is it growing? If the answer to those questions is yes, common sense tells you that the business is doing well. ([Location 328](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=328)) - Tags: [[blue]] - It all starts here. If you don’t have a customer, you don’t have a business. You must fill a need or fix a problem customers have. ([Location 350](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=350)) - Tags: [[blue]] - CEOs who truly understand how their business works—the ones who have street smarts—have the same close connection with their customers and know their company cannot exist without satisfying them. That belief is universal. ([Location 352](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=352)) - Tags: [[blue]] - Everyone has access to the same consumer data, reads the same trade papers, and attends the same industry conferences. If you merely behave as your competition does, you will never outperform them. That’s why you want to observe all the interactions with your product from initial awareness of the product to its purchase and usage—the end-to-end customer experience. You want to talk to the distributors and wholesalers (if your company has them) as well as the end users to really understand what is going on. ([Location 357](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=357)) - Tags: [[blue]] - If you have an insight, test it with consumers to see if you are right. Similarly, spend time studying where you think your industry might be going, and how the consumer’s taste or lifestyle is changing. And once you think you know, talk to customers for confirmation. Firsthand information is always best. ([Location 372](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=372)) - Tags: [[blue]] - Customers need a simple reason to buy from you. You have to give them something they really need. It could be a low price. But it is equally possible that it is quality, service, or the solution to a problem they have. ([Location 386](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=386)) - Tags: [[blue]] - Cash generation is the difference between all the cash that flows into the business and all the cash that flows out in a given time period. ([Location 397](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=397)) - Tags: [[blue]] - Cash flows into the corporation in the form of cash, checks, and credit cards for the sale of its products. Cash flows out for things such as salaries, taxes, and payments to suppliers. ([Location 401](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=401)) - Tags: [[blue]] - most companies extend credit, so cash and income are different. They make a sale and add it to their income now but collect the money later. Similarly, they buy something now and pay for it later. They have accounts receivable (money customers owe them) and accounts payable (money they owe their suppliers). The timing of these payments affects cash generation. ([Location 403](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=403)) - Tags: [[blue]] - Cash gives you the ability to stay in business. It is a company’s oxygen supply. Lack of cash, a decrease in cash, or increased consumption of cash spells trouble, even if the other elements of moneymaking—such as profit margin and growth—look good. ([Location 422](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=422)) - Tags: [[blue]] - everyone in a company must be aware that his or her actions use cash or generate cash. A sales rep who negotiates a thirty-day payment from a customer instead of forty-five days is cash wise. The company gets the money sooner and frees up cash—that is, the cash is available to use for other things. A plant manager whose poor scheduling results in accumulation of a lot of inventory consumes cash, because the company won’t be able to free up that cash until the inventory is sold. ([Location 441](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=441)) - Tags: [[blue]] - Gross margin is calculated by taking the total sales for the company (or a product line) and subtracting the costs directly associated with making or buying it. Those are things such as the cost of the material used to create the products along with the direct labor costs. The “cost of goods sold” (COGS) does not include indirect expenses such as sales and general administration costs or distribution costs. ([Location 495](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=495)) - Tags: [[blue]] - What is the product mix, customer mix, pricing mix, mix of distribution channels, and cost structure producing that number? Could any of them be changed to produce a greater gross margin? How about the material and labor costs? Could they be decreased (which would also increase the gross margin)? ([Location 510](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=510)) - Tags: [[blue]] - For example, if your gross margin goes from 52 percent to 48 percent, you have to ask why. Is it costing more to produce your product, or is competition forcing you to lower prices while costs are staying the same? Or is the gross margin declining because the customer mix is changing and you’re selling more products that have lower margins and fewer of the high-margin goods? Is the trend going to accelerate? ([Location 513](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=513)) - Tags: [[blue]] - There is often a perfect correlation between how well a company uses its capital and how its CEO is perceived, ([Location 527](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=527)) - Tags: [[blue]] - The faster the velocity, the higher the return. In fact, return is nothing more than profit margin multiplied by velocity. This is a universal law of business that can be written simply: Return (R) = Margin (M) × Velocity (V) Or R = M × V This simple formula is worth memorizing. You will find R = M × V to be tremendously useful. The R is stated as a percentage: 8 percent return, 10 percent return, 15 percent return—a single number that can be used for comparison. ([Location 571](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=571)) - Tags: [[blue]] - Many people focus on profit margin but overlook velocity. Here’s what makes successful CEOs different from many other executives: they think about both margin and velocity. This dual focus is the centerpiece of understanding how a business truly works. ([Location 579](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=579)) - Tags: [[blue]] - As you hone your business skills, think hard about return on invested capital and its two parts, velocity and profit margin. Look at your own company’s return on invested capital and start asking yourself questions. Over the past few years, has the return been improving or declining? How does it compare to your competitors’ figures? If it is less, what can you do to improve things? If it is better, ask yourself which companies in any industry have the highest margins, the highest velocity, or the highest return on invested capital. What can you learn from them? ([Location 588](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=588)) - Tags: [[blue]] - the return on invested capital has to be greater than the cost of capital itself—that is, the cost of using your own and other people’s (banks’ and shareholders’) money. If the return does not exceed the cost of capital (which is typically 8 percent or more), there will be real discontent among the investors because management is destroying shareholder wealth. Some companies have businesses, divisions, or product lines that do not earn the cost of invested capital. They therefore have to either improve the return or get rid of these lines of business. ([Location 592](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=592)) - Tags: [[blue]] - Taking a good look into the realities that underlie cash generation, margin, velocity, return on invested capital, and growth provides the clues about where to focus attention and what to change. ([Location 604](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=604)) - Tags: [[blue]] - Growth has a psychological dimension. Growth energizes a business. A company that is expanding attracts talented people with fresh ideas. It stretches them and creates new opportunities. Employees like to hear customers say they’re the best and that more business will be coming their way. They want to be part of a company that is going to be around to shape the future. ([Location 623](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=623)) - Tags: [[blue]] - Companies that thrive over the long run grow both the top and bottom lines consistently over time. They do it through good growth. Good growth is profitable, organic, differentiated, and sustainable. Let’s look at all four factors: Profitable. Good growth has to be not only profitable but capital efficient—that is, it needs to earn an amount greater than the company could receive by putting its money in something ultra-safe like a Treasury bill. Organic. The best growth naturally flows out of what the company is already doing. Not only is that efficient, but it also builds the organization’s creativity muscles. Differentiated. You never want to provide a product or service that is seen as a commodity. Customers must prefer it. Otherwise, you will never make very much money. Sustainable. You are not looking for a quick spike in revenues. The goal is to have the growth continue year after year. ([Location 656](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=656)) - Tags: [[blue]] - Bankruptcy is often the sad end of misguided expansion plans. Don’t use size as a measure of success. Pushing for more sales isn’t necessarily good business. You have to know how and why you’re growing. And you have to consider whether you are growing in a way that can continue. ([Location 665](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=665)) - Tags: [[blue]] - the growth box is a simple, effective tool to try to spot new opportunities. You only need to ask four questions: • How can we fill an existing need our current customers have? (Box A) • What new needs can we satisfy for our customers? (Box B) • Should we go after new customers who have new needs? (Box C) • How can we sell what we have to new customers? (Box D) ([Location 707](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=707)) - Tags: [[blue]] - A true businessperson masters the relationships among customers, cash generation, return on invested capital, and growth to get an intuitive grasp of the total business. ([Location 724](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=724)) - Tags: [[blue]] - Keep business basics in mind to cut through complexity and set the right path and priorities. Superior CEOs take care to define three priorities that will, in combination, take the business where they want it go, and devote nearly all their time and attention to those priorities. They also use those priorities as a guide for directing resources. Why so few priorities? In a word, focus. ([Location 823](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=823)) - Tags: [[blue]] - Superior CEOs use their business acumen to test the logic of their priorities and the path they are setting the business on. They consider what will happen to the company’s moneymaking as a result by revisiting the basics—customers, cash, return on invested capital, and growth—as they shape the future. That focus on the fundamentals helps them discover any flaws and gives them confidence that they are going in the right direction. ([Location 859](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=859)) - Tags: [[blue]] - The best CEOs understand that moneymaking and wealth creation are linked through what is known as the price-earnings multiple. (Also called the P/E multiple or P/E ratio; people usually just refer to it as P/E.) The “P” is the price of an individual share of stock. The “E” is earnings per share, how much profit the company made per each share of stock. ([Location 918](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=918)) - Tags: [[blue]] - The P/E represents expectations about a company’s current and future moneymaking ability—the combination of expected cash generation, margin, velocity, return on capital, and profitable revenue growth—vis-à-vis the competition and going forward. In other words, it is a judgment about the company’s management. Most often, it is based on a track record and on investors’ confidence that management will be able to sustain the moneymaking formula. ([Location 932](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=932)) - Tags: [[blue]] - A company’s stock price and P/E multiple evolve as securities analysts and investors continually reassess the value of the company. ([Location 955](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=955)) - Tags: [[blue]] - P/Es do vary widely within an industry, and that difference can go a long way toward attracting talented employees. People want to be part of fast-growing, exciting companies. ([Location 963](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=963)) - Tags: [[blue]] - Note: People want to be part of fast-growing, exciting companies. This gives another point to showmanship. Those who can brand their companies well and generate excitement (eg. Elon Musk) have easier access to capital AND better talent. This creates a virtuous loop where cheaper capital and better talent leads to more market share & growth, which in turn leads to more hype for the company, which leads to even cheaper capital and even better talent. In short, marketing and sales at the company level (ie. selling your vision) is MASSIVELY important - When a company misses expectations or says that earnings are not going to grow as fast as management had forecast, investors begin to question whether the company can deliver on its commitments going forward. And it’s not just the stock price that falls. The P/E declines, too. If the miss in earnings is a temporary thing, the stock will come back. But if the miss is the first in a series of disappointments, things can get worse. And this is not a problem for the CEO alone. If the P/E multiple is depressed, the entire company can be vulnerable. Its ability to buy other companies is significantly hampered, and instead of being the company that grows, it could become an acquisition target for other companies. ([Location 1006](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1006)) - Tags: [[blue]] - to get an idea of how well a company is being run, you usually only have to look at three sets of fairly straightforward numbers: • The company’s profit-and-loss (P+L) statement (sometimes called the income statement), which summarizes revenues and costs. • The balance sheet, which is a summary of the company’s assets, liabilities, and shareholders’ equity. It is called a balance sheet because assets must always equal liabilities plus shareholder equity—that is, they must balance. And it is not surprising that they do balance, since shareholder equity is nothing more than assets minus liabilities. • The cash flow statement, which tracks the amount of cash entering and leaving the company. People usually refer to this as cash flow. As I said earlier, I prefer to think of it as cash generation, but it is the same concept: the money that flows into the business and the money that flows out. ([Location 1151](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1151)) - Tags: [[blue]] - shareholders’ equity is a shorthand phrase for the net book value of the company. ([Location 1241](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1241)) - Tags: [[blue]] - Gaining an edge in execution takes relentless practice, not just understanding management or leadership in theory. To achieve tangible, measurable results consistently over time, you must be able to select and develop the right people, and then you have to synchronize their efforts and link them to the business’s priorities. ([Location 1298](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1298)) - Tags: [[blue]] - Matching the person to the job begins with understanding what kinds of skills, attitudes, and aptitudes are required to accomplish the business priorities. You’d be surprised at how often leaders, even the leaders in your company, ignore this. ([Location 1310](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1310)) - Tags: [[blue]] - If he can’t motivate others and expand their capacity, he won’t be successful in getting them to achieve the business priority of increasing sales. Such a person can make a fantastic salesperson but a lousy sales manager. ([Location 1345](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1345)) - Tags: [[blue]] - Note: Management is about leverage. Can you increase the output of your group by: 1. Focusing your group on the correct priorities 2. Training up your group to perform their jobs more efficiently 3. Motivating your group to keep morale high 4. Unblocking your group so that they can complete their tasks quickly Being a high quality independent contributor requires none of these skills - How many of the people around you are mismatched to their jobs? When the mismatch is huge, the person tends to feel insecure but may not know what to do about it. He may complain at work and drain other people’s energy. The best business leaders recognize when a person’s natural talents don’t fit the job, and they have the confidence to take action. Effectively and quickly dealing with mismatches gives you an edge in execution. Yet many businesspeople—including some prominent CEOs I’ve known—don’t do this. Over the years I’ve asked many of them about the greatest mistake they’ve ever made in managing people. The most common answer? “Waiting too long” to remove a direct report who was not matched to the job. ([Location 1369](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1369)) - Tags: [[blue]] - Why do leaders so often avoid the mismatch issue? They want to avoid conflict. I see over and over how managers prepare for these conversations, and then the day comes and they back off. That’s understandable, but wrong. Avoiding conflict hurts the business—and hurts the mismatched employee. ([Location 1393](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1393)) - Tags: [[blue]] - Perhaps you think you give people feedback when you do their annual performance review. In reality, performance reviews are rarely used to develop people. Most of the time they’re simply a way to communicate a salary change based on last year’s performance, or they’re used to justify a promotion (or to explain why someone is not being promoted or is actually being fired). That is not the way to help people grow and develop. What is the right way? Building on the person’s strengths with feedback that is honest and direct. No sugarcoating. In fact, every encounter is an opportunity for coaching, and the sooner the better. ([Location 1439](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1439)) - Tags: [[blue]] - Note: Coach early and often. A core aspect of management is helping your people improve - Self-confident, secure leaders know that growing people is their responsibility. They love to give true feedback. By “true feedback” I mean saying what they really think. Too often people hesitate because they worry they may be wrong or they fear reprisal. But chances are your instincts are correct and the people you are trying to help by providing true feedback will improve over time. ([Location 1458](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1458)) - Tags: [[blue]] - Unless you synchronize efforts and link them to your organization’s business priorities, you won’t have an edge in execution. Moneymaking won’t happen. A synchronized organization is like a championship rowing team—people working together in rhythm accomplishing more as a group than any one individual could do alone. ([Location 1552](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1552)) - Tags: [[blue]] - Note: Management is about empowering individuals (through training, coaching, & motivation) as well as coordinating groups to move towards the same goal - as an organization grows, and you have dozens if not hundreds or thousands of people working together, synchronization becomes a greater challenge. It is easy to understand why. To divide responsibilities, companies put in place a formal organizational structure. The moment that structure is created, the social interactions change. Often the information flow from one part of the organization to another gets clogged or distorted. The bigger the company, the harder it is for people to share information, come to agreement, and adjust their priorities. Decision-making slows. The edge in execution gets blunted. ([Location 1562](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1562)) - Tags: [[blue]] - An edge in execution requires mechanisms that synchronize individual contributors, what I call “social operating mechanisms.” Social operating mechanisms are critical if you are to gain an edge in execution. ([Location 1590](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1590)) - Tags: [[blue]] - Designing social operating mechanisms is a leadership task, not one for the human resources department. Use your creativity and take it on as a personal challenge. Then pay attention to the nature of the dialogue that takes place within those mechanisms, ([Location 1633](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1633)) - Tags: [[blue]] - Dialogue is the single most important factor underlying the productivity and growth of the knowledge worker. Indeed, the tone and content of dialogue shape people’s behaviors and beliefs—that is, the corporate culture—faster and more permanently than any reward system, structural change, or vision statement I’ve seen. ([Location 1642](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1642)) - Tags: [[blue]] - Don’t get swept up in grandiose visions of what you want to accomplish. You should be able to explain what you need to do in clear, simple terms, and you should be able to explain how it will improve moneymaking. ([Location 1779](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1779)) - Tags: [[blue]] - Be a leader of the business. With the command and urgency of a street vendor, pick the three items you, and those reporting to you, should focus on. Don’t try to cover the waterfront, don’t keep changing your mind, and don’t back away from the challenge. Make the priorities known by repeating them often. ([Location 1808](https://readwise.io/to_kindle?action=open&asin=B01MR1TTS4&location=1808)) - Tags: [[blue]]