Secrets of the world’s top CEOs

When Francis Halzen set out to build a gigantic telescope at the South Pole nearly a decade ago, he found himself with a major problem.

He had no idea what he was doing.

The University of Wisconsin-Madison theoretician is a foremost expert in his field, known internationally for his work in neutrinos, a rare, mysterious element. But what he didn’t know, the thing that was completely beyond this genius: how to run a construction site for a kilometre-wide telescope on the South Pole.

“The project was such that if you missed a deadline one season and got delayed, it would cost you $10 million,” Halzen said, recalling shipments that needed to arrive before the South Pole’s long winter set in. “If I had to do this myself ... I would have been fired.”

So Halzen hired a team of experts: a project manager to oversee construction, an expert in staging to organize construction equipment and a finance expert to meticulously track the budget using sophisticated computer models.

That last bit, the strict attention to a budget, is something managers seem to be expected to be able to do with ease, but in reality, it’s a skill few leaders in business can muster on their own. Most middle managers earn promotions by being good at what they do, and they rarely receive training in even the most basic financial skills needed to supervise others.

For new managers in the bowels of a big corporation, it can be difficult to imagine their small team having much of an effect on the company’s profitability. But management experts say learning how to figure out how your little department factors into the company’s profit and loss will help leaders, and their firm, become more successful.

Sure, the average college graduate who studied business and any MBA grad ought to know how to balance a P&L, but managers who lack that kind of preparation must navigate their way through financial documents on their own.

If you’re among those who still have to ask whether being in the red is a good thing, know this: a lack of solid financial acumen can stymie your career and make it difficult for you to lead others successfully. You can’t wing it. It might seem like a point of failure to ask for help. But, without it, you won’t get far.

First Steps
The first step is to brush up on the basics, said Yiorgos Allayannis, professor of business administration and associate dean for the global executive MBA program at University of Virginia’s Darden School of Business. For some managers, that means learning how to read balance sheets and developing an understanding of how to compare profits versus cash flow.

From there, make sure you understand the basic ratios that signal health for a company in its industry. For software companies, that’s often returning customers, not just sales. In retail, it’s regular profit margin. Residential construction managers, you might look to new home starts. This will help you decide whether to make an investment in a project, in part based on whether it can help make the company more profitable. Balance sheet newbies should expect a somewhat steep learning curve.“The language of finance is difficult, but just like any language, it can be learned,” Allayannis said.

It’s more likely that workers in the United States will know basic financial skills than counterparts across the globe, Allayannis said. Nowadays, US colleges and even some high schools are teaching students how to balance budgets. New managers in cultures where bosses are viewed as infallible may also be less likely to ask for help.

Libby Nicholson oversees training and development for on-the-job training programs at Kingston Health Care, a 1,700-employee company in Ohio that owns and manages nursing homes and assisted living communities. She said employees on the management track often lack financial skills they’ll need. That’s especially true among people whose jobs focus on specific skills that rarely intersect with financial acumen.

The kitchens at Kingston facilities are a prime example. The kitchen manager needs to figure out how to serve good, nutritious meals within the budget — even if residents wish they could have lobster twice a week.“For nursing home residents, food is one of the most important parts of their lives,” Nicholson said. “New kitchen managers need to know they can’t serve steak every day, but they can figure out a way to serve it on Mother’s Day and other special times.”

At the senior level of management, new Kingston supervisors get extra training during trips to the home office in Toledo, Ohio. They meet with leaders in information technology and human resources, of course. But they also sit down with an accountant to learn the basics of budgeting. Administrators get even more training: they spend eight months learning the ropes.Nicholson said one goal of the training is to identify good leaders who happen to be math-challenged and provide extra help. Nurse supervisors who aren’t good at budgets, for instance, will be paired up with someone from accounting who can help.

Halzen learned a similar lesson while building his South Pole telescope. He never even stepped foot on the construction site. He did what good managers do: realized his shortcomings and found the right people to help — and monitored the progress, learning something himself along the way.

“I let the people who knew what they were doing get it done,” Halzen said.

SET A SPRAT TO CATCH A MACKEREL

Loss leaders area well-known ploy in retailing. Essentially, the store sells some popular item at a much-reduced price to attract people into the store, on the assumption that they are almost certain to buy something else as well. The profit comes from the “something elses.” Fast-food restaurants often do the same thing, offering (say) two pizzas for the price of one on the assumption that customers will buy a bottle of wine, a dessert, a salad, or whatever. Translating this into other business contexts may be another story, of course.

When voice-over-internet protocol (VOIP) was first developed it was difficult to see how to make money out of it. The free communications and information sharing capability of the internet was, until then, paid for from advertising, but it was hard to see how this could apply to voice communications. After all, no one would want their telephone conversations to be interrupted by advertising.

When Skype first started trading, the company decided to give away the Skype-to-Skype part of the business, so that members (not subscribers) could talk to each other indefinitely for nothing. This meant that people could call anywhere in the world to another Skype user, for as long as they wanted, without paying anything at all

This was, of course, a very real advantage to a great many people. Skype conference calls could be arranged globally, at zero cost, and the system very quickly acquired over 12 million members. However, Skype does not allow members to call landlines or cellphones free. These require a further (very modest) subscription, and that of course is where the money comes in. The cost of running the system is minimal—unlike other online businesses, there are no goods to send out or invoices to prepare, and people are simply billed by direct debit every time the subscription or the usage charges fall due.

Giving away something of real benefit has certainly benefited the founders of Skype: the company was sold to eBay for $2.6 billion in 2005.

• Ensure that what you give away has real value.
• The giveaway should not be sufficient in itself—there needs to be a strong potential for follow-up sales.
• If possible, the giveaway should encourage other people to join in with the scheme.

USING CUSTOMER INFORMATION

Seamlessly gathered information can be used to save costs, to provide a tailor-made service to individual clients, and to sell more—often using the internet.

The American online retailer Amazon.com has redefined book selling. Its culture appreciates the potential of technology, with the company using information in four key ways:

1. To minimize risks by analyzing information from millions of customers to see how and when they purchase, enabling Amazon.com to reduce the level of risk.
   
2. To reduce costs by using technology to control the way it manages its inventory and suppliers.
   
3. To add value and help customers by offering reviews of books and free downloadable information, and by treating its home page as an individual storefront for each customer—for example by tailoring lists of suggested titles that the customer may enjoy based on previous purchases.
   
4. To innovate. Amazon believes that, to rival its competitors, an innovative approach is essential in order to improve the value and service offered to consumers.
   

What matters is not simply what information exists, but how that information is used to build competitive advantage. Interestingly, many other retailing companies have now followed Amazon’s lead. For example, Apple’s iTunes and iStore have done for music retailing what Amazon did for book selling, using many of the same principles.

Practice

• Treat each customer as an individual. For example, music retailer iTunes tracks the purchases of individual clients and provides a customized webpage designed to introduce a client to new buying opportunities that appeal to his/her personal taste.
  
• Use the internet to provide information for the individual—even if your business does not carry out its primary operations online. By collecting customers’ email addresses, a business can develop a highly valuable and intimate marketing strategy.
  
• Smaller businesses and freelance workers may be able to research more in-depth information on each client. This can then be organized into an accessible database, with subheadings for each client covering all areas of relevant information.
  
• If your organization is unable to seamlessly track consumer trends, use incentives such as free products for customers who volunteer their information. Similarly, you should also provide rewards for customers who agree to receive information on your organization—the marketing should be entertaining, lively, appropriate, and relevant. 
  

MAKING YOUR EMPLOYEES PROUD

A company with a positive self-image and sense of pride will be more unified and efficient, with a stronger “employer brand.” When employees respect and appreciate the organization they work for, then their productivity, quality of work, and job satisfaction increase.

Are your employees proud of working for your business? This sense of pride may result from the organization’s purpose, success, ethics, the quality of its leadership, or the quality and impact of its products. An example of this is Taylor Nelson Sofres (TNS), a leading market information company, with over 14,000 full-time employees across the world. It collects, analyzes, and interprets information for clients, provides research on business and market issues, and conducts social and political polling.

The firm’s network spans 70 countries, and has been largely assembled through acquisition. Consequently, employees were often more loyal to their local “in-country” TNS business than to the group, which seemed remote or foreign. However, when one of its executives was caught in the tsunami in South Asia in December 2004, TNS donated $250,000 to UNICEF to aid relief operations. This altruism brought the company together, as employees were pleased to be working for an organization with values that they respected.

 As TNS illustrates, simple and positive gestures can achieve impressive results in terms of employee satisfaction, pride, and motivation.

Practice

• Carry out acts of corporate social responsibility—such as donation, fundraising, or simply enacting more compassionate business practices. These all serve to make current and potential employees feel proud to work with your organization.
  
• Ask employees what they value—what would they like their employer to do?
  
• Provide opportunities for employees to engage in fundraising and volunteering activities.
  
• Avoid negative business practices. Employees will be less motivated to work within an organization that is viewed negatively in society.
  
• Remind employees of the ways their services benefit society; how the everyday tasks they perform make a positive difference within society. 
  

SCENARIO PLANNING

Scenario planning enables organizations to rehearse the future, to walk the battlefield before battle commences so that they are better prepared. Scenarios are not about predicting future events. Their value lies in helping businesses understand the forces that are shaping the future. They challenge our assumptions.

In the 1960s, Pierre Wack, Royal Dutch/Shell’s head of group planning, asked executives to imagine tomorrow. This promoted sophisticated and responsive strategic thinking about the current situation, by enabling them to detect and understand changes. Pierre Wack wanted to know whether there were other factors in the supply of oil, besides technical availability, that might be uncertain in the future. He listed stakeholders and questioned the position of governments in oil-producing countries: would they continue increasing production year on year? By exploring the possible changes to government policy, it became apparent that these governments were unlikely to remain amenable to Shell’s activities. Many oil-producing countries did not need an increase in income. They had the upper hand, and the overwhelming logic for the oil- producing countries was to reduce supply, increase prices, and conserve their reserves.

When the 1973 Arab–Israeli War limited the supply of oil, prices rose fivefold. Fortunately for Shell, Wack’s scenario work meant Shell was better prepared than its competitors to adapt to the new situation—saving billions of dollars, it climbed from seventh to  second place in the industry’s profitability league table. It knew which governments to lobby, how to approach them, where to diversify, and what action to take with each OPEC member.

Scenario planning enables leaders to manage uncertainty and risk. Above all, scenarios help firms to understand the dynamics of the business environment, recognize new opportunities, assess strategic options, and take long-term decisions.

Practice

• Scenarios are not predictions: they are used to understand the forces shaping the future. What matters is not knowing exactly what the future will look like, but understanding the general direction in which it is moving—and why.
  
• Plan and structure the scenario process: for example,by agreeing who will be involved.
  
• Discuss possible futures (usually by working back from a possible view of the future).
  
• Develop the scenarios in greater detail.
  
• Analyse the scenarios: why they might occur, what you would do  if they did.
  
• Use the scenarios to shape decisions and priorities. 
  

SHARE THE WEALTH

Everybody wants to grow the business. Gaining more market share, winning more customers, and (ultimately) making bigger profits are all goals the directors eagerly aim for. 

For most firms, though, restraints on capital limit the rate at which the company is able to grow. Working capital quickly runs out, and in any case most small firms rely on borrowed money that has to be paid back on the nail—unlike major firms, which can sell shares and only have to pay out if the company is profitable. 

There is, however, a way to break the deadlock—franchise the business format.

In the early 1950s, Holiday Inns started in America. The company had a good business format, and developed a clear brand image that conveyed a mid-range, comfortable hotel for business users (during the week) and family users (at weekends).

The problem for the company is that new hotels are expensive items. Building a hotel is costly and time-consuming, but Holiday Inns did not want to go the route of buying up existing buildings since they wanted to retain their branding intact.

The answer was to franchise the format. Holiday Inns are almost all owned by the people who run them. The parent company helps prospective franchisees to find appropriate sites, build the right hotel, train the staff, create the appropriate decor, and market the hotel. For the franchisee, being given a complete business format.

dramatically reduces the business risk (and goes down well with the bank, too), and also allows the hotel to tap into Holiday Inns’ existing branding and reputation.

From the viewpoint of the parent company, franchising has allowed a much more rapid growth than would otherwise have been possible. Franchisees pay fees and royalties for being allowed to use the format, and although the overall profit per hotel might be lower than would be the case for directly owned hotels, Holiday Inns are able to open an average of one hotel per day somewhere in the world. 

There is no question that Holiday Inns could never have grown as rapidly as they have without franchising—being prepared to share the idea, and the wealth.

Practice:

• Your business model must be proven to work.
• You will need to allow early franchisers in at a lower rate than you would like to charge later ones—after all, you are still an unknown quantity.
• You must have a very clear manual, covering every possible circumstance: apart from the need for franchisees to know how to operate, this will ensure you keep your brand values intact.
• Accept that you will have to provide a lot of support in the early stages, but regard this as an investment in the future.

ADS ON CARS

Cutting through advertising clutter is a perennial problem for marketers. Most people avoid adverts unless they are looking for something specific: people switch channels during TV adverts, flip the pages of magazines to get past the ads, and talk through advertising breaks on the radio.

There are many ideas for getting past this process, some of which work well and others that simply irritate the paying customers—but some of the best ones involve putting the message exactly where the interested customers will see it.


Most people find driving an expensive necessity. There is little one can do while driving except look at the other cars—which is not usually all that interesting either. This does raise an opportunity, though. Recently, several firms have appeared that can arrange to have private cars liveried (decorated with advertising messages). The motorists are paid a small amount for having their cars liveried, and naturally this helps defray the costs of motoring. Of course, the drivers are allowed to choose the companies—it would hardly be appropriate for a vegetarian to advertise McDonald’s—but in general there are few problems of this nature.

The key advantage for the advertiser is that the cars will be seen in traffic, in parking spaces, at golf clubs, and so forth: sometimes this is a way of reaching people who would otherwise be difficult or impossible to contact any other way.


The ads are applied as a plastic wrap, so they can be changed easily: drivers are chosen on the basis of the cleanliness of their cars and the kind of places they go, so it is perfectly feasible to advertise on golfers’ cars or on frequent flyers’ cars if the company wants to approach that type of audience.


Practice
•Adverts need to be punchy—often observers will only have seconds to see the ad as a car drives past.
•Choosing the type of driver is often crucial, because this will determine the audience for your advertising.
•If possible, recruit drivers who are already fans of your product—this gives them an excuse to talk about you to their friends and acquaintances.

DEVELOP A SEPARATE BRAND FOR EACH MARKET

Brands are the personality of the product. They appeal to a particular segment, and what suits one segment will not suit another. Very few brands are able to cross between segments—people get to like specific brands, and (of course) dislike others.

Sometimes firms will use an overall brand to “wrap” the others—Heinz is a good example—and sometimes firms will use a single brand to cover a wide range of products (as Virgin does, very successfully), but in most cases firms use a separate brand identity for each product-segment match.

Sometimes, though, the product has to function in very much the same way as all the other products if it is to work with those other products.

Nokia is one of the largest manufacturers of cellphones in the world. As such, it has a range of cellphones at various prices to suit various pockets: within each country, and even between most countries, the function of the cellphones has to be compatible with the cellular phone infrastructure, so there can be little variation in 

performance. 

However, as with nearly every other product, there is a segment of wealthy people who are prepared to pay more simply to have a product that is exclusive, i.e., excludes the rest of the population. 

Nokia wanted to tap into this market, but the Nokia brand does not carry the right image for this upper-crust group.

Nokia therefore introduced a new brand, Vertu, to cover its upmarket cellphones. These are, as one might expect, seriously upmarket: although the “works” have to be the same as in any other Nokia cellphone, the exteriors are diamond-encrusted works of art. 

Vertu phones are priced between £4,000 and £15,000, so they are certainly not for the average adolescent text-messager.

Practice

•Consider whether your product or service could appeal to another 

segment if value could be added.

•Always develop a separate brand for each segment—this will 

take investment, but it will be worth it.

•Don’t assume that people will only buy more of something if 

it’s cheaper.

BUILD A NEW DISTRIBUTION CHANNEL

Sometimes distribution channels are so tied up by existing companies it is difficult (even impossible) to get a product to market. Even when retailers can be identified, often part of the chain is contracted to some major supplier who blocks the distribution at the wholesale stage.

For small companies in particular, finding a route to market can present a major challenge: often the big boys are not interested unless there is a fairly substantial financial commitment in terms of renting shelf space or supplying large amounts of product on extended credit.


When Red Bull was first launched in Britain, it was an attempt to create the energy drinks market from scratch. The company was founded in Austria in 1984, but only started selling the drink When Red Bull was first launched in Britain, it was an attempt to create the energy drinks market from scratch. The company was founded in Austria in 1984, but only started selling the drink in 1987.

Breaking into the British market proved difficult. The company wanted to target a young audience, partly because they would have the longest usage life and partly because young people often participate in sports or need to stay up late, either to party or to study. Red Bull therefore began by recruiting students to act as
part-time salespeople, visiting nightclubs and sports centers to promote the drink. Since the nightclub owners were seeking to attract a young audience, the student salespeople represented a powerful influence.

Eventually Red Bull established its own warehousing and distribution, but again ran these using students as part-time workers. Apart from keeping costs down, this ensured that the entire workforce matched the brand values, and (perhaps even more importantly) were able to act as influences, telling their friends
about the product.

Today, Red Bull has reached the point where it sells 3 billion cans of the drink a year. 


Practice
•Decide where you really want to sell your product, and focus on just those outlets.
•Decide who would be your best advocates for the product in those outlets.
•Follow up with a continued commitment to the distribution chain, even when other channels open up.

USE A WEBLOG

The internet has certainly fired people’s imaginations, but the possibilities are far from being fully explored. At first, the internet was seen mainly as a kind of extension of traditional advertising most websites were just presence sites, directing people to telephone or call into an office. The interactive possibilities were 
largely ignored.

However, it is the possibility of online interactions that makes the internet different from anything that has gone before. Consumers have been quick to flock to online forums and weblogs to express their opinions of companies and brands, yet companies have done relatively little to encourage or influence this.


When Toyota launched the new Auris in Greece, they identified a number of regular bloggers (weblog contributors) and gave them each a car to test drive for a week. Needless to say, they posted the results of the test drives on their blogs.

This fitted well with Toyota’s desire to approach a young, affluent market: internet use in Greece is still less than in most European countries, and therefore the Greek internet system is dominated by better-off, educated, usually young people. Getting several reviews of the car onto blogs was a major coup for Toyota: there were 52,000 visits to the websites by 41,000 visitors, leading to over 2,000 requests for test drives.


practice
•This is a risky strategy: if the bloggers don’t like the product, you will have a lot of negative publicity to contend with.
•Make sure you identify the influential bloggers correctly. 
•Give yourself the best chance of a successful outcome by making  sure that the product samples they are given are absolutely perfect.