Scaling Up with the Four Decisions
This month we’ve decided to revisit one of our previous Human Factor Newsletters. We’re bringing back the Four Decisions because they are truly the keys to success for your business. Verne’s article below is a great refresher on the Four Decisions, and if you’re serious about Scaling Up your business, we recommend you join us at our Scaling Up Business Growth Workshop in Waukesha on November 3, 2016. For details on that workshop, click here!
Here’s what Verne has to say about the Four Decisions:
People, Strategy, Execution, Cash
By Verne Harnish
Decisions Equal Success
Decisions equal success – and there are four decisions, in growing your business, that you must get right or risk leaving significant revenues, profits, and time on the table. These four decisions are in the areas of People, Strategy, Execution, and Cash. Even though most growth firms face continual challenges in all four areas, at any one time the challenges in one of these areas overshadows the rest. Therefore, your first decision is to choose which one of the four to focus on next.
In general, you know you have People challenges when you’re not enjoying running your company. You either have a partner issue, a customer with too large a piece of your business, a supplier delaying your success, a key employee or two that’s disrupting the rest of the organization’s effectiveness, or challenges at home. Or you might simply lack enough employees to serve your customers, though I caution executives to avoid tossing employees at problems.
Until you settle these relationship issues, they’ll continue to consume a tremendous amount of emotional energy, making it difficult to focus on the other three main decisions. Focus on getting the right people doing the right things with clear accountabilities and metrics.
Strategy challenges are indicated by a slowing in top line revenue growth. If revenue is not growing as quickly as you like, then it’s time to re-examine your strategy i.e. what you’re selling to whom. It’s important to have a concise articulation of that strategy so you can get everyone aligned and on the same page without wasting sales or operational energies on activities not useful to the business.
Jim Collins, author of Good to Great, calls this precisely articulated strategy a company’s “hedgehog.” Alan Rudy, founder of growth company incubator Into Great, calls it the “ping” of the business. Others call it a unique selling proposition (USP), differential advantage, or brand promise. Whatever you choose to call it, you know you’ve nailed it if revenues are growing as rapidly as you want.
Execution challenges surface when your increasing revenues are not generating increasing profits. I’ve seen many firms triple their revenue, because they have capitalized on a differential advantage, only to see their profitability drop because of the sloppiness of their execution.
The other indication of poor execution is pure hours spent delivering your products or services. When execution is haphazard, the organization has to rely on the “heroics” of their people putting in incredible hours to just keep the wheels from falling off the organization. By simply tightening up your execution habits, you can dramatically improve gross margins and profitability while reducing the time it takes for everyone to complete their work.
And the last challenge is Cash. The first law of entrepreneurial gravity is “Growth Sucks Cash.” We encourage companies to calculate their Cash Conversion Cycle (CCC) which measures companywide how long it takes between when you spend a dollar (marketing, design, rent, wages, etc.) until you get that dollar back.
In the early days of Dell, the CCC was running 63 days and caused Michael to almost run out of cash. By focusing on decreasing this cycle, today they are running close to minus 35 days. This means they generate more cash the faster they grow, which is why they have over $9 billion in the bank, up from $6 billion when they got in trouble. We believe all growth firms can accomplish this or at least dramatically improve their CCC giving them sufficient internal cash to fuel their growth.
I suggest executives read Neil Churchill’s famous Harvard Business Review article entitled “How Fast Can Your Company Afford to Grow” which provides the formulas for calculating your cash conversion cycle.
Experience the Four Decisions!
To learn more about the Four Decisions you can read Verne’s book Scaling Up: How a Few Companies Make It…and Why the Rest Don’t.
If you truly want to experience the Four Decisions, and how they can help your business succeed, attend our Scaling Up workshop on November 3rd! Be sure to bring your leadership team!
For more information on our Scaling Up Workshop, click here!
Verne Harnish is founder of the world-renowned Entrepreneurs’ Organization (EO) and chaired for fifteen years EO’s premiere CEO program, the “Birthing of Giants” and WEO’s “Advanced Business” executive program both held at MIT.
Founder and CEO of Gazelles, a global executive education and coaching company with over 150 coaching partners on six continents, Verne has spent the past three decades helping companies scale-up.
The “Growth Guy” syndicated columnist, he’s also the Venture columnist for FORTUNE magazine. He’s the author of Scaling Up (Rockefeller Habits 2.0); Mastering the Rockefeller Habits; and along with the editors of Fortune, authored “The Greatest Business Decisions of All Times”, for which Jim Collins wrote the foreword. Verne also chairs FORTUNE Magazine’s annual Leadership and Growth Summits and serves on several boards including chairman of The Riordan Clinic and the newly launched Geoversity.