It is only a slight exaggeration to say that Ram Charan makes a peripatetic management consultant look stationary. Known for completing consulting assignments or giving presentations on two continents on the same day, and for doing so routinely, not occasionally, the light-travelling, not-even-carry-on-luggage Mr. Charan has developed the habit of asking staff to courier a laundered shirt to his next destination, lest he arrive only just in time for his next presentation. The road-warrior legend withstanding, Mr. Charan has the ear and respect of the most powerful CEOs in the world. He is one of the world’s leading management consultants and the author of 12 books on leadership and strategy. His most recent book, on which this interview is based, is Leadership In The Era of Economic Uncertainty (McGraw Hill, 2009).
Ivey Business Journal: Many CEOs today must feel as though they’re in a maelstrom. What’s a CEO to do to try to gain some control over the events?
Ram Charan: The immediate and most pressing challenge for a CEO today is to act quickly and decisively, and to prepare for the worst-possible scenario. It’s reasonable to think that if you conscientiously prepare for the worst, chances are that you will encounter something less bad than that and come out ahead when it’s all over. If you don’t prepare for the worst you will put your company and career at risk.
IBJ: How does a CEO prepare for the worst?
RC: Their focus must shift from the income statement to the balance sheet. Today, protecting cash flow is the most important challenge for any CEO. Before the crisis, the most important indicators of success were EPS and revenue growth. Now, the most critical metric is cash on hand. You must understand the cash implications of everything the company does, and you must know your company’s exact cash position each and every day. This is a bit unusual for a CEO but it’s necessary. Projects that were once evaluated on the basis of their ROI must now be assessed in terms of how much cash they consume and can generate, and how soon they can bring in that cash.
IBJ: That’s a constraining style of management for many CEOs?
RC: Yes it is, but CEOs have to manage conservatively. They have to lower their cash break-even point as fast as possible for the worst-case scenario. Breakeven points on a cash basis will tell you what you need to do, whether it means discontinuing a product line or shutting down a plant. Especially if you’re targeting new market share, you must be cash efficient. You can’t afford to consume disproportionate amounts of cash in the form of more inventory or allowing accounts receivable more time than usual. Look at GM. For a good while now, they’ve been talking about regaining market share when they should have been reducing overall market share, cutting product lines, pruning their customer base and trying to increase market share in cash-efficient, profitable segments.
IBJ: It sounds like GM will be a smaller company, that is, if it ever recovers?
RC: Part of the new reality is that your company will emerge smaller than it is today. Your cash breakeven will tell you that you have to reduce your workforce and capacity. This is a chance to be selective about the cuts you make, a time to narrow your focus and concentrate on the core of the business, choose the market segments you want to be in and the customers you want to serve. Shrinking the company will present opportunities to simplify your processes and reduce the layers of management. You will have fewer customers and products but a stronger, better-positioned company. Managers must acquire what I call “management intensity,” a granular understanding of what’s happening inside and outside the company. They’ve never had to have this granular understanding. Also, you must throw out the managing-for-the-quarter approach. Conditions are changing much too fast and too frequently. You may need to respond tomorrow, so you must be sure that you’re agile and very flexible.
IBJ: What about intangible qualities? How, in fact, does a leader lead in a time of uncertainty?
RC: You must be honest and you must be credible. You have to level with people, maybe acknowledge the limits of your understanding and ask them for their own view. By working with people, you can piece together much better probabilities than any one person can do. Also, people need a vision, a realistically optimistic picture of what can lie ahead. So, you try to make decisions that lead to incremental successes. These incremental successes really energize people and lay a foundation for further success.
IBJ: One of the biggest challenges for a CEO in this kind of crunch is to control R&D expenditures without compromising the R&D function?
RC: You’re definitely going to have to cut but you have to make sure that you cut the right thing. Get ahead of the decision curve by doing your own zero-based budgeting. This will show which projects are critical to the company’s future and which can be sacrificed. This is a time when you can grab a big lead over competitors and emerge with new products or processes that give your company a tremendous edge. In downturns, most companies focus their research only on improving existing products. That’s a mistake. You need to focus on new products and disruptive research as well. Focus your efforts on developing a cutting-edge product or process that creates a new market or turns an existing market upside down because it reduces costs very significantly.
IBJ: Thank you very much
RC: You are welcome.