After 2008, the world economy has largely entered uncharted territory. Businesses are grappling with multiple uncertainties. What kind of leadership do we need in such a scenario? Some answers emerged during a conversation with Ram Charan, a world-renowned business adviser, author and speaker. He has spent the past 35 years working with many top companies, CEOs and boards. The companies include GE, Bank of America, DuPont, Novartis, 3M, Verizon, Aditya Birla Group, Tata Group, GMR, Max Group and Grupo RBS. Since 1998, he has authored many books that have sold more than 2 million copies in over 12 languages. His latest book Boards That Lead: When to take Charge, When to Partner and When to Stay Out of the Way (Harvard Business Publishing) has just been released. In this interview with Forbes India, he talks about leadership in uncertain times.
Q. What are the biggest challenges that businesses are facing today? There are a number of unstoppable forces that are changing the global economy. At the same time, we have an increasing level of uncertainty. Those leaders and business persons who can gear up to the uncertainty will progress. And those who don’t will find it very difficult.
Q. What are the unstoppable forces? There are two major unstoppable forces. (There are many other forces, but I would like to put forth two that business leaders need to be cognisant of.) One is the instability of the global financial system. It is uncoordinated and uncontrolled, with so many moving parts that we do not have total transparency of information to dismantle it. At the same time, the central banks and regulators are not fully equipped to prevent this. Hence, you are going to have fluctuations of currency flows. Countries that do not have foreign exchange reserves will need to have certain kinds of controls on the inflow and outflow of money.
Q. Which is the other force? The other one is digitisation. It is the sensors, the web revolution, the internet, the mobility. A combination of all this is going to cause an impact on just about every industry. So leaders have to see how they adapt to it, take advantage of it, and make their organisation more flexible and agile. Q. How would you define uncertainty for a business because, in a sense, all business is uncertain. You don’t know when a new competitor will emerge. You may get taken over, policy and regulatory changes may happen. Is there a new kind of uncertainty lurking beyond the normal business ones? There are two kinds of uncertainty. One is the normal day-to-day one. Like today, the demand for something that a company makes may be 100 tonnes; tomorrow it might be 105 tonnes and the day after, 95 tonnes. For these uncertainties, we now have mathematical models.
Then there is the other kind of uncertainty that can change the whole structure of the industry or [that] of demand. And that is the kind of thing you can see in the personal computer industry, which is now declining in size, and things like tablets are coming up. For these situations, leaders need to look for early warning signals. They [signals] are there and they [leaders] need to face up to the reality.
Q. In the immediate aftermath of the Lehman crisis, you wrote a book called Leadership in the Era of Economic Uncertainty. What are the key things that a CEO needs to do when he sees so much uncertainty around? They need to ensure that they do not put high debt on the balance sheet. In India, the cost of debt is very high. This has a deep impact on the company. And then you manage your businesses for cash, not for accounting earnings. Cash is king. Cash is the blood supply.
Q. Can you expand on that? When you look at Amazon in the United States, its whole management is cash per share. It doesn’t go for accounting methods. So companies and their leaders need to ask a few basic questions: Where is the cash being generated? Where can you have some uncertainty? What would you do in that uncertainty?
Q. What about companies which already have high debt? How can they tackle the situation? Companies need to figure out their good assets; if the debt is high and they cannot repay it or pay the interest on it, they have to decide on how to go about restructuring it. They will have to figure out which assets they may have to sell, or get into a joint venture with a partner to get cash and, thereby, get the company on an even keel.
Q. You talk about how CEOs should practise management intensity in periods of uncertainty. Can you explain that? Management in the era of uncertainty needs to first focus and assess what is happening at the customer level: Where is the information that customer behaviour is changing? Are consumers under pressure? The management must have a first-hand feel from the bottom to the top.
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If companies don’t have—or can’t generate—cash in the short term, they’re not going to have the long term. Then they need to restructure their debt
Q. It must drill down to the customer to get a feel of what is happening out there? [They should] personally observe. Visit. In the early days of the current uncertainty, the CEO of Procter & Gamble personally visited various retail stores to observe the behaviour of consumers, their needs and their motivations. This is very important. Managements need to do a proper [and] thorough research on what is the shift in consumer pattern and behaviour. This kind of intensity is needed: It can create systems to see how the cash is being used. Is it going to the right place or not? Q. You talk about “protecting cash-flow being the most important challenge for any CEO” in an era of economic uncertainty. What does that mean? There are simple questions on cash flow. Where is the cash being generated in the business? And where is the cash being used? In the spheres [in which] it is being used, is it being used productively? Q. It means controlling both the inflow and outflow of cash? Not only controlling, but knowing. When interest rates are high, inflation is high. A lot of cash is used in funding account receivables. Customers, especially if you are in business-to-business [selling], want to preserve their cash, and they don’t pay in time. This can also happen if your inventory management is not very good or you have too many products. Then there can be some products that are so bad that they use a lot of cash in the inventory pipeline. So you need to say, if your receivables are 120 days, and if you can reduce it to 60 days, it saves you a lot of cash. But you need to work this through and figure out how you are going to do it and why you are going to do it. Q. When you are thinking cash, you are probably thinking short term. How do you balance the short-term orientation needed on cash management versus the long-term one needed for investment in the company, brand and a larger customer presence? First, if you do not have—or cannot generate—cash in the short term, you are not going to have the long term. Second, figure out how much cash you are generating and then restructure your debt. Third, revamp your business and understand that it needs to be more focussed. This might even mean becoming smaller, but it will keep you safe; then you can generate extra cash to fund for productivity.
Q. The first thing companies do in an uncertainty is cut jobs. Is that right thing to do? The first thing that you have got to see is what is best for the customer. And say what is required for you to win the customer. If you are short of cash, you redesign your business but keeping the customer in mind, because you must get the customer to prefer you. So your business has to become focussed—then you decide what kind of things you need to keep and what kind of things you don’t need. Q. Do companies need to be more centrally managed in an era of uncertainty? Centralisation [or] decentralisation is very much dependent on the business of the company. On the competition. On the intensity. But there is no general answer.
Q. How does a CEO know when he needs to switch from a cash conservation mode to an investment mode? What are the signs that make him adopt a reverse course and do the opposite of what he was doing under uncertainty? It is not a reverse course. It is always about starting with the customer and his needs, and then asking a few more questions: What is the demand point? Which way is it from? Where is the competition? What is their position? What is going to be your competitive advantage? A classic thorough analysis [is needed] to make some judgements. Q. Any general message that you would like to give to Indian CEOs? The important thing is that all the leaders should invest their time and look for early warning signals that are causing uncertainty. They should watch the balance in terms of debt. And they should always manage from the customer standpoint. And then manage the business in a way such that they know where the cash is coming from and where it is going to. Is it going to the places that are productive?
And nothing beats having the right talent. They have got to have the right talent and ensure that it is focussed. And have them work together. It is a simple thing to say, but hard to follow.