Determining the connection between the external and the internal. This is the art of business acumen: link an insightful assessment of the external business landscape with the keen awareness of how money can be made – and then executing the strategy to deliver the desired results. The building blocks are simple but mastering how they intertwine in each setting demands intense mental activity and skill.
20/20 Foresight – External Context
Identifying the external context requires a quick, decisive mental modeling of the big picture. This skill takes plenty of practice. The essence of this skill is to find patterns, rhythms, from among a wide variety of factors and posit the assumptions that would converge them. A simple way is to begin with a list of six questions:
- What is happening in the world today?
- What does it mean for others?
- What does it mean for us?
- What would have to happen first (for the results we want to occur)?
- What do we have to do to play a role?
- What do we do next?
The answer doesn’t exist in these answers. The questions merely help executives assess the validity of the company’s moneymaking approach. This is a fluid process, and almost entirely qualitative. Assuming this iterative routine encourages executives to transcend old rules of thumb deeply etched in their DNA – i.e. quantitative data, deliverables – and means giving up on the habitual reliance on precedent historical data. Historical data reflects linear change, rather than continuous movement which is the essence of business maneuvers. One big trend is achieved through a million small ones.
Learning to see the business landscape with 20/20 observation depends on the rigor and discipline applied to the entire process of a) envisioning the changes b) deducing the actions and c) implementing the plan.
20/20 Insight – Internal Context
The ability to simplify complexity is vital to the success and sanity of business leaders. We live in a world with unlimited data, unlimited thoughts, and constricted time. The line between the successful and sane strategists vs unsuccessful and stressed out strategists comes in the ability to focus on the basics of moneymaking of a company. Successful marketing strategists know how to break the most complex business situations down to the fundamentals.
Here are the basics:
- Cash – this is a no brainer. Understanding how much cash the business generates and how much cash it consumes is critical.
- Margin - margin is tricky. Typically, when a client mentions margin or bottom line, what they are referring to is the net profit margin – the money the company earns after paying all expenses, interest and taxes. Gross margin is a different story if not more insightful of shifts in the business. Gross margin is the different between a product’s selling price and the cost to make the product (i.e. “cost of goods”) which is expressed as a percent of the selling price. How changes outside or inside you business affect gross margin is key. This could signify changes that need to be made in either the supply chain, value chain or both.
- Velocity – velocity refers to the speed that revenue turns over for each dollar of inventory. For instance, if you have $10 million in inventory for the year and revenues of $20 million, then your inventory velocity is 2. This describes how fast you’re moving raw materials to production to getting them on the shelf for customers. For B2B companies like ourselves, you can track velocity by how much revenue is generated per hour of human capital.
- Return on assets (ROA) – margin multiplied by velocity equals return on assets. This is probably one of the best indicators of a healthy business. Think of this as top of the list in a diagnostic exam. If your return is lower than cost of capital, your business is in no-man’s land. Increasing your return on assets can be done using the math – increase velocity and/or increase margin.
- Growth – there is a distinction between good growth and bad growth. Bad growth happens when your revenues go up while eroding ROA, customer equity – the health indicators of a business. Good growth typically happens organically, where the integrity of the ROA and customer equity are increased through diligence in consistently iterating the business model and its building blocks. The Net Promoter Score is a great performance metric in this game of good growth.
A full perspective is necessary to unclog bottlenecks in our thought process. As a complete marketing strategist, you must have 20/20 foresight into the external context and 20/20 insight into the internal operating of the business, whether your own or your clients.
Next, I will speak on what is step where most miss the leap to becoming a complete marketing strategist – Functions Knowledge.
Credits for this chapter
Ram Charan - What the CEO Wants You to Know for the five building blocks of business.
Kenichi Ohmae – The Mind of the Strategist: The Art of Japanese Business
Strategy + Business - Jared Diamond: The Thought Leader Interview
…and undoubtedly many more!