Harnish

All these great biz leaders know one thing — nothing interesting can come out of your brain that you don’t put in first. Having a natural curiosity and thirst for learning separates the good from the great in our experience.

• Reduce by 80% the time it takes the top team to manage the business (operational activities)

• Refocus the senior team on market-facing activities

• Realign everyone else (onto the same page) to drive execution and results.

Yet there are three barriers to scaling up, which we’ll discuss in the next chapter:

• Leadership: the inability to staff/grow enough leaders throughout the organization who have the capabilities to delegate and predict

• Scalable infrastructure: the lack of systems and structures (physical and organizational) to handle the complexities in communication and decisions that come with growth

• Marketing: the failure to scaleup an effective marketing function capable of attracting new customers, talent, advisors, and other key relationships to the business.

Thus, to overcome these barriers your team must master, using our tools, four fundamentals:

• In leading People, take a page from parenting: Establish a handful of rules, repeat yourself a lot, and act consistently with those rules. This is the role and power of Core Values. If discovered and used effectively, these values guide all the relationship decisions and systems in the company.

• In setting Strategy, follow the definition from the great business strategist Gary Hamel. You don’t have a real strategy if it doesn’t pass two tests: First, what you’re planning to do really matters to enough customers; and second, it differentiates you from your competition.

• In driving Execution, implement three key habits: Set a handful of Priorities (the fewer the better); gather quantitative and qualitative Data daily and review weekly to guide decisions; and establish an effective daily, weekly, monthly, quarterly, and annual meeting Rhythm to keep everyone in the loop. Those who pulse faster, grow faster.

• In managing Cash, don’t run out of it! This means paying as much attention to how every decision affects cash flow as you would to revenue and profitability.

Guided by a set of Core Values and a purpose, it chooses a Big Hairy Audacious Goal (BHAG®)* to achieve in the next 10 to 25 years. To break up the journey, the leadership team sets a series of three- to ve-year targets divided up into annual goals. These are further broken down into specific actionable steps the business takes over the next few weeks or months, adjusting tactics as the market conditions dictate.

BHAG is a registered trademark of Jim Collins and Jerry Porras.*

Goals without routines are wishes; routines without goals are aimless. The most successful business leaders have a clear vision and the disciplines (routines) to make it a reality.

Nothing is more maddening than hearing teams debate whether a certain idea is applicable in a business-to-business or business-to-consumer engagement. In the end, we’re all in the same business: people to people. None of us sell to companies; we deal with the people (consumers) inside these companies, who have the same motivations, challenges, and emotions as any other person.

2. Demands: Leaders have to balance two often competing demands on the business — People and Process. This requires simultaneously maintaining a great reputation with the employees, customers, and shareholders (the People side of the business); and improving the productivity of how the firm makes/buys, sells, and tracks these transactions (the Process side of the business).

3. Disciplines: To effectively execute, there are three fundamental disciplines (routines): Set Priorities; gather quantitative and qualitative Data; and establish an effective meeting Rhythm. It’s in these meetings, debating the data (the brutal facts!), where the priorities emerge.

4. Decisions: Ultimately, all of the above require some decisions. To scale the business requires getting four key decision sets — People, Strategy, Execution, and Cash — absolutely right, and there are right and wrong answers. Shortchange any one element and you’re not maximizing your opportunity.

Much of our work is helping leadership teams formulate the right questions. Once they get the questions right, the answers tend to appear.

KEY QUESTION: Are the stakeholders (employees, customers, shareholders) happy and engaged in the business; and would you “rehire” all of them?

Then you need to evaluate all the key relationships surrounding the business. Would you keep all your existing customers? Are you happy with your investors/bank? Are your vendors supporting you properly? Are your advisors — accountants, lawyers, consultants, and coaches — the best for the size of the organization and future plans? The toughest decisions to make are when the company has outgrown some of these relationships and you need to make changes.

In retaining employees and keeping them engaged, we’ll cover the five activities of great (vs. good) managers (we prefer the term “coaches” — more on this later):

• Help people play to their strengths.

• Don’t demotivate; dehassle.

• Set clear expectations and give employees a clear line of sight.

• Give recognition and show appreciation.

• Hire fewer people, but pay them more (frontline employees, not top leaders!).

It’s time to break apart a 50-year-old business term — strategic planning — and think about it in terms of two distinct activities: strategic thinking and execution planning. Each requires two very different teams and processes.

Strategic thinking requires a handful of senior leaders meeting weekly (it’s not sufficient to do strategy work once a quarter or once a year) in what Jim Collins calls “the council.” It’s a meeting separate from the standard executive team meeting. Rather than getting mired in operational issues, the strategic thinking team is focused on discussing a few big strategic issues including those outlined in the SWT and 7 Strata tools summarized below.

The 7 Strata of Strategy: is tool represents the seven components (stratum) of a robust, yet simply stated, strategy. It’s designed to provide the kind of differentiation and barriers that allow you to dominate your niche in the marketplace.

The seven components:

1. What word(s) do you own in the minds of your targeted customers (e.g., Google owns “search”)?

1. Who are your core customers, what three Brand Promises are you making them (e.g., Southwest Airlines promises Low Fares, Lots of Flights, Lots of Fun), and how do you know you’re keeping these promises (Kept Promise Indicators, a play on KPIs)?

1. What is your Brand Promise Guarantee (e.g., Oracle has been advertising the chance to win $10 million if its Exadata servers don’t outperform the competition by a factor of five)?

1. What is your One-PHRASE Strategy that likely upsets customers (Apple’s “closed system”) but is key to making a ton of money and blocking your competition?

1. What are the three to five Activities that fit Harvard strategist Michael Porter’s definition of the essence of differentiation (e.g., IKEA’s furniture needs assembly)?

1. What is your X-Factor — a 10 times to 100 times underlying advantage over the competition — that completely wipes out any and all rivals?

1. What are your Profit per X (economic driver) and BHAG® for the company? These come straight from Jim Collins.

You know you have execution issues if three things exist:

1. There is needless drama in the organization (e.g., something shipped out late; the invoice was wrong; someone missed a meeting; etc.).

1. Everyone seems to be working more hours, spinning his wheels, or spending too much time fixing things that should have been done right the first time.

1. Most important, the company is generating less than three times industry average profitability.

Companies can get by with sloppy execution if they have a killer strategy or highly dedicated people willing to work 18-hour days, eight days per week to cover up all the slop. Just recognize you’re wasting a lot of profitability and time (i.e., you’ll burn both cash and people in the process!)

You’ll drive everyone in the organization crazy if you implement all of these habits at one time. The key is focusing on one or two each quarter, giving everyone roughly 24 to 36 months to install these simple, yet powerful, routines. Then it’s a process of continually refreshing them as the company scales up.

Employees can articulate the following key components of the company’s strategy accurately. You want all employees to align their actions with the strategy of the company. To do this, they need to know and understand the company’s 10- to 25-year goal (BHAG®); who the core customers are; the three Brand Promises everyone needs to keep; and what the company does — and be able to explain it when asked (the elevator pitch).

KEY QUESTION: Do you have consistent sources of cash, ideally generated internally, to fuel the growth of your business?

Growth sucks cash. This is the first law of entrepreneurial gravity.

... successful companies held three to 10 times more cash assets than average for their industries, and they did so from the time they started.

The quickest action you can take is to have your CFO give you a modified cash flow statement every day detailing the cash that came in during the last 24 hours, the cash that owed out, and some idea of how cash is looking over the next 30 to 90 days. This will keep cash top-of-mind and give you a great feel for how cash is owing through the business.

The Power of One: The 7 main financial levers available to managers to improve cash and returns in the business are:

1. Price: You can increase the price of your goods and services.

2. Volume: You can sell more units at the same price.

3. Cost of goods sold/direct costs: You can reduce the price you pay for your raw materials and direct labor.

4. Operating expenses: You can reduce your operating costs.

5. Accounts receivable: You can collect from your debtors faster.

6. Inventory/WIP (work in progress): You can reduce the amount of stock you have on hand.

7. Accounts payable: You can slow down the payment of creditors.

None of this is complicated (except strategy): It just requires some discipline and perseverance. Treat our tools as you would Sudoku or crossword puzzles. Fill in what you know as you go. Again, it’s not necessary to work through the tools in any kind of sequence. Start where it makes the most sense for your organization. “Get it down; then get it right” is one of our mottos.

Handling a company’s growth successfully requires three things: an increasing number of capable leaders; a scalable infrastructure; and an effective marketing function.

Great execution won’t get you anywhere if your strategy is wrong. Understanding this has paid off handsomely for Rudy at several of his investments, including Perceptionist.

Rudy has achieved some of his greatest successes with rms when following the old adage, “Grow where you’re planted.” In other words, stick to the businesses and markets you know best. For Rudy, this approach shortens the learning curve of entering a new industry, allowing him to better leverage the contacts and knowledge he already has to address the People, Strategy, Execution, and Cash aspects of each new business. (For more on this key point from the founders of Pizza Hut, BostonChicken, Celestial Seasonings, and California Closets, read Verne’s Fortune article “Businesses Worth Repeating.”)

• Leadership: the inability to staff/grow enough leaders throughout the organization who have the capabilities to delegate and predict

• Scalable infrastructure: the lack of systems and structures (physical and organizational) to handle the complexities in communication and decisions that come with growth

• Marketing: the failure to scaleup an effective marketing function to both attract new relationships (customers, talent, etc.) to the business and address the increased competitive pressures (and eroded margins) as you scale

As an organization follows this growth path, it goes through a predictable series of evolutions and revolutions. For more on these natural cycles, read professor Larry E. Greiner’s classic Harvard Business Review article titled “Evolution and Revolution as Organizations Grow,” from July-August 1972.

Whatever challenges exist within the organization can be traced to the cohesion of the

executive team and its capabilities in prediction, delegation, and repetition.

To get to 10 employees, founders must delegate activities in which they are weak. To get to 50 employees, they have to delegate functions in which they are strong!

From 50 employees on up, the senior leaders must develop additional leaders throughout the organization who share the same values, passion, and knowledge of the business.

Successful delegation requires four components, assuming you have delegated a job to the right person or team:

1. Pinpoint what the person or team needs to accomplish (Priorities — One-Page Strategic Plan).

1. Create a measurement system for monitoring progress (Data — qualitative and quantitative key performance indicators).

1. Provide feedback to the team or person (Meeting Rhythm).

1. Give appropriately timed recognition and reward (because we’re dealing with people, not machines).

1. Core Values: the handful of rules defining the culture, which are reinforced through your People (HR) systems on a daily basis.

1. Core Purpose: the top leader’s regular stump speech to keep everyone’s heart engaged in the business.

3. Big Hairy Audacious Goal (BHAG®): the 10- to 25-year goal that provides constant context for all of the decisions made throughout the organization.

1. Priorities/Themes: a handful of three- to five-year, one-year, and quarterly priorities, which require repeated review on a daily and weekly basis to keep them top-of-mind.

To prevent margin erosion, marketing’s role (with lots of customer input) is to determine the right what we should be selling to the best who’s; and how best we should sell at the right price.

It’s between $1 million and $10 million that the team needs to focus on cash. Growth sucks cash, and since this is the first time the company will make a tenfold jump in size, the demands for cash will soar.

In summary, growing a business is a dynamic process as the leadership team navigates the evolutions and revolutions of growth. And like the growth stages of a child, they are predictable and unavoidable. To deal with these challenges, the company must grow the capabilities of the leadership team throughout the organization; install scalable infrastructure to manage the increasing complexities that come with growth; and stay on top of the

market dynamics that affect the business.

To do this, there are 4 Decisions that leaders must address: People, Strategy,

Execution, and Cash.

Nothing is tougher and more time-consuming than having to replace people who haven’t kept up with the growth of the business.

Everybody, Somebody, Anybody, And Nobody

This is a little story about four people named Everybody,

Somebody, Anybody, and Nobody.

There was an important job to be done and Everybody was

sure that Somebody would do it.

Anybody could have done it, but Nobody did it.

Somebody got angry about that because it was Everybody’s job.

Everybody thought that Anybody could do it, but Nobody

realized that Everybody wouldn’t do it.

It ended up that Everybody blamed Somebody when Nobody

did what Anybody could have done.

Unknown author of condensed version of Charles Osgood’s –

A Poem About Responsibility.

We include a short primer on organizational theory to help you think through how to properly divide the company into functions, product/service lines, and divisions.

HINT: Keep everyone as close to his or her respective customers as possible!

And just as no cell can be too far from the blood supply, no team can be too far removed from the action of the marketplace — or so big that it becomes unwieldy and unresponsive…

Divide big teams into smaller ones aligned around projects, product lines, customer segments, geographical locations, etc., based on the idea of getting everyone in the organization into small teams and as close to his or her respective customers as possible. This is a way to increase the surface area of the company, giving the maximum number of employees a chance to interact with the marketplace.

Accountability: This belongs to the ONE person who has the “ability to count” — who is tracking the progress and giving voice (screaming loudly) when issues arise within a defined task, team, function, or division. It doesn’t mean he or she makes all the decisions (or even any decisions) — which is why people often talk about leaderless teams. However, someone must still be accountable. The rule: If more than one person is accountable, then no one is accountable, and that’s when things fall through the cracks.

Responsibility: This falls to anyone with the “ability to respond” proactively to support the team. It includes all the people who touch a particular process or issue.

Authority: This belongs to the person or team with the final decision-making power.

At a Ritz-Carlton hotel, where the philosophy is that any employee who receives a complaint from a guest “owns” that complaint (accountability), first-line employees such as desk clerks, bellhops, and housekeepers are empowered (authority) to spend up to $2,000 to handle any customer complaints. Managers can spend up to $5,000 without additional authorization. A full 250 to 300 hours of first-year training make this possible.

In the end, what matters most in life are the depth of your relationships with friends and family; and the sheer number of people you’ve helped along the way. These represent true measures of wealth. Financial wealth, then, is seen as a resource for fostering your relationships. For an inspirational story about an entrepreneur who used his wealth to help

millions, read Conor O’Clery’s The Billionaire Who Wasn’t: How Chuck Feeney Secretly Made and Gave Away a Fortune (you’ll also pick up some important tips on scaling up a global business).

... leaders who pass two tests (including culture fit):

1. They don’t need to be managed.

1. They regularly wow the team with their insights and output.

However, if you need to bring someone in from the outside to fill a senior leadership position, you should do this only once every six to nine months. It takes this length of time to find the right person, get him comfortable in the position, and transfer the DNA of the

organization into his psyche. In turn, the new executive will need this amount of time to positively impact the organization enough to pay back his salary.

Rather than hire an additional person, you might choose one of the customer service reps to hold overall accountability, rotating this role among the reps every six months. Again, this doesn’t mean that any of these people is the boss; it means they are to monitor the situation, ensure that customer-satisfaction feedback is gathered and reported to the leadership team at the weekly meeting, and alert the team if there are issues.

Are you enthusiastic about the person you have in each box? If the leader isn’t getting the job done, then a change may need to be made. Maybe this leader is in the wrong seat or in too many seats. Maybe there are performance issues. Maybe a person is talented but doesn’t fit the culture (this often happens when a “big company” executive is brought into a

growing firm).

CEOs often avoid these decisions because they involve executives who have become dear friends. We recognize that this is a touchy subject, but it must be faced if the organization is to grow. One option is for some of the early team members to help launch a new product or division. They are usually more comfortable in a start-up situation or working on a smaller team. And several of the early leaders might be relieved to have the burden of an increasingly important and complex function taken off their shoulders. You won’t know until you have these crucial conversations.

A common mistake is simply noting down KPIs that are representative of the daily and weekly activities of the person listed for a particular function. It’s critical to zero-base your KPI decisions. Do this by covering up the names listed in the “Person Accountable” column

(metaphorically or physically) and then decide on KPIs for each function that align with the business model of the company. en consider if the person in the job function has the skills and aptitude to deliver on those KPIs. A mismatch might indicate a potential problem.

When he initially asks them to introduce themselves, he finds that executives with good companies tend to share their titles, whereas executives at strong and great companies share what their accountabilities are in a very measurable fashion, e.g., “I am accountable

for driving revenue into this company.

Because of these needed transitions, it’s often best to have some of the original functional leaders head business units — maybe head up expansion to a new country or lead the launch of a product line — so they can maintain direct operational control.

Remember, your company is a living organism that needs to survive in an environment that’s always changing. To thrive, it has to be able to adapt. Charles Darwin found that survival is determined by the ability to adapt to circumstances.

One of the things that a company can control in any market is operational excellence by

removing waste in a system,” notes Jeff Booth, co-founder and CEO of BuildDirect. In doing so, Booth has dramatically sped up the time it takes to get a new vendor up on his building materials website.

Lean describes waste as anything that happens in a company that a customer would not want to pay for,” explains Mike Jagger, CEO of Vancouver, Canada-based Provident Security. “So our first initiative was to divide all of our costs into two columns: things that add value to our clients and things that don’t.

Operations people are generally systems-focused.

ACTION: For each key process you’ve identified, decide who within the organization will be accountable. These people are then accountable to the head of operations.

It’s important to revisit and examine one process every 90 days as part of your quarterly planning process. Like hallway closets and garages, these processes get junked up and need to be recleaned periodically. With four to nine processes, each will get examined roughly every 12 to 24 months, which is sufficient to keep your company running drama-free.

Among Gawande’s findings: “[Checklists help] with memory recall and clearly set out the minimum necessary steps in a process. … In this one hospital, the checklist had prevented forty-three infections and eight deaths and saved two million dollars in costs. … [Checklists] provide a kind of cognitive net. They catch mental flaws inherent in all of us — flaws of memory and attention and thoroughness. … I have yet to get through a week in surgery without the checklist’s leading us to catch something we would have missed.

The cost of a bad hire is 15x his or her annual salary, according to Topgrading, so it’s important to get the recruiting and selection process right.

Before starting your search for a key executive or frontline associate, create a Job Scorecard (vs. the standard job description). A Job Scorecard details a person’s purpose for the job, the desired outcomes of this individual’s work, and the competencies — technical and cultural — required to execute it.

An A Player, by the Smarts’ definition, is someone in the top 10% of the available talent pool who is willing to accept your specific offer.

While a job description tends to list what people will be doing (e.g., coaching sales reps, building client relationships), a Job Scorecard describes the outcomes you want from such activities ($8 million in revenue, seven new S&P 500 clients, a 100% contract renewal rate

among the customers the trash collector serves).

In addition to seeking culture t, it is critical to hire people who can deliver on the Brand Promises and activities underpinning your strategy…

Teams need to be well-rounded, but their individual members don’t have to be.

The best people to consider first are those with whom you have already worked. Culture fit can be evaluated in interviews and tests, but nothing substitutes for your own real-time observations of someone over prolonged periods of time.

MOM’s has taken a similar approach to attract candidates in a variety of other positions, from grocery baggers to executive-level jobs. For instance, on the “Join us” page on its website, a recent advertisement said:

You:

• are really interested in electric vehicles

• appreciate a good debate, even with your boss

• figure out how to fix it instead of who’s to blame

• paid for your own stuff when you were a teenager

• have pulled recyclables out of the trash

We:

• work to protect and restore the environment

• like real food

• aren’t afraid to make mistakes

• care more about your intelligence and values than your experience

... Browne wondered:

1. How can we expect our employees to be extraordinary and differentiate the company if we use the same hiring and onboarding methods as competitors?

1. What characteristics describe our ideal workforce that our competitors could not or would not use to describe theirs?

At MOM’s, the online job application asks questions such as “What companies do you admire?” to get a sense of a candidate’s values.

When hiring, bear in mind that past performance is the best indicator of future performance.

It’s important to hire the best A Player you can find for each position in your company based on four criteria (in this order!):

• Will — a desire to excel, act with courage, persevere, learn, and innovate

• Values — the test for culture fit – do they align with your core values

• Results — in the end can they deliver on your KPIs/outcomes

• Skills — the least important since most skill-sets need updating every 5 years

5: THE MANAGERS (COACHES)

“People join companies. They leave managers. Therefore, to keep your team happy and engaged, you need one thing above all else: great managers/coaches — not free lunches or yoga classes! As Gallup notes, “Managers account for at least 70% of variance in employee engagement scores.

What the data showed is that periodic one-on-one coaching (rather than superior technical knowledge) ranked as the #1 key to being a successful leader.

From our experience, great managers must focus those coaching sessions with their “direct supports” (a better term than “direct reports”) on five topics representing the five main activities of successful managers/coaches.

In reverse order of importance:

1. Hire fewer people, but pay them more.

1. Give recognition, and show appreciation.

1. Set clear expectations, and give employees a clear line of sight.

1. Don’t demotivate; “dehassle.”

1. Help people play to their strengths.

The key to affording higher wages (we’re talking frontline employees, not senior leadership) is a lower total wage cost as a percent of revenue.

How you structure the compensation — variable vs. fixed — should fit your culture. If your culture emphasizes rugged individualism, like Nordstrom, you might want to have a high-commission/bonus-based compensation plan driven by internal competition among employees. Given the culture of teamwork at the Container Store and its emphasis on customer service, paying store employees a straight (and high) hourly wage without

commissions makes sense.

Last, when it comes to the key people who absolutely drive performance, great managers/coaches simply do whatever it takes to keep them on board, including offering a customized compensation package. If one person wants less base and more incentive-based pay, so be it. If another wants more time off, let it happen. “Fairness” does not mean “sameness.” You need to be creative and flexible in order to keep your top talent happy, from a compensation-package perspective.

Wages are one of your biggest expenses and should be used strategically to differentiate your firm from the competition.

The deepest principle of human nature is the craving to be appreciated,” wrote William James, the father of American psychology. It is impossible to be motivated and do great work if you don’t feel that somebody cares and appreciates what you do.

Studies have shown that for people to be happy and productive at work, they need to experience positive interactions (appreciation, praise) vs. negative (reprimands, criticism) with their manager/coach in a ratio of at least 3:1. (Watch out: For a marriage to work, you actually need a 5:1 ratio!!) So make it a simple habit to thank people each and every day —

and that includes using the word generously in emails to your team.

By defining the what and not the how, great managers/coaches give employees the autonomy to find their own way of achieving these goals.

The best managers/coaches are less concerned about motivating their people and more concerned about NOT demotivating them. They consider it their job to prevent the hassles that block their team’s performance. Such demotivators are usually related to issues with people or processes.

Excellent colleagues trump everything else,” explains Patty McCord, former chief talent officer at Netflix, in a recent Harvard Business Review article.

Fixing people issues for your team can also mean “firing” a client. Unreasonable clients who mistreat your employees and disrupt your business can become an important energy drain.

On the process side, do your people have the appropriate tools and resources they need to get the job accomplished? Are there lame policies and procedures frustrating your team?

Focus on ways to make your team’s job(s) easier — a great definition of an effective manager/coach.

Thus, a key function of great managers/coaches is helping individual employees refocus and prune their jobs over time so they focus more on activities that give them strength and less on activities that make them weak.

Finding employees’ strengths and focusing workers on those assets is the most powerful people-management tool we can suggest. And it goes hand in hand with dehassling a person’s job.

Ask a good manager about his team and he will speak in generalities, saying that they are

hardworking, responsible, fun, etc. Ask a great manager the same question and she will describe each of her team members with specific details about their personality, strengths, and achievements. Again, think about the “A-Team” action television analogy from the last chapter.

Onboarding — Getting the First Impression Right

One of the biggest opportunities to grow and align your people is when they first start working for you. Their initial weeks on the job represent a unique chance to create connection and deeply ingrain a company’s DNA into new people.

Onboarding needs to be a celebration, not paperwork. It should create emotional connections between the new recruit and a maximum number of team members.

Teams at this rapidly growing firm had been screaming that they needed more people in the field immediately. But they found that new recruits who went through the boot camp could hit the ground running at near 100% field-ready alignment, whereas before the orientation process was introduced, they had normally needed a frustrating six-month ramp-up period.

The only way to grow a company is to grow the people first…

… the best growth firms are, first and foremost, training companies.

Managing people is difficult because people are complex. In today’s high-pressure environments, it is very easy to get caught up in the fight for results and to forget about the complex human beings who are needed to produce them.

Articulating a similarly clear and differentiated strategy, supported by a strong core culture that can deliver on the brand’s promises, is the key for any company wanting to scale up.

The other way to know if you have a strategy? Do you say “no” 20 times more than you say “yes” — no to the increasing number of opportunities coming your way; no to the wrong customers for your business model; no to nineteen of the twenty people wanting to work with you (because marketing is getting you a steady stream of applicants!); etc?

WHAT you sell to WHOM and WHERE), Brand Promises, and the Profit per X and Big Hairy

Audacious Goal (BHAG®)

... it’s helpful to think about strategic planning in terms of two separate and distinct activities (and teams): strategic thinking and execution planning.

In the end, that’s what branding is all about: owning a small piece of the mind-space within a company’s targeted market, whether that’s in a local neighborhood, an industry segment, or the world.

1. Who/Where are your (juicy red) core customers?

1. What are you really selling them?

1. What are your three Brand Promises?

1. What methods do you use to measure whether you’re keeping those promises? (We call these the Kept Promise Indicators, a play on the standard definition of KPIs.)

Frei and Morriss’ overarching point is that great brands don’t try to please everyone. They focus on being the absolute best at meeting the needs/wants of a small but fanatical group of customers, and then dare to be the absolute worst at everything else.

However, it’s HOW you deliver on your promises where differentiation occurs.

A true differentiator can only be defined as something your competitor won’t do or can’t do without great effort or expense. Often these can take years to develop since if it can be done cheaply, easily and quickly it provides little or no competitive advantage.

As Porter summarizes, “A company can outperform rivals only if it can establish a difference that it can preserve.

So how do you figure out an X-Factor? Start by asking: What is the one thing I hate most about my industry? What is driving me nuts? What is the choke point constraining the company? It could be a massive cost factor. It could be a massive time factor. The challenge is that you’re often too close to the situation and as blind as everyone else to the real problems that have been accepted as industry norms.

One clue to the source of the X-Factor is going back to your last 10 trade association meetings and gathering the titles of the various breakout sessions. Put them in an Excel spreadsheet, and see if there are any patterns of challenges facing your industry over the past decade. By focusing on these roadblocks, and figuring out a 10x to 100x advantage, you’ll have a huge leg up on the competition.

Your BHAG® should be measured in the same units as the X. This is a key point. Since Southwest Airlines is focused on profit per plane, it made sense that the company set a long-term goal to have X number of planes in the air. The Profit per X and the BHAG® need to align very tightly.

Jim Collins discovered that enduring companies operate with a dual dynamic that he labeled “preserve the core/stimulate progress.

In general, you’ll pick a Critical Number that will address either an opportunity or a challenge on the People/Balance Sheet side of the business (e.g., reduce employee turnover, improve customer service scores, or dramatically reduce a credit line with the bank) or the Process/Profit & Loss side (e.g., improve gross margins, reduce production cycle time, or increase sales close ratios).

Last, move to the middle of the column and ask, “What are a handful of Key Initiatives we must complete this year to achieve our financial outcomes and hit our Critical Number?

Last, choose a handful of Rocks — priorities that must be accomplished to achieve the quarterly financial outcomes and Critical Number. Again, less is more. Finally, place the initials of the person accountable for each Rock in the small corresponding “Who” box.

To realize a vision, you need people doing stuff!

On the right side, we have listed the three main Processes that drive any business: Make/Buy, Sell, and Recordkeeping.

Employees: Happiness and engagement scores (TINYpulse and Atlassian have simple systems for tracking these)

Nothing can emerge from the collective brain of the team that doesn’t enter it first.

Like an individual, an organization has innate strengths and weaknesses. Coping with them is less about changing them and more about playing the hand the organization was dealt.

Like the trends, this handful of inherent strengths (core competencies) and weaknesses needs to be determined and listed on the bottom of the OPSP.

With frontline employees and customers, ask the Start/Stop/Keep questions. With middle management, require a standard SWOT and inquire about their top three priorities for the quarter or year.

And demand that the senior team go deeper and broader using the SWT.

A Checklist is a good way of reminding you what’s missing.”

Jim Collins and Morten T. Hansen, in their book Great by Choice: Uncertainty, Chaos, and Luck — Why Some Thrive Despite Them All, note: “Greatness is not a function of circumstance. Greatness, it turns out, is largely a matter of conscious choice, and discipline.

1. Priorities: Less is more in driving focus and alignment.

1. Data: Qualitative and quantitative feedback provides clarity and foresight.

1. Meeting Rhythm: Give yourself the time to make better/faster decisions.

As Confucius said, “He who chases two rabbits catches neither.” The key is sequencing a series of #1 priorities that keep everyone focused and heading in the same general direction together.

To answer the second question, you can’t implement any of what we’ve taught in this book unless Rockefeller Habit #1 — “The executive team is healthy and aligned” — exists. The order in which you implement the other habits doesn’t matter.

To simplify our methodology, there are two main vision decisions: the BHAG® (Everest) and the measurable next step (one with a 90-day to one-year focus).

Find the lead domino: the one initiative that, when pursued, makes it easier to accomplish everything else. Or identify the constraint — the choke point or bottleneck — and address it first. For more on how to choose this “critical” constraint, read my favorite biz book of all time titled The Goal by the late Eli Goldratt. Scaling up is all about eliminating constraints — in the business and for customers.

At ProService Hawaii, a human resources firm based in Honolulu, President Ben Godsey determined that in the 2014 fiscal year, his Critical Number was getting 600 referrals. This was a major stretch goal. The company, which has $311 million in annual sales (2019), had previously averaged fewer than 200 referrals a year, despite its focus on developing a great service culture and innovative products — indicated by a Net Promoter Score (NPS) consistently above 70% (on par with Apple).

Every quarter, they ask themselves: What is the single most important thing going on in the business in the next 90 days that we want everyone to be aligned on?

Within each theme, the company lists smaller “Rocks” (column 5 of the OPSP) that need to be addressed in order to achieve the company’s big goal for the next 13 weeks, helping to focus everyone on execution. Though employees do not discuss the themes during daily huddles, which are focused on daily operations, they devote 30 minutes at weekly meetings to addressing progress toward the Quarterly Theme.

180 to One

Another lighthearted, betting-oriented theme, “180 to One,” focused on having each of Browne’s 60 employees spend one day a month job-sharing during the first quarter of 2012 (60 employees x 3 job-sharing days = 180), to improve customer service throughout The City Bin Co. “We wanted to get people thinking outside of their own department and get an

appreciation of what the other departments do,” says Browne. That meant having the accounts people work in the call centers, asking the customer center workers to ride around in the company’s garbage trucks, and enlisting the truck drivers to answer the phones at the customer center.

Some themes have focused on improving efficiency. One, adopted in the second quarter of 2012, was called “Bin it.” It asked employees to submit index cards listing wasteful practices and unnecessary tasks they wanted to stop doing — anything that was depleting time, money, energy, or space without a valuable result.

The City Bin Co. alternates between a Critical Number and Quarterly Theme that are focused on improving the People side of the business (“180 to One,” “Saving Mrs. Ryan”) and the Process side of the business (“Life Begins at 40,” “Bin it,” “Bin’s Health”). It’s important to find the same kind of balance as you sequence your #1 priorities.

Like the river making its way from Everest to the ocean, your organization will have to constantly navigate obstacles and take a step back (or pause) every once in a while.

If your company has been through some rough times lately and the culture has taken a couple of body blows, pick some really short-term goals, focus everyone on the same thing, “play to win,” and get back your mojo!!

4. Every facet of the organization has a person assigned with accountability for ensuring goals are met.

• The Function Accountability Chart (FACe) is completed (right people, doing the right things, right).

• Financial statements have a person assigned to each line item.

• Each of the 4-9 processes on the Process Accountability Chart (PACe) has someone that is accountable for them.

• Each 3-5 year Key rust/Capability has a corresponding expert on the Advisory Board if internal expertise doesn’t exist.

8. Employees can articulate the following key components of the company’s strategy accurately.

• Big Hairy Audacious Goal (BHAG) – Progress is tracked and visible. Core Customer(s) – their profile in 25 words or less.

• 3 Brand Promises – And the corresponding Brand Promise KPIs reported on weekly.

• Elevator Pitch – A compelling response to the question “What does your company do?

Senior leaders need to be in the market 80% of the week, either figuratively or literally.

The challenge is choosing metrics that matter, meaning those that measure what’s important to customers, and provide sufficient insight to help both the leadership team and all employees see problems and opportunities in time to react.

WARNING: If talking with customers and employees routinely is so powerful, why do leaders stop doing it? It’s because they continue to hear the same recurring issues or praise over and over — and have to take time from their busy schedules to listen to stories that seem to have zero relevance to their businesses. However, it takes only one or two key ideas to fuel a business model. So hang in there, embrace the human aspects of these conversations, and relish the moment the light bulb goes on - it will!!

Smith and his top managers take half a dozen workers to dinner at one of the area’s best

restaurants each week. What better way to tap into the rumor mill, pick up ideas, and share a little bit of the company’s DNA with the team?

Recent hires will have fresh eyes that lead them to notice things longer-term employees have come to accept.

Have the middle-management team that is driving this process create a “Suggestion Aging Report” tracking how many ideas are 30, 60, and 90 days past due.

The 4Q refers to the four questions that we suggest leaders ask customers in person (not on a survey):

1. How are you doing?

1. What’s going on in your industry/neighborhood?

1. What do you hear about our competitors?

1. How are we doing?

We’re not big on using sports analogies in business books. In sports, the team gets to practice 90% of the time and perform 10%. In business, it’s the opposite: We’re lucky if we get 10% of the time to practice through executive training and development.

To move faster, pulse faster. At the heart of a team’s performance is a rhythm of well-run daily, weekly, monthly, quarterly, and annual meetings.

Reading Titan: The Life of John D. Rockefeller, Sr., by Ron Chernow, Verne was struck by the magnate’s daily luncheon routine. Each day, without fail, he’d sit down with his key people, have lunch, and talk with them. At first, the meetings included only Rockefeller and the four cofounders of Standard Oil. But as the decades wore on and the company

grew, the meetings came to include Rockefeller’s nine directors. And yes, they continued to meet daily.

A century later, Steve Jobs repeated the same ritual, having lunch almost every day with Apple design genius Jonathan Ive…

Consciously or not, these leaders understood the root meaning of the word company: “to share bread.

1. Assembling talented musicians: They play a variety of instruments, creating a unique sound.

1. Knowing the rules: All jazz musicians must master a handful of fundamentals (the Core).

1. Performing the same song: This is the equivalent of the One-Page Strategic Plan (OPSP).

1. Playing to the same beat: What the drummer communicates to the band, the meeting rhythm does for the organization (alignment).

If you’re growing 20% to 100% a year, view each quarter as if it were a year. That means possibly adjusting your strategy every 90 days.

Hearing stories, information, and even numbers connects more deeply to our pattern-recognition capabilities than staring at Excel spreadsheets.

Bumping into each other all day doesn’t substitute for tightly focused team discussions. And a lot of that bumping is causing unnecessary interruptions. Casual encounters fail to take advantage of the three most powerful tools a leader has in getting team performance:

1. Peer pressure

2. Collective intelligence

3. Clear communication

Communication rhythm is established and information moves through organization accurately and quickly.

• All employees are in a daily huddle that lasts less than 15 minutes.

• All teams have a weekly meeting.

• The executive and middle managers meet for a day of learning, resolving big issues, and DNA transfer each month.

• Quarterly and annually, the executive and middle managers meet offsite to work on the 4 Decisions.

• The annual sets the strategic direction and priorities for the year and beyond.

• The quarterly breaks these longer-term priorities into bite-sized priorities that the company can digest.

• The monthly addresses the bigger issues or opportunities that surface around the strategic direction.

• The weekly keeps the priorities top-of-mind and drives discussions around input from customers, employees, and competitors, which feeds back into the quarterly and annual planning processes.

• The daily huddle tracks progress and brings out sticking points that are blocking execution of the strategic direction.

Meanwhile, all 35,000 Ritz-Carlton employees participate in some kind of Daily Line-Up at their local hotels. (A great deal has been written about their Line-Ups. It is worth searching for information online.)

Who Runs the Meeting — Pick someone who is naturally structured and disciplined (that might not be the CEO) to keep meetings running on time.

The Agenda — the agenda should be the same every day, and it’s just three items long, with five minutes maximum per item:

1. What’s up (in the next 24 hours)?

1. What are the daily metrics? (All companies should have some.)

1. Where are you stuck (constrained)?

In general, looking forward is great management; looking backward is micromanagement.

Anytime somebody goes two days without reporting a constraint, you can bet there’s a bigger problem lurking. Busy, productive people who are doing anything of consequence get stuck pretty regularly.

Important as they are, conversations about bottlenecks shouldn’t be allowed to drift into problem-solving. It’s okay if somebody wants to reply to a “stuck” by saying, “Call so-and-so,” or, “I’ll get on that right away” (if he or she is the “stuck”!), but take anything more than that offline. Remember: The daily meeting needs to be kept short.

It’s ideal if the series of weekly meetings ends before lunch (like OTG’s) or happy hour, so the executives can have a more informal setting in which to discuss issues that surface during the structured part of the meetings. That informal time is often when real decisions are fleshed out.

Weekly CEO One-Pager

Many CEOs also send out a weekly one-pager to all employees updating them on the status of the #1 priority and other significant developments inside the company and the industry. Employees want to hear from their top leader and appreciate the sense of being on the inside provided by this kind of report.

Doing this requires one simple routine: a well-structured, one-day monthly management meeting that includes everyone who supervises or manages anyone in the business. It should be a day focused on learning, sharing, and problem-solving vs. a day of mind-numbing reports.

To rectify this problem, we strongly recommended that they initiate a monthly management meeting, bringing together all 70 managers from around India for a day of learning and development.

We encourage management teams to set aside an hour or more each month to brainstorm ways to improve each of these cash cycle components. This is a powerful exercise to do with the broader middle-management team at a half- to full-day monthly management meeting. It will give everyone a better understanding of how cash flows through the business and how each function can contribute positively.

Almost all of these ideas fall into three general categories where you can make improvements:

1. Shorten cycle times.

1. Eliminate mistakes.

1. Change the business model.

Because many accounting departments are short-handed, there are often delays in getting invoices sent out and bills collected.

The point is to have someone pay attention to the accounts payable people!

Also specify a due date (May 31, for example) on the invoice rather than include the standard “due in 30 days.

However, we’ve seen profits and cash double within a year when businesspeople also devote just a little more attention and resources to accounting (remember, John D. Rockefeller was an accountant by training).

A key accounting activity is to slice and dice a company’s financial data as granularly as possible. This lets the leadership team view the gross margin, profit, and cash flow by categories, such as individual customer, location, product line, salesperson, etc. Accountants do this by creating a series of waterfall graphs.

Turnaround specialists like Greg Brenneman, the Houston-based chairman of private

equity firm TurnWorks Inc., rely on this kind of data to eliminate consistently unprofitable routes, as he did at Continental Airlines, and menu items, as he did at the Quiznos restaurant chain…

… read Brenneman’s Harvard Business Review case study on the turnaround of Continental Airlines.

A fundamental responsibility of leaders is prediction, and they need both frequent quantitative data and qualitative feedback from the market to make the right calls.

This led to the Simple Numbers process, discussed in his [Greg Crabtree] book by the same name. His approach focuses on four keys to running a wealth-building business:

1. Clear the distortions.

1. Set appropriate profit targets.

1. Use labor efficiency to drive profitability.

1. Understand the 4 Forces of Cash Flow.

Gross margin doesn’t get enough respect. It’s bad enough that it’s stuck in the middle of the P&L and often gets glossed over. It’s actually THE most powerful indicator of an effective sales team, a differentiated strategy, and real growth.

Our pet peeve is when a company’s leaders think it should grow regardless of profit. This is just reckless, unless you’re a venture-backed firm pioneering new territory. For everyone else, we recommend getting profitable with the work you have, proving you can get to 15% profitability (based on our adjusted Simple Numbers), adding labor to knock profit back

to 10%, and then growing to 15% again. Lather, rinse, and repeat.

Once you get to 15% profit the first time, you can then add labor dollars across the categories, based on where you see stress — and there will be some initially. Adding dollars means covering raises or bonuses, or adding new people. Labor efficiency does not care how you spend your money, whether on more people or raises. Just keep the same rate of labor productivity.

The typical frustrated entrepreneur wants to fill every role as soon as possible. However, unless you have sufficient capital to cover the losses until sales catch up with salaries, this is a deadly move. Taking it slow is especially critical when adding highly paid senior leaders to the team. Add one key role at a time. Get profitable with that executive before you add the next one or add support personnel.

We say “additional” because whenever management tells us there’s a cash-flow problem, we always start with fixing profitability, unless the company is broke and needs an immediate cash infusion to make payroll.

Meeting your core capital target means having two months of operating expenses in cash, after you have set aside money to pay your taxes and assuming that you have nothing drawn on your line of credit.

Hitting the core capital target is one of the most rewarding accomplishments we have seen our clients achieve. It changes their thinking. It improves their profitability. They are not so cash-strapped that they have to give away margin.

Owners like Gary choose to spend money every day to grow their businesses. However, sometimes they are actually spending their hard-earned money to cover management-influenced waste (read that again).

This question highlights the only two uses for cash flow:

1. Cash is used to invest in growth, or

1. Cash is used to fund management-influenced waste.

The famous DuPont Formula then takes this ratio and breaks it down into two components:

As a business owner, you should also consider that equity is the most expensive source of funding and that it is usually cheaper to source debt financing…

… it is mission-critical over time that management grow EBIT faster than the investment in net operating assets.

To fix this, Gary had a choice of two main strategies:

1. Increasing his gross margin.

1. Reducing his working capital.

If he didn’t make a change in the relationship between working capital and profitability, his company was not going to survive.

In Gary’s case, volume is detrimental to cash. The more Gary sold, the worse his cash got (his gross margin percentage was 31%, while his working capital percentage was 41%).

1. Price: You can increase the price of your goods and services.

1. Volume: You can sell more units at the same price.

1. Cost of goods sold (COGS)/direct costs: You can reduce the price you pay for your raw materials and direct labor.

1. Operating expenses: You can reduce your operating costs.

1. Accounts receivable: You can collect from your debtors faster.

6. Inventory/work in progress: You can reduce the amount of stock you have on hand.

1. Accounts payable: You can slow down the payment of creditors.

As mentioned in the beginning of this section, you can get by with decent People, Strategy, and Execution, but not if you run out of Cash. All growth firms hit bumps in the road (or craters!). Having sufficient cash is key to surviving another day.

Success belongs to those who have these two attributes:

• An insatiable desire to learn

• An unquenchable bias for action

Those who win are constantly looking for better ways to do things and to improve. They don’t sit back and let others pass them by. They use their tools and resources to attack issues and make things happen.

Our favorite book on the topic is Ron Lovett’s Outrageous Empowerment: The Incredible Story of Giving Employees Their Brains Back.

Regis McKenna, author of the classic Relationship Marketing: Successful Strategies for The Age of the Customer.

To up your skills in this area we strongly recommend reading pricing guru Hermann Simon’s book Confessions of a Pricing Man: How Pricing Affects Everything. His firm Simon-Kucher & Partners is the leading pricing consultancy in the world — you might consider engaging them.

Last, we encourage you to read Adele Revella’s book Buyer Personas: How to Gain Insight into your Customer’s Expectations, Align your Marketing Strategies, and Win More Business.

Bill Gross, founder of IdeaLab

For help in selecting KPIs appropriate for your industry and/or function, visit KPILibrary.com. For more general KPIs, we recommend the book Key Performance Indicators: The 75 Measures Every Manager Needs to Know, by Bernard Marr.

(For more practical insights about building Job Scorecards, read Bluewire Media’s excellent blog on the topic.)

Good managers play checkers while great managers play chess, according to researchers Marcus Buckingham and Curt Coffman, authors of First, Break All the Rules: What the World’s Greatest Managers Do Differently. In checkers, the pieces all move in the same way, whereas in chess, the pieces move differently, allowing you to bring different strengths to the game.

Daniel M. Cable goes one step further and suggests you hire people who are downright strange. Author of Change to Strange: Create a Great Organization by Building a Strange Workforce.

For an excellent overview, read Geoff Smart and Randy Street’s book Who: The A Method for Hiring; to learn the details of the process, read Bradford D. Smart’s book Topgrading: The Proven Hiring and Promoting Method That Turbocharges Company Performance.

Whenever you have a department scream for more help, rather than throw more of the same people at the situation, try Buckingham’s approach. And before starting the “love and loathe” exercise, have your team take the inexpensive online StrengthsFinder assessment offered by Gallup (gallupstrengthscenter.com). You will get insightful reports that will serve as conversation-starters and will help your people achieve self-awareness about their strengths.

Buckingham’s follow-up book with Donald O. Clion, Now, Discover Your Strengths

If you want to follow Facebook’s example, go to tmbc.com and get Buckingham’s six-DVD series titled Trombone Player Wanted.

Marcus Buckingham, this time in his book The One Thing You Need to Know … About Great Managing, Great Leading, and Sustained Individual Success, explains this difference between managing and leading.

A Herman Miller Aeron chair

As Harvard professor Frances Frei and organization builder Anne Morriss remind leaders in their breakthrough strategy book Uncommon Service: How to Win by Putting Customers at the Core of Your Business, onboarding is like the imprinting that happens to birds immediately after hatching.

One book that has been a hit among Croft’s team is The Weekly Coaching Conversation: A Business Fable About Taking Your Game and Your Team to the Next Level by Brian Souza.

Read the short management fable Leadership and the One Minute Manager: Increasing Effectiveness Through Situational Leadership, by Ken Blanchard, Patricia Zigarmi, and Drea

Zigarmi, to gain more insight into this powerful coaching framework.

Beverly Kaye and Julie Winkle Giulioni’s book Help Them Grow or Watch Them Go: Career Conversations Employees Want.

And last, read Chapters 5 and 6 in Marcus Buckingham and Curt Coffman’s First, Break All the Rules: What the World’s Greatest Managers Do Differently

For an update to the 4Ps, search the Internet for ad agency Ogilvy & Mather’s 4Es

of marketing (Experience, Everyplace, Exchange, and Evangelism), and add these to your marketing meeting and strategic thinking agendas.

Jim Collins refers to this team as “the council.” Grab a copy of Collins’ Good to Great: Why Some Companies Make the Leap… And Others Don’t and read the three most important pages ever written in business — Pages 114 to 116 — where he describes the 11 guidelines for structuring such a council.

Titled Lords of Strategy: The Secret Intellectual History of the New Corporate World

For more on how to use content to drive revenue, read Joe Pulizzi’s highly insightful Epic Content Marketing: How to Tell a Different Story, Break through the Clutter, and Win More Customers by Marketing Less.

If you’re a LinkedIn member, read the piece Verne wrote as a LinkedIn Influencer titled “Your Career Success Hinges on One Word: Do You Know It?

Robert H. Bloom and Dave Conti’s book The Inside Advantage: The Strategy at Unlocks the Hidden Growth in Your Business, and Rick Kash and David Calhoun’s book How Companies Win: Profiting From Demand-Driven Business Models No Matter What Business You’re In.

Kash and Calhoun, authors of How Companies Win, further suggest that there is a niche within any industry that represents no more than 10% of the total customers but holds a disproportionate percentage of the profit —what are termed profit pools.

Jim Collins’ Harvard Business Review article “Turning Goals Into Results: e Power of Catalytic Mechanisms

The book Uncommon Service will give you a myriad number of examples and walk you through how to both “be bad” the right and highly profitable way and “be great” via a few Brand Promises.

Michael E. Porter’s classic 1996 Harvard Business Review article titled “What Is Strategy?

Verne’s Fortune article titled “The X-Factor

Patrick M. Lencioni’s best-selling book The Five Dysfunctions of a Team: A Leadership Fable defines the unhealthy situations that can derail your leadership team: an absence of trust, fear of conflict, lack of commitment, avoidance of accountability, and inattention to results.

This hint is courtesy of Aubrey C. Daniels, author of Bringing Out the Best in People: How to Apply the Astonishing Power of Positive Reinforcement (a foundational business book that all leaders should read).

However, they’ve [GE] been replaced by Danaher, one of the best “unknown” Fortune 500 firms. Leaders in implementing Topgrading and Lean practices, combined into what is branded Danaher Business Systems (DBS), read the 2020 HBR article titled Unexpected Companies Produce Some of the Best CEOs.

For a glimpse into these meeting rhythm disciplines, read Chapter 11 on meetings in Managing Up: How to Forge an Effective Relationship With Those Above You, by Rosanne Badowski.

To tackle the cash conversion cycle, start by reading “How Fast Can Your Company Afford to Grow?” a Harvard Business Review article by Neil C. Churchill and John W. Mullins.

John Mullins published a new book that Verne endorsed, titled The Customer-Funded Business: Start, Finance, or Grow Your Company with Your Customers’ Cash.

For sources of cash other than loans or investors, read the Fortune Small Business article Verne wrote titled “Finding Money You Didn’t Know You Had.

Miltz and his colleagues created an inexpensive online software tool — www.cashflowstory.com — to do all the powerful calculations that show your team how to double operating cash flow and sleep better at night.

Verne wrote a column specifically for entrepreneurs on how to “Hire the Right #2.” Go to scalingup.com to download a copy.

We also offer a SaaS called Better Book Club that helps you get employees reading books and applying what they learn to improve your organization.