Building Leaders by teaching Business Acumen
“It is the mark of an educated mind to be able to entertain a thought without accepting it.”
“It is the mark of an educated mind to be able to entertain a thought without accepting it.” Aristotle
My experience as a business leader has taught me that excellence requires a combination of domain expertise, people skills, and business acumen. Most hiring processes screen for domain expertise. When hiring a manager, recruiters evaluate the candidates’ people skills and ask about processes they use to select, manage and develop their teams. As we progress in our careers we naturally gain domain expertise. And most companies will offer ongoing training to managers to up-level their skills.
Business acumen is harder to gauge in the interview process. And,I know of no specific training programs in the workplace to nurture this skill.
What do I mean by business acumen? It is best encapsulated in phrases such as, “knowing how to think” and being a “skilled critical and creative thinker.” In many ways it is the direct opposite of domain expertise. It benefits from thinking broadly across functions and industries looking for patterns and possible similarities.
Most job descriptions list a set of strongly preferred or required skills. It is common to read about jobs that require knowledge of specific programming languages or familiarity with specific software platforms. Many positions will list a set or required credentials such as a CPA or MBA or a degree in a particular field. And so we all know, when writing our resumes, to put a list of these “skills” at the bottom so that computers “reviewing” our resumes looking for specific words will match our skills against those required in the job description. However, there is no shared language around how to communicate “business acumen” in a resume. And that is an unfortunate shortcoming.
Over my career, at different times I have been a job seeker, a hiring manager, and the leader of an HR department, I know the importance organizations place on hiring. Hiring takes up a lot of time and money. Many investors will list “team building” or “hiring: as one of the key responsibilities of the CEO. When asked about the success of Microsoft, Bill Gates said “The key for us, number one, has always been hiring very smart people.”
The conventional wisdom on getting the most out of people, echoed by both manufacturing leaders such as Lee Iacocca and Silicon Valley leaders such as Steve Jobs, is “to hire good people and then get out of their way.” For all the effort (time and money) spent on hiring, most businesses (especially smaller companies) invest a lot less time and money in the on-boarding process and ongoing learning and development. The vast majority of the corporate learning and development budget is dedicated to enhancing domain expertise or building specific skills (particularly related to software competence) with some time dedicated to management training. Business acumen training is nowhere to be found.
In my recent leadership roles I became passionate about teaching. My interest in teaching is based on the old adage: “Give a Man a Fish, and You Feed Him for a Day. Teach a Man To Fish, and You Feed Him for a Lifetime.” Through teaching my teams and others in the business, I felt I could make a multiplicative difference. I focused on the “why” of the business, sharing the perspective of the customer and talking through how the business works from a financial standpoint. My experience is that once employees know these things they are more likely to find purpose in their work. And the added knowledge helps them feel more empowered to do things that make a difference for customers, other employees and shareholders.
My content focuses on a mix of financial principles coupled with business acumen. When people ask me how they can grow to be “world class” in their field or become the C-Level leader of their function, I offer the following thoughts. These are the closest to what I would call my principles around business acumen. My caveat is that what follows here is a highly simplified explanation of each principle. Reach out to me to talk further about any one thing if you are so inclined.
View the world from the perspective of your customer: Invest time to understand what customers hope to accomplish through using a product or service and how they want to feel (the emotional state is particularly important for consumer products). And then dig into what frictions or pain points exist in their current process. Sit in on sales calls or meetings. Go meet with customers if your business allows for that. The customer is the center of any business. Even if your role does not directly touch the customer, really work to understand them. This knowledge can only help you do your job better.
Engage in Second Level Thinking: “Second order” or “second level” thinking is an approach I first learned from Howard Marks and has been embraced by others such as Ray Dalio. When making a decision, second level thinking asks you to think beyond the immediate consequences and ask “and then what?” Lots of business decisions appear to have obvious positive or negative first-order consequences. The question you need to ask yourself is what are the second and third order consequences.
Remember the power of incentives: When rewards are offered for a particular action or outcome, that often distorts behavior. Incentives are extremely powerful. Charlie Munger has explained that even though he is aware of the power of incentives, he has repeatedly underestimated their impact. Incentives may seem normal (part of every business) and benign on the surface. When setting up an incentive scheme, remember to think through how someone might “hack” an incentive to benefit themselves and not all parties involved.
Optimize for the long-term, not for today: Most relationships have multiple interactions. Winning today may feel good in the moment, but the feeling can be short-lived. Walking away from a contract or selling a lower amount of a product or service to a client may lead to missing the monthly or quarterly target. And, it may actually be the right long-term decision for the client and your business, leading to more success down the road.
Many optimize locally; few optimize globally: In an effort to drive performance, managers are encouraged to set quantifiable and easily measurable goals for their team members. And managers are encouraged to set goals that are directly within the control of their employees. This type of goal setting leads to local optimization. Employees know that they are being measured and thus do their best to reach their specific goals, even if those are not in the global interest of the business.
Prioritize and focus: Most companies “suffer” from a plethora and not a dearth of good ideas. It is hard to say no to new ideas and projects, particularly because top-line growth (users, customers and revenue) is so important to investors. I recommend you choose to do a few things well rather than lots of things at an average quality. Prioritize what matters for you and your teams to accomplish each quarter. Saying no to opportunities is really hard and that discipline is a feature of good management.
Plan for a range of outcomes: As much as numbers in an excel spreadsheet suggest precision, remember that point forecasts are always wrong. When planning for the future, think about a range of outcomes and aim to allocate probabilities to each future state. Nate Silver’s book The Signal and the Noise offers a great primer of probabilistic thinking.
Information asymmetry exists and trust is hard to establish: In the internet age with lots of information available and reviews on every product or service, we tend to believe that information asymmetry has vanished. Yet e-commerce sites such as Amazon and most travel sites use dynamic pricing to optimize their likelihood of earning a profit on your purchase by showing different prices to different consumers for the same product. Bird, the e-scooter company, recently got a lot of negative press when on the same day customers in Atlanta were given a lot of different prices per mile. Transparency matters in dealing with customers and employees. They will value it greatly and reward you for it over the long term.
Take risks while understanding the potential consequences: Building a successful business requires taking risks. Successful leaders don’t avoid risks. They take them while understanding the probabilities of each outcome and the likely consequences. And they don’t take too many risks at the same time. There is a key difference between risk and uncertainty which Michael Maboussin explains well.
Use inversion thinking and/or pre-mortems: When undertaking big projects that are critically important to business or team success, it is worthwhile doing a pre-mortem. That means envisioning that the project fails and working backwards to figure out what item(s) drove the failure. Charlie Munger advises using inversion or thinking in reverse to solve difficult problems. The idea is when the path to a solution seems hard to find, he suggests looking for the opposite, the things to avoid. Knowing bad outcomes and poor decisions helps narrow the focus to potential solutions.
Business decisions are a series of options: Business decisions are rarely one and done. In the course of new product development or other investment decisions, there are often multiple times to make a decision to stop, continue or change course. Options are the opportunity to do something without the requirement to take that action. Options have an upfront cost. Look for ways to create options with a low upfront cost relative to the expected future value. When you are paying for a future expected benefit, the ability to have a choice (i.e. month to month vs. annual subscription) can be quite valuable. And when receiving a benefit, the certainty of that continued benefit is also valuable. Use options to your benefit to allocate risk efficiently between parties who value different things.
These are my quick thoughts on business acumen and encapsulate some of the principles I draw upon when working with emerging leaders who are seeking to become world class and get ahead in their jobs. None of these ideas are originally mine. They represent a synthesis of what I have learned from reading other thinkers and then figuring out which ones have been most consistently applicable in my career. For those who want a regular dose of this type of thinking, I recommend the easily accessible and broad ranging content offered by Shane Parrish at his Farnam Street blog and James Clear in his weekly newsletter and books.