Judgment and Strength of a Leader
by Ram Charan Author of Know-How
When you're leading an organization you often have to make tough business decisions... decisions that affect egos and livelihoods. Take a look at how one of those situations would be handled by a strong leader in this article from Ram Charan, author of Know-How.
The greatest psychological challenge in setting and acting on priorities has to do with resource allocation. Whether in a group meeting or through conventional budgeting and capital approval processes, you have to demonstrate judgment and courage in making resource allocation decisions that reflect your business priorities and in following through to ensure that the things that should be happening in fact are. You have to do the analytic work to separate out the facts and assess the opportunities and risks, but you also need to call upon your inner strength and judgment as John did as CEO of his company.
"You know I'm always behind you, John, but I think you're making a big mistake on this one," Art, one of the division presidents, told John during the usual bottom-up, top-down budgeting process. "My division contributes 65 percent of the company's profits and our brands need advertising support. If you think we're fighting for market share now, just watch what happens six months down the road when consumers forget who we are and we can't get on the shelves."
John listened intently to all that Art had to say. After all, Art was experienced, respected, and the strongest leader they had. It was true that Art's division brought in the lion's share of revenues and profits. The problem was that the division was not bringing in what the company needed most: profitable growth. All of the divisions had been hurt by soft markets and currency fluctuations, but Art's business was faced with especially intense competition that was pushing prices down, and it looked as if revenue and earnings would decline for the foreseeable future.
Cara's division, on the other hand, had good margins and was growing. John had combed through Cara's business plan and believed she had positioned the division well to grow faster than the market, but she would need ample resources to keep growing at the current rate.
Then there was Peter. He had already been to see John twice to try to impress on him the importance of continuing the development of the SAP initiative. The company had already spent some $50 million on it and Peter needed another $100 million spread over the next three years to bring it to fruition.
John knew that the decisions he made would seriously affect the future of the company and the lives of people who had put their hearts and souls into the business. But with earnings down and the price of the company's stock depressed and only limited capital available for investment, he knew that he was about to make some of those people very unhappy, so unhappy that they might even leave the company. Relying on the goals and priorities he had thoughtfully established to guide his decisions about where resources had to be deployed, how they might be generated, and where they had to be extracted, he prepared himself to withstand the fallout from those decisions.
Building a presence in growth markets was a top priority for the business so he increased Cara's budget. He made the business judgment that Art's division was on a downward slide that didn't look as if it would be reversed any time soon, and cut Art's budget. To free up more cash to pursue the opportunities in Cara's business, John pulled the plug on the SAP project, even though he knew it meant the loss of jobs for people who had been dedicated to it and a write-off of $50 million.
John's decisions were realistic, well reasoned, and anything but personal, but Art was deeply offended by what seemed to him a loss of power, and he began to consider his next career move. As hard as it was, John stood by his judgment to withdraw resources from places they had always gone. Six months later, the sales numbers for Cara's division came in weaker than expected, and John dug in to see what had caused the weakness. He realized that the numbers were low because of currency swings, that the business was on the right track, and that the growth prospects were as bright as ever. Even when the numbers went off track, his judgment told him that the priorities and resource allocations he had made were still correct, and he stuck with them.
Copyright © 2007 by Ram Charan from the book Know-How Published by Crown Business; January 2007;$27.50US/$36.50CAN; 978-0-307-34151-8
Ram Charan is the author or coauthor of many bestselling business books, including What the CEO Wants You to Know and Execution. For more than forty years, he has worked behind the scenes at Fortune 100 companies like GE, Bank of America, DuPont, Thomson Financial, Honeywell and The Home Depot to help senior executives develop and implement strategic plans and practice their business acumen. His articles have been published in Fortune magazine and Harvard Business Review, and his other books include What the Customer Wants You to Know, Boards At Work, and The Leadership Pipeline. www.ram-charan.com www.acumenlearning.com