Logical or Illogical –
Think or React
Tell me how you will measure me, and I will tell you how I will behave. If you use illogical measurements, don't complain about my illogical behavior.
Years ago, I learned from a good business leader that business is a game to be played, and to have fun playing. Then Payless Cashways CEO David Stanley told a group of managers “If you are not having fun, find something to do in business that is fun. This is a team sport, and you should have fun playing the game.” Some young managers did not understand, asking, “Isn’t business supposed to be serious?” A few of them cynically dismissed the remark. What ego.
When someone dismisses the advice of someone else who has failed, his or her ego is in the way. The symptoms of business failure—lack of liquidity, poor capitalization, excessive expenses, or falling revenues—are easy to spot; they are not the root cause of the failure. Dig deeper and you will discover ignorance, stupidity, and ego.
THINK
Before he started working at Computing Tabulating Recording Company (CTR), Thomas Watson Sr. worked at National Cash Register (NCR). Watson was a salesman. Watson endured a number of different sales failures, including losing his wagon of Wheeler and Wilcox sewing machines when he had too much to drink in a roadside saloon. He finally owned a little butcher shop, which had an NCR cash register.
Watson had to transfer the installment payments for the machine to the new owner of the shop. After relentlessly calling on the sales manager for a job, Watson was hired as a sales apprentice. At first a poor salesman, Watson followed the teaching of his sales manager until he became the top NCR salesman in the East.
Hard work paid off for Watson as he grew with the company. NCR was the premier sales organization in the US. But that did not stop it from employing questionable practices, like setting up dummy companies to help undercut and force competition out of the market. Watson headed up the covert second-hand machine business, which helped NCR acquire a monopoly in the East. Eventually the US Federal government indicted 30 senior managers at NCR in an anti-trust suit.
While many people believe that Watson started using the slogan THINK at IBM, it was at NCR that Watson would use the word to motivate and inspire staff. He continued to use THINK when he moved on to CTR, in 1914. Watson renamed that company International Business Machines in 1924, continuing to drive people to think.
THINK became IBM’s first US Trademark in 1935, 14 years before the company trademarked its own famous initials. The word THINK became a constant reminder to the employees. THINK was posted on office walls, in hallways, and in lunch rooms. The company issued a THINK notebook to each of its employees. Company stationary, matches, and scratch pads all carried the instruction to THINK. The word THINK showed up on ties, desk plates, posters, scarves, and shirts (dress shirts, mind you). Times typeface, multi-colored, capital letters, multiple languages—everywhere you turned was the word THINK.
Think about it. The International Business Machine company spent cash assets to encourage its managers and employees to engage in and think about… THINKING!
Business is an Intellectual Sport.
Look at the business landscape. What businesses have survived and prospered over multiple generations? What businesses failed in the first year?
If you look at the ones that failed quickly, you see that they really were not businesses. They were lambs for the slaughter. They did not understand that business is not a bakery, a craft shop, a book store, or a coffee house. Those are nothing but vehicles in which to conduct business. These dilettantes went into business because of a passion, a hope, or a dream. They failed to understand that there are rules to business, and in the sport of business, breaking the rules will always result in failure. Thomas Watson, Sr. learned that lesson.
Restaurant, food distributor, shoe store, bakery, retail store, machine shop—it does not matter; the rules of business apply. The way they apply may be unique to the type of business, but not to the individual business. To think otherwise, to believe that your business is unique and the rules of the sport of business do not apply, is nothing but a fantasy.
If you are smart, you learn from your mistakes. If you are really smart, you learn from the mistakes of others. Wise people learn from the mistakes of others who are brave enough to admit their mistakes when they offer advice.
Which are you?
Here is a question to consider. If business is a sport, how do you tell whether you are winning?
The Scoreboard
How do you tell who won a baseball game? You look at the score. How do you tell who won a hockey game? The scoreboard. So, if business is a sport, how do you tell whether a business is “winning”?
Numbers. Numbers on a balance sheet or an income statement.
Do you know the difference? Both are filled with numbers. Which number on which document tells you whether you are winning or losing?
The balance sheet tells you two things: what the business owns (assets), and what the business owes (liabilities). By definition, it must balance the assets and the liabilities. An asset is something the business owns—that is, things and stuff. Assets are buildings, inventory, receivables, fixtures, computers, cash, and goodwill. Assets are both tangible and intangible.
The income statement tells you what the business took in as revenue and what it paid as expenses. Revenue minus expenses equals profit.
So is profit the score to pay attention to? Nope. You need to pay attention to the cash. Profit is an opinion, and cash is fact.
Are you confused? Don’t feel bad—many people are. Many companies throughout history have made great profits and still gone out of business. Enron is one example. That was a very public story. They made big profit but negative operating cash. Every year there are companies that show a profit but still go out of business.
The important measure of any business is how much cash it generates from its operations. That measure does not appear on the balance sheet or the income statement. You must use both documents—and some arithmetic—to figure it out.
Do you know how much operating cash your employer created in the last fiscal period? Most people don’t. They may know what the profits of a public company are, but in many family-owned companies, the financials are a family secret. The reasons for this are murky; sometimes it's just paranoia.
There is a natural benefit to transparency of public and private financial performance and alignment. When all the associates are pulling together, a company performs better. Associates are enlisted and engaged when they are given the ability to see financial performance and how they contribute to it. Peter Drucker teaches us in "The Practice of Management" that high-performance business leaders ensure that employees at all levels of the company understand the goals and how each manager contributes to performance.
If you don’t know the score, how do you know how you are doing? If management does not show you the financial results of the company, you are not working for a high-performance business.
One reason company management does not share financial reports is that they sometimes don’t understand them. Even in public companies, this is a problem. Sometimes managers are promoted for their tactical and executive achievements, not their business knowledge. They learn some of the fundamentals through on-the-job training, but just enough to get by. Others depend on the technical knowledge of subordinates or superiors, trusting in the appearance of knowledge. That trust can be misplaced.
Which brings us to something to think about.
Tell me how you will measure me, and I will tell you how I will behave. If you use illogical measurements, don't complain about my illogical behavior.
If you don’t know how to read the scoreboard, how can you tell that you are winning?
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