Is a pre-tax profit margin of 7% good?  Be careful before you answer.  It’s not as obvious as it might seem.  The answer is – it depends.

For WalMart, whose 2011 first-quarter pre-tax profit margin was 5.5%[1], 7% would be welcomed news.  However, for Nordstrom, whose first-quarter 2011 pre-tax profit margin was 10.5%[2], 7% would be a disappointment.  Numbers and data have no meaning without context.

Given that Nordstrom’s profit margin is nearly double that of WalMart, who’s making more money?

It’s not even close. WalMart comes out on top.  Does that surprise you?  If it does, you may be confusing profit and profit margin.  The first is an absolute number, the second is a relative number.  Walmart makes less profit on every dollar of sales.  However, their sales were almost fifty times greater than Nordstrom.  As a result, WalMart’s first quarter profits were almost one and a half time greater than Nordstrom’s sales.

Does this mean that one company is better than the other?  Not at all.  Each company has its own model, value proposition, and way of doing business.  Without understanding what those are, it’s impossible to make effective decisions and take actions on data.

This is the essence of Business Acumen.  Having business acumen means understanding the content and context of business in general, and of your business in particular.

Business Acumen is a hot topic.  Increasingly, I see it appearing on more leadership and general skills competency models.  However, while there is strong consensus that it is needed, there seems to be less consensus about what it looks like. In some leadership models, Business Acumen simply means knowing what’s currently going on inside and outside of the business.  In other models, it is a more formal, MBA-like foundation in the art and science of business.  To be effective at leading with data, leaders need a broad understanding of business.  I divide this into three categories:

• General business understanding
• Understanding your industry
• Understanding your company

Within each of these categories, leaders need content knowledge (what things are and how they work) and context knowledge (what is currently happening in this area).  Content is relatively static.  It can be learned once (and might need an occasional tune-up).  Context, on the other hand, is dynamic and requires on-going attention.

This holistic model of business acumen most effectively positions leaders to make sense of, interpret, and act upon data.

The remainder of this essay outlines key considerations for each area of this business acumen model.

General business understanding

Many leaders are running parts of a business not because they know a lot about business but rather because they know a lot about their particular process or function.  That’s a good starting point, but it’s not enough to make good data-driven business decisions.

A content-based understanding of business understanding the mechanics of how business work:

• What are the parts of a business?
• How do businesses make money?
• What are the general processes and functions of a business and what do they do?
• How are businesses organized (corporations, partnerships, co-ops/mutual companies) and what are the implications of those structures on the way the company is run?
•  How do businesses keep track of and use money (basic accounting and finance)?
• What are the standard business reports? (e.g., income statement, balance sheet, etc.) How do they work? What information do they provide? What decisions and actions do each type of report support?

Contextual business understanding involves knowing how businesses are changing, new techniques for running businesses, and the macro-economic, social, technical, and political dynamics that influence the way businesses operate.

Once a leader understands how businesses work in general, he or she is ready to think about how those principles apply within their industry.

Understanding the industry

A content-based understanding of an industry involves knowing how the industry, as a whole, functions:

• What are the different ways that companies in this industry go to market (e.g., high volume, low margin or low volume, high margin)?
• Does the industry tend to have a lot of collaboration or competition among its members?  Is the industry heavily regulated?
• Does the industry focus on business-to-business or business-to-consumer (or both)?
• How do companies in this industry make money?
• What are the different types of value propositions that companies in this industry bring to the market?
• Which functions and processes tend to be strategic/market facing and which tend to be support functions?
• What are the best practices for the various functions and processes associated with this industry?

A contextual understanding of the industry involves knowing what is currently happening among the players in the industry.

• Who are the key players in the industry?
• What innovations or “game changers” are emerging?
• What new trends exist in supplier or customer behavior?
• What key plays are different companies making?
• How will pending or new legislation affect the industry?
• Is the industry in a growth, mature, or declining state?
• What innovations or practices from other industries can be adapted to this industry?

Maintaining contextual knowledge of the industry requires staying abreast of what is happening outside of the organization.  It requires attending conferences, keeping up with the news, and exploring other industries.  In many cases, the payoff won’t be immediate or directly applicable to the leader’s day-to-day role.  As a result, many leaders make contextual knowledge of their industry a lower priority.

Each business within an industry operates in a unique way.  That’s why the final and possibly most important type of business acumen is knowledge of your own company.

Understanding the company

Companies have their own specific value proposition, business model, and ways of doing business.  Some emphasize quality and service while others might emphasize price and availability.  Some might outsource most of their functions while others might do everything in-house.

Understanding how your company works is critical for leading with data.  Too often, leaders fall into the trap of pulling a “page” out of a successful company’s “playbook”.  The problem is that the page is part of a broader set of practices, policies, and strategies.  Without them (or an understanding of them) that page most likely isn’t going to help.

There are four different perspectives that a good leader undestands with regard to his or her company.

Functional

• What are the key functions in the organization?
• What is the role of the function?
• For what outcomes is the function responsible?

Process

• How do information (data) and physical materials move through the organization?
• How does the company determine what products and services to provide?
• How does it get people interested in those products and services?
• How does it create and deliver those products and services?
• How does it manage, track, and control all of those processes and services?

Financial

• How does money move through the organization?
• How is a customer’s dollar translated into profit/loss or shareholder value?
• What are the company’s greatest expenses?

Economic

• How does the company fit into the broader economy?
• With what other industries does it interface?
• Who are its direct and indirect competitors?
• How do different market forces impact it?

A contextual understanding of the company involves knowing what is happening inside and outside of the company across those four content-based dimensions.

• What are the current goals, challenges, and initiatives?
• What types of threats exist from the outside?

Contextual understanding requires a leader to keep up to date with information that might not directly relate to his or her job but is essential to the company’s success.  Often this information is treated as “nice to know” and cast aside while the leader focuses on the day-to-day minutia of his or her department.

In order to lead with data, a leader must first understand the “story” of his or her business, the industry in which the company operates, and the external economic, political, and social forces that are influencing the way businesses run.  Without that understanding, the leader has little to add to the numbers on the page.

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Brad Kolar is an Executive consultant, speaker, and author with Avail Advisors.  Avail can improve your leaders’ ability to draw business-insights from data.  Contact Brad at brad.kolar@availadvisors.com.

 

[1] Forbes.com, http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=jwn

[2] Forbes.com, http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=jwn