3 Fundamental Questions Every CEO Needs To Answer…Always
I’ve written that CEO’s have three key focuses: strategy, people and culture. In addition to looking after those major elements of a company I believe there are three core questions that a CEO is uniquely positioned to answer. Not only are these questions important filters to evaluate corporate investment and attention, but also boards, bankers, investors and possible acquirers will ask these questions. What are they?
1) What will drive added growth?
Seems simple but often it’s not. What are your levers for growth? More sales people? New markets? Changes to the product? Acquisition(s)? Product expansion?
If someone walked in tomorrow and offered a large sum of money to the company and required it be used to accelerate growth, where would you put the cash? Often there are theories, but not clear answers, to this question. Have an answer. If you have a theory, then how do you prove it is the answer?
I’ve asked this question to several CEO’s and I usually get a long pause and then a complex answer, one that seems really hard to execute. What I really hear is “we aren’t really sure”. Growth is complicated. If you are a growing company already, I will bet that it’s a few things that are the core drivers of added growth. If you are not growing, there have to be clear paths to getting to growth, even if they are difficult and require larger investment or the company has bigger challenges.
2) How would you improve product margins?
Improved product margin is always sought after, but many companies cannot tell me the steps, investment or actions they would take to improve their product margins. Do you reduce cost of sale? How? Do you need to automate a part of your business? Which parts and how do you do it? How do you compare to benchmarks? Ensure that the company is not taking action by design and it’s not an accident that your margins aren’t better.
Start by knowing components that make up your product costs. From there knowing the actual costs of these components. Is it in the product itself? Development? Delivery? Customer service? Knowing those components leads to knowing the costs, which leads to identifying the areas that can be improved.
I often find that process improvements in the company can improve margin, but the people responsible for these processes often don’t think about it. Those responsible may look for ways to make their jobs easier, serve customers better, but don’t always have the data, responsibility or incentive to think about how changes to their “world” will lead to a more profitable product. Solvable.
3) What would you to improve company profitability?
An offshoot, but not the exact same as the previous question. Many other components to the company cost that could be managed. Do we consolidate locations? Do we need fewer G&A staff? This is really a way to keep the CEO thinking beyond just product margins and to be sure they are looking comprehensively across the organization for cost improvement opportunities.
Many companies lump “other” costs into a few big buckets such as G&A, marketing, or capital costs. A strong CFO will know the breakdown of those categories inside and out and generally have the path in mind to get those costs down. The CEO’s job is to be sure that there is clarity on where those costs can be reduced and that the business impact of those possible reductions are understood.
The key is to develop the discipline to not just answer these once, but to always have answers for each of these. Why know these all the time? Because the CEO should always be thinking about revenue growth, product margin and profitability. Not knowing these answers tells me that they the CEO may not be prioritizing investments correctly.
When I’ve been asked these questions I can’t say I always had great answers. After digging in I found that at times I may not have made all the right investments (time and money) or identified steps I could have taken that would have made more of an impact.
Know the answers and you can be sure your time and investments are spent the best possible ways — and of course always be ready for BOD or investor questions.
