Lack of Business Acumen and Business Leadership Skills has Executive Leaders Worried about the Future
By Robert S. Brodo, Executive Vice President, Advantexe Learning Solutions
October, 2011
The conversation at the executive reception was startling. There I was talking with the Chief Operating Officer of a $6 billion Fortune 500 company and the topics included finessing his corporate strategy and value proposition, the recent stock buy-back, the current cost of capital, the trouble developing investor confidence, the impact of Social Media Marketing, the slimming defense budgets and the impact on the economy, the European economic crisis, China, Russia, the Middle East, alternative forms of energy, and the potential global water shortage.
As a good consultant should, I asked the textbook magical question, “So…what are your biggest challenges?” His answer totally took me by surprise: “That I couldn’t have this same business conversation with most of our future leaders because they don’t understand business.”
Over the past year, I have had the privilege and honor of working with some of the best organizations in the world to help develop their talent by focusing on Business Acumen, Business Leadership, and Strategic Business Selling skills. Our learning solutions – specifically our award-winning business simulations – integrate and incorporate critical business issues to develop and prepare future leaders. As evidenced by this anecdotal conversation, these gaps are especially distinctive in the next generation of future talent.
This raises the question of what business acumen is and what future leaders should know as they progress through their careers to become General Managers, Directors, or even CEOs. The rest of this month’s AdvantEdge focuses on the specific topics and skills needed to be an effective business leader.
Each quarter we modify the base conditions of our core business simulations to reflect relevant current and future business situations, and the following discussion provides insights into that thinking as well. Please feel free to review and share this document; our hope is that these insights offer thought-provoking ideas about the future of business. In addition, as you read through this document, ask yourself if your future leaders have the skills and knowledge they need to have conversations about these important topics, and if they are prepared to make the right business decisions that drive profitability and shareholder value.
Recession: Is there going to be another Dip?
During the later parts of the summer, many economists, analysts, and clients were predicting doom and gloom. Growth numbers (revenues, profits, etc.) all appeared to be going down while raw materials costs were going up. Data released last week indicate that the Gross Domestic Product (GDP) actually did grow by 2.5%. While that is a relatively low number, it is quite higher than the 0.9% growth rate for the first part of the year. It also indicates a positive trend that was led by increased consumer spending, which is usually a good sign for an economic recovery. A survey of analysts, consultants, and economists reported that there will not be a “double dip”, with the general consensus being that the GDP will grow by 2.5-3.0% in the fourth quarter of 2011.
There are many factors to consider, but based on this and other information, Advantexe is going to modify the simulation model base conditions for the fourth quarter of 2011 and the 1st quarter of 2012 to have 2.75% economic growth.
Three Business Acumen Take-Aways a Future Leader Should Know:
- There will be no 4th Quarter “Double Dip”.
- US economic growth will not go into “recovery mode” but will be small and steady over the next 2-4 quarters.
- Innovation and investments can and should be made rather than more cost-cutting and belt-tightening.
Small Increase in Gross Domestic Product (GDP)
It’s hard to get overly excited by 2.5% growth, but this number shows that we are certainly not in recession. The feeling is similar to being stuck in a low gear going up a hill. Despite positive headway, the economy is not in full recovery mode, which makes business decisions for leaders even more difficult because everything is still at risk.
Three Business Acumen Take-Aways a Future Leader Should Know:
- New housing starts – and all of the materials needed from basic to advanced chemicals, wood products, cement, and furnishings – will be almost non-existent.
- Housing prices will remain low.
- The job market will be very weak and unemployment will remain high.
Interest rates
The Federal Reserve has been consistent in saying that interest rates are going to remain very low through mid-2013. From a pure Treasury (and cost of capital) perspective, we experienced low yields during the end of September and early October, with slightly higher yields now. Typically, this signals recovery – or at least a smaller chance of going back into recession – but the facts speak for themselves and we have taken note in the core simulation. The 10-year Treasury yield has gone from 1.78% at the start of October up to nearly 2.40% as I write this document. Concurrently, the 30-year Treasury yield rose from 2.75% at the start of October up to almost 3.50% today, which is interesting and should be appreciated; a rise of over 0.60% in the 10-year and almost 0.70% on the Long Bond is significant.
Three Business Acumen Take-Aways a Future Leader Should Know:
- Interest rates are as low as they are going to be, so make those investments in strategy execution now.
- Because the rates are so low, if for some reason the Fed lowers them even further, it probably won’t matter.
- Internal capital should be leveraged now as the weighted average cost of capital (WACC) will never be lowerIf it’s not going to get worse, then make decisions that are long term and create long term shareholder value.
Corporate Earnings
We believe that 3rd quarter earnings are the most significant from a strategic execution perspective. Because of seasonality in businesses and the economy, we have a good understanding of the road we traveled earlier (Q1 and Q2), the road we just traveled (Q3), and the road that leads us to the end of this year’s journey.
The facts speak for themselves. In April 2011, the Dow Jones index maxed out around 12,800, then started dropping dramatically in August and September – to around 10,000 – as projection and guidance for earnings started to hit the street. Over the past few weeks as I have been listening to investor calls and watching earnings reports, we have seen almost no upside surprises, quite a few downward surprises, and overall results that were not very stellar. Yet, the Dow Jones index is above 12,000! (More on this later.)
Apple suffered the tragic loss of its leader in Steve Jobs and had underwhelming success in the quarter financially with the launch of the iPhone 4s, which didn’t hit its target. For the first time in recent memory there was actually a sell-off of Apple stock this month, which is surprising because they still are giving guidance for a very strong Q4. Most of the big conglomerates, pharmaceutical, and semiconductor companies that I watch all had less-than-ideal performance.
Three Business Acumen Take-Aways a Future Leader Should Know:
- Don’t get into a dividends war at the tail-end of a recession. In our simulation experiences we provide advice to that effect, but corporate America is using too much cash to appease shareholders with dividends, which may be foolish.
- Don’t buy back stock. Many of the clients I work with bought back stock during the past quarter; we teach our participants to be very careful when doing this because it could backfire in the long-run.
- If you think the future looks strong, be proactive and not reactive. Make smart investments that support the execution of your strategy and don’t pander to the analysts.
The Stock Market
The stock market – and the creation of shareholder value – is a very key element of the learning experience when using our business simulations. In the real world, October of 2011 is turning out to be a very strong month for the stock market. Consider that the Dow Jones index (as I shared earlier) got back above 12,000 after the European stabilization and Greek debt deal, and has increased in value by almost 20% since the low point of the year. More importantly, it happened during earnings season. And the fact that Apple was only up about 4% meant that the rest of the market was far better than the darling of Wall Street, which is very positive news! There will never be a full-fledged recovery without the core companies that drive growth and expansion. The types of companies that make trucks, equipment, and other products that support making things happen.
The bottom line is that there would be no action this big and powerful if another double-dip recession was imminent.
Three Business Acumen Take-Aways a Future Leader Should Know:
- The recent surge proves that the smart investors believe better days are in soon ahead (not more recession).
- Leaders need to make business decisions that support the optimism.
- There will be leeway for business leaders who make big and bold decisions that don’t turn out perfectly.
Inflation and Commodities
For much of the last two years, gold was selling and trading like a “fear asset”; investors who were scared the world was going to end or stock markets around the world were going to crash to the ground put all of their money here. As I write this document, gold is now trading more and more like a core asset and crude oil prices have gone down despite increased turmoil and uncertainty in the Middle East. It is great to see gasoline prices under $3.50 a gallon! For the past few months, crude oil prices have stabilized and have hovered around $92-$94 per barrel. The critical point is that as long as commodities like crude, corn, and copper remain fairly stable, there will be no inflation. We need to have a no inflation situation in order to have a chance of surviving this crisis.
The September Consumer Price Index – which always has a lag – was 0.3% in September 2011, which is essentially nothing. When you subtract food and energy costs, it was even lower; this puts the economy on the doorstep of “deflation”, but that is another worry for another day.
Three Business Acumen Take-Aways a Future Leader Should Know:
- There will be no inflation for the next 3-6 months so business decisions should reflect that knowledge.
- It will be extremely hard to pass along any price increases toFor those business decision makers that are facing increased global raw materials costs, it will impact margins.
- While US inflation is not an issue, good business leaders will keep their eyes on Europe and South America as those economies will face different pressures, especially in Europe after the Eurozone financial deal.
Consumer Spending
No topic is more confusing or interesting from a business acumen perspective then consumer spending behavior and trends. All you have to do is go to your local Louis Vuitton store and watch in amazement as the luxury items are purchased at record-breaking rates. On the other hand, consumer confidence hit an all-time low in October! The next release of the Consumer Confidence Index should be telling, but again, the facts need some analysis to be understood. FedEx is adding more workers than ever before in expectations of a very busy holiday season and high-end retailers are doing the same. Wal-Mart has already begun its holiday commercials as part of a major campaign oriented around stretching the dollar and providing quality.
Three Business Acumen Take-Aways a Future Leader Should Know:
- Consumers with disposable income are more apt to spend on quality and brand rather than cheap and low quality.
- There will be temporary jobs available to those who want them.
- Training workers to be able to deliver the value proposition and execute the strategy on a short-term basis actually can mean the difference between profit and loss this holiday season.
Emerging Markets (Brazil, China, India)
All of the recent data indicates some cooling off in Brazil, China, and India. China and India represent over 2.5 billion people and the cooling off there has impacted heavy equipment sales, commodity sales, and consumer spending. However, a 9.5% growth rate is still outstanding and provides a lot of positive opportunities for years to come. Brazil is a little bit different as the growth rate is finite meaning there is a time limit related to the Olympics and the World Cup. After that, it’s anyone’s guess and my hunch is that things will return to what they were before rather than an evolved economy.
Three Business Acumen Take-Aways a Future Leader Should Know:
- Emerging market countries will start to ease their tightening measures and go back to pushing growth.
- The talent market is going to be tight for the foreseeable future.
- If you are going to go to Brazil, do it now and do it right. Otherwise, forget it and save your resources.
Europe
Having spent quite a bit of time in Europe over the past few months, I have seen how most of Europe has been impacted by the woes of Portugal, Ireland, Italy, Greece, and Spain. You see it in the streets and you see it in the faces of the people. Due to many reasons – financial, political, and cultural – the central banks of France and Germany have been slow to react. The collective European Central Bank has been putting off doing something the same way we put off going to see a dentist. But the good news is that the latest economic and market recovery has been as a direct result of the Europeans finally taking real and measurable action.
The European Financial Stability Fund (EFSF) is very similar to the TARP bailout here. I must admit it seems so much better when someone else does it and not us! The total bailout could be as much as $1.4 trillion dollars. More importantly, the Europeans have also agreed on a 50% reworking of the Greek debt. Almost overnight, the European financial community has taken their harsh medicine and moved on.
Three Business Acumen Take-Aways a Future Leader Should Know:
- While there has been great action and a real desire to fix the problem the right way, there are still other countries that may have a drag, including Italy and Spain.
- European costs are going to be higher as the EFSF costs are spread to everyone.
- Investment and capital in Europe are going to be tight for a while.
Politics and the Elections
For many years, economists and investors have believed that things get better in an election year. As 2012 starts, the political landscape is in turmoil and there is real uncertainty whether President Obama will be re-elected. Politicians are going to do everything possible to get re-elected and the bet here is that the stock market will continue to rise, gasoline prices will go down, and there will be more jobs available in Q1.
Summary
In summary, the US has avoided a double-dip recession, but this doesn’t mean that everything is perfect or we will see robust growth, as there are clearly unstable days ahead. Many problems still exist that have never existed before so even the greatest minds of economics are without historical data to analyze. The bottom line is that the age of lean is upon us and the implication, as evidenced by the summer budget battle, is that government spending (including defense) will be low.
After reading this document, you have to ask yourself the following question:
Do our high potentials understand and speak the language of business?
If the answer is no – and your Executives know the truth – then you need to investigate ways to close that learning gap.
As a value-added offer to our clients and potential clients, Advantexe is pleased to offer you a detailed Conceptual Design Document of the Business Acumen for High Potential Leaders learning solution that teaches participants the skills they need to be effective business leaders.
Business Acumen for High Potentials ™ is part of an award winning series of learning solutions that integrates learning modules, business simulations, and application exercises into real and usable skills that improve business performance.
In this design document, we also provide the overview of follow-up webinars for continuous learning that includes the topic of Business Acumen.
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