The group of five financial subject matter experts provided by our client were extremely flustered. We were working with these finance managers to test and calibrate a new customized business simulation that is part of a high potential leader program. This group of experts were selected because they know the intricacies of their own organization from a finance perspective.
“I don’t understand how your business simulation works! I developed a spreadsheet model just like I do back on the job to conduct an analysis of the business results. I decided to raise the price of the core product to add revenue. But every time I raised the price, what I had in my spreadsheet wasn’t reflected in the results of your simulation. They were a lot lower. Something is wrong with your simulation.”
Trying to identify the root cause of the frustration, I asked the group if they accounted for the fact that when they raised the prices it lowered demand and their simulated company sold less products.
“Why would we do that? If the customers have already made a commitment to buy, and the market forecasts agree, then we know the units sold. We just have to raise the prices to generate additional revenue.”
It was my turn to become flustered. I couldn’t get my arms around the fact that these experienced finance managers didn’t fully comprehend a business acumen fundamental such as the concept of price elasticities. In order to help, I asked their boss, the VP of Finance, to provide some insights. “Oh, I’m not surprised” he shared. “This group of finance managers are spreadsheet wizards but they aren’t knowledgeable in the tactics of business acumen.”
Unfortunately, this wasn’t the first time that a group of subject matter experts testing a business simulation had difficulties grasping concepts of business acumen. Specifically, the concept that these subject matter experts struggled with is the fact that business is systemic.
It’s all systemic.
Business is a set of interdependent systems that require deep study, understanding, and practice in order to be successful and make good business decisions. Marketing is a catalyst for sales; manufacturing can’t make products for customers if they don’t have the raw materials from supply chain management, and finance can’t pay dividends if the company misses its’ profit targets. It’s all systemic. In the linear page of a spreadsheet, none of these business interdependencies exist if all you have built is a one-to-one, cell-to-cell relationship.
Three business acumen fundamentals that can drive better business performance
Based on this realization, I went back to some previous subject matter interview notes to see if there were patterns to identify and share about the most common areas misunderstood about business acumen. I found many interesting patterns and challenges and have selected the top three for discussion in this blog. These findings are common issues in many organizations and one of the reasons why every business organization needs enhanced business acumen skills.
Price / Demand
The most common lack of business acumen is the concept of price elasticities.
Price is typically the top decision driver of every customer making a decision. Most customers in most markets are sensitive to price and the general assumption is that customers will buy more of the product or service if it is cheaper and less of the product if it is more expensive. This concept is called price elasticity and is one of the most quantifiable economic equations and can show exactly how responsive customer demand is for a product based on its price.
In a spreadsheet, it is easy to change the price and see the immediate one-to-one. In the real world, it is critical that all business leaders see the system of business including the need to adjust for price elasticities.
Lags in Investment Impact
The next most common misunderstanding is the lag time in terms of investments in the business. “I doubled the marketing budget, and I didn’t see anything happen, so I just reduced it to almost nothing.”
In the real world of business, investments take time; in a spreadsheet they are expenses on a P&L. It is critical for business leaders to have the business acumen to understand there are lags in impacts of investments that support the strategy.
Perceptions of Customers and Shareholders
In this day and age of virtual information and social media, the world is watching everything. Investments in the business, cuts in the business, changes in strategy. Business leaders must have strong business acumen to understand this and make the right decisions. In a spreadsheet, all of the numbers are black and white and don’t address how customers and shareholders interpret decisions.
In the real world, stock prices appreciate with the consistency of strategy. For example, if your strategy is product leadership, then you want to invest more in R&D than your competitors. If you are running your business off of a spreadsheet, you may miss this perspective.