CFOs and their colleagues in the finance and accounting functions are good at expressing their organizations’ value-creation logic as mathematical relationships. For example, in a consumer-goods company, sales volume of a product might be calculated with this algebra:
Breadth (the percentage of models or features available in the market that our products offer), multiplied by Presence (the percentage of time that our products are available to a purchaser ready to buy), multiplied by Hit Rate (the percentage of purchase decisions where our product is selected from the available choices)
To explain further, in an organization that makes personal computer mice and keyboards:
- One-hundred percent breadth would mean offering all types, prices and features, while lower breadth would mean offering only ergonomic, feature-rich models.
- One-hundred percent presence would mean that your products are always on the shelf or websites where your customers search, while lower presence would mean that only certain outlets or websites offer them.
- One-hundred percent hit rate would mean that every time a customer has a choice between your product and a competing product, they choose yours, while lower hit-rate would mean they choose your competitor’s product sometimes.
Unfortunately, such “business algebra” often resides exclusively in the finance or accounting departments. That is a missed opportunity, because this lens is a powerful way to locate your hidden talent and organizational pivot points.
You might doubt that business algebra can really reveal talent insights that are not obvious already. Doesn’t everyone know how their business makes money and try to act accordingly regarding talent?
I worked with a group of product-design engineers at a global company that makes computer keyboards and mice. The engineers were asked to work with me by HR, who told them I would help them identify their pivotal talent. The engineers’ first statement to me was, “With all due respect, professor, how hard can this be? We know our most important talent is our engineers, because we are an innovation company and the engineers are the ones that come up with the features that make our products unique.”
I asked them to help me understand their logic, by going through the algebra of their sales revenue model. Here is the conversation (JB is me and EE is the engineers):
JB: Please tell me what financial numbers must move to make a big difference to your unit goals?
EE: We need to see sales rise, particularly in Central America, in countries like Brazil.
JB: If we think of breadth, presence and hit rate, what does the work of your engineers most improve?
EE: Engineers develop better product ideas, so we can offer more product features, and make our products different from competitors.