The more good businesspeople I work with, the more I realise that the really effective folks are nearly always able to cut a business situation down into a single thing that matters.
Very rarely are there two things that matter. Usually it’s just the one.
Of course, this doesn’t sound like it should work as well as it does — but it does!
Getting better at this has been something of an obsession of mine for a few years now. This has always been a little difficult to articulate because it sounds so dumb. Thankfully, I’m not the first person to realise this.
Last week we published a members-only case taken from Jim Kilts’s Doing What Matters — a book that Kilts wrote in 2007, attempting to describe how one might be able to do this ‘reduce down to one thing that matters’ technique. He called it his ‘fast track quick screen elimination process’.
The context we were talking about was Kilts’s Gillette turnaround:
Kilts had a number of challenges across Gillette’s many product lines. At the high level, the company’s sales and earnings were flat for the prior four years. The market shares of various products were declining, some of them sharply. Advertising spending had been slashed year after year — always disastrous when it came to consumer products. And Gillette faced new competition in most of its markets.
Here were the options that Kilts faced in those early months.
First, Kilts could divest Duracell. Gillette had purchased the battery company for $8 billion four years ago. Post-acquisition, Duracell’s market share declined by 15%. In the US, it dropped from 46% to 40% in the alkaline battery market. On the face of it, selling Duracell and cutting further losses seemed like a good idea.
Second, Kilts could keep Duracell and slash prices. This meant accepting that Duracell’s acquisition was a big mistake. If Kilts believed that batteries had little differentiation and were essentially a commodity, then the logical thing to do would be to reduce prices and milk the product line for as long as was feasibly possible.
The third option was to sell everything except for the highly profitable shaving business. Gillette would operate as a pure play in this one sector. The absolute sales dollars would be much smaller, but the huge profit margins should send the share price skyrocketing.
The fourth option would be to divest the personal care business. This included brands like Right Guard, Dry Idea and Soft & Dri antiperspirants and deodorants, as well as Gillette Foamy and the Gillette Series shaving preparations. These products were not doing well: not only was the market share of most of these products falling, but profits were also declining, and operating margins were lower than its competitors.
The fifth option was to divest the Braun electric shaver and household appliance business. Gillette had acquired Braun in 1967, decades ago. Unfortunately, the division never performed consistently and required heavy investment. The business was a major drag on Gillette.
The sixth option is to admit that Gillette was yesterday’s news and ‘invent a whole new growth strategy’. That is: bet everything on new product lines either through R&D or by doing multiple new acquisitions. This would definitely jump start stock performance.
The seventh option was to acknowledge that Gillette was over and throw in the towel. That is, call in the investment bankers and work on the ‘endgame’.
This was just seven of the many options and opinions thrown in Kilts’s way in the first few months of his tenure. He had to decide what the key issues were.
Now notice that for the decisions he made, Kilts literally cut the entire decision down to one key issue each:
Kilts applied his quick screen method in the following way.
First, he chucked out the sixth and seventh options. Things were not that dire for Gillette; the company owned a number of leading consumer brands. On top of that, Kilts was brought on to turn things around, not to shut things down. Kilts had options.
Now what to do with the rest of it.
Divest Duracell. In order to divest Duracell, you had to find a buyer for Duracell. Kilts looked at the potential set of buyers. The problem: the battery category was so competitive that any company who could buy Duracell would not have wanted to. And even if someone dared to buy it, Gillette’s price-earnings (P/E) ratio — the price investors will pay for a stock expressed as a multiple of its net earnings — was far higher than the P/E ratio of any possible buyer. So Duracell stock was worth more to Gillette than anyone else. This was not a viable choice. On to the next option.
Milk Duracell. What matters most for consumer products? Kilts believed that the key metric, aside from sales and earnings, is market share. After which you look at the advertising-to-sales ratios. You must also look at the promotion-and-trade-spending-to-sales ratios. When you examine these, you ask yourself: are these rising or falling?
Kilts observed that consumers considered Duracell batteries to be superior to private-label and price-brand batteries. This was because of its reliability, durability and better performance. The quick screen process told Kilts that Duracell was the leader in the alkaline battery category, which meant it should be disciplined in how it led the category. In theory, market leaders were supposed to impose discipline when the non-leaders got out of line. Duracell had done neither.
Instead of investing in marketing to increase consumer equity, Duracell had substantially cut its advertising. As a category leader, it should have stopped competitors from stealing its market share and should have avoided irrational spending on promotions for short term results. None of these observations needed any in-depth analysis; they were fact-based findings and were easily verifiable. (Of course, Duracell’s leaders eventually needed to do an in-depth analysis to get out of this mess, but that was later. Right now Kilts just needed to know enough to make a decision and move on).
So what was the answer? Kilts asked himself why they should throw out a product with great equity and an impeccable 20-year record of profitability. Duracell had done badly for three years, sure. But it should be possible to turn it around. They were going to keep Duracell, and fix it.
Kilts notes that this approach was generalisable. In Doing What Matters, Kilts writes:
In other businesses, the key metrics will vary. But they always exist, and they will give you the quick read you need to move forward. Yes, you’ll go back and spend time conducting the analysis necessary to execute a plan of action. How much should you invest in marketing? What does marketing-mix modeling tell you about where to invest? How much of a price gap does your brand and market advantage allow? How effective is your sales force in working with your trade customers? What channel of trade is driving growth? Do you have the right trade-channel strategy? There’s a lot you’ll have to cover. But you can’t allow it to bring you to a halt at the outset. You have to go with the quick screen so you can act.
Sell Everything Except the Shaving Business. Kilts did the math for this option relatively quickly. With $10 billion in sales, Gillette was a medium-sized consumer product company. For perspective, Unilever sat at around $48 billion, and Nestlé was at $70 billion. Strip Gillette down to razors and you’re left with $4 billion. This would barely command any presence with its primary consumer, the $300 billion Walmart. Kilts might as well hang a for-sale sign on the door if he shrunk down to that size. This was not an option.
Divest the $800 million personal care business. The previous management thought to place personal care within Gillette’s blades and razors business unit. They believed the scale of all the aforesaid products combined would have a big impact on customers, which should result in a higher in-store presence for the personal care products.
Kilts observed that while this was a good concept, it didn’t seem like the right fit for personal care. One problem was that deodorants and antiperspirants required great attention to detail and constant innovation in new fragrances and consumer benefits to stay ahead. In reality, Gillette’s personal care business was managed like a stepchild within the larger blades and razors umbrella. It was neglected to the extent that it became the place to train young managers who lacked institutional knowledge.
Armed with these insights, Kilts set up personal care as a separate business unit. He focused on the vitality of the brands and increased cost control. The quick screen paid off. Within three years, it started to make profits, market share increased, and the new product pipeline was bursting with innovation.
Divest Braun. Kilts’s fifth option was to divest the Braun electric shaver and household appliance business. The reason for Braun’s failure was that Gillette was running it like a small appliance company. Braun’s leadership kept broadening the product line and entering new geographies. Kilts thought they would have a better shot if they narrowed down Braun’s focus, and limited sales to a select few locations. This would ensure returns higher than the cost of capital.
Which category to focus on took a bit more time. Eventually, Kilts’s team decided to focus Braun on just dry shaving, and only in certain targeted markets. In just one year, profits went from $94 million in 2000 to $120 million in 2001. Operating margin rose by three percentage points to 11.6% and return on assets increased from four percentage points to 14.8%. Braun was back on track.
So, in sum: Kilts refused to sell Duracell, recognizing its long-term equity and choosing instead to restore discipline in marketing and category leadership. He dismissed the idea of shrinking Gillette down to just razors, which would have made it irrelevant at scale. He pulled personal care out from under razors, giving it its own space to grow. And he narrowed Braun’s sprawl to dry shaving, increasing margins and returns.
Of course, this did not mean that Kilts was just doing one thing at a time. Turnarounds rarely afford one the luxury of such single-mindedness. Kilts was executing across multiple things in Gillette, but in each of those things there was just one key issue that was the most important. Or, more accurately, he was delegating execution whilst tending to the quality of the organisation he could delegate to; for each of those delegated things, there were only one or two bits that mattered.
This skill is not unique to Kilts. It is, in fact, quite common in business. Once you recognise this pattern — or perhaps, as in my case, once you work for someone who thinks like this — you’ll start to see it everywhere. Typically you’ll have to look for things directly said by or quoted from business leaders themselves; biographers and journalists rarely focus on this aspect of business skill. Perhaps they do not appreciate how useful it is.
Here’s an example. We last saw Kwek Leng Beng in The Absurd Deal That Led to Republic Plaza. In his biography, there’s a throwaway passage in the section about the Seoul Hilton deal (bold emphasis mine):
His [Kwek Leng Beng’s] son Kingston pointed out his dad’s laser-like ability to focus on the crux and dismiss the background noise. “My father believes the way the world works is there is usually one master reason behind a course of action, along with one main problem associated with doing it,” he said. “In deciding whether to do something or not, it’s not deciding between the many reasons for against the many problems, but rather if the one master reason for outweighs the main problem. He narrows down the lines of reasoning into one master reason that can explain everything.”
There are echoes, in this passage, of an investing maxim: if your thesis cannot fit into one page, then it’s not worth doing. Most things should be done for simple, understandable reasons. Otherwise they should not be done at all. Investments tend to fall into this category. Deals also.
I do occasionally miss this about working with my old boss. He would sometimes take me out to dinner, and start the conversation by telling me about a recent discovery he had made. Within minutes the relevance would be clear, and the action that we had to take was straightforward and obvious. Other times, he would tell me — with gleeful abandon — about a deal he’d made on the side. His reasoning would be stupidly obvious, the risk-reward a ‘no-lose’ or ‘survivable even if we lose; huge win if it works’ tradeoff, and the reason for action built around just one big thing. Of course sometimes things turn out badly, for reasons we couldn’t predict or were beyond our control. But there was never any convoluted argument for why we did what we did.
“There is only one thing that matters in any business situation” seems like a dumb idea — to the point of being banal — and perhaps it is. Whole self help books have been written about it. I won’t belabour this point for much longer, except to say three last things.
First: the way that I’ve historically thought about this is ‘The Highest Order Bit’. I got this from a business mentor many years ago, and the older I’ve gotten, the more true I realise it is. The concept of the ‘high order bit’ is deceptively simple. It is a bit like saying ‘prioritise the most important thing’, except it includes the add-on clause “you can let everything else that’s less important fall away and die.” I believe it’s worthwhile to meditate on this idea. It should change the way you approach a great number of things in life.
Second, I’ve found that you can get better at this. The easiest way to do so is to constantly ask yourself two questions:
This is, as you might expect, closely tied to Outcome Orientation. But I’ve said all I wanted to say about that.
Finally, I am aware that writing about this can be rather pointless. It seems difficult to believe that one can adopt this approach purely from reading alone. The more effective way to adopt such thinking is to find a boss who works like this, who will invariably ask you, again and again: “Is this the high order bit?” At which point you say “No, this isn’t the high order bit. The high order bit is … X.” And then your boss stares at you and you wisely realise you should be thinking about that instead, and you go do that.
The other thing that’s useful about working for someone like this is that sometimes he or she will tell you “No, that’s not the high order bit. The high order bit is this other thing, and here’s why.”
High order bits are usually domain specific. It helps to learn what matters from someone who is good at your domain.
But it turns out that this principle works at the general level, in addition to the specific.
There’s a professor by the name of John Vervaeke, who is famous for his studies of wisdom. He argues that one key property of wisdom is something he calls ‘relevance realisation’. This is the idea that wise people pay attention to what matters; they ignore everything that doesn’t.
Knowing what matters for a specific thing is called being an expert.
Knowing what matters over the course of a human life is called being wise.
Therefore, finding the most important things for your business may be called ‘getting good’. But finding the most important things in life and focusing exclusively on them may be described as the pursuit of wisdom.
In some ways, that’s the only thing that matters.