Verne Harnish: Listen To Scale

Bestselling author Verne Harnish will be the keynote speaker at our 2019 CEO Leadership Conference, Nov. 7-8 in Dallas. More information. 

In the late 1990s, Verne Harnish picked up a copy of Titan, Ron Chernow’s powerhouse biography of John D. Rockefeller. For some, it was interesting history. For Harnish, it was a page-turning how-to, a guide to the practices and processes of one of history’s greatest business minds.

The book confirmed many of the things Harnish observed in great companies as a longtime entrepreneur and founder of the world-renowned Entrepreneurs’ Organization, especially the need for priorities, solid data and a set rhythm for operations. Four years later, he released Mastering the Rockefeller Habits, a slim, detailed guide to putting these principles to work. It became an international bestseller.

In 2014, he followed with Scaling Up, an update he dubbed “Rockefeller 2.0.” It expanded on his original work, detailing a virtuous cycle for growing a business by attracting the right people, creating a differentiated strategy, executing that strategy—and making sure you had enough cash on hand to weather the inevitable bad times. It’s since become one of the most influential bestsellers of the past decade.

Nurturing high-growth “Gazelle” firms is Harnish’s passion—and business—but given his interest in Rockefeller, I couldn’t resist asking him what the most powerful CEO of the Gilded Age would make of the C-Suite today—what’s changed and what hasn’t. What follows is a transcript of our conversation, edited for length and clarity.

It’s been more than 20 years since you published Mastering the Rockefeller Habits. What would Rockefeller recognize about business today, and what would he not?

What’s more impressive is what hasn’t changed. He understood the need for getting data in from the field on a daily basis. He had one of the bleeding-edge telegraph systems right in his home. Today, you have some slightly different technologies, but I dare say that a lot of leaders still don’t really have good daily visibility into how well their company is running, particularly mid-market firms. That amazes me.

Number two, one of the most important of what I call “leader KPIs” is getting a lot of quiet time for thinking. He worked from home every morning and didn’t go into the office until lunch.

Today, with all this influx of connectivity and technology, I don’t think we’re getting necessarily more important information, but everything seems to have been raised to the urgent. It’s giving us less time to really think, and ponder, and read, which is critical to the creative and innovation process, which is what you’ve got to accelerate if you want to keep up.

I was enamored by the fact that he was into this kind of daily walk and talk in the morning and the evening. He had lunch every day with his nine directors and—when you speed forward 100 years—the late Steve Jobs’s key to leading was with famous walks and talks with people. Bill Campbell, who was Steve’s coach, would do their walk and talk on Sunday. Steve had lunch almost every day with [Apple design chief] Jonathan Ive. He understood that it’s important to choose who you break bread with on a daily basis.

How’s the role of CEO changing in this era, and how is it not changing?

Our mid-market leaders, they’re faced with too much innovation. They’re faced with too many good ideas. I think part of what happens is we keep trying to apply MBA management techniques to these growth firms, and that’s been the bigger failure.

What do you see as the big challenges facing mid-market CEOs?

There are just a lot more shiny objects. That’s number one, which is distracting. Number two, Rick Kash, former vice chairman of Nielsen, noted in his book, How Companies Win, that in 2007, we crossed a significant line. In [the past], there was more demand than supply. I don’t want take anything away from some of these family-run dynasties all through the last half century, but truly, if you just showed up, you had the business. It was all a drive around the planet on the supply-chain side, to do better, faster, cheaper.

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Now, through the Internet, you can do business with anyone at anytime from anywhere. The fundamental shift that has to be made is get your head out of the cost and supply side of the business, and get it refocused on the demand and price side of the business. So we’ve really been pushing our CEOs to push the supply chain side of the business down closer to the front line, and get much more focused on understanding the customer side of the business, like they’ve understood the supply side of the business for the last five decades.

How do you do that? How do you begin to become a more customer-centric CEO?

First of all, we’re spending literally every day talking and interacting with customers. Everyone loves to talk about how Steve Jobs disliked focus groups. But he would spend most of his afternoons grabbing hold of a customer issue and tracking it through Apple, almost to the chagrin of everyone else in Apple. It could almost feel like micromanagement. But that’s what we did with Sanjeev Mohanty in India.

Sanjeev had the job of CEO of Benetton India, a brand that’s not been doing particularly well and was getting crushed as a fashion brand in India by Levi Strauss. So the first thing we had Sanjeev do is on a daily basis get back in touch with both his employees and his customers.

He very simply put a card into each store that said, “Hey, if you have any problems, complaints, concerns, issues, ideas, e-mail me directly.” That was open to both the employees and the customers. These began flowing in on a daily basis.

Sanjeev would read—like Warren Buffett reads the headlines of newspapers from all over the world to get an idea of what’s happening in marketplaces—the subject lines of all of these emails coming in from the customers. He had a whole team that was responding to all of them.

So, he was first getting a good gut feel for just what was happening on the frontlines with the customers and employees. One of my favorite stories was when one of the leading politicians in India emailed him. He’s having some troubles with some acid-wash jeans that he had gotten at Benetton. Sanjeev jumped at the opportunity to talk with him, and he was able to head off at the post a production problem they were having with these acid-wash jeans.

Within two years, Benetton rose to be the number-one fashion brand in India. You can imagine who was disrupted by that: Levi Strauss. So, the end of that story is today, Sanjeev is running half the globe for Levi Strauss. They poached him away.

He’ll tell you it was this daily routine, not unlike Sam Walton five decades ago. Walton would get in his pickup truck or his plane and spend most of the week talking to customers, talking to employees, and shopping competitors, getting his head out of the business—and into the marketplace. Get out of the supply chain side and get in the demand side of the business.

Everybody talks about these unicorn companies that go to $1 billion in about half the time it’s traditionally taken. They really have two things in common. One of those is they’re all focused on the demand side. They don’t supply anything. Uber didn’t own any car, Airbnb doesn’t own any properties, and Amazon doesn’t really make much of what it sells—nor do Google and Facebook. What they are brilliant at is better understanding the customer: what they are doing just before, doing right now, doing next, their likes, their dislikes, their uniqueness and using their understanding of the customer to then drive demand for us poor suppliers, in oversupplied markets. Who’s making all the money? The demand engines, not the supply engines. That’s what we’re pointing out.

They understand what’s getting in the way of the customer and removing it?

No. That’s a piece—but a small piece. That’s thinking supply chain. Yes, one of the things that we’re teaching leaders is that if you’re doing anything that’s hard for the customer, it’s just dead on arrival. Nobody wants hard today. But anyone can focus on making stuff easier.

The big difference with the unicorns is they understand the demand side like we used to understand the supply side, and what do they use that for? To throttle price. In the olden days, everyone just had a price. Today, price changes by the minute. That’s why traditional retailers are getting killed. They put a sticker on something and maybe change it when it’s time to put it on sale. My book on Amazon, the price will vary from $15 to $21 in a week. It’s this ability to understand demand and use it to drive price—sophisticated pricing versus sophisticated cost—this is the message we’re trying to get across to all CEOs.

The airline industry lost money for decades. Now, they’ve had four of their best years—including 2018. One of their CEOs was quoted saying that he had 1,500 people on a particular route in a day, and there are only 1,200 different prices. So they’ve screwed up 300 times. Same with Uber. Taxis have the same price for an eighth of a mile. Uber’s price is based on demand and their understanding of the movement of the customer, not the supply. So, that’s the first thing they have in common.

All the unicorns have a second thing in common—they have figured out how to get the most people on their bus to get the most brands engaged in the business model.

For instance, the other reason why Jeff Bezos is the wealthiest person on the planet is that first, he made it very easy to do business with Amazon. But more importantly, he understands moment-by-moment the demand curves on any particular product that they’re offering and is able to throttle price to take advantage of that.

Number three, it’s the millions of people who have voluntarily provided detailed reviews—he has tapped into the crowd. That’s why the fastest growing part of Amazon right now is their search. They’re the biggest threat to Google they’ve ever had. If you’re looking for any particular product, you don’t go to Google. You don’t even go to the manufacturer—if they even know who that is—they go right to Amazon because Amazon has the reviews.

And what they paid those millions of people to write those is nothing. So if you’ve got millions of people supporting your business model for which you have to pay zero, that’s a really good business model.

If you’re not digitally born, how do you begin to make this change?

You need to tap into the brains of your employees. If you think you as the CEO and your senior team are smart enough alone, that’s your first fatal mistake. It took ego to get started, but it’s going to be your ego that crushes the business.

So it starts with tapping into the broader knowledge of your employees. Very specifically, I’d share the story of my partner John Ratliff. He scaled up a sizable call center business through 24 acquisitions. This is not Facebook or Google. This is call centers, 650 employees. He created an app on Salesforce [to solicit ideas from employees]. When he launched it in his first 90 days, he got 10,000 ideas from his employees. Many of those ended up delivering millions of dollars of EBITDA to John’s customers, which made them stickier. In the call center business, the average profitability is four percent. John drove that to 21.8 percent. That’s better than Apple’s profitability last year.

Step two is to really begin to engage your customers in conversation. One of our early clients was a company called Citizen. They only had seven major government agencies as clients. They’re a government contractor. B2G, if you would. Their very first 90-day theme, we called it CSI, customer satisfaction investigation. They engaged in reaching out to 20 of the key people within these government projects they were working on.

It looked like they had seven customers but really, within each of those, there were hundreds of people that would influence those projects. At the end of 90 days, they discovered about $87 million worth of additional business they could mine within their existing seven clients.

Then last, you begin to engage the broader tribe, if you would, or hive. In the old days, like when I did The Rockefeller Habits, I wrote it, published it, and it was in the marketplace. With Scaling Up, I said, “Hey, why don’t I put 500 copies out to the market and get their feedback and input?” [Readers] came back and said, “You may be the ‘Growth Guy,’ Verne, but your baby is both ugly and stupid.” Several of them gave me volumes of critique down to specific wording of sentences.

I put my tail between my legs and rewrote all 70,000 words. I guarantee you it would not be approaching 400,000 copies out in the marketplace if I had not set my ego aside and tapped into our own employees, our coaching partners, our customers and the broader market in order to shape that product, that IP. So, that’s how us mere mortals do this.

So, it seems the fundamentally most important skill of our time for a CEO is listening—as opposed to creating culture, mastering technology and all of that?

Let me preface it, though, with one thing: My favorite quote of all time, “We have the answers. It’s the question we do not know.” In the early days, you had to have the answers. Today, if you think you have the answers, that’s your fatal mistake. It’s the ego problem.

Our focus is helping CEOs and leadership teams frame the right questions. That’s why we’re very precise about the four questions you ask a customer. What you really need to hear from a customer so it doesn’t waste your time. So, yes, you’ve got to listen, but it’s better if you can drive it with the right questions.

It really is about the CEO and the leadership team immersing themselves with the customer and the marketplace, and spending a lot of time talking about that at their weekly meeting.

It really does come down to that: What are you discussing at your weekly meeting? Internal issues or what’s happening in the marketplace? That’s one of your key metrics. The percentage of time spent at your weekly meetings: What are you talking about?

A lot of folks would rather just deal with things within the walls of their companies.
Precisely. And that’s where it comes around full circle. That’s the technology all the unicorns are using—A.I., machine learning and technologies to monitor and gather insights about the marketplace that are difficult for mere mortals to handle. So you really do have to get on that side of the equation—on the customer side.

Harnish: Here’s What To Ask Your Customers

1. “How are you doing?”
Get them talking about themselves immediately. They want to talk about them, not us. Ask them detailed follow-ups. Maybe I want to know, “Hey, what’s your bonus type?” I don’t want to know what your bonus is. But what’s your bonus type? Because if I know that, and then I can frame my product to help you get your bonus, that’s a huge win. So, first, I want to find out what’s going on with them.

2. “What’s going on in your industry/neighborhood?”
Talk more generally about what’s happening in your industry if it’s B2B or what’s happening in your neighborhood if it’s B2C, and begin to get some insights into how they’re thinking, what’s going on in their industry.

3. “What do you hear about our competitors?”
The third question, which people are often reticent to ask, is really the most insightful. Because if you don’t think your customers are being pounded by your competitors, your head is in the sand. I get more and better intel about my competition through the customer’s eyes than I do through my own eyes. The only way you win is to be different in the marketplace. The only way to know that you’re really different is to get this intel from customers and how they perceive you versus that competitor.

4. “How are we doing for you?”
The point of the fourth question is that it should be asked  last, not  first. There’s a tendency to ask “how are we doing” first—but that’s not customer centric, that’s “us” or “me” centric.  Customers (people!) want to talk about their favorite subject: themselves.