The CEO Factory: Reflections from the Book

I read The CEO Factory: Management Lessons from HUL this past weekend. It is a book written by Sudhir Sitapati who joined HUL in 1999 and currently serves as Executive Director, Foods and Refreshments.

The book is a great refresher on what it takes to create and sustain an enduring business and provides some great wisdom nuggets and management lessons from the consumer goods king HUL. Below I provide a few key lessons which stood out and my reflections from the book (in italics)

In just the opening few pages some statistics on the company’s performance and legacy are surprisingly impressive!

- It is hard to find another large company that has delivered 15% earnings growth over 60 years anywhere in the world.

- It is nearly impossible to find one that has stayed in the top five of a large country for over sixty years.

- In just the last decade it has given shareholders an annual return of 23% with its stock price up 7x.

- There are currently around 400 HUL alumni who are CEOs/CXOs across corporate India. In corporate circles, HUL is well known by the nickname ‘The CEO Factory’.

The role of enlightened capitalists and why it is so crucial for large Indian conglomerates to reflect that in their spirit and actions especially in the current times of crisis and uncertainty. This was brought out through the below para in the book

- But if William Lever is remembered today, it is mainly in his role as the ‘enlightened capitalist’. In 1888 near the soap factory at Warrington, he built a town called Port Sunlight for his employees. At a time when 90% of British citizens did not own their own homes, Lever employees were given free housing, medical care, schools, recreational facilities and, most radically, pensions. Port Sunlight is now recognized as the earliest example of a factory city, the most famous Indian example of which is the Tatas’ Jamshedpur.

While the core company values are simplistic and in hindsight apparent to startups and corporates, it’s HUL’s relentless pursuit and staying true to them over more than six decades which has brought it to where it stands today

- Harish spoke about how unique a company HUL was. What, he asked, was its secret sauce? He gave four answers which you will find woven through this book: a middle-class soul, a meritocratic culture, managers who are equally comfortable in dusty Indian villages as they are in London or Rotterdam and finally unchanging core values.

- There was however a fifth quality that also came up: the ability of the company to mold its employees into ‘entrepreneur professionals’, people who followed the processes and rigor required of a professional company but were willing to go the extra mile that only entrepreneurs do.

- Since ‘most leaders are high achievers in their academic career, they bring confidence that is reinforced by the institutional self-confidence they encounter’. Culture reinforces culture.

Several key insights on chapters on the product, pricing, sales chapters stood out encapsulated below

- The gross margin a brand is born with is the gross margin that it dies with.’ What he meant is that while scale can improve net margin through advertising and overhead costs, gross margin or the difference between price and cost of material never structurally changes for a brand.

- Pricing never drives penetration or attracts new users. New users adopt a brand for three reasons: access, awareness, and availability.

- Sales is a cost center and not a revenue center. Once you are clear on this, everything else about managing a sales and distribution system is easy.’ What Tan was saying was that brands and not the sales function generate sales

- A no-brainer: rotation not margin is king in business. Calculating distributor return on investment (RoI) is the very first task HUL management trainees are taught.

- At the heart of how HUL works in sales lies a ruthless focus on reducing working capital and getting the commensurate benefit in terms of margins.

- So the retailers were not shopping for high-margin products but for high-velocity products. The wholesalers were not selling high-margin products and were only stocking high-rotation products. Velocity always trumps margins.

Often and in almost all organizations sales team’s variable pay is determined based on the volume of business brought in or key clients retained/ renewed. HUL turns this logic on to its head by linking it to input-driven metrics than output driven

- If one takes Tan’s principle to the logical conclusion — that sales are not a revenue function — then sales teams shouldn’t be rewarded for bringing in revenue; instead they should be rewarded for creating the enablers of revenue.

- All of us in any business we run must ensure that at least 75% of rewards is input- and not output-linked.

On cost efficiency and being the best in class not only within but across industries

- There are many ways to assess how cost-efficient a company is. Two simple metrics are employee cost and return on capital employed. Employee cost as a percentage of turnover shows how much productive value a company gets from its people. ROCE measures show how much value a company extracts from its capital.

- HUL compares with its peers in the consumer goods space. Its employee cost is 4% of its turnover compared to a benchmark of 7% (mind here that 143 executives have an annual salary of more than Rs. 1cr!) and its ROCE is 92% (phenomenal!) compared to 33% for the industry. These are not just best in class numbers within consumer goods, but best in class across industries.

- Arun Adhikari, a former managing director at HUL, believes that ‘respect for money’ is a key value system in HUL and it is best evinced by its attitude to capital expenditure.

- Working capital includes credit and stocks in hand and it is famously (though not accurately) said in corporate circles that HUL operates with negative working capital.

This below is again an interesting insight where HUL fixes the price and profits and works backward to retain/ improve margins as it focuses on reducing costs. It illustrates this through a product which I am sure all of us would have consumed at some point in our lives- the plain old Rs. 10 vanilla cup!

- The evergreen vanilla cup was Rs 10 on the price board, just as it is today fifteen years later. HUL has played every trick in the book to ensure that this price point is not violated: from reducing grammage per cup to better supply chain efficiencies to technologies like fat homogenization to reduce the vacant airspace in a vanilla ice cream cup. A great example of the principle ‘price for the consumer, fix the profit and then work away at the costs’.

- The most important reason Harish’s formula works is that price is the biggest driver of volumes and volumes are the biggest driver of cost reduction. By fixing prices low, you drive volumes up and costs down.

The art of lean supply chain and seeking cost efficiencies where it might not be immediately obvious

- A lean supply chain does three things: it extracts more from fixed capital, creatively reduces operating costs and sells close to the factory

- Reducing operating factory costs such as energy, secondary packing material, labor cost, etc., requires both creativity and often courage

- Transportation of goods and services adds no value to the consumer experience, and you can always save money here. The key principle in distribution cost management is to produce close to either the market or the source of the raw material.

Why it is necessary to have a Rahul Dravid approach than a Virendra Sehwag approach in a job and in life illustrated through an advertisement!

- My former boss Sandeep Kataria once told me about an ad his predecessor Vivek Rampal had made on the brand Rin. It was a pretty average ad, but Vivek ran it for three years till every consumer remembered it. The salience driven by consistency (not great advertising) not only made a difference to sales but also cut advertising production costs.

As the famous saying goes unless you get on the ground to get your hands dirty you will never be able to learn or appreciate the finer nuances of the trade

- The first job in HUL is almost always a field leadership job: as an area sales manager, a factory finance manager, a factory engineer or a branch HR manager.

- No matter which IIT or IIM you came from, your first job was always on the field. It gave you a real grounding but at the same time ensured a leading-edge sales system.

On the fine art of picking the best people and remunerating them appropriately with a mission to enable them to build a career for life

- Sanjeev Mehta’s mantra for people costs is ‘pay six people the salary of eight people and get them to do the job of ten people’, implying pay well but drive productivity even harder.

- In a chairman’s speech, Harish Manwani had listed six principles of the HUL way of people management — get them early, train them well, build careers, encourage diversity, reward performance and instill values

- HUL measures caliber using three criteria: judgment, drive, and influence

- Influence is getting the world to see your point of view. One obvious technique to gain influence is through collaboration and teamwork

- Drive is the most important trait in junior management, influence in middle management and judgment at senior levels

- Anuradha Razdan, HR director, says that the abiding principle in leadership development is 70:20:10–70% of development is by a leader building a leader on the job, 20% formal coaching interventions by the boss and 10% in the classrooms by external faculty.

Ultimately nothing matters more than purpose and values in any organization

• Brands and businesses will only be purpose-driven if the values of the people driving them are purpose-driven
• Good recruitment of candidates is more than half the job done. Character and caliber are key.
• Values in the context of a business have no meaning unless they have a clear impact on business outcomes over a long period of time and unless they are lived by most employees. It is not important whether employees remember verbatim the company’s official values. Much more important is that when asked to articulate them, most employees say roughly the same thing.

P.S. I hope everyone is staying safe and well in the current times. Indulge in your hobbies and remember this too shall pass! If you liked the piece don’t forget to press the clap button!

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of any institute or organization he is associated with.