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In order to remain viable, businesses must grow, make a profit and stay ahead of the competition. No matter what role a leader plays in an organization, therefore, he or she must be able to navigate the competitive business landscape effectively, a skill often referred to as "business acumen."
Business acumen starts with the ability to understand how a company makes and loses money, says Chris Berger, a principal and member of the human resources practice at CTPartners, a global executive search firm. But he says it is also important to understand the company's strategies and decisions and how those strategies and decisions impact business results.
Leaders must be financially literate, Berger suggests, and be able to understand numbers on company financial statements. But he says those demonstrating business acumen have the ability to take their knowledge of business fundamentals and use it to think strategically and then take appropriate action. "It's really the ability to think and act," he adds.
Business literacy is defined in SHRM's Business Literacy Glossary as "the knowledge and understanding of the financial, accounting, marketing and operational functions of an organization." But Webster's New World College Dictionary defines acumen as "keenness and quickness in understanding and dealing with a situation," in this case, the ability to understand and deal with issues related to business.
"When I think of business acumen I think of someone who is naturally 'with it,'" says Michael R. Losey, SPHR, CAE, a former president and CEO of the Society for Human Resource Management (SHRM). "They are always prepared and know what they are talking about … and they consistently conduct themselves in a very appropriate and admirable manner."
Losey says those with a high level of business acumen have a clearly recognizable capacity for being effective in competitive environments and in demanding business circumstances, especially those requiring good communications and interpersonal skills.
Those who possess business literacy, on the other hand, may possess the knowledge their business function or discipline requires—which can be imparted to anyone -- but that knowledge does not ensure effective performance or business success, according to Losey. "And that is the difference," he says.
"Of course, almost everyone has some level of business acumen," Losey says. But it is only when an individual's business acumen is fully present and identifiable that it contributes to any type of personal or leadership gain, he adds.
Losey says an individual's business acumen often exists as a result of their upbringing and life experience, but it might be enhanced with training.
"Today, most employers do not provide actual business acumen training unless it is remedial," Losey says, such as when a leader is unaware of his or her poor personal conduct and how it inhibits the organization's performance.
However, Losey said, he participated in a training program early in his career intended to train high-potential employees in business acumen—a program he and the other participants referred to as "charm school." The multiple session program covered topics such as how to be interviewed by the media in crisis situations, how to give effective presentations, how to dress and how to ensure that cross-cultural norms are observed in dining and other situations. "We joked about this program then, but in retrospect it was important," he says.
In an October 2007 research paper, The Perth Leadership Institute, a business acumen assessment and development firm, suggested that business acumen assessment and development should be included in leadership development programs to increase their effectiveness. The paper is based on the book by E. Ted Prince, founder and CEO of the institute, titled
The Three Financial Styles of Very Successful Leaders (McGraw-Hill, 2005).
According to Perth, many senior executives feel leadership development programs focus too much on "soft issues" to the detriment of the hard issues of finance and profitability. Those which do address business issues, however, might limit their focus to financial literacy, the organization suggests.
"Financial literacy is almost never the need for senior managers and high potentials. Most already possess degrees in business, including MBAs, and many have also had significant experience in the business sides of their professional roles," the report suggests. "The real need for these managers is to understand how their actions and their behavior impact their financial decision-making and how this in turn affects financial outcomes at the unit and the corporate level."
"An individual's advancement in a competitive environment without good business acumen is rare," Losey says, because, as individuals advance, their performance requirements change from an emphasis on knowledge, education and experience and how well they do their job to how well they:
"Thus business acumen becomes increasingly important the higher up in the organization a person goes," Losey says.
According to Perth, the presence of an individual in a profitable company does not mean that the profitability achievements of the company "rub off" onto the individual. Instead, the organization says an individual's innate financial traits will dominate once they are placed in a position where they have a high degree of discretion over a profit and loss area.
Business acumen is a key competency for HR leaders, according to Berger. He says those manning the HR function must be viewed first and foremost as business leaders who just happen to perform the HR function. "Business acumen is what enables an HR leader to sit across the table from their CEO and explain why a program they want to drive makes sense for the company," he says.
According to Losey, chief human resource officers must recognize that business acumen:
"The outcome of business acumen is that it enables an HR function to position the functions they lead as strategic investments in the business," Berger says. "So they are better equipped to communicate how their function is going to result in increased revenue, increased profitability and can demonstrate a return on investment."
Berger says many HR executives now pursue MBAs instead of HR-related master's degrees as one way to increase their business acumen and demonstrate their marketability to prospective employers. "What an MBA will do is it will give someone the ability to understand generally how business works -- even if they don't understand a specific industry," he says.
But Perth says the possession of a business education, including an MBA, is unrelated to the level of business acumen. The report suggests instead that individuals in possession of an MBA may actually have lower performance because of "a level of overconfidence in their abilities which is not warranted by their behavior or by the demonstrated outcomes of their financial performance."
Some HR professionals seek opportunities to rotate into a role outside of HR -- especially those with profit and loss responsibility, Berger says, to gain first-hand experience with other aspects of the business.
Losey predicts that global business acumen will continue to become more important, particularly as businesses continue to be affected by social trends such as preferences and requirements of the available workforce. As such, companies will need to place greater emphasis on business acumen if they want to remain competitive.
Rebecca R. Hastings, SPHR, is online editor/manager of SHRM Online's Diversity Focus Area.
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