But that’s the wrong way. All my life I have been working with the Bossidys, the Welches; I was exposed to Sam Walton, people like that. And I saw these guys — because I have access privately to them, and how they think — they don’t go this way. So I talked to Larry Bossidy about it. And he said, “You’re right, this is not the way successful leaders think or act.” There’s a lot of superficiality in conventional approaches to strategy.
But there is an opposite way of thinking, one that’s followed by the most successful leaders. They ask, What is the how of money making in this business? How does that how fit with the shifting environment? Is there a misfit? Are you expecting a misfit?
S+B: Once you begin to answer those questions, how do you act on them?
CHARAN: There are four component questions to ask about your organization: How should your strategy transform? How should your operating activities transform, whether or not you have a shift in strategy? To accomplish a transformation, what shift in people and leadership is necessary? And what shift in organization processes must you facilitate?
These are the four components of how to make money: strategy, operating activities, people, and processes. When you confront reality, you may have to make changes in one of the four, two of the four, three of the four, or all four. To confront reality, you start with the selection of the mix of financial targets. You see how they link to the external environment. If those targets are not being met, you ask the question, “What’s going on in here?” A leader has to determine when not to change, when to change, and to what extent to change. Then you determine which of the four internal organizational components have to be changed, and in what sequence, to meet those goals.
Wall Street Wiles
S+B: Just as Execution implied in its title that senior executives had somehow forgotten how to execute, Confronting Reality by implication says people lost their business savvy. What happened?
CHARAN: One factor was Wall Street. There’s an excess supply of capital available to fund just about any project. You prepared your plan, you got the funding. A lot of capital was coming into and from a variety of channels, such as private equity. And there was another factor: The banks figured out how to dump the risk taking into a big ocean. So when these things went sour, the banks didn’t really suffer. There was a shift in the responsibilities assumed for risk.
S+B: You term the result of this malinvestment.
CHARAN: The global dispersion of risk and faster, global, larger flows of capital — together, these trends promote commoditization and continuing excess capacity. That’s the difference.
S+B: One of the underlying themes of your book is that each company must find its own sweet spots on the spectrum from commoditization to differentiation, almost for each customer. For example, you talk in the book about Thomson Financial. Part of Thomson’s success was developing seven integrated solutions packages that could be tailored for each customer.
CHARAN: It’s very important. The key is you cannot rest on the laurels of your current differentiation. The whole history of business is about bringing things to people at cheaper prices. That’s commoditization. So you have to have the leadership, the organization, the processes, and people inside to allow differentiation to continue in the face of commoditization.
S+B: Which creates a need for continual change, because companies have increasingly limited pricing power.
CHARAN: Very limited.
S+B: It creates a terrible spiral for so many industries.