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 / Fall 2004 / Issue 36(originally published by Booz & Company)


Ram Charan: The Thought Leader Interview

CHARAN: Airlines, autos, paper.

S+B: You’d think that almost any business leader would want to throw up his or her hands and say, “Leave somebody else with the problem.”

CHARAN: But there are always profitable segments! There’s always a way to discern something from something else. Even in commodities. You’ll have to work very hard, you’ll have to fight for every inch of market space. But if there were no way to discern opportunities, why wouldn’t there always be equal market shares? There are always advantages to be gained: service, point of contact, delivery.

S+B: You and Larry Bossidy say that the business model enables a leader to define and confront reality. It comes from simultaneous and tenacious iterations of three elements: external shifts, financial targets, and internal operating activities.

CHARAN: That was one of Jack Welch’s strengths. His mind was always experimenting. He was always asking, What is the business model?

S+B: How important are breakthrough products or services in this conception of strategy?

CHARAN: Michael Dell personally told Larry that he didn’t have a vision: He was driven to it. His singular goal was survival. That was it. “How do I survive against these big guys?” And out of that came a philosophy, a concept. But that meant a huge amount of transformation involving the whole supply chain, which his competitors didn’t get. He wasn’t starting with a “strategy.” Operating activities were forcing the strategy. He’s saying, “I’m a mass guy; I’m going to sell direct and be the lowest cost.” But saying it does not get him anywhere. He needed to transform the operating activities — the supply chain.

S+B: In the new environment, what capabilities does a company need now that it might not have needed 10 years ago?

CHARAN: While we say you’re going to have to change more often — and make deeper change — you still have to have a resilient core gut of your business model. That’s what makes a Wal-Mart, a Dell, a Toyota, a P&G, a GE so special; they understand their core underlying business model.

Leaders need to have intellectual honesty to see that what worked in the past either might not be relevant in the future, or might no longer differentiate them, because competitors have caught up.

Take, for example, Joe Tucci of EMC. He quickly recognized that a single-trick pony — the high-technology, high-priced, high-margin business model — had become obsolete and was no longer differentiated after the bubble burst in 2001. He tenaciously iterated many times the three components of his business model and changed all four pieces of EMC’s internal activities. Results are impressive.

When you understand your core business model, you can determine where there needs to be and where there doesn’t need to be wholesale change. For most companies, the key processes are not going to go through major change. They are not adaptable. No matter what Dell does, the supply chain will still be needed. Now matter what Wal-Mart does in its business model, the linkage with suppliers will always remain a core competency.

S+B: I was very much intrigued by the story you tell in the book about James McNerney, who left GE to become CEO of 3M, because that story is largely about focusing on internal activity — not strategy — as the fundamental component for change. 3M had a great innovation capability, but it was too slow.

CHARAN: Jim is a very accomplished leader who’s mastered the three pieces of the business model. He recognized that the P&L and balance sheet were OK. The company had bright people around the world. He focused on taking performance to a higher level, concentrating on organization processes as a driver to make the change impactful. In most other cases, a new leader comes in and focuses on changing top people and strategy. Jim focused on the lever that mattered most.

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