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Best Business Books 2004: Strategy

Successful companies also develop strategies that meet customer needs, while mobilizing customers to participate in discovering their needs and creating superior experiences. Finally, successful strategies are developed not only in light of external threats and opportunities, but also with an eye toward how a company’s strategy affects other firms — changing the rules of the game, accelerating (or hindering) the growth of distribution channels, shifting profit pools in an industry, and discovering unmet customer needs.

Creating a strategy integrated along these multiple dimensions is a difficult intellectual challenge, akin to solving dozens of simultaneous equations, only harder. Real-world managers meet the challenge by developing strategy iteratively, working back and forth across the four aspects of strategy — internal activities, financial results, customers, and external results — until a coherent strategy is created.

Bossidy and Charan’s Confronting Reality offers the best description we’ve seen of how real-world managers develop integrated strategies. The heart of effective strategic management, they argue, is “an organized, rigorous way of looking at the health and profitability of a business, now and in the future” — what they call a “business model.” But unlike the meaningless way this term was tossed around during the dot-com craze, when Bossidy and Charan say “business model” they mean something specific and powerful.

For them, a business model is a mental model that logically breaks down the many elements that make up a business, from its markets to its income statement to its leadership elements; the mental model groups the elements into three components — external realities, internal activities, and financial targets — and then analyzes how all the elements are linked. They write:

The business model starts with a logical breakdown of the many elements that make up a business, from its markets to its income statement to its leadership development programs. These group into the model’s three components. The first is the environment your business lives in. The second includes your financial targets. The third includes the activities of the business: strategy formation, operating activities, selection deployments, and development of people, and organizational processes and structure. Iteration is the process of harmonizing the three components by repeatedly reviewing them as you add new information, and analyzing the subsequent changes in relationships among them.

It is also an early warning system for real-world changes that pose threats or provide glimpses of opportunities. The business model helps you understand whether the ups and downs every business experiences are the result of cyclical change … or something far more serious … that can have a permanent impact on the profitability of any business or an industry.

Our one critique of their business model concept is that it treats customers as merely an element of the external realities, failing to recognize the increasingly dynamic relationship between a business and its customers. That said, Bossidy and Charan’s construct demonstrates that managers can estimate the likely impact of alternative actions, and guide the iterative development of a strategy. More dynamic than backward-looking analysis, and much more effective than “just do it” experimentation, the business model is central to a manager’s effectiveness.

The authors believe that skill in defining and redefining the business model is more art than science: It requires the kind of savvy and business judgment innate in people with management potential — part analysis and part intuition, honed through experience. They advise young managers: “The earlier in your career you start to develop and practice your mental facilities in this discipline, the sharper your judgments will be as you advance.”

Although experienced managers may find little that’s really new to them in this book, they’ll do well to be reminded of the central theme of Confronting Reality:

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