Best Business Books 2004: Strategy
The Crucial Link to Execution
Great strategy, poor execution” is the excuse most frequently offered by the CEOs and boards of directors of unsuccessful companies. The last decade provides many examples. C. Michael Armstrong purchased cable companies to help the AT&T Corporation bypass local telephone companies to gain access to the home. Thomas Middelhoff committed to a digital future for Bertelsmann AG. Motorola, when it was led by Christopher Galvin, stood steadfastly behind the development of Iridium satellites to serve travelers’ needs for global cell phone coverage. Under Kenneth Lay, Enron spawned a series of knowledge-based businesses. All of these concepts sounded good; many reflected accurate insights into industry dynamics and appreciation of customer needs. Yet all were unsuccessful.
Is it fair to say that these companies had “great strategies” but simply failed to execute? The knee-jerk reaction to this question by many contemporary businesspeople would be “sure, it happens all the time.” But that’s just plain wrong. “Great strategy, poor execution” is, in fact, a pernicious oxymoron, rooted in ineffective concepts that sharply separate the formulation of strategy from its execution, and assume that there is a linear, sequential relationship between the two. These dangerous misconceptions come in four flavors:
The first views strategy purely as insight into industry dynamics and customer needs, evaluated on the basis of novelty, distinctiveness, analytical depth, or intellectual elegance — rather than on results achieved.
The second considers strategy as the long view, a step-by-step plan toward a comprehensive vision of a future 15 to 25 years distant — ignoring the reality that timing matters.
The third views strategy solely as the province of the CEO and the board of directors, which leaves others in the organization to address the grubby details of execution — and fails to mobilize the people who are best equipped to understand emerging opportunities.
The fourth misconception positions strategy as the first and most important driver of decisions about organization and operations — instead of basing strategy on the company’s core strengths and competencies.
So pervasive are these notions — and so widespread is the resulting separation of strategy from execution — that many companies today, in their efforts to increase value, seem to ignore strategy entirely, choosing instead to focus solely on execution. The highly visible failures of companies with poor execution have exacerbated this subtle twisting of the “great strategy, poor execution” oxymoron into a perilous move toward “great execution, no strategy.” Such an approach inevitably consigns a company to producing below-average returns to investors, leaving it vulnerable to competitors.
Although business gurus have documented the inadequacy of the linear strategy-first-execution-next view in today’s business environment, no one has provided businesspeople with actionable concepts they can use to replace the old thinking. A new framework is needed — one that views strategy as an integrated change program linking together multiple dimensions of strategy: external realities, internal activities and business processes, financial targets, and customers. We think of this as “integrated strategy.”
The three books we selected for this review make the most substantive contributions this year to the development of a new, integrated view of strategy: Confronting Reality: Doing What Matters to Get Things Right, by Larry Bossidy and Ram Charan (Crown Business, 2004); The Future of Competition: Co-Creating Unique Value with Customers, by C.K. Prahalad and Venkat Ramaswamy (Harvard Business School Press, 2004); and Strategy Maps: Converting Intangible Assets into Tangible Outcomes, by Robert S. Kaplan and David P. Norton (Harvard Business School Press, 2004).
A few of the best practitioners of strategy are already doing what theorists and authors are attempting to describe and formalize. Successful companies realize that internal activities, financial results, customers, and external results are all equally important — and that the linkages between these aspects of strategy are all bi-directional. For example, not only must operational priorities and organizational structure conform to the strategy, but an effective strategy also must be built upon superior organizational and operational competencies. Further, although companies can aspire to deliver financial returns that delight shareholders, effective strategies are grounded in realistic appreciation of likely financial results.
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:
Some people try to fend off disruptive forces of change by denouncing or ignoring them. But in this new environment, confronting reality has to become a leadership priority of the highest order — a nonnegotiable behavior for everyone at all levels of an organization.
Plenty of savvy businesspeople around the world are willing to try something different. As a result, we predict, most businesses will be required to change more and more often in the coming decade than they have in their previous histories. And if they stick with their old practices and behaviors, a great many won’t be able to handle the changes.
Confronting reality is especially important for CEOs of established companies, often shielded from the marketplace by layers of managers who put their own spin on events. Changing the business model that has made a company successful is difficult because the model itself defines the information managers seek, shapes their interpretation of information, and is embedded in a firm’s metrics. The most critical tasks for a CEO are to recognize when the business model needs to be significantly altered, and to lead the coordinated transformation of the company into its new reality.
Bossidy and Charan don’t offer managers the pragmatic, in-depth advice about how to develop and refine a business model that made their previous collaboration, Execution: The Discipline of Getting Things Done (Crown Business, 2002), so successful. Instead, they offer their perspectives about the business models and changes in business models at Cisco, Sun, Home Depot, and several other businesses. Although the case studies don’t offer the kinds of lessons that could help inform young managers, the description of how effective managers formulate strategy — and the reminder of the need to confront reality — make Confronting Reality a worthwhile read.
C.K. Prahalad and Venkat Ramaswamy argue that the future of competition will be to offer customers superior experiences by “co-creating unique value” with them. A focus on customer experience isn’t new, of course. Most companies recognize that ever more demanding customers, fast following by competitors, and increasing product parity make customer experience the next frontier. The contribution of Prahalad and Ramaswamy is to recognize that the delivery of superior customer experiences requires a fundamental change in company mind-sets and business models. Traditionally, companies have seen customers as passive — exactly as Bossidy and Charan depict. It has been up to the company to engineer products and value chains to serve customers’ needs. In contrast, Prahalad and Ramaswamy demonstrate that personalized experiences are created through the interaction of companies and customers: More-active customers and less-in-control companies “co-create” value, making customers a full element of the business model.
The authors use four case studies to illustrate the meaning of co-create. Amazon.com is a great example of a company that, instead of offering products, offers “experience environments that shape themselves to consumers’ needs and preferences, not the other way around,” they write. “As a customer, I get recommendations for books, music, and movies based on my tastes, on the selections of those who have purchased the same books I have, on bestseller lists, [and] on reviews by professional critics and fellow Amazon users.” Although Amazon develops the overall environment and contributes data and algorithms, its recommendations also reflect the customer’s past choices: What’s on each screen is co-created.
Another case illustrates how marketers can give customers the opportunity to contribute directly to product development — to improve product targeting, to generate excitement, and to accelerate penetration of new products. Prior to the release of Lord of the Rings: Fellowship of the Ring, New Line Cinema provided more than 400 unofficial Tolkien Web sites with insider tips, rough sketches of costumes, handwritten production notes, and other exclusive content, and then asked for feedback — co-opting the rabid fans and increasing buzz for the movie.
Communities of customers can enhance the experience of each customer, not just through product reviews and rankings, but by performing applications engineering. For example, a customer of Lego Mindstorms Robotics Invention System (a kit including a microprocessor to create toy robots) developed a new unauthorized operating system for the microprocessor and made it available to other customers over the Internet.
Most fundamentally, communities of customers can help shape the evolution of a company’s product lines and its entire business. EBay CEO Meg Whitman embraces the suggestions of the site’s communities of buyers and sellers, who exchange an estimated 200,000 messages a week concerning tips, problems, and possible site improvements.
Co-creation requires major changes in operations. Marketing, for example, must be organized with several “experience gateways”: one for customers interested in extensive help or involvement, another for users who want only a simple transaction, possibly one for users willing to purchase the product over the Internet, and a different gateway for users who want to touch the product or interact with a human being. Operations must be more flexible, capable of providing each customer with a consistently high-quality experience without a significant increase in costs. Management of risk is more important and more difficult, since customers are part of the experience of other customers.
One warning about The Future of Competition: It describes ideas that are still a work in progress. The ever-changing frameworks, the jargon, and the lack of specific guidance about what a company should do may frustrate readers. But it’s a valuable book, we think, because of the importance of the issues that Prahalad and Ramaswamy address and the power of their ideas.
Maps and Metrics
Strategy Maps, by Robert Kaplan and David Norton, continues the intellectual journey begun by the authors in their previous books, The Balanced Scorecard: Translating Strategy into Action (Harvard Business School Press, 1996) and The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (Harvard Business School Press, 2000). Whereas a strategy map is an explicit description of an organization’s business model that can be communicated throughout the organization and embedded in metrics, the process of creating a strategy map usually stimulates the refinement (and in some cases development) of a strategy.
The four elements of a strategy map are:
Financial Performance. This lagging indicator provides the ultimate definition of an organization’s success. Strategy describes how an organization intends to create sustainable growth in shareholder value.
Customer Value Proposition. Success with targeted customers is a principal component of improved financial performance. In addition to measuring lagging indicators of customer success, such as satisfaction, retention, and growth, the customer perspective defines the value proposition for targeted customer segments.
Internal Processes. These create and deliver the value proposition for customers. The performance of internal processes is a leading indicator of subsequent improvements in customer and financial outcomes.
Learning and Growth. Intangible assets are the ultimate source of sustainable value creation. Learning and growth objectives describe how the people, technology, and organizational climate support the strategy. Improvements in learning and growth measures are leading indicators for internal process performance, customer outcomes, and financial performance.
Objectives in the four perspectives are connected in a chain of cause-and-effect relationships: Enhancing and aligning intangible assets leads to improved process performance, for example, which drives success for customers and shareholders.
Strategy Maps offers checklists of potential objectives (and associated metrics) that will stimulate any manager’s thinking. Managers with an operational orientation can even use the strategy-maps process for
creating and evolving strategy to test and refine their business model. Kaplan and Norton, however, fail to consider the complex dynamics of shareholder value creation. We suggest using their objectives and metrics, but developing your own causality.
Kaplan and Norton’s strategy maps are consistent with both our concept of integrated strategy and Bossidy and Charan’s business model concept. Both include financial targets and customers; internal activities are subdivided into internal processes and intangible assets; and external realities are reflected in the specific metrics that companies select. However, where Bossidy and Charan err on the side of art, Kaplan and Norton come down on the side of science. Indeed, whether it’s intended or not, Strategy Maps can lead the reader to think that management is simply a mechanized process of identifying and pulling levers. But that’s precisely the reason these books have power when read side by side — think of them as stepping stones on the pathway toward integrated strategy.
Each of these books offers different value for different readers depending on their knowledge and needs. So we suggest selectively investing your time, depending on your context.
For students of business, these books are all must-reads, both to understand the state of play in the ongoing strategy dialogue and to become familiar with some lasting ideas. Aspiring managers should sample a chapter or two of each, delving deeper into the book that addresses the issues that concern them most directly. Senior managers and strategists will find little that’s new in any of the books, although they may find important reminders and some new avenues for further thought.
Whether you read these books or not, we urge you to keep in mind the insights we have highlighted from each, particularly Bossidy and Charan’s admonition: Confront reality. Every manager should continually question whether his or her business is adequately confronting reality. Will the traditional business model continue to generate profitability? Are traditional competitors changing their models? Are potential competitors testing new business models? Is my business in danger of losing its preeminence?
These are certainly the right questions, and we predict that as the study and theory of strategy evolves, future authors will continue to investigate and emphasize the interrelationships between the external realities and internal operations of businesses, eventually arriving at a consistent, unified theory of integrated strategy.
Chuck Lucier (email@example.com) is senior vice president emeritus of Booz Allen Hamilton. He is currently writing a book and consulting on strategy and knowledge issues with selected clients. For Mr. Lucier’s latest publications, see www.chucklucier.com.
Jan Dyer (firstname.lastname@example.org) spent 11 years at Booz Allen Hamilton, where she served as the firm’s director of intellectual capital and, as a principal, worked with corporations in a variety of industries. She has worked independently for the past two years, specializing in the strategic application of knowledge and learning.