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Executive Times |
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2005 Book Reviews |
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Confronting
Reality: Doing What Matters to Get Things Right by Larry Bossidy and Ram Charan |
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Rating: •••• (Highly Recommended) |
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Click on
title or picture to buy from amazon.com |
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Models I’m a sucker when it comes to
structure. I’m willing to apply a discipline to gain greater understanding,
to use a model to gain understanding. For me, Larry Bossidy
and Ram Charan’s new book, Confronting
Reality, presents a model well worth trying. The authors implore
executives to use a business model framework consisting of three interlocking
components: external realities, internal processes, and financial targets. A
realistic and ruthless analysis of all three elements will lead to business
success. By following their proposed methodology, Bossidy
and Charan point out that executives can uncover
the difference between cyclical and secular changes. Here’s
an excerpt, from the beginning of Chapter 3, “Redefining the Basics of
Management,” pp. 59-67: Every age of structural change
redefines management theory and practice. The post—World War II era, in which
modern management theory took shape, was an epic seller’s market, driven by
pent-up demand and an explosion of a new middle class. Production people and
accountants shared the driver’s seat as managers focused on achieving
ever-greater economies of scale through mass production. They ruled over a
growing new breed of professional general managers—people who (so it was
believed) could run any kind of business, and sell to anyone through
ingenious new tools of marketing. If one CEO can be said to exemplify the
era, it would be the legendary Alfred P. Sloan, who made General Motors the
world’s largest and most powerful company. Sloan not only brought modern
marketing to the automotive industry (“a car for every purse and purpose”)
but systematically and rigorously figured out how to organize a large
business enterprise with diverse product lines and multiple customer
segments. He pioneered the art of balancing decentralized operations with
centralized financial controls, which became the model for many other
companies, such as General Electric, as they got bigger. Sloan’s innovations
in organizational structure and processes can still be seen in large-business
organizations across the globe. From the late 1960s through the 1980s,
acquisition and dealmaking became a major activity
of corporate If good professional managers could
manage any type of business, why not? The great skill of top management was
in crunching numbers and doing deals to yield the best financial results.
Headquarters mainly contributed financial expertise; if a business delivered
the numbers, it was left alone. If not, staff people were sent in to whip
them into shape or replace them. Wall Street loved the idea of these
conglomerates. It boosted their stock prices and price/earnings ratios; the
higher valuations, in turn, helped them to acquire more and more companies. The era’s iconic CEO was Harold S. Geneen, the unrelenting number-cruncher who built ITT
from a $750 million telecommunications company largely operating outside the Through the 1980s it was back to
basics. Acquisition took a new turn: corporate raiders such as Boone Pickens
and Carl Icahn went after underperforming companies
and installed executives who could straighten them out. “As a management fad
they were never all that widespread, but they didn’t have to be,” noted
Fortune magazine, “just as executing one mutineer can sober up a whole
boatload of sailors, a few hostile takeovers left vast swaths of the American
CEO class in mortal dread of their secretary’s saying, ‘Mr. Pickens on line
one.’” Further sobriety was supplied by the
invasion of Japanese manufacturers. They had been quietly building a manufacturing
powerhouse by focusing on low cost, quality, productivity, and faster cycle
time. Their operational expertise won them market share and high marks for
customer satisfaction in some of America’s and Europe’s largest and most
prominent industries, including autos, machine tools, and consumer
electronics. It was the first time a global competitor had hit The rise of Japanese companies and
relative decline of GE’s Jack Welch symbolized the age,
transforming an uninspiring diversified industrial giant into a tightly
organized growth machine and management model. Measured by its market
capitalization, GE during Welch’s tenure became the world’s most valuable
company. The mid-nineties brought a boom of
immense scale and scope, fueled by technology, rising productivity, boundless
optimism, and unprecedented growth of risk capital driven by an
ever-expanding stock market. New laws governing retirement plans funneled
huge amounts of middle-income money into mutual funds for the first time.
Also for the first time, individual investors became a major force. The booming
stock market meant that large funds could invest hundreds of millions of
dollars in enterprises that ultimately failed, often without significant
effect on the investor. It also meant that technology companies could attract
talented young knowledge workers by paying them with liberal awards of stock
options. Looser antitrust enforcement allowed industries to consolidate,
turning the consolidators into growth stocks. Eager for productivity gains,
companies spent heavily on computers and related new information
technologies: by 2000, IT spending accounted for about half of Four mantras dominated management
thinking during the nineties: innovation in business practices, productivity,
speed, and creation of shareholder value. All were fine ideas, and they
increased shareholder value and produced more wealth for more people than any
previous era. But unintended consequences eventually undermined them. Easy money drove both real and
imaginary innovation, real in the sense of companies like Microsoft and eBay,
imaginary in the sense of Enron and WorldCom. The obsessive pursuit of
shareholder value distorted financial goals and compensation metrics of many
companies. It also produced a generation of leaders who were essentially
high-ranking financial public relations people, notable mostly for their
skill at persuading Wall Street of their abilities to generate double-digit
growth. And some new practices that arose because they ostensibly were in
tune with the New Economy—such as valuing companies based on their revenues
rather than on the money they make—proved to be fallacious. Bill Gates is the iconic figure of the
1990s. Call him the father of speed: more than anyone else, Gates made the
computer a tool for everyman, laying the foundation for the age of
information technology. His unique business model helped to change the game
from one dominated by a few players to a vast open market space that brought
ever-expanding choices and ever-falling prices. (You’ll find the details in
Chapter 5.) What Federal Reserve chairman Alan
Greenspan called “irrational exuberance” came to an abrupt end when the stock
market bubble burst. Now we are in a new era of structural change. It is at
least as distinct and significant as the previous four. And more than any of
them, it demands fundamental changes in the way leaders run their businesses. To take just one example, it’s almost
impossible to overstate the magnitude of the changes being wrought by information
technology. IT’s impact
may seem abstract when, say, you read about its contribution to productivity
growth. It gets real when you look at a room full of people with lap-tops,
and later see one of them sitting in a Starbucks connected to the flow of
business by Wi-Fi. The point is not just that she’s
working harder and longer than ever but that she could be communicating with
someone in PHARMA AT A CROSSROADS Past success has never guaranteed
future success: it’s an old adage, and never more true than now. Too much can
change too quickly. Even powerful and successful businesses—or whole
industries—can be battered or swamped by the storms of change. What industry would seem to have a
brighter future than pharmaceuticals, given aging populations and the growing
body of knowledge about the human body? But today the pharmaceutical industry
is at a critical crossroads as a result of worldwide competition, new technology,
and spiraling health-care costs that have generated public anger over drug
prices and portend increasing government involvement iii the industry’s
future. For more than two decades, pharma was a dynamic moneymaking machine without peer.
Between 1980 and 2000, worldwide sales rose from $22 billion to $149 billion.
With estimated operating income typically in the 20 percent neighborhood,
profits soared. During the nineties, the market caps of the ten biggest
companies expanded by $1 trillion. Everyone loved pharma—investors
for the double-digit returns, the public for the stream of blockbuster drugs
that made people’s lives better and longer, not to mention the professionals
and managers who worked in the industry. The industry’s business model was that
of a highly differentiated, high-margin producer. Years of intensive research
produced such drugs as Wamer-Lambert’s Lipitor, Pfizer’s Viagra, and Merck’s Vioxx,
and the high profits from those monster successes in turn drove more
research. In many ways pharma resembled the movie
business, with enormous up-front development expenses, numerous failures, and
the occasional big hit that carried everything. Margins in the industry are still lush
by anybody’s standards, but they are under assault from almost every quarter.
Several factors have conspired to change the landscape. For one, product life
cycles are shorter. In the boom years, drug-makers could count on long
periods of patent protection— well beyond the decades-long expiration
dates—by stretching and extending the patents with small differentiations.
But regulators have become far more willing to open the doors to competition
sooner, from both generics and so-called branded generics that deliver
similar pharmaceutical properties with minor variations that skirt the
patents. At the same time, more and more drugs
under development fail to make it to the marketplace. One reason is that the
industry has already hit the easy targets. The big research challenges that
remain, such as diabetes, depression, and various forms of cancer, are more
complex. The new competitive intensity has
raised marketing expenses and has begun to compress margins. It has also led
some drug companies to push the envelope in their marketing practices. State
attorneys general, for example, have charged numerous drugmakers
with billing governments at higher prices than the ones they charge doctors.
And, of course, the price of drugs has become an immense political issue. The
old pricing model depends on a tiered system, with the highest prices paid by
The industry has tried to strengthen
itself with mergers and cost cutting, and by reshaping its research
organizations. While consolidation has helped a few companies, larger scale
by itself doesn’t confront the structural issues facing pharma.
The moneymaking potential from licensed drugs, partnerships, and
over-the-counter markets is a far cry from the lavish profit streams of the
blockbuster era. Unlike such structurally defective
industries as airlines or commodity chemicals, the drug industry still has a
world of opportunity. Aging populations and advances in science should
guarantee both growing demand and supply. Most experts think the future lies
increasingly in drugs produced through genomics, or targeted to an
individual’s DNA. But finding the right compounds is an immense and costly
task. And gene-based drugs are typically aimed at highly specific conditions,
for which the market is measured not in millions of people but in tens of
thousands with particular genetic flaws. Pharma’s next era will almost certainly look
different from its past one, with lower growth and lower margins, requiring
changes in product development, cost structure, and marketing. In fact, what
the pharmaceutical industry needs is a new business model. As we will show in
the next chapter, only with an integrated analysis of their external
environment, their financial target, and their internal activities can this
(or any) industry successfully chart a new course and realize the substantial
opportunities that remain. The examples and stories in Confronting
Reality reinforce the key messages, as does the credibility Bossidy and Charan have achieved
from their past successes. There’s not much that’s new or faddish in this
book, and they make it all sound simpler than it is. Executives who like
structure or discipline or models will love Confronting
Reality and can push copies under the noses of colleagues who prefer a
more laid back, rationalizing approach to business. Steve Hopkins,
February 25, 2005 |
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ã 2005 Hopkins and Company, LLC The recommendation rating for
this book appeared in the March 2005
issue of Executive Times URL for this review: http://www.hopkinsandcompany.com/Books/Confronting
Reality.htm For Reprint Permission,
Contact: Hopkins & Company, LLC • E-mail: books@hopkinsandcompany.com |
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