October 20, 2004
News & Opinion: Confronting Reality: Ram Charan Interview
Q: Would this book have been different if written five or ten years ago?
Charan: Yes. That’s because we have significant change underway. There are periods, such as now, where you have unidirectional change. Everything is changing. Starting in March 2000 when the Federal Reserve began to change high interest rates, combined with the dotcom era and other key factures you are seeing a stretch period starting then and now with a different kind of a change. And business leaders have to anticipate and perceive the nature of this change, and then either take advantage of this dynamic or adapt to it. We are trying to stimulate this fundamental skill in every manager. In the past you had most people just saying that change is everywhere. This was largely exhortations on their part. In our book we take you through the nature of change in a granular way and give you hooks to dissect this change. We don’t just say that significant change is upon us. We tell you what needs to be done about it—and that is to confront reality,
Confronting reality means recognizing new opportunities or an extreme threat to the business you are in. One such opportunity is iPod. The music industry faced issues such as piracy. And Steve Jobs took a hard look at this and created an industry from it. Another extreme involves the company Thomson, which realized that its core business, the paper industry, was less attractive than it had been in the past, and so it sold out at the peak of the market. This enabled the company to transform itself and in the process double sales and growth.
Our purpose with this book is to provide tools and insights that enable all managers to see the business from both 50,000 feet and 50 feet.
Q: Most business books argue that change is everywhere and so you must look for the next great strategic inflection point. Isn’t this essentially telling people to apply quantum physics in a universe that is largely Newtonian?
Charan: Over the past 35 years working with more than 500 companies I have seen many many outsiders telling people that they need to make quantum change. But if you make a change of this nature every day you will never have the energy or focus to execute anything! The real issue is knowing what to change and when to change—understanding the timing and magnitude of the key dynamic. The most crucial element of leadership is judgment. Consider A.J. Laffley of Procter & Gamble. He has taken a very resilient and consistent approach to the growth of a business. He inherited a company in which certain products and operations were not in very good shape, but he did not respond by making a quantum change. Instead he exercised judgment, showing that he had the skills and temperament to determine the timing and scope of the necessary changes. Exceptional leaders can sift through the structure of change and not be carried away by fads.
Q: Where does culture fit in? Doesn’t a corporate culture often drive leaders away from confronting reality?
Charan: Yes, and this brings up one of the two most critical things a CEO does, which is select the right people and create the right culture. The ability to confront reality should be an important criteria for forming the top team. The top team needs to be connected with the outside world, particularly with the customers. They need to understand what is going on with related industries and with key trends. Through the process of perception and dialogue the CEO and his direct reports sets the agenda for the company. If you don’t have reality at the top level you can’t get it at the company as a whole. This links to the second critical task, of setting the direction of where to take the company.
Culture is often too ethereal and high-level. We need to make translate the mission into operational practices. Values must reflect behaviors. And a key behavior is a realistic assessment of the business activities of the model. The four components of the business model are strategy, people, operating activities, and organization. When you go to people and organization that is where the values are reflected, where the behaviors are reflected. Leaders must always ask the question of whether the big goals can be actually be achieved—how to make them operational rather than strand people at a very high level.
The most important thing that a leader has is his or her credibility. All these inspirational goals that academics spout and CEOs need are fading for lack of credibility. The essence of leadership is building credibility and faith. Today transparency is very high. Analysts are smarter. People know if you are real or not. This means that credibility is the deciding factor and not hollow inspiration that comes back to haunt people.
Q: We’re in the midst of a presidential election at a time when the trade deficit and the federal deficit are creating concern among many financial veterans. Are the candidates confronting reality?
Charan: I think there are a couple of things worth noting here. Just as every business has a scorecard, so do the politicians. What is a scorecard? Whether it is for Bush or for Kerry, the scorecard is about getting elected, which means winning electoral votes. Their message has to be to win the electoral votes. That is the reality they are confronted with. That is how the whole democratic system is because the alternative is not better. Very few people understand the reality of those twin deficits. And in my opinion the worst part is not those two deficits but the fact that the global financial system lives on the edge. It is driven by complicated mechanisms such as derivatives, and if a crisis came it would be quite vulnerable. But the politician’s job is to get the electoral votes. Over time someone will win and have to deal with it.
About Dylan Schleicher
Dylan Schleicher has been a part of the 800-CEO-READ claque since 2003. Even though he's stayed on at the company, he has not stayed put. After beginning in shipping & receiving, he joined customer service and accounting before moving into his current, highly elliptical orbit of duties overseeing the ChangeThis and In the Books websites, the company's annual review of books and in-house design. He lives with his wife and two children in the Washington Heights neighborhood on Milwaukee's West Side.