Confronting the reality of new business model is the essence of this book.
A business model consists of 3 components:
1. External Realities: 1) Financial history of your industry, 2) Overall business environment, 3) Customer Base, 4) Root-cause analysis.
2. Financial Targets: 1) Operating margins, 2) Cash flow, 3) Capital Intensity, 4) Revenue Growth, 5) Return on investment.
3. Internal Activities: 1) Strategy, 2) Operations, 3) People, 4) Organization.
Harmonizing the three components by repeatedly reviewing them as you add new information, and analyzing the subsequent changes in relationships among them.
The author uses 3 technology companies as examples: EMC, Sun and Cisco. Of course, you can probably predict what the bad apple is among the 3. Sun, of course. The author cited Scott McNealy’s slow response to the structural change of the business model.
The authors also credited Nardelli for doing a banged up job at Home Depot in remaking Home Depot’s business model due to the rapidly dwindling cash position. He was able to centralizing purchasing to cut costs, improve the management quality, install the information systems needed to manage inventory more efficiently. Of course, this book came out before Nardelli was removed from Home Depot as the CEO. The stock price of Home Depot did not go up that much during his tenure but he seems to have kept up Home Depot’s competitive position against Lowe’s.
In looking around corners chapter, they go over the tools for staying ahead. Some ideas are interesting:
– Look for the customer chain: all the way to the end users.
– Converse with people from different parts of the business, at a trade show, or at lunch with a supplier.
– GE’s strategy sessions – look for external changes and issues that seem relevant for the future then discuss the strategy.
How to condition your culture for reality:
– Pick a initiative to mobilize the organization and lead an initiative by learning the guts of the initiative yourself and then invest your time and energy in the initiative.
– Pick the right people to implement the initiative.
– Be courageous.
– Changes in rewards can add muscle.
What stands out from this book is how easy it is to tell people to confront reality and respond to them. Sometimes, the consequence is so dire that one may need to go through the normal grief process just to achieve the transformation. Having worked at Sun during the last 13 years, I saw how Sun went through the transformation of the roller coaster ride. The elephant was in the living room, everyone saw it but nobody wanted to do anything about it because it takes courage from the top to make the change. Sun is changing the business model to embrace the open source strategy. Whether this change will save Sun or not, it remains to be seen.