Get Real

By CIOinsight  |  Posted 04-05-2005

Though he is officially retired, Larry Bossidy is still in a rush. At 69 years of age, the former Honeywell International Inc. CEO is direct, brief and occasionally abrupt. He moves the conversation along briskly, trying to hammer out inefficiencies, eliminate vagueness and do away with small talk. He is trying to get to what's real.

Bossidy is coauthor, along with Ram Charan, of the best-selling Execution: The Discipline of Getting Things Done, and the pair took on another back-to-basics topic in their latest book, Confronting Reality: Doing What Matters to Get Things Right. In it, they posit that realism is one of the most important qualities a business leader can possess. And that getting—and staying—realistic is not as easy as it sounds.

Bossidy has seen enough businesses succeed and fail over the course of his nearly five-decade career to know what he's talking about. In 1991, after 34 years at General Electric Co., he was named CEO of AlliedSignal Inc. When AlliedSignal Inc. merged with Honeywell, in 1999, Bossidy became CEO of the combined entity. Having retired in 2003, he now spends his days writing business books, consulting and sitting on the boards of JPMorgan Chase & Co., Merck & Co. Inc. and Berkshire Hills Bancorp Inc. "It's important to keep occupied," he says. Executive Editor Dan Briody kept Bossidy occupied for a few hours answering our questions. Here's what he had to say.

CIO Insight: What is so novel about the concept of confronting reality?

Bossidy: People in business will tell you that they've always been realists, but I think there's a strong sense of denial in corporations about reality. And it's becoming more compelling today because of three major things that have happened.

First, the arrival of globalization. Globalization makes it more difficult to get price. It compresses margins. It commoditizes products more quickly than ever before. And because of outsourcing, it makes the quest for jobs a worldwide fight. Globalization has kept inflation down almost across the world, but it's made the business world even more competitive.

The second mega event is the unprecedented expansion of credit. When I studied economics, there was a fellow by the name of Joseph Schumpeter, and he said the U.S. really flourished from creative destruction. When businesses failed, the supply-demand balance got restored, and as a consequence, excess capacity got taken out of the system. Today businesses fail—like the airlines—but they keep operating, and the restoration never occurs.

The third event is the arrival of the mega retailers: the Wal-Marts, Lowe's, Home Depots. Again, they've brought some value to the consumer in terms of lower prices, but they've left a lot of destruction in their wake. You know, the town hardware store doesn't exist anymore. And the same is true of some other businesses. It may surprise you to know that Wal-Mart is the biggest jeweler in the country. Never mind groceries or toys, where they also dominate. And they're taking a big position on books, too. They've disenfranchised a lot of businesses. So you better figure out how these events are going to impact you, and you better do something about it in advance of it happening.

If you wait too long, you could end up with what we call structurally defective industries. These include the big airlines and the commodities—steel companies, commodity chemical companies, rubber businesses, automakers. They haven't confronted some of these realities, and now they're in a very difficult position, with fewer options than they might have had, had they made this realization a number of years ago.

With all the difficult trends affecting global markets today—pricing pressure, global competition, mega retailers—is this a bad time to be in business?

No, I think it's a great time. It's the best time to be in business. All these things are occurring, but if you can do something different, if you can differentiate yourself, your product, there has never been a chance to be as successful as there is now, because of the size of the market you can serve. So it isn't a bleak outlook at all, but the reality is that it is going to be tough.

If this convergence of events is so unprecedented, how can you effectively assess the external realities and take action? Where is the point of reference?

We've put a model in the book. If you're interested in finding reality, we ask you to think about it in four ways. One, identify the external realities of your business—what industry are you in, how fast is it growing, who are your competitors, what's their profitability compared with yours, what does a root core analysis say of the differences between you and your competition, how's your customer, how healthy are they, and what's the regulatory environment?

And we also say, "Look, in order to get this right, even if you're running a gas station, as opposed to a major corporation, go out and ask some people other than those who work for you. Get a good, sound case to make sure you understand the environment you're in."

Take GE's engine business. There are lots of people who are experts in the airline industry—some come from the military, some are consultants—and they brought all these people together with the GE people, and they had a good, robust discussion about what was going to happen in the airline industry and how that might affect GE's engine business. After a couple of days, they figured out what the trends were—not only how to understand them, but how to take advantage of them.

When that's done, the second part of the model is to identify your financial aspirations: What are your revenue growth goals, earnings growth goals, and cash flow goals? Third, assess your internal reality: What are the strategies you're going to use to take on this environment, how are your people compared with other people in the industry, what's your organization like? In other words, how do you go to market?

And the fourth piece is the iterative process, asking yourself: How do these three things fit together? If you say you're going to grow 10 percent and the industry's only growing 2 percent, there's a mismatch. The answer gives you reality, and you can build on it if you don't like the answer. But at least you know you're going to have to do something in order to change it.

How does the iterative process you describe work?

It makes sure the first three components—external realities, internal activities and financial targets—are in sync. So many business plans are dead on arrival because they don't fit together, they present unrealistic assessments of an environment that is very different from what history has shown. Or, on the internal side, people assume they're going to have a technology breakthrough, even though they've never had one. So the iterative process makes you go back and continually test.

So many times people's emotions get in the way, and as a result, they don't wind up with a product that's useful.

Is there no place for emotion in business?

There is. And for passion, too. But they both need to be tempered. They have to face the test of reality. Great people get things done because of their commitment, their passion, their emotion. That's all good, but it has to be contained.

What do you think is the most common unrealistic outlook that businesses are suffering from today?

Growth. I would say that people project growth rates that they cannot attain. Everybody thinks they've got the newest whistle, and as a consequence of having super growth plans, they tend to staff up and their costs get too high, and then it's a steady decline.

If you think you have a good marketing plan, you get emotionally attached to it, and you're committed to it, whether or not it's got any rationale. I've looked at a thousand business plans in my life, and you don't want to discourage people, but you have to point out, "Look, you think you're going to grow 15 percent in an industry that grows 1 percent a year? Yeah, you might have something a little bit better, but I don't think it's that much better."

And so you encourage people to go talk to customers, make sure they share your enthusiasm, that it's not just a product of you and your group.

You talk about the difference between cyclical and structural market shifts in your book. How do you distinguish the two, especially in the early phases, when it is most important?

Let's say you own a newspaper, and sales are down 15 percent, but that's relatively consistent with the newspaper business in general. Now you have to ask yourself the question, "Has this come about because there's an economic problem, that people can't afford the papers? Or is there another medium that people are using to get the news?" If it's the former, if it's a question of going through economic hard times, it'll probably come back. If newspapers are getting displaced, it's not going to come back, or at least it's not going to come back with the same degree of vigor that it has in the past.

So you've got to make sure you understand why it's going down, and then decide whether it's structural or cyclical. A lot of wishful thinkers, as you know, call all downturns cyclical, and they keep waiting for the market to come back.

Speaking of wishful thinkers, is there any amount of realistic thinking that could have avoided what happened with the tech bubble?

Oh, absolutely. We had grown men buying stocks for ridiculous prices. I had some losses too, and I consider myself a realist. But corn doesn't grow to the sky—never has, never will. There were some good companies in there. Obviously, eBay continues to flourish, and Amazon's done well. Google has certainly been remarkable. But that's three out of thousands. A realistic assessment would have kept us out of this.

But when you're caught up in a mania like that, can a realistic thinker, a leader of a company, really buck the trend?

It's a great question, because your board members would look at you as though you were a dinosaur, your employees wouldn't be happy because you weren't getting on the bandwagon, and shareholders would think you missed it too, so it does pull you along to some extent. The answer is that you probably have to go along that path a little bit, but not overcommit yourself. Don't bet your business. You know, even if you're stoic and right, you may not be around to be proven right.

Is outsourcing one of those emotional issues that can obscure reality?

Companies will be left behind if they don't outsource. Because of globalization, you have to be competitive on a worldwide basis. Now I'm not saying the flower shop down the street has to be, but I'm saying any established business of some size has to go to the place where it can be the most efficient.

Now I don't think that's the end of the story. The Lou Dobbs story says, "All you're doing is exporting jobs out of America." But as you know, this country has been the biggest developer of jobs in the history of the world. So jobs are different today than they were 20 years ago. They're going to be different in 20 years than they are now. But I don't think it's a bleak outlook. I think the composition changes.

What's the reality facing CIOs today?

How do I continue to build capability without making enormous investments? Good CIOs with whom I've worked are never ahead of the curve on equipment, and they don't get too far behind. In other words, they understand the pacing, and they continue to search for software that can make their systems more effective.

Without spending too much . . .

Without spending fortunes.

Is that realistic?

Well, no, it hasn't been. You can say this for CIOs: The last ten years there's been a better return on CIO investments than before, and that's because the boxes have come down so much in price.

What role should the CIO be playing in this rapidly changing business world?

CIOs are trying to establish interconnections across the world now in businesses. You have call centers in India, you might have R&D in China, etc. So the demand to connect these things has never been greater. And they have to understand supply chains much better than before. The CIO's job is broader now than it's ever been. They're involved in the full business. And they should be, they should be. So the opportunity has never been greater, and the demands have never been greater.

How much of a say should CIOs have in the boardroom?

They shouldn't have much in the boardroom, but they should have a lot on the CEO's staff. They should have an equal contribution as that of marketing and finance and manufacturing and sales, because their input is just as important as any of the others. There's always been a lot of discussion about whom they should report to. They should report to the CEO. They did to me.

Click here for our Feb. 2002 article on Larry Bossidy