Confronting Reality emphasizes that successful businesses are based on successful business decisions, which in turn are based on a management team having an extraordinary commitment to continually seek the truth about their business and their people in the business. The authors focus on the process of building a powerful and effective business model instead of trying to breath life into a stale or ineffective model.

The Basic Model for Confronting Reality

The basic model that Bossidy and Charan present for confronting reality has three components:

1. The externalities, or external environment
2. The internalities, or the internal capabilities and resources of the organization
3. The desired financial results that the organization wants to achieve

The externalities include several components that impact all businesses, such as: their market and their competitors. Externalities also include such factors as: the health of the economy, changes in technology, changes in the social world, the capacity of the industry, increasing globalization, the increase of regulation, the consolidation in an industry, etc. These factors have an extraordinary influence on the success of the organization. A rigorous confrontation with reality requires that these external components be identified and analyzed, using direct current information, to help understand the root causes of the dynamics of change.

Another important issue in analyzing the externalities requires looking at how these factors may affect your clients. They may not be affecting you directly, but are affecting you through them. There are three critical questions for you to ask as you look at your analysis of the externalities: What’s happening to the growth of your industry? Is there room for profitable growth? Is your industry becoming commoditized?

Internal realities are the assets and capabilities of a business: its people, systems, strategies, and passions. As you look at the internal elements of the model, once again, reality must be confronted. Many organizations touch on these when they do a traditional SWOT analysis for their strategic planning, in which they list their strengths. Too often businesses create an overblown list that includes just about everything they’re doing as strengths; confronting reality requires that you be a lot tougher. Usually there are two to four areas of real strength that have gotten your business to where it is; these alone must be listed. You must also ask two critical questions internally: Are your products or services truly unique? To what degree is commodization occurring?

The last element in the author’s model is the financial results that the organization could be, or should be, producing. Here we list things like growth, profit, cash flow and return on investment.

Bossidy and Charan present a powerful case that all three of these elements--externalities, internalities and results--must be vigorously linked together and subjected to constant examination and assessment. The only way to link or integrate these three fundamental elements in the business model is by rigorously confronting reality. They present strong cases and examples in their book of organizations that have regularly failed to make the connection between the three elements and have suffered dramatically as a result.

Singer Sewing Machine Co. experienced a significant decline in sales of their sewing machines in the 1970’s. Frontline salespeople reported that many women no longer wanted to sew. They simply didn’t have enough time or interest, and with limited time, the average woman preferred to play a poor game of tennis than to stitch a poor-looking dress. The president of Singer refused to believe this and simply demanded that the sales effort be intensified. This led, eventually, to Singer’s one-year loss of over nine million dollars, which was record setting in the year it occurred.

In the manufacturing arena, when building new plants in North America, a company should be able to make accurate predictions regarding the plant’s future performance. Yet we find that in the last ten years, after a new plant opens, on average only 20% of them have reached even a quarter of their original design capacity after operating for a full year. To think that over 80% of those decisions by experienced executives failed is an amazing statistic.

We find the same failure rate of about 80% in companies that are launching new products. In fact, a recent Business Week article on the stumbling, depressed, low-performing Coca-Cola business over the last decade points out the failure of not confronting reality. The consumption of beverages in the United States has dramatically shifted away from carbonated beverages. Because Coca-Cola resolutely refused to confront this fact it has lost market share while stock price, profitability, and growth have plummeted.

Over the last few years corporate boards in America have been in the news repeatedly for two reasons: extraordinary ethical failures and extraordinary losses in value. When Enron collapsed, there was a great outcry about how such a thing could have happened; how so much of the investors’ money and the employees’ money in pension funds and investments could be lost. The question that arose was, “How was it possible for a corporate board and the experienced business leaders of the company to make such grievous errors?”

All of these examples, both at the executive team level and the corporate board level point out the extraordinarily low success rate of corporate decision-making among experienced, trained executives. While business leaders have a reputation for being hard-nosed, focused only on facts, and driven by the bottom line, the authors demonstrate how rarely this is true. Most business people, especially leaders, have extraordinary difficulty in sufficiently confronting realty in order to build a successful business plan.

The Oakland A’s and the Hidden Insights

One of the most dramatic examples of successfully confronting reality that the authors use is the baseball industry. More facts and figures have been collected in baseball over more decades than almost any other sport/industry in the world. So we would assume that baseball scouts who are looking for new players to recruit for their team would have adequate information to make good choices. Billy Bean of the Oakland A’s has pointed out that this is not true. For years, baseball executives have been making serious errors in confronting the reality in recruiting ball players. The traditional wisdom in the industry is that you want to recruit players who have great batting averages, hit lots of home runs and make spectacular plays in the field. What Billy Bean pointed out is that these statistics are not linked to winning. He developed a number of alternative statistics. One of them is the ability of a player to take a full count, in other words, for a player to go to bat and take the largest number of strikes and balls before getting on base or striking out. He discovered that players who take full counts are much more likely to get on base with a walk. They also wear out a starting pitcher quicker so that the relief pitcher comes into the game sooner, thus giving their team an advantage.

By using such statistics and truly confronting reality, the Oakland A’s have recruited teammates with whom they have managed to win more games and be in more playoffs per dollar spent than any other professional baseball team. The data had been there for decades, yet no one confronted reality with rigor. No one asked the tough questions. Everyone assumed that great hitters won games. False!

The Process for Confronting Reality

More than anything else, according to the authors, this process requires a high level of integrity and persistence in the search for truth and the connectivity between the three major elements. It starts with the examination of your current business model.

Be honest:

• Is the model working?
• How do you really make money?
• Is the model financially viable?
• Is it producing?
• Are things getting better?

The next step is setting realistic financial targets, adjusted to reality. This reality includes an honest analysis of the external environment along with an assessment of the internal strengths of the business.

The final step in the process is iteration, i.e., repeatedly examining and questioning the previous steps. For example: set financial targets, assess the external environment, adjust the internal activities, set targets, assess the external, and adjust internally. This constant reiteration is the cornerstone of Bossidy and Charan’s model.

7 Habits of a Highly Defective CEO

In the book, Bossidy and Charan also hint at a few traits of a highly defective CEO and we have expanded on them based on our experience.

1. Arrogance. Easily identified. Arrogance is the perpetual overconfidence in one’s own views and decisions. Arrogance appears to be nurtured by education. Generally, the more degrees after the name, the more likelihood that arrogance can set in - doctors, college professors, CPAs, engineers, and attorneys top the list. In our consulting experience, it has always been more difficult for them to accept new ways of looking at or thinking about new things.

2. Wishful Thinking. It is a childish belief that “if I think it, it is so”. This defective habit seems to be strongly supported by the self-development movement, which focuses on goal setting and self-affirmations. At times, the businessperson’s attempt to be a visionary and to set challenging goals for others is simply an expression of childish wishful thinking. This is not to say that truly visionary and challenging goals should not be set, but they need to be based on reality.

3. Insecurity. Fears of looking bad, failure, embarrassment, shame, making waves, and confronting others are traits of an insecure CEO. To put some icing on this, consider the fear that one may have of refusing to face a problem without having a solution in mind.

4. Denial. Denial seems to protect us from experiencing the discomfort of confronting reality. It appears in many forms, such as: avoidance, changing subjects, humor, selective memory and selective hearing, or silence. Denial protects us from experiencing our fears.

5. Control. There is a belief that a leader should be smarter and more competent than everybody else and more in control of everything. The desire to be in control, or at least look in control, blocks any new input and resultant learning from others. In fact, one of the assumptions that underlie the desire to be in control is that nobody else has anything of value to contribute.

6. Distancing. This is the process of shifting responsibility to others in order to protect oneself. The signs of distancing range from anger, accusation, annoyance and criticism, to defiance, disapproval, sarcasm, threats, and sometimes violence. These are all ways of creating a certain amount of distance from others while simultaneously absolving oneself of blame.

7. Isolation. Isolation from information and people who might nurture or enable learning sometimes happens simply through the complex areas of management and information systems. Sometimes CEOs purposely seek isolation by shutting out information and people by simply walking away or by resorting to: hobbies, over-work, fantasy, or more destructively, alcohol.

All of the 7 Habits of a Highly Defective CEO are the opposite of those habits that drive a leader to take responsibility, to learn, and to understand at a deeper level.

For Those Who Buy The Book, But Are Not Speed Readers

Here’s our outline of the key parts of Confronting Reality and the pages we would encourage you to read.

For the minimalist reader:

Introduction
Part I, pages 1-12
Part II, pages 73-77

If you’d like to read a little more, here’s how to choose:

Chapter 1 - Good war stories, but not necessary.

Chapter 2 - Takes a very broad sweep of some of the change factors that are impacting businesses in today’s world. Most of you will be familiar with these.

Chapter 3 - A history of the five different eras of management from the 50’s to the 21st century. Not particularly necessary for most of you.

Chapter 4 - Goes into the new model for confronting reality and is worthwhile reading.

Chapters 5 through 9 - Are all examples of business that have or have not confronted reality. Chapter 6 is an excellent read for your management team to reflect on and ponder. Chapter 8 talks about a company - 3M - which began confronting reality preemptively, before the plateau and before the pain set in. And lastly, in Chapter 9, you’ll find the most proactive approach to confronting reality by the Thompson Corporation. Their ability to confront reality before the plateau even began enabled them to have an extraordinarily easy and effective transition to the next stage of their company’s growth.

Chapters 10 through 12 are mainly summarized in this review.