CHAPTER 1

When Reality Bites: The Stories of John P. and Lou G.

The most widespread unrealistic behavior when the game changes drastically is to violate the First Law of Holes (when you're in one, stop digging). People redouble their efforts to do what they know best. They often achieve heroic results-which are, alas, almost as often pointless, because they fail to confront the new realities.

For example, many managers facing competition from abroad are still fighting yesterday's war. That's the one the Japanese started with their efficient manufacturing processes. Today even the Japanese can't win it. Doubling your productivity is a wonderful accomplishment, but it does not confront reality because it won't save you when your competitors have global supply chains with costs that are a small fraction of what you can hope to achieve in your home country. Services are now in the equation too. Customer support, back-office operations, product development, and even some segments of R&D can be as outsourceable as factories.

Consider John P., a business unit leader we know. In mid-2003, John and his top managers were preparing the 2004 strategic plan for their $500 million division, which made protective coatings for a highly specialized industrial market. John had run the division superbly for more than five years, and was considered a candidate for senior leadership of the parent company. He knew operations, and had good relationships with his customers.

Recently those customers had been telling him that their sales were down because of competition from abroad. They allowed that John's products were the best on the market, but they were under tremendous pressure to reduce their costs, and they expected all their suppliers to do the same. John took their message seriously, and told his people what he'd heard.

John's team agreed they could do a number of things to cut costs. They worked out a plan to close one of their four U.S. plants, consolidate three European plants into two, tighten other expenses wherever they could, and increase R&D spending to further distance their product from the competition's. Based on past experience and on what everyone present at the meeting knew, the plan looked realistic.

Then the new CFO spoke up. He'd joined the company only recently and was seeing the issue from a broader perspective. "From my point of view, you appear to be heading down the wrong track," he said. "Your recommendations would be good if the problem was our traditional domestic competition. They might satisfy the customers in the short term. But I know for a fact that two of those customers have already started moving to China. The others will undoubtedly be doing the same soon. Don't they expect us to reduce our costs just as significantly? Closing a U.S. plant, consolidating in Europe, and cutting costs by a few percentage points won't do that."

John looked around the room and noted that the other members of his team seemed just as uncomfortable as he felt. "I'm not sure what to do," the CFO continued, "but I urge you to consider the pros and cons of moving the whole operation to China or licensing our technology to a China-based supplier."

John knew that lots of businesses were outsourcing to China these days. Still, the idea stunned him. It just didn't make sense for this company.

"Mike," he said to the CFO. "This is not something we need to do-or even necessarily can do. You surely know that a lot of our differentiation comes from the application process. That's all about proprietary techniques and human experience. How could anybody duplicate that elsewhere?

"But let's suppose we did move...

 

Confronting Reality by Larry Bossidy
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