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WHAT
MANAGEMENT IS
Book Author- Joan Magretta and Nan Stone
Book Review by -S S George
Dean, ICMR Case Studies and Management Resources
CONT...PAGE2
The Universal Discipline
Firms can be seen as systems that
create value for a multitude of constituencies. To understand and manage these
systems, they must use business models.
Magretta describes a business model as
"a set of assumptions about how an organization will perform by creating value
for all the players on which it depends, not just its customers." A good
business model is a story of how a business works. Take the example of American
Express, a company with one of the most successful business models of all time.
Its story began in 1892, when J. C. Fargo, the president of what was then a
regional freight express business, took a trip to Europe, where he found it
immensely difficult to encash his letters of credit into local currency.
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This led to the invention of the
traveler’s check, where for a small fee, travelers could buy a solution to this
problem. American Express had found a riskless
business, where customers paid up front for their checks. They also found
something more, which they had not anticipated – float. Since customers paid for the checks
before they used them, American Express was getting the equivalent of an
interest-free loan from its customers. Thus they could make money on selling the
checks, make some more from the float, and finally some more from the checks
that customers never encashed. They had found a brilliant business model - a
model that has been a success for over a hundred years.
Business models are easy to recognize
– after an organization has succeeded or failed. Before the fact, the success or
failure of a model can be assessed only on the basis of assumptions about the
behavior of people and organizations in markets. Essentially, every model is
based on a set of hypotheses about how the world works. The world here is a
world of markets on which the organization depends on for its success – markets
for talent, capital, supplies and products or services.
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The success of a business does not depend on its business
model alone. To succeed it must also have the right strategy. But what is the
right strategy? More fundamentally, what is strategy? Everyone agrees strategy
is important, but few people can agree on what it is. According to the author,
cutting away all the jargon, strategy is all about "how you are going to do
better by being different." It provides the basis for superior performance (in
comparison to competitors) and is critical to success. A good business model is
only the beginning of strategic thinking.
Though strategy is a common (and much
overused) term today, its appearance in management literature is relatively
recent. Interestingly, Peter Drucker's 1964book, Managing for Results, was
originally titled Business Strategies. This title was however rejected, because
people perceived strategies to belong to military or political campaigns, and
not to businesses. Although nowadays many writers liken business to war, there
are significant differences between the two. A war is always a zero-sum game. If
one side wins, the other side loses. While strategy in management is also about
winning, competition in business need not always be a zero-sum game. Most of the
time, there is room in the markets for more than one winner.
For a business, an effective strategy results in
competitive advantage, which in turn translates into superior returns. In recent
times, there has been a growing body of opinion that the notion of sustainable
competitive advantage, which provides the basis for continuing superior
performance, is obsolete in an environment of rapid technological change and
dynamic markets. While there is some truth to this assertion, the objective of
strategy remains unchanged – "figuring out how to hide from the competition, or
dampen it, or constrain it, so that you can earn superior returns." If you see
your business as a castle, earlier it was sufficient to build a moat around it
to protect it from competition. Now, you may even have to move the castle –
i.e., find new ways to differentiate yourself from the competition.
Strategy also involves tradeoffs. In a
tradeoff, when choosing one option, you forgo one or more alternative options.
Dell Computers followed a direct selling model to reach its customers. Its
competitors could not quickly adopt the direct selling model because of the
tradeoff involved – if they had tried to sell direct like Dell, they would have
disrupted their existing distribution channels and alienated their distributors.
A real tradeoff was involved here, and in such a situation, they couldn't have
it both ways.
Strategic thinking is hard because it is interactive. It recognizes that there
are potential allies and rivals in the environment, with whom cooperation and
competition are both possible. The motives of the potential allies and rivals
are also not always evident – they may be in tune with your objectives, or they
may be opposed to them. To think strategically then, you must put yourselves in
the shoes of the other players, and also look forward into the game,
anticipating the moves and responses of your competitors and allies.
To translate a business model and a strategy into performance, management
requires an organization. An organization is defined by lines: boundary lines to
define what is inside and what is outside; lines of the organization chart,
which show the division of the organization into working units and illustrate
the relationships between the units; and lines of authority , which determine
"who gets to decide what."
Which comes first – structure or strategy? This may seem like a chicken-and-egg
question. However, according to the author, "the design of an organization is
implicit in its strategy, so that it's sometimes hard to tell where strategy
leaves off and organization begins." Organizational structures are designed to
help organizations achieve their objectives. But since strategy is dynamic,
organizational structures must be flexible. This explains the radical and
repeated organizational restructurings that have convulsed much of the corporate
world in the last two decades.
The Aravind Eye Hospital in India is an example of a successful nonprofit
organization with a structure designed to support strategy. The hospital has
devised an efficient, standardized, assembly-line process to carry out cataract
surgery, so that the operation can be performed on a large number of patients at
an extraordinarily low cost of around $10 per patient.
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