STRATEGYA VIEW FROM THE TOP

CHAPTER 2

Erinn AdamsKunal PatelBrandon AndersonMatt Castleberry

STRATEGY AND PERFORMANCE

Good to Great: Why some companies make the leap… and Others Don’t by Jim Collins.

What Really Works: The 4+2 Formula for Sustained Business Success by Joyce, Nohria, and Roberson.

Conceptual Framework for Strategy and Performance

The Balanced Scorecard Role of Board of Directors

FROM GOOD TO GREAT

• Top Leadership– The attributes of top leadership are a significant

difference between good and great companies.– Level 5 Leadership is a common characteristic of

great companies.• Forms top level of a five-level hierarchy. • Display a mix of intense determination and humility.• Have a long term sense of investment in the company.• Financial gain is not as important as long term benefit

of the company.

FROM GOOD TO GREAT

• Nature of the Leadership Team– Level 5 leadership must be obtained before an overall

strategy can be developed.– With the correct management in the correct places,

management problems harmful to the company will disappear.

– Worth the extra time and money.• Willingness to identify and assess defining facts in

the company and in the larger business environment. – Have to keep pace with the changing marketplace and

trends in order to succeed.

HEDGEHOGS

• Metaphor to show the principle that simplicity can lead to greatness.

• Transformation from good to great is not from doing many things well, but by doing one thing better than anyone else in the world.

• Those who identify their “hedgehog concept” are rewarded with success.

• To determine your hedgehog concept:– Determine what the company can and cant be best at in

the world.– Determine what drives the company’s economic engine.– Determine what the company’s people are deeply

passionate about.http://www.jimcollins.com/media_topics/hedgehog-concept.html#audio=80

OVERARCHING ORGANIZATIONAL CULTURE OF DISCIPLINE

Organization where the managers and staff are driven by an unrelenting inner sense of determination.

Individuals function as entrepreneurs and have a deep personal investment in their work and the company.

Members stick to the script of the company’s “hedgehog concept”.

TECHNOLOGY

Businesses shouldn’t depend on technology to: Increase efficiency Reduce overhead Maximize competitive advantage.

Good to great companies approach technology with careful attention. Apply technology in relation to their hedgehog

concepts. Collins’ Ideal approach to technology:

“Pause-Think-Crawl-Walk-Run.”

FLYWHEEL EFFECT

Advantageous business cycle (flywheel effect). When companies make decisions that

reinforce their hedgehog competencies, this initiates positive momentum.

This results in a string of positive outcomes that energized and gain the loyalty of the staff.

DOOM LOOP

In contrast to the flywheel the doom loop can be described by: Reactive decision making. Extending into too many diverse areas of

concentration. Following short-lived trends. Constant changes in leadership and

personnel. Loss of morale and disappointing results.

CORE VALUES

Companies need a set of core values to achieve long-term success. The values can be open ended as long as the

team members are dedicated to the same ones. Netflix Values:

“Values are what we value. Real company values are the behaviors and skills that we particularly value in our fellow employees: Judgment, Communication, Impact, Curiosity, Innovation, Courage, Passion, Honesty, Selflessness.”

Extract from the Netflix “Reference Guide on our Freedom & Responsibility Culture ”

4+2 FORMULA

Study conducted of 200 management practices employed over a 10 year period by 160 companies. Companies outperforming others excelled at

four primary management practices: Strategy, execution, culture, and structure.

In addition they increased these strengths with any 2 of these four management practices:

Talent, innovation, leadership, and mergers and partnerships.

4+2 FORMULA

Results of study show: It doesn’t matter what particular decision a

company chooses to make. What matters is how a company

implements its decision. Ex: Whatever technology a company selects, it

needs to implement it flawlessly. Winning performance depends on more

than having the right strategy. You need to excel in six dimensions of

success all at once. A misstep in any of the six dimensions can

hinder a company’s performance.

EXCELLING AT FOUR PRIMARY PRACTICES

What does it mean to excel in setting strategy, execution, shaping culture, and forging structure? Executives have used

TQM (total quality management) Kaizen Six Sigma

Implemented by Motorola

The 4 primary practices, which most successful companies have demonstrated for more than 10 years. Strategy Execution Culture Structure

STRATEGY: DEVISE AND MAINTAIN A CLEARLY STATED, FOCUSED STRATEGY

A company must be clear on what strategy to use, and consistently communicate it to customers, employees, shareholders and other stakeholders.

Successful strategies tend to focus on growth. Usually doubling the size of the core business and

building a new business every 7 years. A clear success of an effective strategy comes

from a simple, focused value proposition that is rooted in deep, certain knowledge about a company's target customers and firm’s capabilities.

EXECUTION: DEVELOP AND MAINTAIN FLAWLESS OPERATIONAL EXECUTION

Having a flawless Execution is just as important as having a sound strategy.

How to execute? Successful companies consistently

exceed in customer expectations. Also increase productivity by twice the

industry’s average. Identifying which processes are most important to

meeting customer needs and focusing on the company’s energies and resources becomes paramount.

EX: Southwest Airlines

CULTURE: DEVELOP AND MAINTAIN A PERFORMANCE-ORIENTED CULTURE

Building the right culture is key . A business environment that entails a high

level of performance and ethical behavior rather than merely just a fun environment, will be successful.

A good business culture should: Encourage individual and team contributions Hold employees (not just managers) responsible for

success Compare themselves beyond competitors to an

even further benchmark.

STRUCTURE: BUILD AND MAINTAIN A FAST, FLEXIBLE, FLAT ORGANIZATION

High Performance companies try to eliminate unnecessary bureaucracy- extra layers of management, an abundance of rules and regulations, outdated formalities. When a company focuses too much on rules ,

regulations, and protocols can really restrict the growth and development within the company.

Winning companies strive to make their structures and processes as simple as possible, not only for the employees, but also the customers and vendors.

EX: IDEO – A design and Innovation consulting firm.

SECONDARY PRACTICES

Winning Companies complemented their strengths in the four primary practices, with superior performance in any two of the secondary practices.

Studies show that excellence in the the 4 primary practices and any 2 out of the 4 secondary practices, can make a company very successful. However, it makes no difference if a company excelled in all 4

secondary practices rather than just two; going beyond “4+2” was not rewarded.

1. Talent 2. Innovation 3. Leadership 4. Mergers and Partnerships

TALENT: HOLD ON TO TALENTED EMPLOYEES AND FIND MORE

Companies that focus on talent building dedicate major resources, including personal attention from top executives, to building and retaining an effective workforce and management team.

The best test of the quality of a company’s talent base is the ease with which any executive who leaves to join a competitor can be replaced from within.

INNOVATION: MAKE INDUSTRY-TRANSFORMING INNOVATIONS

Companies that excel at innovation are focused on finding new product ideas or technological breakthroughs.

Innovation encompasses more than developing new products and services; they also apply new technologies to their business processes, which can yield huge savings and sometimes have the power to transform an industry.

EX: Netflix

LEADERSHIP: FIND LEADERS WHO ARE COMMITTED TO THE BUSINESS AND ITS PEOPLE

Having the right leader can raise a company’s performance significantly.

Important Qualities of a CEO: Ability to build relationships with people at all levels

of the organization Inspire managers to do the same Spot opportunities and problems early

Effective leaders help their companies remain winners by seizing opportunities before their competitors do and tackling problems before they impair ongoing performance.

MERGERS AND PARTNERSHIPS: SEEK GROWTH THROUGH MERGERS AND PARTNERSHIPS

After innovation, pursuit of mergers and partnerships is the 2nd most popular avenue of growth.

Less then 25% of Mergers and partnerships are really successful.

Those who were successful, were able to do it by creating value in most deals they struck, generating returns in 3 years that exceeded the premium paid. Also, invested substantial financial and human

resources in developing an efficient, ongoing process for deal making

STRATEGY AND PERFORMANCE: A CONCEPTUAL FRAMEWORK

Corporate success increasingly depends on the willingness and ability of every manager to not just meet their own functional or divisional responsibilities, but to think about how their actions influence the performance of the company as a whole.

Focus should be on changing the organizational environment to encourage decision making that is aligned with the overall objectives of the company.

Developing the right organizational model thus requires identifying which activities are critical to achieving a chosen strategy, and then defining the organizational attributes.

STRATEGY AND PERFORMANCE

Purpose

Strategy Leadership

Structure

Systems Processes

People Culture

Performance/Control

STRATEGY, PURPOSE, AND LEADERSHIP

Strategy-Structure-Systems paradigm dominated role of corporate leaders for many years GM experimented with diversification

strategies Dominant for most of 20th century Successfully executing complex

strategy: Create right organizational structure Disciplined planning & control support

systems

CONTINUED

Global competition & technology revolution reduced effectiveness Principal strength became major weakness

Corporate leaders articulated broader, long-term strategic intent with clear sense of purpose

“chief strategist” to “chief facilitator”

CONTINUED

Sought ways to involve employees at all levels in strategic management process

Top executive agendas included: Organizational

momentum Instilling core values Developing human

capital Recognizing individual

accomplishment

Purpose

Leadership

Strategy

Structure

Systems Processes

People Culture

Performance/Control

STRATEGY AND ORGANIZATIONAL CHANGE

Structure, systems, processes, people, & culture are key to creating effective organizational change

Interrelated Why new strategy

requires change in all variables

Purpose

Leadership

Strategy

Structure

Systems Processes

People Culture

Performance/Control

STRUCTURE Adopted flatter organizational structures Goal: Create organizational environment that

allocates resources effectively and is naturally self-correcting

No “one right form of organization” Transparency is critical

Authority and responsibility need to be clear 5 dominant approaches to organization:

Functional Geographically Decentralized Strategic business units Matrix structures

SYSTEMS AND PROCESSES Support systems

Planning systems Orderly process, balanced internal/external focus

Budgeting & accounting systems Provide accurate historical data, set

benchmarks/targets Information systems

Analysis, internal/external communication Reward & incentive systems

Motivation and commitment

Process – systematic way of doing things Formal/informal Facilitate or obstruct change

PEOPLE

Expensive to replace knowledge & talent

Companies focusing on attracting, rewarding, retaining talent

Developing tomorrow’s skills key to strategic flexibility

CULTURE Culture is a shared system of values,

assumptions, & beliefs among employees Artifacts: visible or audible processes, policies, &

procedures supporting important cultural belief Shared values: explain why things should be as

they are Example: Microsoft

Supports culture of high energy, drive, intellect, & entrepreneurship

Basic assumptions: invisible reasons why group members perceive, think, and feel the way they do about operational issues UPS believes firm’s culture so important they spend

millions annually on employee training and education

BALANCED SCORECARD

Developed by Robert Kaplan and David Norton

Is a set of measures designed to provide strategists with a quick, yet comprehensive, view of the business.

Provides answers to four basic questions How do customers see us? At what must we excel? Can we continue to improve and create value? How do we look to our company’s shareholders?

BALANCE SCORECARD CONT.

Requires managers to translate a broad customer-driven mission statement into factors that directly relate to customer concerns Examples

Product quality On-time delivery Product performance Service and cost

CUSTOMER-BASED MEASURES

They are important but must be translated into measures of what the company must do internally to the customers’ expectations

These measures must be translated into operational objectives such as Cycle time Product quality Productivity Cost

BALANCE SCORECARD CONT.

Encompasses four management processes Translating a vision

Netflix’s vision- “to change the way people access and view the movies they love”

Communicating goals and Linking Rewards to performance

Improve business planning Gathering feedback

BALANCE SCORECARD CONT.

Vision- used to clarify and gain employee support for that vision

Communication- essential to ensure that employees understand the firm’s objectives and strategies

Rewards- direct means of measuring and rewarding contributions to performance

Business Planning- consists of a set of long-term targets in all four areas of the scorecard

Feedback- short term measurements to monitor progress in achieving the long term strategy and learn how performance can be improved

PERFORMANCE AND CONTROL

Methods used for measuring and evaluating performance at different levels in the organization.

Outcome control is principally achieved by altering the incentive structure for business units, executive teams and individual managers.

Behavior Control allows the company to directly monitor the behavior of specific business units, executive teams, or individual managers ( Used to enhance performance)

THE ROLE OF THE BOARD

To create a high performance culture the board of directors should Define its role, agenda and information needed Ensure that management not only performs, but

performs with integrity Set expectations about the culture of the company Formulate corporate strategy with management Ensure that culture, strategy, compensation and

controls are consistent and aligned Help management understand the expectations of

shareholders and regulators