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StrategyA View From
The Top
Prentice Hall
2-1Copyright © 2009 Pearson Education, Inc.Publishing as Prentice Hall
Chapter Two
Strategy and Performance
Cornelis A. de Kluyver
and
John A. Pearce II
Third Edition
Jim Collins, Good to Great: Why Some Companies Make the Leap…And Others
Don’t, 2001, Harper Collins; and Jim Collins and Jerry I. Porras, Built to Last: Successful
Habits of Visionary Companies, 1994, Harper Collins
William Joyce, Nitin Nohria, and Bruce Roberson, What Really Works: The 4+2
Formula for Sustained Business Success, 2003, Harper Collins
Two Studies on the Link Between Strategy and Performance
The Collins’ Studies
• Started with 1,435 good companies
• Found the companies that became great based on certain criteria over 40 years of performance– Company had to show good stock
performance, capped with a transition point
– After transition, company had to generate stock returns that exceeded general market at least 3 times over 15 years independent of industry
Being Good Is Not Good Enough
• Vast majority of good companies remain just that – good, not great
• 11 “great” companies were identified – $1 invested in the general market since
1970 would yield $56 by year 2000
– $1 invested evenly upon the 11 great companies would have yielded $471 by year 2000
• All 11 companies performed decently, until a transition occurred
Collins’ 11 “Great” Companies
– Abbot– Circuit City– Fannie Mae– Gillette– Kimberly-Clark– Wells Fargo– Walgreens– Philip Morris– Kroger– Nucor– Pitney Bowes
What Factors Do Not Lead to Greatness?
• Larger-than-life celebrity leaders– Negative correlation– 10 of the 11 good to great CEOs came from
the firm
• Good to great companies did not principally focus on what to do to become great– Equally focused on what NOT to do– And also what to STOP doing
• Technology can accelerate a transformation, but cannot cause a transformation
What Factors Do Not lead to Greatness (cont’d)
• M&A played no role in igniting a transformation from good to great
• Good to great companies had no specific action or program to signify their transformations– Only in retrospect did the magnitude appear– No outlandish, over published event or change
• Good to great companies were not in great industries, some were in terrible industries
The Flywheel Cycle to Greatness
• Level 5 leadership• First who…
then what• Confront the brutal
facts• Hedgehog concept• Culture of discipline• Technology
accelerators
Buildup
Break-Through
People
Thought
Action
The Importance of Humility
• There are five levels of leaders• Level 5 leaders had one distinguishing
characteristic: humility• Level 5 leaders channel their ego needs
away from themselves– Larger goal is building a great company– Ambition is first and foremost for the
institution, not themselves– Extreme blends of humility and intense
will
Egos Get into the Way of Performance
• Absence of Level 5 leaders was the consistent factor that hindered greatness
• Level 5 leaders set up successors for success
• Good to great leaders never wanted to be larger-than-life– Ordinary people producing
extraordinary results due to unwavering resolve to produce sustained results
Are You A Level 5 Executive?
• Abraham Lincoln• Modest and shy nature• Not a sign of weakness
• Darwin Smith – CEO of Kimberly Clark 1971– Generated stock returns 4.1 times the market– Demolished rivals Scott Paper and P&G– Resolve to do what’s best for company: Sold
the paper mills to concentrate on consumer products
– Wall Street called the move stupid – downgraded
– “I never stopped trying to become qualified for the job”
The Flywheel Cycle to Greatness
• Level 5 leadership• First who…
then what• Confront the brutal
facts• Hedgehog concept• Culture of discipline• Technology
accelerators
Buildup
Break-Through
People
Thought
Action
First Who NOT What
• Best companies began achieving sustained success by first getting the right people on the bus– Get the wrong people off the bus
– Then figure out where to drive it
Should Not Strategy and Product Come First?
• Collins:– Begin with “who” instead of “what” can
more easily adapt to a changing world– If you have the right people on the bus,
problem of motivation and people managing are diminished
– If you have the wrong people, it doesn’t matter whether you have the right direction because the company will still not be great
The Importance of Teamwork
• Good to great companies build deep and strong executive teams– Decent companies followed a “genius” with
a “thousand helpers”
– What happens if genius is wrong or leaves? Idiots…
• People are NOT your most important asset. The RIGHT people are.
• Look for companies with distinguished managers who have been in the company and work together over time
The Flywheel Cycle to Greatness
• Level 5 leadership• First who…
then what• Confront the brutal
facts• Hedgehog concept• Culture of discipline• Technology
accelerators
Buildup
Break-Through
People
Thought
Action
Candor Matters
• All good to great managers first confronted the brutal facts of their current reality– Impossible to make good decisions without
being honest in the process
– Look for executives who admit to the reality of their industry – company to invest in
• Comparison companies were afraid to confront adversity, but not the good to great companies
The Flywheel Cycle to Greatness
• Level 5 leadership• First who…
then what• Confront the brutal
facts• Hedgehog concept• Culture of discipline• Technology
accelerators
Buildup
Break-Through
People
Thought
Action
The Hedgehog and the Fox
• Ancient Greek parable:– The fox knows many things
– The hedgehog knows one big thing
• Foxes pursue many ends and see the world in all of its complexity
• Hedgehogs simplify the world into a basic principle; see what’s essential and ignore the rest
The Three Key Questions
• All good to great companies adhered to the Hedgehog Concept (three questions)– What you can be the best in the world at?
– What drives your economic engine?
– What are you deeply passionate about?
• The goal is not to be the best, but understand what you can be the best at
Sometimes You Need to Rethink
• If you cannot be the best in the world at your core business, then your core business cannot form the basis of your Hedgehog Concept– Best to look for companies that keep it
simple
– Exotic companies in many different industries are like the fox and stretch themselves too thin
– As a manager, you want to focus solely on your core and how to make it the best in the world
Hedgehog Concept: Very Important
• To remain great over time requires to strictly adhere to the Hedgehog Concept
• If the firm slides outside its hole, it will slide back down to mediocrity
• Good to great transformations never happen at once, unlike the WSJ likes to make it appear– Happens slowly over time– And can easily be tracked by looking at
qualitative clues outside of ratios and DCFs
William Joyce, Nitin Nohria, and Bruce Roberson, What Really Works: The 4+2
Formula for Sustained Business Success, 2003, Harper Collins
Another Perspective:What Is Different About Winning
Companies?
4+2 Study design: Many companies;200+ Management Practices; 10-years of data;
4 Companies per Industry
Period 1 Period 2
Winners
Climbers
Tumblers
losers
Winners Outperformed Losers on Every Financial Measure
TRS Sales Assets Op. Income ROI
Winners Excelled on Four Primary Management Practices
• Strategy: Devise and Maintain a Clearly Stated, Focused Strategy
• Execution: Develop and Maintain Flawless Operational Execution
• Culture: Develop and Maintain a Performance-Oriented Culture
• Structure: Build and Maintain a Fast, Flexible, Flat Organization
Primary Practices – Winners vs. Losers
NEG POS*
Strategy
Execution
Culture
Structure
Percentage of Companies
WinnersLosers
77 9 7 82
56 14 4 81
47 17 3 78
50 14 3 78
Winners Excelled on Two Out Of Four Secondary Management
Practices
• Talent: Hold on to Talented Employees and Find More
• Leadership: Keep Leaders and Directors Committed to the Business
• Innovation: Make Innovations that are Industry Transforming
• Mergers and Partnerships: Make Growth Happen with Mergers and Partnerships
Secondary Practices –Winners vs. Losers
NEG POS*
Talent
Leadership
Innovation
Mergers/Partnerships
*Percentage of Companies
WinnersLosers
44 6 4 47
65 6 13 56
39 5 3 43
2 22
Primary Practices: Strategy – Five Keys to Winning
• Build a Strategy Around A Clear Value Proposition for the Customer
• Develop Strategy from the Outside In• Maintain your Antennae that allow fine-
tuning during implementation • Clearly communicate your strategy to all
stakeholders• Keep growing your core business – beware
of the unfamiliar
Execution: Three Winning Dimensions
• Deliver products that consistently meet or exceed customer expectations
• Empower front lines to respond to customer needs
• Constantly improve productivity; eliminate excess and waste
Building a Performance-Oriented Culture: What Winners
Do…
• Inspire all to do their best• Reward achievement and keep raising the
bar• Create a work environment that is
challenging, satisfying and fun• Establish and abide by clear company
values
Organization – How Winners Are Structured
• Eliminate redundant layers and bureaucracy – Simplify, simplify, simplify
• Promote cooperation and the exchange of information across the entire company
• Put your best people closest to the action – keep your front-line stars in place
Secondary Management Practices:
Winners Excelled on Two out of Four Dimensions
Talent – What Winners Do…
• Fill Mid- and High-level positions from the Inside whenever possible
• Create and maintain top-of-the-line educational programs
• Design jobs to challenge the best performers
• Become personally involved in the ward for talent
Leadership – Winners vs. Losers
• Inspire management to strengthen its relationships with people at all levels of the organizations
• Inspire management to spot opportunities and challenges early
• Does the board have a substantial (financial) stake in the business?
• Link pay to performance for the leadership team
Making Industry-Transforming Innovations
• Introduce disruptive technologies and business models
• Exploit new and old technologies to enhance products and operations
• Don’t hesitate to cannibalize existing products
Mergers and Partnerships
• Acquire new businesses that leverage existing customer relationships
• Enter new businesses that complement existing strengths
• With a partner, move into new businesses that use the partner’s strengths
• Develop a systematic capability to identify, screen and close deals
Implementation as Alignment
Successful Strategy Implementation: The Real Test
Implementation: A Top Management ResponsibilityConflict resolutionAuthority to make key decisionsResource allocation
Key tasks:Closing capability gapsMaintaining strategic focus
Organizational learning Managing expectations
The Challenge: Matching Capabilities with Intent
Successful business outcome
Market position and fit Value propositions Competitive advantage Products and services
Distinctive core competencies
Customers
Shareholders
Community
Strategicintent
Organizationalcapabilities
Partners
Alignment: Closing Capability Gaps and Maintaining Strategic Focus
What it takes
(the market)
Strategic plans(what we say)
Strategic action(What we do)
What we’ve got(capabilities)
The company
Capability Gaps
Strategic Focus
Strategic Alignment: The Challenge
Given: A clearly articulated strategic intent
It must:
Implement a new/revitalized set of core
competencies and business model upon
which it bases its competitive advantage Foster a corporate culture conducive to
successful implementation
Strategy and Performance: A Conceptual Framework
Purpose
Strategy Leadership
Structure
Systems Processes
People Culture
Performance/Control
The Balanced Scorecard:Linking Strategy to Performance
A new strategic measurement and strategic management system which attempts to reconcile traditional financial measures with more forward-looking, non-financial measures of performance.
The balanced scorecard can be used to address barriers to effective strategy implementation:
Mission and strategy which are not known, actionable or understood
Strategy not linked to departmental, team and individual objectives
Strategy not linked to resource allocation When feedback is tactical, not strategic
The Balanced Scorecard
LeadingLagging
Soft
Hard
Vision &
Strategy
Vision &
Strategy
CUSTOMERCUSTOMER
“To achieve our vision, how should we appear to our customers?”
Objectives Measures Targets Initiatives
FINANCIALFINANCIAL
“To succeed financially, how should we appear to our shareholders?”
Objectives Measures Targets Initiatives
INTERNAL BUSINESS PROCESSES
INTERNAL BUSINESS PROCESSES
“To satisfy our shareholders and customers, what business processes must we excel at?”
Objectives Measures Targets Initiatives
INNOVATION AND LEARNINGINNOVATION AND LEARNING
“To achieve our vision, how will we sustain our ability to change and improve?”
Objectives Measures Targets Initiatives
TargetsTargetsTargets
Vision / Mission
Objectives
Measures
Targets
Initiatives
Whatwill progresstowards out visionof the future look like?
What are the steps we willbe taking to achieve
our vision ofthe future?
Objectives…Measures…Targets
Financial Measures are Necessary but Not Sufficient…
Revenue growth ratesCost reductionAsset utilizationProject profitabilityTo succeed
financially, how should we appear to our
shareholders?
Financial objectives tend to be influenced by the organization’s position on the life-cycle
curve.
What should our
balance sheet look
like?
Customer-based Measures are Key…
To achieve our vision, how should we appear to our
customers?
What do
our customers
value most?
MarketShare
CustomerRetention
CustomerProfitability
CustomerSatisfaction
CustomerAcquisition
Customer RelationshipProduct / Service
AttributesImage and Reputation
Organizational sub-units may have internal clients.
As are Internal Business Processes
Improve qualityReduce cycle timesMaximize productionMaximize throughputReduce cost per processReduce cost per transaction
CUSTOMER
NEED
SATISFIED
SERVICE THE
CUSTOMER
CUSTOMER
NEED
IDENTIFIED
CREATE THE PRODUCT/ SERVICE OFFERING
BUILD THE PRODUCTS/ SERVICES
DELIVER THE PRODUCTS/ SERVICES
IDENTIFY THE
MARKET
Innovation Process Operations Process
Customer Service
To satisfy our shareholders and customers, what
business processes must we excel at?
corecompetencies
And Learning and Innovation…
Employee capabilitiesInformation system capabilitiesMotivationEmpowermentAlignment
To achieve our vision, how will we sustain our ability to change
and improve?
Internal &
External R
&D
Analysis of these measures highlightsgaps in employee skills and information systems.
Look for Causal Links and Themes
Financial
Customer
Internal Business Processes
Learning and Innovation
accounts receivable
return on capital
employed operatin
g expense
s
customer satisfaction
rework
employee morale
employee suggestions
(+) (-)
(+)
(+)
(+)
(-)
(-)
Setting Objectives
pecific
easurable
chievable
ealistic
angible
Implementing the Balanced Scorecard
Everyone in the organization should understand their long-term objectives, as well as the strategy for achieving them.
OBJECTIVES at all levels should fall into thefour perspectives
Financial CustomerInternal Business ProcessesLearning and Innovation
Business Unit Mission and
Strategy
Strategic Objectives
and Measures
Departmental Business
Plans
Team Business
Plans
Individual Performance
Measures
Outcome and Behavior Control: Key Dimensions
Outcome Control Structure: Independent,
self-contained units Rewards, Incentives:
Substantial part of overall compensation, tied to a single, quantifiable objective
Resource Allocation: Tight expenditure controls
People: Focus on industry experience, aligning incentives with performance
Corporate Office: Small, focused on analyzing results
Behavior Control Rewards, Incentives: Focus
on long-term career progression; performance measurement based on multiple quantitative and qualitative goals
People: Internal career paths; active career development focused on industry and company-specific experience
Culture: Focus on common corporate culture designed to allow managers to move freely among divisions
Corporate Office: Experienced corporate managers function as advisors and monitors
Managing Expectations
StrategyGood Bad
Good
Execution
Bad
StrategyA View From
The Top
Prentice Hall
2-57Copyright © 2009 Pearson Education, Inc.Publishing as Prentice Hall
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in
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