Transcript Real Work, Real Leadership , Real Value
Real Work Real Leadership Real Value
Organization Structure & Leadership Capabilities To Drive Value Creation in The Knowledge Economy Mark Van Clieaf Managing Director, MVC Associates International www.mvcinternational.com
Toronto • Chicago • Tampa 416-489-1917 / 813-891-6644 © Copyright 2001, MVC Associates International
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Evaluating Corporate Performance
• • • No longer ONLY about hard assets.
How do you really measure Leadership capital that contributes to short, medium & longer term performance ?
Many Boards / CEO’s / CFO’s are not focusing on the right measures that guide medium term performance. • How do you structure the organization & put differentiated metrics & decision making in place to unleash intellectual capital & create value at all leadership levels ?
• There really is NO link between pay & value creating performance in most organizations.
• What capabilities & mindsets link to performance & return, medium to longer term?
© Copyright 2001, MVC Associates International
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Overview
• Industrial vs. Knowledge Economy - Implications • Boards, CEO’s and Investors using inadequate metrics & many NOT structured for long term value creation (Board Governance not working) • Link between Organization Structure and Value Creation (Creating the Viable Business System) • Complexity Based Organization™ A new model for the Knowledge Economy • Leadership Value Added LVA ™ & Implications for Assessing Leadership that delivers real value • Measuring & rewarding what really counts OVA™ is a Trademark of MVC Ass Int LVA™ is a Trademark of MVC Ass Int EVA™ is a Trademark of Stern Stewart © Copyright 2001, MVC Associates International
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Organizing for the Knowledge Economy
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Factors External Environment Organizational Model Information Systems Business Planning Resource Management Metrics Role Relationship Decision Authority Communications Pay & Rewards Industrial Economy Knowledge Economy
Stability / Closed System Mechanistic & Routine Mainframe & Batch Fixed with Annual Cycle Uncertainty / Open Adaptive System Organic, Planned & Opportunistic Networked & Real Time Fluid & Constantly Adapted Past is Justification for Future Resources Potential Future Justifies Resources Point in Time & Linear / Static Vertical Command & Centralized Decision Making Title & Status Velocity-Based & Non-Linear Value Added W ork & Distributed Decision Making Capability to Manage Complexity Batch between Mgr / Subordinate Real Time Virtual Team Size of Budget & Team Complexity of Work & Real Value
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A New Organizational Model
Based on the Principles of Levels of Complexity & Complex Adaptive Systems –Social Systems “Weick” –Complex Adaptive Systems “Santa Fe / Kauffman” –Performance Systems “Rummler” –Viable Systems “Beer” –Stratified Systems “Jaques” –Work Systems “Hoebeke” –Value Added Work & Value Added Leadership Integrated into holistic business system “Van Clieaf” © Copyright 2000, MVC Associates International
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Global Financial Capital
• Recent 10 year Returns – S&P 500 –TSE 300 = 19.2 % = 10.5 % – MSCI World Equity = 9.0 % – US Govt. Bonds = 9.0 % • Efficient, Strategic & Forward Looking – Biotech & Internet - Big Market Caps & NO Earnings Source: Micropal , Vanguard © Copyright 2000, MVC Associates International
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Free Capital ?
•
Equity Capital is not free
•
Stock Options are not free
•
Many Boards, VC’s, CEO’s, CFO’s think they are ?
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Wealth & Value Creation Two Measures
Positive ∆ Economic Profit (EP) =
Yr/Yr ∆ Net Operating Profit After Tax minus Weighted Average Cost of Capital
Negative Hidden Value Value Destroyers Value Builders Value Myths Negative Positive Market Value Added (MVA) =
∆ Total Market Value of Shares & Debt Minus ( Total Capital Raised+ Retained Earnings )
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Leadership & Value Creation Over 4 Years in Canada
∆ Economic Profit =
Yr/Yr ∆ Net Operating Profit After Tax minus Weighted Average Cost of Capital
Positive Hidden Value
11 %
Value Builders
24 %
Negative (65 %) Value Destroyers
48 %
Value Myths
17 %
Source
1996-1999 Corporate Renaissance Group Canada Wealth Creation - 453 Public Companies
Negative Positive Market Value Added =
∆ Total Market Value of Shares & Debt Minus ( Total Capital Raised+ Retained Earnings )
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© Copyright 1997, MVC Associates International
Leadership & Value Creation Over 5 Years in U.S.
Positive ∆ Economic Profit =
Yr/Yr ∆ Net Operating Profit After Tax minus Weighted Average Cost of Capital
Negative US = 35 % CDN = 65 % Hidden Value
US - 8 % CDN -11 %
Value Destroyers
US -10 % CDN-48 %
Value Builders
US -57 % CDN -24 %
Value Myths
US -25 % CDN - 17 %
Source
1994-1999 MVC Analysis of Stern Stewart 1000 = 773 companies
Negative Positive Market Value Added =
∆ Total Market Value of Shares & Debt Minus ( Total Capital Raised+ Retained Earnings )
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© Copyright 1997, MVC Associates International
MVC Research Performance Measures & CEO Compensation
• • • 55 % S&P 500 only measuring and paying based on 1 year results - does not measure value & viability of the business system (NPV or ∑ of ∆ in net operating profit after tax after cost of capital 3 + years) Only 11 % S&P 500 measuring results beyond 3 years Less than 1 % measuring beyond Financial Measures: Customer, Suppliers/ Partners, Employees , Environment – Governance system is flawed - fails to recognize the complex , non-linear relationships between the enterprise and its business system design, all resource inputs, & the interface with all external stakeholders / societies that impact system viability, 2- 5 years + © Copyright 2001, MVC Associates International
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Structure & Leadership Make A Difference
Industry Sector / Company Metals - Alcoa M etals - Nucor Chemicals - Dupont Chemicals - Great Lakes Healthcare - Pfizer Healthcare - Bausch & Lomb Retail - Walmart Retail - T oys-R-Us Semiconductor - Intel Semiconductor - National Semi Software - Oracle Software - Novell 5 year Avg Shareholder Return 94-99 5 yr ² in MVA 94-99 $ millions 16 % 4 % $ 5,509 $ -1,983 5 yr • ²’s in EP 94-99 $ millions $ 1,141 $ -146 20 % - 8 % 49 % 6 % $ 23,196 $ - 2,964 $ 132,793 $ 95 $ 4,217 $ - 186 $ 1,264 $ - 17 10 % - 16 % $ 113,538 $ - 8,836 $ 638 $ - 417 50 % - 4 % 38 % - 3 % $ 150,391 $ - 1,345 $ 29,263 $ - 1,222 $ 2,886 $ - 45 $ 833 $ - 290
© Copyright 2001, MVC Associates International
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Value Creation & CEO Turnover in the U.S.
• • • CEO turnover 8.2 % for firms with MVA above median vs. 20 % with firms below median • Firms with below median MVA performance fired CEO 2.5 times more frequently (including Stempel at General Motors, Whitmore at Kodak, Akers at IBM, Lego at Westinghouse, etc) • CEO turnover 9 % for firms with EVA above median vs. 19 % for firms with EVA below median Neither ROA nor ROE correlated to CEO turnover Shareholders / Analysts starting to use growth in MVA and Economic Profit / Free Cashflow as performance measures even if enterprise does not
Source:
Study of 241 large US companies 1987-1993 by Lehn & Makhija of University of Pittsburgh © Copyright 1998, MVC Associates International
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Internal Value Creation & Market Value Added / Total Enterprise Value
• Correlation of Business Performance and MVA / TEV – Economic Profit / Free Cash Flow – Return on Equity – Earnings Per Share Growth = 50 % = 35 % = 18 %
Source:
Credit Suisse First Boston
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© Copyright 1998, MVC Associates International
Earnings Per Share is NOT an Effective Measure
•
Does not tell you
–Risk –Capital Intensity –Time Value of Money –Future Free Cash Potential •
Is used because of
–Simplicity –Commonality © Copyright 2000, MVC Associates International
Source:
Credit Suisse First Boston
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Market Value & Organization Structure
NOPAT Minus WACC Current Products & Services Future Products & Services Future Business M odels
Future Operations Value ™ Current Operations Value ™
Competitive Advantage Period
COV an d FOV trade mark Ste rn Ste wa rt © Copyright 2000, MVC Associates International
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Market Value to Capital
Industry
Software & Services Pharmaceuticals Personal Care Beverages
Mean
Non-Ferrous Metals Cars & Trucks Forest Product Aluminum Steel source: Stern Stewart
Market Value per Capital $ Future Growth as % MV
$ 8.20
$ 6.60
$ 4.40
$ 4.30
$ 3.20
$ 1.20
$ 1.20
$ 1.10
$ 1.00
$ 0.90
80 % 71 % 66 % 70 %
63 %
63 % 33 % 53 % 78 % 17 %
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OVA™
Value Creation Model
RTSR / MVA / EVA / CFROI
CVA RTSR MVA EVA™ CFROI OVA™ LVA™ = Customer Value Added = Relative Total Shareholder Return = Market Value Added = Economic Value Added (Stem Stewart) = Cashflow Return On Investment = Organization Value Added (MVC) = Leadership Value Added (MVC)
CVA LVA™
© Copyright 1998, MVC Associates International
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Designing The Complexity Based Organization ™
Business Planning & Performance Measurement Organization / Work Design Complexity Based Organization™ Is a Trademark of MVC Assoc Intl © Copyright 1994, MVC Associates International Leadership Capability & Talent Management
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Getting The Structure of Work Right Organization Value Added OVA™
• • • • Not only about steep vertical hierarchies with too many managerial layers not adding value Work that is a unique output, adds to future growth & viability of the business, & uses resources efficiently Nested Work Processes & Accountability structure where roles have distributed & differentiated decision making that varies by complexity level of work Executive Leadership is about creating the right structure that provides clarity of work design for career development & executive selection, concurrent with creating value © Copyright 2001 , MVC Associates International / The Institute For The Complexity Based Organization ™
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Scope & Variety as Determinants of Complexity
• Inherent in Scope & Variety are complexity, diversity, uncertainty, paradox & ambiguity • Innovation Complexity • Leadership Complexity • Planning Complexity • Customer / Stakeholder Complexity • Other © MVC Associates International 1994
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Complexity Levels of Innovation
Service Continuous Improvement Process / Systems
Business Development Business Model Stewardship / Citizenship Global Enterprise Purpose
© Copyright 1998 , MVC Associates International / The Institute For The Complexity Based Organization ™
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Complexity Levels of Leadership
Lead Self Lead Team
Lead Others Who Lead Teams Lead Multiple Functions/Processes Lead Business Lead Businesses Lead Global Enterprise
© Copyright 1998 , MVC Associates International / The Institute For The Complexity Based Organization ™
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Leadership Complexity Jumps
• Walt Mahler’s early research on Career Crossroads ( basis of GE’s executive development still ) – Lead self – Lead team – Lead others who lead team – Lead multiple functions / processes – Lead business – Lead multiple businesses – Lead global enterprise © Copyright 1997, MVC Associates International
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Complexity Levels of Resource Management & Planning
Labour M aterials Revenues Expenses Quality Customers M ultiple Processes M ultiple Functions New Products New M arkets New T echnologies Net Income Stakeholders Culture & Values Global Economic Risk Global Political Risk Social Systems Global Trade EVA / M VA / RTSR Societies / World Order
1 Day to 3 Months
3 Months to 1 Year 1 to 2 Yrs 2 to 5 yrs 5 to 10 yrs 10 to 20 yrs 20 yrs +
© Copyright 1998 , MVC Associates International / The Institute For The Complexity Based Organization ™
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Planning & Resource Management Complexity Jumps
• Elliott Jaques’ findings on time-span – Planning – Discretion – Accomplishment • US Army 10 years + of Leadership research confirms quantum jumps in conceptual capability at each Complexity Level as # 1 predictor of executive success, potential or derailment • MVC Assoc Intl research (300 + interviews, etc) confirms levels of conceptual capability & time-spans still valid
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© Copyright 1998, MVC Associates International
Three Distinct Work & Leadership Domains For Value Creation
Operational Domain
Current Customers Short Term Respond to Change Locally Engineering of Processes for Superior Execution Work Assignment for Short Term Results Budgets & 1 year Profit Plan Stakeholders Medium Term Anticipate Change Nationally Societies Long Term Create Change Globally Direct Leadership
Strategic Innovation Domain
Evolve New Products, Services, Business Model Resource Balancing & Integration for Medium Term Profit
Purpose / Values Domain
Change Industry Structure Investment Policy & Principles for Long Term Sustainability 2-5 year Operating Income & Capital Management Indirect Leadership Leadership of Business Unit Leaders Balance Sheet Strategy & Total Shareholder Return © Copyright 1998 , MVC Associates International / The Institute For The Complexity Based Organization ™
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Complexity Based Organization™
© Copyright 1998 , MVC Associates International / The Institute For The Complexity Based Organization ™
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Complexity & E-Strategy
• • Each Complexity Level is different work & requires different skills – CL 3 - E-Process (automating processes through the Internet) – CL 4 - E-Commerce (selling new products / new services on-line through the internet) LL Bean, AMEX, Wells Fargo, American Airlines – CL 5 - E-Business (transforming the business model & value chain and becoming a customer led enterprise through the internet) Dell, Cisco, Schwab – CL 6 - E-Industry ( transforming the industry structure through the internet - i.e. B to B exchanges like GM/Ford/Daimler Chrysler = Covisint ) Some delegated CL 4 and CL 5 work to CL 3 capable team members - result was a website design and automation of existing processes vs. E-Business strategy © Copyright 2001 , MVC Associates International / The Institute For The Complexity Based Organization ™
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CL 1 CL 2 CL 3 CL 4 CL 5 CL 1 CL 2 CL 3 CL 4 CL 5
Layering Across Complexity Levels
GAPS JAM-UPS CL 1 CL 2 CL 3 CL 4 CL 5 CORRECT © Copyright 2000, MVC Associates International
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6H 6M 6L 5H 5M 5L
Organization Value Added -OVA™ Diagnostic
5H Group President, Services 5M President, U.S.
4H
4H President, Canada
4M 4L 3H
3H President, XYZ 4L VP & GM ABC
3M 3L
Proprietary & Not to be shared with third parties 3M VP & GM Technology Services 3M VP, Technology Investment 3M VP, Science 3L VP, Strategic Business Development
CONFIDENTIAL
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© Copyright 1998, MVC Associates International
Leadership / Structure & Value Creation
• • Quantum Difference in Role Design & Skills to Create Customer and Shareholder Value between: – General Manager of Business Unit (partial P&L) – General Manager of Business Unit (full P&L) – General Manager of Multiple Business Units (multiple P&L’s = Sector of Businesses across multiple geo-political systems and diverse cultures) – General Manager of Global Enterprise (multiple business sectors operating across multiple continents, geo-political systems, & cultures) MVC 300 + interviews, many Board members, CEO’s, top HR and leading Executive Search Firms had no discernable point of view on the differences © Copyright 1999, MVC Associates International
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General Manager Complexity Level 5 Leadership Value Added LVA™ Capabilities
• • • • • Can they describe the profit drivers & key success factors in their business model & how this may change ?
Do they recognize how capital efficiency & the cost of capital impacts the business model, NOPAT & Free Cashflow ?
Can they succinctly describe their customer needs, competitive set, size the market, & how this may change ?
Can they balance resource management between the 1 year operating plan & the 2-5 year investment plans to grow the business?
Can they integrate and balance non linear linkages between such functions as research, development, production & sales ?
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Executive Compensation Strategy For a New Organizational Model
• • • • Link Compensation to metrics for both: – Internal Value Creation = Economic Profit / CFROI AND – External Value Creation = MVA / RTSR metrics • Differentiates duration of Performance Measurement based on the Complexity of Executive Work & value created ( NOT size of budgets & team),
HR locked in an old industrial model
Should include Customer, Company, & Societal measures otherwise will sub-optimize business viability over time Recognize Organization Value Added OVA ™ in determining Performance Measures Decide on Policy for STIP & LTIP plan linked to Performance Measures and Real Value created © Copyright 2000, MVC Associates International
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Summary
• There is a direct link between organization structure, leadership capability & market cap in the Knowledge Economy • Design the organization structure so value is created in each nested Work Level. Govern the firm recognizing the Business Strategy and link to Complexity Levels of REAL WORK = Organization Value Added OVA™ • • Recognize there are differentiated levels of Leadership capability . Recruit / Match executive leadership talent based on the complexity of the work = Leadership Value Added LVA ™ to drive long term value = Economic Profit / MVA / RTSR Design metrics & reward / compensation strategies to reward REAL WORK & REAL LEADERSHIP long term!
that creates REAL VALUE © Copyright 2000, MVC Associates International
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