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Strategy
A View From The Top Prentice Hall Cornelis A. de Kluyver and John A. Pearce II Third Edition
Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall 2-1
Two Studies on the Link Between Strategy and Performance Jim Collins,
Don’t Good to Great: Why Some Companies Make the Leap…And Others
, 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
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
People Thought Action
• Level 5 leadership • First who… then what • Confront the brutal facts • Hedgehog concept • Culture of discipline • Technology accelerators
Buildup Break Through
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
People Thought Action
• Level 5 leadership • First who… then what • Confront the brutal facts • Hedgehog concept • Culture of discipline • Technology accelerators
Buildup Break Through
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
People Thought Action
• Level 5 leadership • First who… then what • Confront the brutal facts • Hedgehog concept • Culture of discipline • Technology accelerators
Buildup Break Through
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
People Thought Action
• Level 5 leadership • First who… then what • Confront the brutal facts • Hedgehog concept • Culture of discipline • Technology accelerators
Buildup Break Through
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
Another Perspective: What Is Different About Winning Companies? William Joyce, Nitin Nohria, and Bruce Roberson,
What Really Works: The 4+2 Formula for Sustained Business Success
, 2003, Harper Collins
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
Winners Losers Strategy Execution Culture Structure 77
NEG POS*
9 7 82 56 14 4 81 47 17 3 78 50 14 3 78 Percentage of Companies
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
Winners Losers Talent 44
NEG POS*
6 4 47 Leadership Innovation 65 6 13 56 39 5 3 43 Mergers/Partnerships 2 22 *Percentage of Companies
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
stakeholders your strategy to all • Keep growing your
core business
of the unfamiliar – beware
Execution: Three Winning Dimensions
• • Deliver products that
consistently meet or exceed customer expectations Empower front lines
customer needs to respond to • 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
team for the leadership
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 Responsibility
Conflict resolution Authority to make key decisions Resource allocation
Key tasks:
Closing capability gaps Maintaining strategic focus
Organizational learning
Managing expectations
The Challenge: Matching Capabilities with Intent
Successful business outcome
Shareholders Partners Customers Community
Market position and fit Value propositions Competitive advantage Products and services
Strategic intent
Distinctive core competencies
Organizational capabilities
Alignment: Closing Capability Gaps and Maintaining Strategic Focus
What it takes (the market
)
Capability Gaps
Strategic action (What we do) Strategic plans (what we say ) The company
Strategic Focus
What we’ve got (capabilities )
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 Systems People Structure Processes Culture
Performance/Control
The Balanced Scorecard: Linking Strategy to Performance
A new strategic
measurement management
and strategic 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 “To succeed financially, how should we appear to our shareholders?”
FINANCIAL
Objectives Measures Targets Initiatives “To achieve our vision, how should we appear to our customers?”
CUSTOMER
Objectives Measures Targets Initiatives
Vision & Strategy INTERNAL BUSINESS PROCESSES
“To satisfy our shareholders and customers, what business processes must we excel at?” Objectives Measures Targets Initiatives
INNOVATION AND LEARNING
“To achieve our vision, how will we sustain our ability to change and improve?” Objectives Measures Targets Initiatives
Objectives…Measures…Targets
Vision / Mission What are the steps we will be taking to achieve our vision of the future?
Objectives What will progress towards out vision of the future look like?
Measures Targets Targets Initiatives
Financial Measures are Necessary but Not Sufficient…
To succeed financially, how should we appear to our shareholders?
Revenue growth rates Cost reduction Asset utilization Project profitability What should our balance sheet look like?
Financial objectives tend to be influenced by the organization’s position on the life-cycle curve.
Customer-based Measures are Key…
Market Share To achieve our vision, how should we appear to our customers?
Customer Acquisition Customer Profitability Customer Retention Customer Relationship Product / Service Attributes Image and Reputation Customer Satisfaction Organizational sub-units may have internal clients.
As are Internal Business Processes
To satisfy our shareholders and customers, what business processes must we excel at?
Improve quality Reduce cycle times Maximize production Maximize throughput Reduce cost per process Reduce cost per transaction
core competencies CUSTOMER NEED IDENTIFIED
Innovation Process
IDENTIFY THE MARKET CREATE THE PRODUCT/ SERVICE OFFERING
Operations Process
Customer Service
BUILD THE PRODUCTS/ SERVICES DELIVER THE PRODUCTS/ SERVICES SERVICE THE CUSTOMER
CUSTOMER NEED SATISFIED
And Learning and Innovation…
To achieve our vision, how will we sustain our ability to change and improve?
Employee capabilities Information system capabilities Motivation Empowerment Alignment Analysis of these measures highlights gaps in employee skills and information systems.
Look for Causal Links and Themes
Financial accounts receivable
(+)
return on capital employe d
(-)
operatin g expense s
(-)
customer satisfaction Customer
(+)
rework Internal Business Processes
(+)
Learning and Innovation employee morale
(+) (-)
employee suggestions
Setting Objectives
pecific easurable chievable ealistic angible
Implementing the Balanced Scorecard
Business Unit Mission and Strategy OBJECTIVES at all levels should fall into the four perspectives
Financial
Customer
Internal Business Processes
Learning and Innovation
Strategic Objectives and Measures Everyone in the organization should understand their long-term objectives, as well as the strategy for achieving them.
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
Strategy
Good Bad Good
Execution
Bad
Strategy
A View From The Top Prentice Hall
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Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall 2-57