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