STRATEGY

A VIEW FROM THE TOP CHAPTER 2

Erinn Adams Kunal Patel Brandon Anderson Matt 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:

GROWTH THROUGH MERGERS AND PARTNERSHIPS SEEK    After innovation, pursuit of mergers and partnerships is the 2 nd 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 People Processes 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 20 th 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 Strategy Systems People Purpose Structure Leadership Processes Culture Performance/Control

STRATEGY AND ORGANIZATIONAL CHANGE

Purpose  Structure, systems, processes, people, & culture are key to creating effective organizational change  Interrelated  Why new strategy requires change in all variables Strategy Systems People Structure Leadership Processes 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