Strategy A View From The Top Prentice Hall 2-1 Copyright © 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 Winners Losers

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 Winners Losers

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 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  Market position and fit  Value propositions  Competitive advantage  Products and services  Distinctive core competencies Customers Shareholders Community Strategic intent Organizational capabilities 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 StrategyLeadership Structure SystemsProcesses PeopleCulture 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 Leading Lagging Soft Hard Vision & Strategy Vision & Strategy CUSTOMER “To achieve our vision, how should we appear to our customers?” ObjectivesMeasuresTargetsInitiatives FINANCIAL “To succeed financially, how should we appear to our shareholders?” ObjectivesMeasuresTargetsInitiatives INTERNAL BUSINESS PROCESSES INTERNAL BUSINESS PROCESSES “To satisfy our shareholders and customers, what business processes must we excel at?” ObjectivesMeasuresTargetsInitiatives INNOVATION AND LEARNING “To achieve our vision, how will we sustain our ability to change and improve?” ObjectivesMeasuresTargetsInitiatives

Targets Vision / Mission Objectives Measures Targets Initiatives What will progress towards out vision of the future look like? What are the steps we will be taking to achieve our vision of the future? Objectives…Measures…Targets

Financial Measures are Necessary but Not Sufficient…  Revenue growth rates  Cost reduction  Asset utilization  Project profitability To 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? Market Share Customer Retention Customer Profitability Customer Satisfaction Customer Acquisition  Customer Relationship  Product / Service Attributes  Image and Reputation Organizational sub-units may have internal clients.

As are Internal Business Processes  Improve quality  Reduce cycle times  Maximize production  Maximize throughput  Reduce cost per process  Reduce cost per transaction CUSTOMER NEED SATISFIED SERVICE THE 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? core competencies

And Learning and Innovation…  Employee capabilities  Information system capabilities  Motivation  Empowerment  Alignment To achieve our vision, how will we sustain our ability to change and improve? Internal & External R&D Analysis of these measures highlights gaps 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 employe d 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 the four perspectives  Financial  Customer  Internal Business Processes  Learning 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 Strategy Good Bad Good Execution Bad

Strategy A View From The Top Prentice Hall 2-57 Copyright © 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 any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.