1. Organization: Overview of Core Frameworks Local Training Module For First-year Associates Associate Handbook

2. FOREWORD AND OBJECTIVE This Organization Practice(OP) document provides an overview for use in local training sessions for first-year associates. It is part of a “series on functional areas.” The objective of the series is to introduce McKinsey practitioners to the basics in each of our functional areas of expertise. All the documents in the series are comprehensive in nature and describe the current tools and frameworks in that functional area At the end of this document, you can find a section describing a selection of the core documents and handbooks that can give you further details on some of the frameworks descried here. All of these documents are now on PDNet; and hard copies of them can be requested from PDNet Express, which will deliver them in 24 hours The contents of this document have been adapted for local training sessions through “Switching Tracks” — OP’s first-year module videotape, which communicates the basic concepts in a concise and visual way using an actual client — The Scandinavian Railroad Company. It is 40 minutes long and should be presented in 3 short segments. Between these segments, the faculty member runs the attached exercises, adds any commentary he/she considers necessary to clarify the concepts, and provides personal experience on selected topics. A copy of the videotape and moderator’s guide with exercises can be requested from the Firm

3. This document seeks to answer 4 questions SECTION 1 Why do associates need to consider organizational issues in every engagement? SECTION 2 What frameworks do we use to help our clients improve organizational performance? SECTION 3 What role does an associate play in organization work? SECTION 4 Where can an associate find out more?

4. McKinsey’s mission is to have lasting and substantial impact on our clients. To succeed, we need to work all three of the critical elements: choose the best strategy, develop world-class operations, align the organization. These three elements both reinforce and constrain each other. The best strategy is only relevant if it is operationally and organizationally feasible. The optimal organizational design depends upon the strategic requirement and the operational methods of the client. This document focuses on one vertex of this triangular relationship. It would be wrong, however, to believe that you can achieve the impact we seek by focusing on one vertex. We need to consider all three in every study.

5. CRITICAL ELEMENTS FOR IMPACT Successful strategy Efficient operations Effective organization

6. We only achieve impact when the organizations we serve are successful in implementing the strategies and operational methods we propose. However, a recent survey of engagements in which clients failed to implement proposed strategies found, in three cases out of four, that the client organization was not change-ready or even capable of implementing the strategy we proposed. To ensure that we have impact, we need to consider organizational issues as we devise strategies. We must choose strategies the clients are ready and able to implement or complement our strategy work with investment in building the organization’s skills so that the organization can step up to the challenge the superior strategy poses..

7. 3 OUT OF 4 STRATEGIES THAT FAIL DO SO BECAUSE OF THE ORGANIZATION’S INABILITY TO EXECUTE 100%=340 responses Percent McKinsey recommendations flawed Client not change-ready or committed Organization lacked the capabilities to execute strategy Other

8. The demand for organizational work is increasing. Trends in the marketplace and the evolving nature of our clients largely explain this increase in demand. The pace of change in the marketplace is accelerating. A strategic choice or an operational innovation evokes a rapid reaction from competitor. Rarely can a durable competitive advantage be found in these choices. Rather it is the development of a unique organizational capability with the inherent flexibility and commitment to sustain world-class performance that provides durable competitive advantage in these times of rapid change. The clients we serve are changing as well. They have increasingly hired in-house strategic capabilities. Most have built strategy shops close to the CEO. Few, however, have the in-house capability and objectivity to do the organizational work required to make change happen.

9. ORGANIZATIONAL WORK GROWING IN IMPORTANCE Evolving marketplace Quickening pace of strategic adaptation Durable competitive advantage often rooted in unique organizational capabilities Evolving players Many businesses acquiring in-house strategic capability Making change happen remains the “neglected art” McKinsey’s engagement mix Percent of time Increasing demand for help with organization issues and change management Crafting the answer Helping implement change 10 years ago Today Source: Survey of 23 MGMs across the Firm

10. The recent evolution in our clients has not been missed by our competitors. Each of our competitors has recently introduced a branded organizational element to their portfolio. Their organizational expertise figures prominently in their marketing campaigns.

11. COMPETITORS HAVE BRANDED ORGANIZATION TOOLS Consulting firmProductClient example BCGTime –based competitionGE General SystemsProcess redesignUPRR Booz AllenContinuous improvementExxon United ResearchProcess redesign and facilitationMobil Delta PointTransformational changeSmithKline Beecham

12. McKinsey’s consulting approach must evolve as our clients evolve. These changes provoke a shift in the nature of our work and an evolution of the role of the associate on engagements. The increased demand for organizational work impacts associates directly. Associates are drawn into leadership roles on larger teams at an earlier point in their careers. This places greater emphasis on the need for associates to develop quite soon after joining McKinsey- superb team leadership skills.

13. EVOLUTION IN McKINSEY’S APPROACH *Survey of 23 MGMs across the Firm From…To… “The answer”Solving for the “answer” and the change process Managing client teamsBuilding client capabilities Small, analytically focused teams ––average client team of 3* Multiple, highly leveraged McKinsey/client teams —Average client team of 10* CEO counseling by senior people Coaching and feedback at all levels

14. Before we dive into the organization materials, we should announce one critical caveat: the frameworks you are about to see are only as good as the judgment and insight used to fill them out. The frameworks are often mere checklists, useful tools to ensure you do not overlook a key dimension. The OP can provide interview guides and questionnaires that you can use to flesh out the frameworks, as well as applied examples in a range of settings. However, almost all organizational issues are “situation dependent”, and almost all client settings are unique. Your judgment, insight, creativity, and organizational acumen will determine whether you add value in the client setting.

15. A CRITICAL CAVEAT “Garbage in, garbage out” Organizational practice frameworks Checklists Surveys, questionnaires Applied examples Garbage Good judgment, keen insight, creativity, organizational acumen Garbage Client impact CONCEPTUAL

16. A series of frameworks are available to help clients identify and address organizational limits on effectiveness or obstacles to change. They also point toward solutions. These frameworks help teams answer two fundamental questions: ¶ What change is needed? ¶ How should the client implement the change? The OP has derived a set of six attributes that characterize high-performing organizations(HPO). By assessing whether your client organization exhibits these six attributes, you can diagnose whether an organizational performance gap exists as well. Additionally, the 7-Ss will help you identify strengths and deficiencies in the organization. The 7-Ss focus teams on aligning structure, staff, systems, and style to promote behavioral change and build skills in pivotal jobholders. By contrasting the required skill set (at both the organization and the pivotal jobholder level) with the current skill set, you can often clarify the organizational gap that exists. You complete the diagnostic by filling out the change board. That exercise helps teams understand the organizational skill deficits or resistance to change so they can deliberately plan to build the necessary skills and willingness to change in the organization. Once the gaps have been identified, the team needs to lay out a change program to close the gaps. The transformation triangle highlights the three critical dimensions of any effective change program-top down, bottom up, cross-functional. The proper balance among these dimensions depends on the gap, the client setting, and the competitive context. Every change program contains some mix of six fundamental energizing elements. Each must be considered as we design change programs. This section of the handbook will discuss each framework in turn.

17. CORE FRAMEWORKS ① High-performing organization attributes Vision Perfor- mance CEO led PeopleSkillsSimple ② 7-S framework Winning formulaPivotal jobsDesign levers Organizationa l structure What change is needed?How should the client make change happen? What gaps in organizational performance exist? What organizational challenges exist? What initiatives comprise the change program? How do we create energy for the change program? StrategySkills Shared values VISION Staff Management systems Leadership style ③ Change board Agend a/platf orm Direction setting Structuring Bottom-up energizing ④ Transformation triangle Performance management Vision and leadership communication Organizational infrastructure People development Problem solving process ⑤ Energizing elements

18. The OP undertook a study of 10 high-performing companies, true industry leaders, that we knew very well. The companies had sustained pace-setting performance in their respective industries over 2 decades. These 10 HPOs shared six management attributes, each of which focuses on performance. By comparing your client organization to these HPOs, you may identify opportunities to improve your client organization.

19. ① “HIGH-PERFORMANCE COMPANY” ATTRIBUTES Driven by leaders Aligned by simple structures and core processes Based on world- class skills Rejuvenated by well-developed people systems Built by relentless pursuit of before- the-fact strategies/vision Energized by an extraordinarily intense, performance-driven environment What change is needed? How should the client make change happen? Organizational challenges Initiatives Energizing elements Gaps in performance

20. The first three of the six common management attributes: ¶ Driven by leaders. The leaders of these companies had very high performance aspirations. For these leaders there was no such notion as “good enough”. At the center of these leadership groups, we consistently found demanding, unreasonable CEOs. ¶ Built by relentless before-the-fact strategies/visions. HPOs spend their time looking forward, not back. Their strategies drive relentlessly for both profitability and growth. ¶ Energized by an extraordinarily intense, performance-driven environment. HPOs have a demanding, occasionally punishing, work pace. There is real accountability, especially at the top. HPOs, while being very good places to work, are not always nice places to work.

21. ATTRIBUTES OF AN HPO Driven by leader Very high performance aspirations held by all key leaders Demanding, “unreasonable” CEOs Effective working group at top Ability to penetrate to micro- level of their businesses Single-minded adherence to simple, clear success measures-not just financial Productive “fear of failure” Built by relentless pursuit of before-the-fact strategies/vision Highly motivating, if not inspiring, “end” state Frequently oriented toward industry leadership Consistently striving for both profitability and growth Passionate defenders of core businesses Understanding of how industry(s) works, what customers want, and what competitors can do- and how these might change Energized by an extraordi- narily intense, performance driven environment Demanding, occasionally punishing, work pace; on call all the time Real follow-through on accountability – especially at the top Aggressive learning from things that do not work “good” places to work but not always “nice” Performance shortfalls change careers Members feel rewarded by being part of winning institution

22. The last three common management attributes focus on structure, skills, and systems: ¶ Aligned by simple structures and core processes. HPOs align authority, accountability, and performance challenges. Lines of communication and approval are simple and are mirrored from one division to the next. ¶ Based on world-class skills. HPOs are world class in at least one critical skill of their industry, e.g., product development in high technology, risk management in wholesale banking, direct-to-store delivery in consumer goods, best-cost manufacturing. Additionally, HPOs exhibit superior process management skills that in and of themselves become a source of competitive advantage. ¶ Rejuvenated by well-developed people systems. The CEO in these companies is the Chief Personnel Officer. The CEO interacts regularly with the entire leadership group, understands the individual development needs and goals, and leads staffing reviews.

23. ATTRIBUTES OF AN HPO (CONTINUED) Aligned by simple structures and core processes Straightforward alignment of authority, accountability, and performance challenges Uncomplicated lines of communication and approval – line to line Similar internal structural units and key management processes across the company Minimal critical staff reviews Regular calendar of key management processes and communication Based on world-class company skills Do many things well, but at least 1 functional skill at world-class competence level underpins strategy Also focus on building corporate skill in the way they run the place Company key management processes viewed as real competitive advantage Rejuvenated by well- developed people systems CEO is Chief Personnel Officer Clear focus on performance and motivation – successful long-term wealth-building programs seem key Management processes ensure leaders have “informed” view of key contributors 2-3 levels down CEO leads annual “staffing review” – best people/teams in most critical/demanding jobs “Bench strength” is a top priority

24. The HPO research found something else common to the HPOs: all 10 were experimenting with self-governance. Self-governance in these HPOs means empowerment with accountability. The HPOs share the common characteristic of involving “a wide range of “or “broad cross-section of” employees in driving for improved performance. Their goal is to imbue every employee with an owner’s mind-set. Self –governance in these HPOs is different from that practiced in other “engaged and empowered” companies. In HPOs the single-minded objective of empowerment is performance. In the matrix below, the HPOs we studied were all in the top half of the matrix (high performance); many were reaching, in addition, for the right-hand side of the matrix(engaged and empowered).

25. PERFORMANCE AND EMPOWERMENT AT HPOs HPOs Performance- focused, top- down-driven organizations Performance-driven, empowered, and accountable organizations Hierarchical, command- and control-oriented, “entitled” organizations Activity-driven, “engaged and empowered” organizations Command and control Engage and empower High Low Average Performance Management approach

26. Most large companies start out in the lower left-hand corner of the matrix (low performance and command-and-control management approach). We discovered that HPOs that have successfully transitioned to the upper right-hand corner have first achieved high performance and then experimented with and adopted empowerment. Empowerment without first establishing a true performance ethic in the company tends to result in continued low performance. If your client falls in the lower left-hand corner of this matrix, it needs to concentrate first on building a true performance ethic. Empowerment, alone, is unlikely to yield performance improvement.

27. TRANSFORMATION PATH Path followed by high- performance companies Path experienced by companies that fail to instill performance ethic first Emerson Pepsico Sonoco Sun Trust VF 3M GE Hallmark Johnson&Johnson Many high perfor- mers” on the journey” Most companies BP FP&L Wallace Command and control Engage and empower High Low Average Performance Management approach

28. As discussed above, the first phase of the organization diagnostic identifies performance gaps. The second phase focuses on identifying organizational issues and impediments to change. The framework most commonly used to identify organizational issues includes seven buckets that start with “S”. ¶Strategy. An integrated set of actions that deliver a superior value to a set of customers with a cost structure allowing excellent continuing returns. ¶Institutional skills. End-result activities the company must be really good at in order to deliver the value proposition. ¶Shared values. Simple, agreed-upon principles that say what is important around here. Taken together, the first 3-Ss define the company’s vision: an overriding goal that people in the organization strive to achieve; that is challenging, valuable, and exciting to them; and valuable and differentiated to the intended customer. To achieve the vision, the company must design and align levers to guide the behavior of those holding pivotal jobs close to the front line – i.e., those who directly affect delivery of value to the customer. ¶Organizational structure. An orderly and predictable system to determine who reports to whom and how tasks are divided up and integrated. ¶Staff. The people in the organization considered in terms of their capabilities, experience, and potential. ¶Management systems. The processes and procedures through which things get done day-to- day. ¶Leadership style. The way leaders focus their time and attention and the personal tone they set.

29. ② 7-S FRAMEWORK What change is needed? How should the client make change happen? Gaps in performance Organizational challenges initiatives Organizational challenges Energizing elements Winning formulaPivotal jobsDesign levers Organizational structure Management systems Leadership style Staff StrategySkills Shared values VISION

30. At the heart of we mean by organizational performance is a “winning formula” creating a combination of strategy, skills, and shared values to carry out an organizational purpose. What links these elements together (the “overlap”) is the organization’s vision: ¶The vision is the overriding goal of the organization – the place where strategy, skills, and shared values intersect. It is the single, noble purpose that guides organizational priorities and gives meaning to the day-to-day activity of the staff. ¶ For example, McDonald’s has a vision-driven “winning formula,” as described below.

31. McDONALD’S WINNING FORMULA Vision : to become the leading restaurant chain in the world Strategy Shared values Skills Convenient Good quality Consistent Family-oriented environment Fair value Quality control over all aspects of business Superior site selection Continuous new product development Strong promotion of products and McDonald’s image Quality Service Cleanliness price

32. Organizations usually change in response to discontinuities – either external shocks (such as deregulation ) or internal changes (such as new leadership) that make it clear that the old, “grooved” way of doing things is no longer winning. The successful ones will create a new winning formula that is based on changes in strategy, newer or stronger skills, and/or shared values. Contrasting the new winning formula to the old formula identifies and gauges the change that the organization is considering and defines the vision for the change program. A change vision is a creed that summarizes what an organization is trying to become and why. As such, it guides organizational priorities by redefining and recombining business objectives, required institutional skills,and corporate values about what is important around here. A change vision is at the heart of top management’s role in improving performance and is often the first step. It provides the vital bridge between the initial dissatisfaction with the status quo and the first practical steps taken in a change program – the articulation of a clear target that represents something better that is both logically sound and emotionally appealing.

33. IMPROVING ORGANIZATIONAL PERFORMANCE GroovedRedirectedUnfrozen Discontinuities External shocks New competitors, economics New technologies Deregulation Internal changes New aspirations New leader Major change through people StrategySkills Shared values VISION New strategy New or stronger skills Shared values CHANGE VISION

34. Certain key people in the organization hold positions that determine success or failure in instituting a new strategy, skill, or shared value. These people fill what we call pivotal jobs. We will only succeed in implementing the change vision if we succeed in changing the behavior of pivotal jobholders. At McDonald’s, for example, pivotal jobs include the centralized purchasers of all raw materials for all stores, the store managers, and the hourly employees who take and assemble orders.

35. PIVOTAL JOBS What people must do What are they ? Positions that have direct impact on delivery of value to the customer. Typically they -Design the product -Make the product -Sell the product Positions that must capably master new skills Where are they? Close to the front line

36. In a recent study at a chain store retailer, the change vision included a significant improvement in in-store convenience. Two positions were identified as pivotal jobs – the store manager and the area operations manager. This study employed a contrast analysis in two forms. The first considered each element of behavior and defined how the new behavior would need to differ from current practices. A behavior contrast analysis often proves helpful in defining precisely how the pivotal job- holders need to change.

37. CONTRAST ANALYSIS Pivotal jobs: store manager, chain retailer ElementsOld behaviorNew behavior Use of time Spend majority of time on daily routine tasks – unloading trucks, stocking shelves, etc. Devote much more attention to training/coaching, evaluating/experimenting with pricing, staffing, merchandising Job objectiveEnsure that day-to day store operations run smoothly Manage store profitability and implementation of new convenience strategy Critical skillsConscientious, responsible Basic math and writing skills Old skills, plus… –Good instincts about how to affect profits –Leadership qualities Criteria Task completion Financial performance Old criteria plus added emphasis on… –Customer service –Inventory management –Store appearance

38. The second analysis contrasted the percentage of time spent on critical tasks under current practices and envisioned in the future.

39. CONTRAST ANALYSIS BY PERCENTAGE OF TIME SPENT Pivotal job: area operations manager 100% CurrentProposed Tailor products, services, pricing, and promotion to segments Search for new business Evaluate business and customer service performance Expand one-on-one time with SM and associates Train and motivate face-to-face for customer service, inventory management… Encourage SM to innovate Clerical support should eliminate tasks Short vendor contacts Recruiting SM and pharmacist Disciplining Balancing inventory Follow-up on telephone messages Inventories Paperwork Putting out fires Monitoring compliance –Policies –Planograms Answering surveys Filling out appraisals District reports Merchant/ owner Coach Player Admini- straor

40. The 3-S winning formula sets the standards, goals, and mission of the organization. How do you get people (particularly pivotal jobholders) to actually follow those goals? While you can dictate what skills and shared values you want, the organization must provide guidance, motivation, and monitoring to see that the right decisions are made. This is provided through the other Ss – structure, systems, staff, and style. Collectively known as the “design levers”, each of these four should be set by considering the specific skills and shared values you want to instill in the organization’s people – and balancing them with other designs that might be suggested by other specific skills and shared values needed. ¶ Structure. Who reports to whom and how tasks are both divided up and integrated. ¶ Systems. The processes and procedures through which things get done from day to day, including hiring, compensation, performance evaluation, promotions policy, and training. ¶ Staff. The people in the organization considered in terms of their capabilities, experience, and potential. ¶ Style. The way managers collectively behave with respect to use of time, attention, and symbolic actions.

41. ORGANIZATIONAL DESIGN LEVERS AT McDONALD’S Winning formulaPivotal jobsDesign levers Organizational structure Management systems Leadership style Staff StrategySkills Shared values VISION Centralized buying to control fat content Hamburger University degree required Promotion from within to build experience Regular inspections Franchise expansion based on high grades on prior inspections Many procedural mechanisms aimed at building employee enthusiasm and loyalty Hard-nosed, rigid attitude on how to run the business

42. The skills and shared values must be used to determine needed changes in organizational design. For example, McDonald’s specific skill of quality control drives many organizational design decisions. Structure1.Centralized buying provides more than economics of purchasing. It also helps ensure that fat content is between 17.0 and 20.5 percent and ensures that burgers are 100 percent beef. Staff1.Owner –operators have more say on quality of operations than absentee investor-owners. 2.Training at Hamburger University ensures that managers really know how to make the food right. It is a $40 million facility, with 750-student capacity per 2-week session, and translation booths for foreign managers. It is the only school in the fast-food industry accredited by the American Council of Education. 3.Promotion from within builds experience in meeting company standards and reinforces shared values. Systems1.Operating systems, including job descriptions and performance appraisals, ensure that quality of operations meets standards.. 2.All franchises are inspected on a regular basis, including grades( A through F) on QSC. 3.Unlike other franchises that give rights to territories, McDonald’s franchises cannot expand unless they show a history of high quality in operations. 4.McDonald’s Personnel Action Manual provides mangers with a wide array of programs to keep crew members motivated and committed. Style1.Little tolerance for variance from operations standards, except as well-thought-out improvements. No shortcuts allowed. 2.Kroc’s inspections. Before entering a franchisee’s office, Kroc would often pick up all the trash within a two-block radius of a McDonald’s restaurant and then dump it on the franchisee’s desk to show a need for greater cleanliness in McDonald’s vicinity.

43. ORGANIZATIONAL DESIGN LEVERS AT McDONALD’S Winning formulaPivotal jobsDesign levers Organizational structure Management systems Leadership style Staff StrategySkills Shared values VISION Centralized buying to control fat content Hamburger University degree required Promotion from within to build experience Regular inspections Franchise expansion based on high grades on prior inspections Many procedural mechanisms aimed at building employee enthusiasm and loyalty Hard-nosed, rigid attitude on how to run the business

44. The design lever clients exercise the most is probably structure. Too often we hope that by tinkering with boxes in organizational charts, we can solve organizational problems. Structure is really about how to arrange people and jobs for optimum performance. A few assertions about structure: ¶There is no one best structure for any company. Structure choices for a client may change over a few years, depending on external environment, leaders’ strengths, and internal capabilities. ¶Structural choice should be based on the desired behaviors for the organization, which are based on strategic direction.

45. STRUCTURAL OPTIONS Strategic directionDesired behaviorStructural options 1.Greater uniformity across the organization Centralization Small span of control; many layers Functional structure 2.Rapid adaptation to quickly changing or complex environment, or greater response to market Decentralization Fewer corporate staff Flat structures Business unit structure to match strategic direction (geographic/product/market segment) Temporary teams across products or functions 3.Rapid technological innovation Centralized technical staff for economies of knowledge Decentralized task force for focus, Initiative 4.Cost reductionConcentrating staff only at level where integration is most crucial Flatter structures; broad span of control

46. The change board framework can be useful for understanding the commitment and ability to undertake major change. For each management layer and pivotal job, it asks: ¶Who among the important players is able to perform is his/her part in providing the new skill? ¶What do they have or lack: Conviction that the new skill is important? Courage - the “guy” willingness to do what ever it takes to develop new skills? Individual ability – that is, personal skills or talents? Organization supports – such as the necessary system support? Investing time in a change board analysis has helped a number of leadership teams understand the nature of the current gap and gain insight into the most effective skill- building program

47. ③ CHANGE BOARD Leadership group of area to be changed Down-the-line staff affected* External Constituencies** Chief executive (or equivalent) Skill to be built * Modified as appropriate for company ** E.g., customers, suppliers, trade unions What change is needed? How should the client make change happen? Gaps in performance Organizational challenges initiatives Organizational challenges Energizing elements ConvictionCourage Commitment Individual ability Organization supports/obstacle Capability to leverage the commitment

48. Specific questions can guide you as you fill out the change board. ¶ Will people have to Learn new skills? Learn new behaviors? Reestablish priorities? Delegate/assume decision making responsibility? Build new working relationships? Compromise other agendas? ¶ Do people have the capacity to make all these changes? ¶ Have people had positive or negative experiences with past change efforts? ¶ Is the change consistent with existing cultural norms? Beliefs /values Behaviors A retail chain provided this example of a completed change board.

49. CHANGE BOARD – CHAIN RETAILER EXAMPLE Top management (6) Intellectually convinced, but Distant from field realities LBO pressures Fair to strongStrong, except COO lacks field experience HR position vacant Little support No performance measures on in-store History of top-down “customer service programs Other Officers/“owners” Home office (15) Field (8) Lip service “Make the field do its job” “H.O. does not understand what it is asking for” Weak Moderate Fair to strong Fair Few support “Segmentalist” rivalry among functions Inadequate operating systems “Can do” style (do not admit weakness) Area operations Managers (125) Suspicious, but eager to believe StrongFair to weakOverloaded: span of control=60-80 Store managers and assistants (3,200) Cynical (“yet another program”) Fair: ready to follow clear orders from above Fair: most trained as “task masters” “Horizontal priorities” (unrealistic number of tasks assigned) Associates (30,000) Mixed, but many natural supporters ?Surprisingly strong, on average Turnover increasing; too few labor hours for full service CourageConviction Commitment Individual ability Organization supports/obstacle Capability Diagnosis Delivering in-store convenience

50. A completed change board often suggests the actions that may be necessary to build the commitment and capability required to implement change within your client’s organization. In the chain retailer case, actions included: 1.Lock – in support COO as “champion” Full –time change leader (facilitator) Line accountability 3-year commitment 2.Create shared responsibility for progress Three “skill teams,” each headed by a field “baron” District entrepreneurship: each district manager to experiment with two to three initiatives and then share lessons 3.Build a success model from below Focus on one pilot area (14 stores ) Use full-time task force of high-potential area managers (eight managers, 3-to 9- month tours ) “Trained “area managers return to home districts to lead pilot area process there 4.Force awareness of realities Quarterly workshops to assess progress on skills Close observation of pilot area (“ If we can’t make it work in one area, there’s no point in talking about company wide programs” ) 5.Restructure field organization Store staffing standards AOM span of control, supports New recruiting/selection Link to pharmacy strategy/skill gaps

51. CHANGE BOARD – CHAIN RETAILER EXAMPLE Top management (6) Other Officers/“owners” Home office (15) Field (8) Area operations Managers (125) Store managers and assistants (3,200) Associates (30,000) CourageConviction Commitment Individual ability Organization supports/obstacle Capability to achieve change objectives Strategy Delivering in-store convenience 1.Lock in support 2.Create shared responsibility for progress 3.Build a success model from below 4.Force awareness of realities 5.Restructure field organizatio n

52. To answer the question, “How should change happen?”, the OP developed the “organizational transformation triangle” that summarizes the three basic management tasks when dealing with change. Their relative emphasis may vary, but all three of them have to be managed to achieve fundamental behavioral change.

53. Energizing elements What change is needed? How should the client make change happen? Gaps in performance Organizational challenges initiatives Energizing elements ④ TRANSFORMATION TRIANGLE ④ Top management 1.Top-down direction setting Process design, target, communications, etc. 2.Front-line performance improvement Unit-by-unit, team-oriented, problem solving 3.Cross-functional initiatives Link activities and information in new ways for break-through performance Operations Staffs

54. The well-known GE “workout!” change program included elements from each dimension of the transformation triangle.

55. GE “WORKOUT!” 1.Top-down direction setting/culture shaping No.1 or No.2 in every business “speed, simplicity, self- confidence” Delayering Best practices workshops 2.Bottom-up performance improvement Town meetings: 2- to 5- day interactive sessions “Brand name” quality processes Operations: unit-by-unit redesign 3.Core process redesign Project teams to identify cross- functional issues Process mapping

56. The client should seek an appropriate balance across all three dimensions of the transformation triangle. Overreliance on any dimension will impede change.

57. BALANCE ON 3 DIMENSIONS IS KEY RequirementsDimensionPotential risk from overreliance Energizing vision Customer/shareholder/emplo yee triad Clear performance targets Lack of commitment Confusion Cynicism Performance wins Relevant knowledge and skill building Expansion expectation Unfocused efforts Ignored or undermined by management Cross-functional opportunities missed Discontinuities addressed Clearly understood process installed Old systems/structure/ processes eliminated Overly complex Beyond existing skill and capabilities

58. The OP has defined a wide array of change approaches. Each change approach strikes a unique balance among the dimensions of the transformation triangle. Your challenge is finding the change approach that strikes the balance appropriate for your client situation.

59. OVERVIEW OF 5 PERFORMANCE CHANGE APPROACHES ABCDE DescriptionStructured process-Driven problem solving (compliance) Empowered opportunity- driven innovation Values-driven adaptive improvement Cross- functional process redesign Top-down, skill-driven building/ improvement Transforma- tion emphasis ExampleTOP/AVABreakthroughTQMCPRCorporate skill teams When appropriate Step change needed quickly Entitled culture Change-ready, flexible organization Approaching theoretical limits; performance ethic and capability in place Cross- functional redesign needed New basis for competitive advantage needed Typical goals40% of compressible costs (imposed) Up to each team; typically, stretch targets in quality, cost, etc. Continuous improvement Quicker, cheaper, better Lasting competitive advantage

60. No matter what change program is selected, the following six energizing elements should be addressed. By addressing each one, the client builds the energy required to make organizations change.

61. ⑤ ENERGIZING ELEMENTS Ambitious, measurable objectives Reinforcing feedback Consequences Winning formula Winning leadership group Doer-driven Fact-based People-intensive New mind-set New skills, behavior Systems and process Structure Roles Build commitment Establish 2-way flow Manage expectations Inspire action What change is needed?How should the client make change happen? Gaps in performance Organizational challenges initiatives Energizing elements Performance measurement Communications Vision and leadership Problem solving process People development Organizational infrastructure

62. The OP has a wealth of experience and research to support the design of each element of a change program.

63. World benchmarks Project performance indicators framework Performance maps Performance contracts pro forma Best practice examples Leading for success CEO time-leverage manual Analytical tool kit framework Analytical problem solving workshop “data to chart” video and workbooks Client advocacy videos Skill/will/diagnostic Continuous improvement principles workshop Best practice examples Core process redesign Example role description “7-S” checklist Communications coordination team-job specifications Communications channels audit Stakeholder analysis Communications plan Communications workshop Best practice examples POSSIBLE ACTIVITIES/TOOLS Framework for designing skill-building programs Discrete training modules — management skills (MFS), leadership skills(LFS), building high-performing teams, project management guide, designing ongoing improvement Discrete tools — RJDs, time-usage logs, change-readiness surveys, signaling change tool kit, how to run a training workshop Beliefs/behavior-prompt sheet — staff activity survey Best practice examples Performance measurement Communications Vision and leadership Problem solving process People development Organizational infrastructure

64. A packaging company applied these energizing elements as they built the skill they called value-based systems selling (VBSS): ¶With a clear vision and leadership settled, the company decided on a problem solving process that involved six multinational skill teams, each with a credible leader. ¶Their performance measures were narrowed to two aspects: in terms of input, they measured account plans created and number of plans created and number of people trained; in terms of output, they measured price and market share. ¶To communicate the message, the president embarked on a “road show” to manufacturing and sales locations; the senior managers attended workshops; and a newsletter/bulletin about VBSS was begun. ¶The organizational infrastructure was modified to establish account teams, global account managers, and an account planning function. ¶On the people development front, an “ action learning” program was begun to teach people more about account planning. All these tools and activities were focused on achieving a new level of excellence in the core skill of VBSS that the company knew was critical to its strategy.

65. Account-based “action learning” program Multinational skill teams with 6 credible champions Pilot effort with leadership to get buy- in and advice The leader skill for becoming $1 billion President as sponsor Input –Account plans –People trained Outputs –Price –Share Awareness building – President’s road show Skill building through workshops Reinforcement through VBSS network bulletins Account teams Global account managers Account planning Performance measurement Communications Vision and leadership Problem solving process People development Organizational infrastructure VBSS

66. Associates will often step up to manager roles on engagements that address organization issues and/or implement change. These engagements often involve multiple client teams. Associates assume responsibility for managing one or more of these client teams. These engagements also seek the active support of a broader set of client managers. Associates assume responsibility for developing influential relationships with critical client managers. Engagements which focus on organization issues therefore provide exceptional opportunities for associates.

67. ASSOCIATES ASSUME MANAGER ROLES IN ORGANIZATION ENGAGEMENTS Traditional view of team roles ED/DCSAssociate Client team Associate EM Team roles on organization engagements ED/DCS Associate Sr. client exec. Associate EM Client manager Client manager Client team Client manager Client manager Client team Client team Client team

68. The effective associate manager serves three functions: 1.The associate manager builds and sustains effective client teams that define, plan, and implement the change. 2.The associate manager leads problem solving on multiple client teams. 3.The associate manager forges a consensus of support for the change vision among critical client managers and ensures that managers maintain the energy level required to effect the change. All three functions are critical to success. However, in engagements that address organization issues and /or implement change, building and sustaining an effective team is often the necessary precondition to success in the other functions. The client team provides the critical insight, knowledge, and skills required to solve the organizational problem. The associate / manager needs to build an effective team environment to tap into the essential client input. The client team should hold the confidence of the critical client managers. Once the associate manager has earned the endorsement of the client team, the support of the client manager is much more likely.

69. Client involvement Problem solving Team dynamics Consensus builder Chief engineer Focuser Structurer Quality controller Devil’s advocate Coach and team developer MANAGERIAL ROLES

70. Since effective teams are so fundamental to success in organization work, the OP has invested considerable effort in understanding how to build high-performance teams. Follow these principles to build high-performance teams. PRINCIPLES OF TEAM BASICS DimensionDefinition Meaningful purpose The team purpose must Inspire the individual team members Justify the investment of Firm and client resources, as well as the personal investment of each individual For an engagement team, the purpose must include reference to substantive and sustainable client impact Clear performance goals The best teams translate the purpose into a well-defined set of tangible and measurable goals. The goals encompass What will be achieved for the client in terms of performance What will be achieved for the team and its individual members Nearer-term goals, as well as “completion-related” goals Well-defined working approach The best teams decide up front and throughout the effort how to work together day-by-day, and how individual team members will apply and develop their skills as they produce collective results above and beyond what members working as individuals could produce. Their working approach allows substantive time for “unstructured” creative team thinking/brainstorming Complementary skills The best teams are composed of individuals who provide or are expected to develop the full range and depth of skill needed to fulfill the purpose. Skill development is seen as a key reward for team participation. This applies particularly to functional skills, but also to problem solving skills and interpersonal skills Mutual accountability In the best teams, all team members feel mutually accountable for accomplishing the team’s purpose and performance goals. Individuals do not succeed or fail – the team does Small numbersSuperior team performance can only be achieved by a small number of people who can spend substantial time working together as a team. A group of more than approximately 15 people has little chance of becoming a superior team The principles are described much more thoroughly in The Wisdom of teams, authored by Jon Katzenbach.

71. PRINCIPLES OF TEAM BASICS Coach and team developer Small numbers Meaningful purpose Clear performance goals TEAM BASICS Mutual accountability Complementary skills Well-defined Working approach Source: The Wisdom of Teams

72. A team’s potential is defined by the quality of its membership. The associate manager should, whenever possible, participate actively in the selection of team members. Recent research by the OP has found that most successful change programs were driven by a few impassioned leaders. These “real change leaders” exhibit a common set of characteristics. Look for these attributes as you consider which client people to include on the team.

73. REAL CHANGE LEADERS “People with a reputation for improving performance through people – and for exceeding expectations along the way” * Commitment to a better way Courage to challenge existing power bases Personal initiative to go beyond defined boundaries Motivation of themselves and others Caring about how people are treated and enabled to perform Staying under cover A sense of humor about themselves and their situations * Real Change Leaders

74. . Once the associate manager has assembled the right team and built an effective team environment, solving the problem should be easier. The principles of good problem solving do not change for engagements that address organization issues and/or implement change. The way the associate participates does change, however. Here are a few recurrent themes taken from interviews with associates after their first organization engagement ¶Let the team solve the problem. You won’t have time to solve the problem yourself when you have multiple teams to manage. More importantly, the team will feel more ownership for the solution if you let them solve the problem. ¶Teams should be productive. Focus the team on action and work. Define specific end products. ¶If you have assembled the right team, every member has an important part of the answer. Engage the entire team in solving the problem. Every team member should have a challenge piece of the problem. ¶Meetings are necessary evil for effective teams. Keep them to a minimum. Prepare meetings carefully so that they are a constructive use of team time. ¶Listen. Especially on organization problems, the client often knows the answer but needs help recognizing it.

75. SOLVING THE PROBLEM Chief engineer Focuser Structurer Quality controller Devil’s advocate Structure the problem, then let the team solve it Focus the team on action and work – not process, talk, and review Keep the entire team engaged Prepare brief, high – impact meetings Listen

76. If you have the consensus of the team, it should be easier to sustain the support of critical client managers. A few basic principles merit emphasis: ¶You need to begin building credibility with client managers early in the study. Talk to them early and often. Engage then in defining the issues and prioritizing the work. This ensures that their issues will be addressed. ¶Managers have specific interests and motivations; these interests explain much of their behavior. You will be more effective at influencing managers if you spend a few moments trying to understand their interests. Before each discussion, consider how your recommendations impact the client manager’s interests. ¶When issues or concerns become apparent, address them squarely. There is little value in avoiding and issue; it will come out eventually. Many issues evaporate when explicitly discussed. Many others can be resolved by specific analysis. Issues that persist need to be factored into the team’s thinking. ¶Whenever appropriate, include key team members in important discussions with critical client managers. Then client manager will get to know the team members better and place more trust in their advice. When you include team members, the client manager can sense first-hand the strength of the team consensus. As an added benefit, team members appreciate the opportunity to interact with managers, and they can help you interpret the client manager’s feedback. ¶Good written materials are always useful in client manager discussions. Preparing them forces the team to explicitly agree on the content. After presentation they serve as a solid record of what was said. The opportunity to interact with client managers in one of the more attractive elements of organization work. Associates can use this interaction to develop client relationship skills that will be vital in the years ahead.

77. BUILDING CONSENSUS Talk to critical managers early and often Understand the motivations of the critical managers Address issues and concerns directly Include key team members in important discussions Prepare clear, concise written materials Consensus builder

78. We hope that you take away four major points from this session: ¶Performance is the point of our consulting work, which involves an integration of strategy and organization. ¶Inevitably, at the heart of all our work is change. And at the heart of change is a respect for and understanding of people. ¶To understand organization performance and bring about lasting change, it is as important to problem solve for how ( the engagement process ) as what ( the engagement issues). ¶Organization work provides associates an opportunity to stretch their people-management skills early.

79. WHAT WE HOPE YOU TAKE FROM THIS DOCUMENT 1.Winning performance is based on the integration of strategy and organization 2.Respect for and understanding of people is at the heart of all change 3.Problem solving for process is as important as problem solving for issues 4.Associates have a significant and rewarding role to play in organization work

80. WHERE CAN AN ASSOCIATE FIND OUT MORE Selected core documents and handbooks The overview of core of frameworks in Sections 1 and 2 of this document describes the basics and provides a template to better understand client organization issues, which should prove helpful in almost any engagement because no matter what the focus of an engagement is, a basic understanding of the process of change is necessary to focus on the priorities of the client Once you are assigned to an engagement of this kind, you may need to read more about some of these frameworks or gather handbooks about the topic. As you may know, PDNet contains a large array of documents that may be useful to you. You can get hard copies of such documents in 24 hours using “PDNet Express” through your local library However, there are thousands of documents in the Firm’s databases; therefore, the key for efficient data gathering and “getting smart fast” will be to access only a limited and targeted selection of documents when you need them. This section provides you with some hints on key, core documents of the organization practice and related disciplines

81. Appendix This appendix contains: 1.HPO bulletinsHPO bulletins 2.Glossary of 7-S frameworkGlossary of 7-S framework 3.Organization transformation triangle 4.Energizing elements

82. GLOSSARY OF 7-S FRAMEWORK Winning formulaPivotal jobsDesign levers Organizational structure Management systems Leadership style Staff StrategySkills Shared values VISION Centralized buying to control fat content Hamburger University degree required Promotion from within to build experience Regular inspections Franchise expansion based on high grades on prior inspections Many procedural mechanisms aimed at building employee enthusiasm and loyalty Hard-nosed, rigid attitude on how to run the business

83. STRATEGY Winning formulaPivotal jobsDesign levers Organizational structure Management systems Leadership style Staff StrategySkills Shared values VISION What is it?An integrated set of actions to deliver a superior value to a set of customers with a cost structure allowing continuing excellent returns What is it important? Gives direction and purpose to organization activities Strongly influences what skills the organization needs, what values are stressed, and how it should be designed Provides benchmark for measuring organization’s success and redirecting its activities What must I know about it? Balance between strategic thinking and capability to execute often unmanaged Strategy formulation must consider the complexities of external environment (e.g., discontinuities gaining ) balanced with internal history and capabilities Increasingly, superb performers frequently win not by “inventing it first”, but by doing it best In highly uncertain environments, institutional skills may help dictate strategy

84. INSTITUTIONAL SKILLS Winning formulaPivotal jobsDesign levers Organizational structure Management systems Leadership style Staff StrategySkills Shared values VISION What they are?End – result activities the company must be really good at in order to deliver the value proposition Why are they important? To help people focus on the 2-4 skills critical to delivery of the value proposition They drive organization design – other organization elements must be designed to build needed skills What must I know about them? Institutional skills are organization capabilities, not just abilities of managers or other staff Strategy work is incomplete without explicit consideration of the institutional skills required to execute the strategy Institutional skills increasingly are the primary basis for achieving sustainable competitive advantage

85. SHARED VALUES Winning formulaPivotal jobsDesign levers Organizational structure Management systems Leadership style Staff StrategySkills Shared values VISION What they are?Simple terms that say, “ What is important around here? “ Why are they important? Provide means to achieve value proposition through –Aspirations, pride, emotion, and energy –Focus, guidance, and learning orientation –Solution space/ tie breakers What must I know about them? Shared values are probably the hardest S to influence But ignore at your peril. Any strategy consistent with deeply grooved shared values will never be implemented The leadership team must articulate, believe in, and be credible on shared values Shared values are shaped by obsessive, persistent communication from leaders

86. VISION Winning formulaPivotal jobsDesign levers Organizational structure Management systems Leadership style Staff StrategySkills Shared values VISION What is it?An overriding goal that people in the organization strive to achieve; that is challenging, valuable, and exciting to them; and valuable and differentiated to the intended customer Why is it important? “Strategy and tactics are for the battlefield, but the battle must be fought for a purpose of value to society” Genichi Kawakami, Yamaha Corporation Provides meaning, motivation, and source of pride to attract and retain customers and able employees Helps drive long-term strategy formulation and development of needed skills and values Supplies courage in the face of the unknown by providing sense of stability and enduring themes Guides and inspires daily behavior, reducing need for bureaucratic rules and systems What must I know about it? Leader must set and live by vision for it to permeate institution Best visions are simple, easy-to-understand, and demand nothing short of long-term excellence Financial goals (e.g., increase SOM, increase shareholder wealth ) are not visions; they do not excite the organization’s people or provide enough competitive differentiation to serve as standard for behavior Vision is extremely difficult to change significantly without creating discontent, reduced effectiveness, and even abandonment of institution by its best people and customers However, visions can and must be constantly challenged and changed at the margin to adjust for the institution’s changing environment

87. PIVOTAL JOBS Winning formulaPivotal jobsDesign levers Organizational structure Management systems Leadership style Staff StrategySkills Shared values VISION What is it?Positions, close to the front line, that have direct impact on delivery of value to the customer (e.g., those who design the product, make the product, and sell the product ) Why is it important? Successful implementation of any change hinges upon the pivotal jobholders acquiring new skills Thinking about the new skills these pivotal jobholders must acquire pushes the depth and rigor of our thinking What must I know about it? Relationship between microskills of pivotal jobs and macroskills of the organization Contrast analysis compares microskills required after a major change program to those currently required in the organization Reverse-engineer the organizational design – start with the results you expect; identify the behavioral change needed to achieve those results; then shape the “other Ss” to influence pivotal jobholders to perform as required

88. STRUCTURE What is it?An orderly and predictable system to determine who reports to whom and how tasks are divided up and integrated Why is it important? Facilitates coordination and integration Symbolizes priorities Focuses organization attention What must I know about it? Design should support needed skills and shared values Structure is most powerful tool for energizing change Structuring is not simple Key structural issues include –Types of structure –Span of control –Centralization vs. decentralization Winning formulaPivotal jobsDesign levers Organizational structure Management systems Leadership style Staff StrategySkills Shared values VISION

89. STAFF What is it?The people in the organization considered in terms of their capabilities, experience, and potential Why is it important? Staff composition and productivity are important determinants of current and future strategic success The people who make and sell the product/service collectively determine if the client delivers superior value What must I know about it? Front-line positions require detailed attention to specific skills and shared values Key issues can include who to hire, how to train and coach them, how to motivate and reward them, and what information to give them Support positions must reflect the needs of the front-line people Winning formulaPivotal jobsDesign levers Organizational structure Management systems Leadership style Staff StrategySkills Shared values VISION

90. SYSTEMS What is it?The processes and procedures through which things get done from day to day Why is it important? Most important tool for Commanding attention Influencing behavior Indicating how things really work here What must I know about it? Best companies employ relatively few and simple systems They should be shaped on a regular basis Important types include – Management information systems (MIS) – Incentive systems – Planning Systems to get right information in the hands of the right people are increasingly important Winning formulaPivotal jobsDesign levers Organizational structure Management systems Leadership style Staff StrategySkills Shared values VISION

91. STYLE What is it?The way people focus their time and attention. There are tow types Personal tone (e.g., supportiveness, argumentativeness ) How people spend time, what questions they ask, settings they appear in Why is it important? The key lever in shaping values and reinforcing strategy What must I know about it? What people do means more than what they say The best leaders use style to emphasize a few simple values While personal tone is hard to change, managers can more easily adapt how they spend time, questions they ask, and settings they appear in Winning formulaPivotal jobsDesign levers Organizational structure Management systems Leadership style Staff StrategySkills Shared values VISION