Strategy A View From The Top Prentice Hall 2-1 Copyright © 2009 Pearson Education, Inc. Publishing...

StrategyA View From

The Top

Prentice Hall

2-1Copyright © 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”





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





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





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

WinnersLosers

77 9 7 82

56 14 4 81

47 17 3 78

50 14 3 78

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

WinnersLosers

44 6 4 47

65 6 13 56

39 5 3 43

2 22

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 ResponsibilityConflict resolutionAuthority to make key decisionsResource allocation

Key tasks:Closing capability gapsMaintaining 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

Strategicintent

Organizationalcapabilities

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

Strategy Leadership

Structure

Systems Processes

People Culture

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

LeadingLagging

Soft

Hard

Vision &

Strategy

Vision &

Strategy

CUSTOMERCUSTOMER

“To achieve our vision, how should we appear to our customers?”

Objectives Measures Targets Initiatives

FINANCIALFINANCIAL

“To succeed financially, how should we appear to our shareholders?”


INTERNAL BUSINESS PROCESSES

INTERNAL BUSINESS PROCESSES

“To satisfy our shareholders and customers, what business processes must we excel at?”


INNOVATION AND LEARNINGINNOVATION AND LEARNING

“To achieve our vision, how will we sustain our ability to change and improve?”


TargetsTargetsTargets

Vision / Mission

Objectives

Measures

Targets

Initiatives

Whatwill progresstowards out visionof the future look like?

What are the steps we willbe taking to achieve

our vision ofthe future?

Objectives…Measures…Targets

Financial Measures are Necessary but Not Sufficient…

Revenue growth ratesCost reductionAsset utilizationProject profitabilityTo 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?

MarketShare

CustomerRetention

CustomerProfitability

CustomerSatisfaction

CustomerAcquisition

Customer RelationshipProduct / Service

AttributesImage and Reputation

Organizational sub-units may have internal clients.

As are Internal Business Processes

Improve qualityReduce cycle timesMaximize productionMaximize throughputReduce cost per processReduce cost per transaction

CUSTOMER

NEED

SATISFIED

SERVICE THE

CUSTOMER

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?

corecompetencies

And Learning and Innovation…

Employee capabilitiesInformation system capabilitiesMotivationEmpowermentAlignment

To achieve our vision, how will we sustain our ability to change

and improve?

Internal &

External R

&D

Analysis of these measures highlightsgaps 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

employed 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 thefour perspectives

Financial CustomerInternal Business ProcessesLearning 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

StrategyGood Bad

Good

Execution

Bad

StrategyA View From

The Top

Prentice Hall

2-57Copyright © 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.

Strategy A View From The Top Prentice Hall 2-1 Copyright © 2009 Pearson Education, Inc. Publishing...

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