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End of baby-boomers likely to slow growth

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Anatomy of a healthy corporation

How can business leaders embed "healthy" thinking in the organization?

The challenge of sustaining corporate performance has long exercised the minds of executives and management thinkers. Pioneering leaders such as GM's Alfred Sloan and IBM's Thomas Watson, who sought to create enduring institutions, have become the stuff of business legend. And scholars have spilled oceans of ink trying to explain what makes strong performance endure.

Yet many senior executives, try as they might, still find it hard to shift their attention away from today's stock price and the next set of interim results. The forbidding presence of hedge fund and private-equity investors on corporate share registers and the increasingly short tenure of CEOs have only intensified the obsession with short-term performance.

A series of articles in The McKinsey Quarterly has described the way companies can take steps today to ensure that they perform well not only this year but also in the years to come (see Related Articles to the right). Underlying these actions is a mental discipline founded on the simple metaphor of human health, which improves when cared for and deteriorates when neglected. Further research has deepened the understanding of what a healthy corporation looks like and, more important, what business leaders can do to embed healthy attitudes throughout their organizations.

Continued from Last Week

Execution

Even as companies hedge against external shocks, they need to get the basics right, make good decisions, and perform essential tasks. Brilliant products, clever promotions, or surging markets can obscure sloppy execution for a while. But sooner or later, as Atari spectacularly demonstrated when it fell from grace in the mid-1980s, this kind of fragility will be exposed; the games company lost the ability to turn out high-quality products because it focused too much of its energies on marketing and cost control.

As both our experience and our reading of the academic research suggest, companies that execute well share certain attributes: distinctive capabilities, the ability to make sound and timely decisions, strong forecasting skills, and employees who understand their roles and responsibilities. Too many managers take these things for granted. A healthy company pays attention to them constantly.

Alignment

Many companies seem robust in the face of external surprises and good at conducting day-to-day business, yet their managers and employees lack cohesiveness of purpose. In our experience, healthy companies, however scattered and disaggregated physically and organizationally, generally work toward a common cause. They usually achieve this kind of alignment when they sketch a compelling vision of the future for everyone connected with them-employees in particular-by articulating a shared identity that rises above individuals, functions, and business units; by reflecting stakeholder concerns in corporate values; and by reinforcing the sense of common purpose with formal mechanisms, such as performance contracts.

Renewal

Healthy companies invest in their future by expanding into well-chosen markets where existing assets and competencies provide real leverage, usually with the help of a winning formula that has been honed from experience and facilitates smooth integration across the entire value chain and the efficient extraction of synergies. Nike's forays into golf, ice hockey, and soccer in the areas of footwear, sportswear, and equipment, for example, follow a pattern that the company first set with basketball.

Renewal also requires attention to softer issues, such as the ability to generate ideas and adapt to change, both culturally and strategically. Markets and industries move quickly; most companies do not. Smith Corona was a peerless and highly successful typewriter maker until the electronic age overtook it.

Complementarity

The concept of complementarity, explored in detail by John Roberts in his book The Modern Firm,2 often figures in organizational practices, such as hiring policies, training programs, and consistent and mutually reinforcing behavioral incentives. Toyota Motor has long been singled out as a company whose aspirations for quality, management of suppliers, and capability-building and management systems all serve to reinforce the drive for steady improvement.

Effective communication and collaboration are crucial to ensuring that assets, processes, relationships, and management practices act in concert. Typically, in healthy companies information flows across the organization, as well as from top to bottom, tapping into social networks beyond the formal organizational structure.3

Healthy actions

The five attributes we've outlined are emergent characteristics of a company's performance system rather than narrow outputs of performance. A manager therefore cannot expect to take an action or a set of actions that automatically "creates," say, resilience or renewal, much as the effect of medicine on a fever depends on what's going on elsewhere in the patient's body.

For this reason, executives must not think of any one of the attributes as though it operated independently. There are invariably tensions among them-moving to improve one could weaken or compromise another. To the extent that renewal involves adaptation or a radical transformation, for example, a company's usual execution skills can suddenly look obsolete and ineffective. What's more, making all the different parts of an organization complement one another generally yields value, but changing a single element, without being sensitive to its impact on the rest, could ultimately jeopardize the performance of the whole.

The discipline of managing tensions among the different characteristics of health requires a willingness to transcend daily routines and conventional mind-sets and to view the performance system in its full complexity. Vital corporate and individual processes are highlighted by our suite of recommendations: breaking down a company's resources into separate performance and health components, ensuring a balanced portfolio of strategic and other initiatives, integrating that approach into planning and budgeting, identifying metrics for assessing health, and building health into formal performance mechanisms. Individually, and even collectively, these recommendations do not create health or, still less, its attributes. They do help an organization to focus routinely and instinctively on the health imperative and to avoid falling into the traps identified earlier.

Monitor the way you allocate resources

The quickest way to get everyone in an organization thinking deeply about its health is to break down resources into two categories-those devoted to driving performance and health, respectively. One ready reckoner is labor costs: executives, for example, should routinely know how many of their employees work on delivering the current operating plan as opposed to looking after the underlying health issues described earlier. That way, they can have well-informed conversations about whether or not they are investing resources in a balanced way.

Balance the strategic portfolio

Companies can keep an eye on their health by regularly assessing all their business ideas and new initiatives-projects or programs to change or improve something in the business. They should evaluate these projects both by mapping the point when each would be likely to create the greatest value and by looking at whether a project involves familiar, routine work that plays to their strengths and experiences or is a novel departure, which could be riskier and consume additional resources. Healthy companies seek to keep a balance between the two and know that it is not a trade-off between the short and long terms: investing for the long term means action today.

One North American chemical manufacturer we know reviews its project list quarterly, updates the expected value of initiatives once a year, and seeks to ensure that they always represent a mix of efforts to deliver immediate performance and those likely to bear fruit in subsequent years. Companies can use this approach to manage the different attributes of health: one European retail bank designed the initiatives to strengthen its renewal and execution capabilities.

Integrate into core processes

Extending health-oriented strategic thinking into detailed planning and budgeting processes is the next step; for instance, an analysis of the underlying health of cash flows should inform traditional budget reviews. One idea that we find works well is to initiate, as a formal part of the performance-management process, a health dialogue that might touch on the relevance of investment priorities or the product pipeline to a company's future performance. Reviews can also examine human-resource allocations and the way executives spend their time-an exercise that can yield surprising results about their practical commitment to the company's health. A Middle East oil joint venture, for example, recently identified six priority processes as the object of its new focus on health: managing the portfolio of assets so that it contains a full range of projects, at all stages of the hydrocarbon maturation life cycle; managing wells and reservoirs; capital execution; contracting and procurement; talent management; and operational excellence.

Have the metrics to match

Many businesses make a religion out of counting their new customers and the growth of their revenues. Banks look at their cost-income ratio, insurers at the combined ratio. But these metrics don't necessarily measure corporate health, so executives should develop a number of health variables for each of the attributes vital to the health of the business. A retail bank, for instance, might test its resilience by tracking its credit fraud volumes and recurring revenues or its execution skills by determining the turnaround time on loan applications. A company can monitor its alignment by calculating the proportion of its senior managers who disagree about strategies and corporate priorities. To concentrate the minds of its executives, it can test its capacity for renewal by tracking the share of its revenues from new markets and new products and its complementarity by calculating how much of its revenues come from products and services that span business units and from promotions.

Companies typically use key performance indicators (KPIs) to track how they are doing, but health measures are different in nature.The approach we recommend can be helpful in identifying where a company most urgently needs to act.

Reinforce through performance

Once a company has redesigned its regular strategic, budgeting, and planning processes to inject a strong dose of "healthy" thinking-and appropriate metrics are in place-executives must embed health in formal people-management mechanisms, including performance contracts, incentives, career path planning, and staffing decisions. Managers at all levels should know the expectations set for them. Companies should use the metrics discussed earlier to structure evaluations ensuring that employees reap rewards as much for doing health-building work as for enhancing performance.

Whatever gratification executives may get from a juicy set of financial results, the shareholders will ultimately judge them on their ability to repeat these achievements year after year. Becoming well acquainted with the attributes of health-and the tensions among them-is the first step in confronting that challenge. Unless companies embed a health consciousness in their key management processes, the goal of sustained performance will likely remain elusive.

Source: McKinsey & Co. 2007

The Business Cycle

The road to success on two wheels

In January 2005, Rahul Sood, the founder of VoodooPC, was trying to attract the attention of potential acquirers when a friend gave him a hot tip: buy a bike.

In July, a gaggle of Silicon Valley tech executives would be making a pilgrimage to Europe to follow the Tour de France on their bicycles.

"He mentioned that some people from Hewlett- Packard would be there," says Mr. Sood, whose Calgary-based company makes souped-up computers for game enthusiasts and other power users.

"We were at the point where we needed a partner and HP was our number one choice."

Sensing a life-changing opportunity, Mr. Sood wangled a spot on the trip, and began to make preparations. "I had never been on a road bike," he says. "I spent day and night training on a stationary bike at the gym. I went to France looking like a total poser with a shiny new helmet. I didn't know what I was doing."

But the trip paid off. In September last year, Mr. Sood sold VoodooPC to HP for an undisclosed amount. He is now head of HP's new gaming division.

Mr. Sood's story is emblematic of the increasingly important role cycling plays in Silicon Valley's social hierarchy.

On any given weekend morning, scores of spandex-clad rainmakers converge on coffee shop parking lots across Silicon Valley to prepare for a morning climb up the roads that wind their way through the nearby hills that separate San Francisco Bay from the Pacific Ocean.

"Being in Cupertino, we are surrounded by some of the best cycling in the world. It's a beautiful thing to ride 20-30 miles around here," says John Roberts, chief executive of SugarCRM, an open-source software company (the company is named after Mr. Robert's mountain bike). "You can ride all year round."

For many Silicon Valley executives, cycling is more than a way to keep fit or to take in the countryside. It is also an opportunity to network, think up ideas, even to recruit talent.

"For us, at a high level, you look [for] the attributes of cycling: you've got endurance, strength, power and intensity," says Mr. Roberts. "It's also a very social sport. Instead of doing 18 holes of golf, you go ride with 30 people. As you're going through the peloton [a pack of cyclists] you can meet a lot of people."

Mr. Roberts says cycling has been good for business. When SugarCRM began sponsoring competitive rides in San Jose, he was surprised by the response. "We used the rides as a recruiting event and we got some great resumes," he says. "We've ended up hiring a lot of cyclists."

Mr. Sood, an avid cyclist since his auspicious trip to France, says cycling offers a rare chance to get away from his Blackberry and other office distractions. "It clears my mind completely," he says.

In a land of engineers, cycling's technical aspects - gears, brakes and composite frames - also lend geek appeal. "There are a lot of gear-heads out there," says Deepak Kamra, a partner at Canaan Partners, a venture capital firm.

Mr. Kamra rides three times a week, for the exercise: "It's just like running, except it's a lot easier on the body. You can socialize a lot better."

Many local cycling clubs organize trips abroad. "I've been to Europe five times now to follow the major races with my club," says Mr. Kamra.

Closer to home, a common route runs up Old La Honda Road, a narrow ribbon of asphalt that climbs into the hills separating Palo Alto from the Pacific. From the top, riders can choose from a series of stunning routes.

Here, a typical ride can last between an hour and a half to four hours; plenty of time to talk with fellow cyclists about the Valley's Next Big Thing.

"We'd never admit that we're doing it for the networking," says Mr. Kamra. But he volunteers: "The people I ride with are basically tech execs. People talk business, but that's not the main objective."

Source: The Financial Times Limited 2007

The new golf?