Toward the High-Performance Organization
|
June 1, 2007
June 1, 2007
It didn't used to be this way. Oh, sure, business owners have always kept a wary eye on their competitors, picking up new ideas from those that thrive. But the idea of systematically trying to tease out what separates an exceptionally high-performing organization from the also-rans is a trend that can be measured in mere decades. Maybe it could be traced back to the late Peter Drucker's groundbreaking study of General Motors in 1945. More likely, the trend didn't truly begin until Tom Peters and Bob Waterman produced In Search of Excellence in 1982.
Either way, the familiar sight of researchers and consultants scrambling to discover and share the secrets to organizational performance shouldn't be taken for granted. It's a trend that's still evolving. As Julia Kirby (2005) argued in the Harvard Business Review, today's management experts are still building on one another's work, developing more sophisticated survey instruments, mining richer data with better tools, and creating theories with greater explanatory powers. Some are even hoping that a definitive model of high performance will emerge, but there are at least two reasons that this goal could remain elusive - reasons that tell us much about organizational performance itself.
First, there's the metrics problem. Knowing exactly how to measure high performance is not as easy as it might seem. Do you only study those who outperform others in their own industry? How long a time period should you assess? And which measures, financial or otherwise, are the best ones to use?
Students of business tend to be most convinced by long periods of exceptional organizational performance, but those types of corporations are rare. One study conducted by McKinsey found that, among 1,077 large globalorganizations, fewer than 1% "outperformed competitors on both revenue growth and profitability over a decade" (Devan, Klusas, & Ruefli, 2007). Some might argue that sets too high a standard for high performance.
Scholars also debate about which types of measures are best able to shed light on performance in the 21st century. McKinsey's Lowell Bryan (2007) writes that "the vast majority of companies still gauge their performance using systems that don't take sufficient notice of the real engines of wealthcreation today." He claims that those engines are intangibles such as the talents of employees and investments in R&D and training. Bryan notes that most companies rely too much on returns on invested capital (or ROIC) as a performance metric, and he believes that measuring profit per employee is a better way to gauge performance in the digital age. Looking at the growth for the 30 largest global companies between 1995 and 2005, he found that the rise in the median market cap went from $34 billion to $168 billion, whereas the ROIC rose only by a third during that period. Profit per employee is, Bryan argues, a superior "proxy for earnings on intangibles."
This debate about how to measure performance is instructive because it highlights just how hard it is to pinpoint what organizational characteristics are truly driving performance. That is, even once a research team has identified high-performing organizations, it then has to look for patterns that show why these particular companies perform well. What are the common characteristics? Do those characteristics support a testable theory of high performance, one that holds true over time and across cultures and industries?
Answering these questions can be a daunting analytical task, so it's no wonder that different experts draw different conclusions or, at least, emphasize a different set of explanations. Some might stress, for example, that high performance is correlated with major strategic decisions. The McKinsey study cited above found that the top-performing companies tended to make few acquisitions or divestitures, much preferring to grow organically from within (Devan, Klusas and Ruefli, 2007). At a time when worldwide M&A activity has been breaking new records, this could be an important strategic finding ("Partying," 2006).
Or perhaps high performance is tied to certain universal truths about organizations. Experts from Booz Allen Hamilton, for example, note that a company's ability to perform and execute well is strongly linked to its "organizational DNA," which is made up of decision rights, information, motivators and structure. That is, a company is likely to be "healthy" if there are clear decision rights, an efficient flow of information, motivators that encourage people to pursue the proper goals, and lean structures ensuring that managers have the right kind of expertise (Knott & Neilson, 2006).
High performance could also be tied to essential practices. In What Really Works: The 4+2 Formula for Sustained Business Success, the authors argue that high performance is tied to four primary areas - culture, strategy, execution and structure - as well as any two of four secondary areas: talent, leadership, innovation, and mergers and partnerships (Joyce, 2005; Kirby, 2005).
There are other theories as well, of course. Some focus on the bigger picture, such as the alignment of critical organizational components. Others are focused more on particulars, including unique capabilities or products that provide hard-to-imitate competitive advantages.
Practicing managers have much to learn from such research. They must be mindful, however, that the business world is highly dynamic. Safe and solid tangibles are replaced by turbo-charged intangibles. Silos are replaced by matrices, which are then replaced by networks. Today's best practices become tomorrow's failures of imagination. And amid this turbulence, there are those companies that defy the odds and perform at a high level for years at a time. These organizations will always have much to teach us.
For more information:
Readers interested in high-performance organizations should be aware that i4cp is currently conducting a major study on this subject. Information from this study will become available to i4cp members in coming weeks and months. For more information see the Strategy Execution and Alignment Knowledge Center. More information on corporate profits, productivity, and earnings can be regularly found on i4cp's homepage.
Documents referenced in this TrendWatcher include the
following:
Bryan, Lowell L. "The New Metrics of Corporate Performance: Profit per Employee." The McKinsey Quarterly, No. 1, 2007, pp. 57-65.
Devan, Janamitra, Matthew B. Klusas, and Timothy W. Ruefli. "The Elusive Goal of Corporate Outperformance." The McKinsey Quarterly, April 2007.
Joyce, William. "What Really Works: HR's Role in Building the 4 + 2 Organizations and an Introduction to the Case Studies in the HR Leadership Forum." Human Resource Management, Spring 2005, pp. 67-72.
Kirby, Julia. "Toward a Theory of High Performance." Harvard Business Review, July-August 2005, pp. 30-39.
Knott, David G. and Gary L. Neilson. "Organizing to Execute: It's in the DNA." Ivey Business Journal, May/June 2006, pp. 1-6.
"Partying Like It's 1999." The Economist, November 25, 2006, pp. 75-76.
Either way, the familiar sight of researchers and consultants scrambling to discover and share the secrets to organizational performance shouldn't be taken for granted. It's a trend that's still evolving. As Julia Kirby (2005) argued in the Harvard Business Review, today's management experts are still building on one another's work, developing more sophisticated survey instruments, mining richer data with better tools, and creating theories with greater explanatory powers. Some are even hoping that a definitive model of high performance will emerge, but there are at least two reasons that this goal could remain elusive - reasons that tell us much about organizational performance itself.
First, there's the metrics problem. Knowing exactly how to measure high performance is not as easy as it might seem. Do you only study those who outperform others in their own industry? How long a time period should you assess? And which measures, financial or otherwise, are the best ones to use?
Students of business tend to be most convinced by long periods of exceptional organizational performance, but those types of corporations are rare. One study conducted by McKinsey found that, among 1,077 large globalorganizations, fewer than 1% "outperformed competitors on both revenue growth and profitability over a decade" (Devan, Klusas, & Ruefli, 2007). Some might argue that sets too high a standard for high performance.
Scholars also debate about which types of measures are best able to shed light on performance in the 21st century. McKinsey's Lowell Bryan (2007) writes that "the vast majority of companies still gauge their performance using systems that don't take sufficient notice of the real engines of wealthcreation today." He claims that those engines are intangibles such as the talents of employees and investments in R&D and training. Bryan notes that most companies rely too much on returns on invested capital (or ROIC) as a performance metric, and he believes that measuring profit per employee is a better way to gauge performance in the digital age. Looking at the growth for the 30 largest global companies between 1995 and 2005, he found that the rise in the median market cap went from $34 billion to $168 billion, whereas the ROIC rose only by a third during that period. Profit per employee is, Bryan argues, a superior "proxy for earnings on intangibles."
This debate about how to measure performance is instructive because it highlights just how hard it is to pinpoint what organizational characteristics are truly driving performance. That is, even once a research team has identified high-performing organizations, it then has to look for patterns that show why these particular companies perform well. What are the common characteristics? Do those characteristics support a testable theory of high performance, one that holds true over time and across cultures and industries?
Answering these questions can be a daunting analytical task, so it's no wonder that different experts draw different conclusions or, at least, emphasize a different set of explanations. Some might stress, for example, that high performance is correlated with major strategic decisions. The McKinsey study cited above found that the top-performing companies tended to make few acquisitions or divestitures, much preferring to grow organically from within (Devan, Klusas and Ruefli, 2007). At a time when worldwide M&A activity has been breaking new records, this could be an important strategic finding ("Partying," 2006).
Or perhaps high performance is tied to certain universal truths about organizations. Experts from Booz Allen Hamilton, for example, note that a company's ability to perform and execute well is strongly linked to its "organizational DNA," which is made up of decision rights, information, motivators and structure. That is, a company is likely to be "healthy" if there are clear decision rights, an efficient flow of information, motivators that encourage people to pursue the proper goals, and lean structures ensuring that managers have the right kind of expertise (Knott & Neilson, 2006).
High performance could also be tied to essential practices. In What Really Works: The 4+2 Formula for Sustained Business Success, the authors argue that high performance is tied to four primary areas - culture, strategy, execution and structure - as well as any two of four secondary areas: talent, leadership, innovation, and mergers and partnerships (Joyce, 2005; Kirby, 2005).
There are other theories as well, of course. Some focus on the bigger picture, such as the alignment of critical organizational components. Others are focused more on particulars, including unique capabilities or products that provide hard-to-imitate competitive advantages.
Practicing managers have much to learn from such research. They must be mindful, however, that the business world is highly dynamic. Safe and solid tangibles are replaced by turbo-charged intangibles. Silos are replaced by matrices, which are then replaced by networks. Today's best practices become tomorrow's failures of imagination. And amid this turbulence, there are those companies that defy the odds and perform at a high level for years at a time. These organizations will always have much to teach us.
For more information:
Readers interested in high-performance organizations should be aware that i4cp is currently conducting a major study on this subject. Information from this study will become available to i4cp members in coming weeks and months. For more information see the Strategy Execution and Alignment Knowledge Center. More information on corporate profits, productivity, and earnings can be regularly found on i4cp's homepage.
Documents referenced in this TrendWatcher include the
following:
Bryan, Lowell L. "The New Metrics of Corporate Performance: Profit per Employee." The McKinsey Quarterly, No. 1, 2007, pp. 57-65.
Devan, Janamitra, Matthew B. Klusas, and Timothy W. Ruefli. "The Elusive Goal of Corporate Outperformance." The McKinsey Quarterly, April 2007.
Joyce, William. "What Really Works: HR's Role in Building the 4 + 2 Organizations and an Introduction to the Case Studies in the HR Leadership Forum." Human Resource Management, Spring 2005, pp. 67-72.
Kirby, Julia. "Toward a Theory of High Performance." Harvard Business Review, July-August 2005, pp. 30-39.
Knott, David G. and Gary L. Neilson. "Organizing to Execute: It's in the DNA." Ivey Business Journal, May/June 2006, pp. 1-6.
"Partying Like It's 1999." The Economist, November 25, 2006, pp. 75-76.
Authors