The Foundations of Recovery

So critical to a company’s success is its Will to Compete, that
Changing it by just 20% improves the bottom line by 42%
Comparable to increasing capital investment by 70%.

They had survived.  The CEO was looking at the numbers.  Like a dark tide the recession was ebbing, the ground of the economy growing firm. It was time for the company to create its new enterprise, to make its long promised thrust into the marketplace.

They had, finally, the financing.  With the retrenchment of competitors, they had the opportunity.  They had the will – at least the CEO had.  They had the people.

But  questions remained.

During the recession, during the cutbacks, and the downsizing, and the survivor-guilt of farewells, had the courage of the company been damaged? Had its competitive spirit been eroded?  For it is this spirit that is the foundation of all corporate performance.

Would it be strong enough?  Would he be able to tell?  Would he be able to renew it, transform it?

The Will to Compete

When we look at the causes of corporate performance, the eye is drawn first to strategies, processes, procedures, machinery and such.  However, a moment’s thought shows that the effectiveness of all of these is driven by something else: the management systems the company uses.  If we look even deeper, we see that the effectiveness of these is caused, in turn, by something else again, something that might be termed the Operating Dynamic of the organization.  Or, its Will To Compete.  We shall use these terms interchangeably.

Napoleon said that the first strategy of war was to have an army, mobilized and motivated to confront the enemy.  He called this esprit, the Will to Combat.  Creating it, shaping it, renewing it, is the fundamental work of the commander.  If he cannot, if it is weak or wayward, it can break him.

The business equivalent of the Will to Combat is the Will to Compete.   In the final analysis, managing it, strengthening it, restoring it, is the work the CEO is really hired to do.  (The terms “culture” or “morale” are entirely inadequate to describe this; they are as close to Operating Dynamic as accent is to the human soul.)

This Will to Compete is the ground and root cause of all corporate performance.  Its effect can be great or small, positive or negative.  It drives success or stagnation or failure.

In well functioning businesses it is positive.  But almost always it is much less, much weaker, than its potential.  However, it can be great, vastly more powerful than the sum of the leaderships of its managers; a powerful synergy is evoked.

When that happens, you have a world class company, one that succeeds in hard times and flourishes in good.  In such a company managers perform beyond anything they could be expected to do elsewhere.

But when the Will to Compete turns negative and stays that way, it destroys the company.

The Operating Dynamic

The Operating Dynamic can be defined as:

  • The resultant leadership available to guide and drive a company when all internal, organizational forces, positive and negative, are accounted for.

It is the invisible elephant in the boardroom.  It has its own persona, motivations and energies, distinct and different from those of the individual managers, even the CEO’s.  Everyone has seen instances where excellent individual managers collectively flounder, and instances where average managers who, as a team, perform excellently.  Unless the elephant is clearly seen and understood, it dominates the ambitions, the thinking, the actions and the results of the company.

Imagine for a moment that an executive has just taken over an organization, become responsible for its success or failure.

He has the financials and KPI’s at his fingertips.  These, of course, are backward looking,  expressions of historic results – the rear view mirror of the company.  However, he has no information about the cause of performance, that which is really generating performance, that which is, in the present, laying down the future.  Those who hired him may not have articulated it clearly, but this Operating Dynamic, is what the executive has really been hired to manage and, of course, improve.

But he has to GUESS at what this is.

He has limited – perhaps very limited – time to grasp it, own it, transform it.  If he cannot, he fails and the company loses.  This is the major reason why 50% of all new executives are gone within 18 months, why another 20% are deemed “disappointing”.  In large companies the loss of a senior executive is estimated to cost $1,000,000.  Some would put the cost much higher.

Without explicit and detailed information, taking control of the Operating Dynamic is difficult and time consuming.  And the time available is short; during downturns, it is very short indeed.

This Operating Dynamic, this Will to Compete, functions at the unit and enterprise level – not at the individual level.  Because of this, it needs to be measured and examined at the unit and enterprise level, in much the same fashion as the financials depict the results of performance, and with the same level of detail.  (It is in the details that the devil – and the power of transformation – reside.)

Organizational Forces

First let us identify the organizational forces comprising the Operating Dynamic.

In all, there are more than a hundred, each of which can have a positive or negative impact.  However, in practice, they break into fifteen key forces in two major categories: the Critical Functions and the Generators/Blockers.  When measured, these can be expressed in terms of a Balance Sheet and P&L.

Their most important attribute is that they are entirely within the control of management.  When known in detail, they can be easily altered, easily improved.  It costs virtually nothing to change them and this can happen quickly.  Changing the operating dynamic even a little, profoundly changes the performance of the company.

Longitudinal studies by McKinsey and the London School of Economics, now of more than 4,000 companies, have shown that changing just three of the Critical Functions by 20% improves the bottom line by 40%.  And this happens for high performing companies as well as troubled.  This level of profit improvement  is something no strategic change or the most draconian of retrenchments can provide.

In alpha order, the Critical Functions are:

  • Customer Orientation
  • Innovation
  • Lean Operations
  • Performance Management
  • Profitable Growth Orientation
  • Talent Management

Some of these, of course, are more important than others and each is comprised of sub-elements.  When measured and weighted, they provide the Balance Sheet for the effectiveness and impact of the Operating Dynamic.  Like the Critical Functions, each sub-element can have a positive or negative value.  If positive, the operating dynamic is driving the company towards success; if negative, it is weakening it.

This Balance Sheet shows the innate trajectory of the company.  It is forward looking.  It predicts performance long before results can possibly show in the financials.  Its predictive horizon is far greater than any anything that can be provided by financial models. 

While the six Critical Functions are the proximate drivers of corporate performance, how well they work is driven in turn by nine Generators / Blockers.  It is worth mentioning again that these are entirely within the control of management; changing them is easy and costs virtually nothing.

These are the major avenues to changing the Critical Functions, and through them the bottom line performance of the company.

The Generators / Blockers are, in alpha order:

  • Accountability
  • Acknowledgement of Work
  • Adaptability
  • Commitment of Management
  • Corporate Assertiveness
  • Corporate Decisiveness
  • Effectiveness
  • Internal Competition / Cooperation
  • Openness of Management

Each of these is comprised of numerous elements.  When measured and weighted, they provide a Growth and Loss (G&L) statement for the Operating Dynamic, the full analogue of the financial P&L.

To summarize: the Critical Functions are the proximate drivers of performance; these are shown on the Balance Sheet.  The Generators / Blockers are the drivers of the Critical Functions; they are shown on the G&L.  The Balance Sheet provides the trajectory of the company.  The G&L shows the trajectory of the Balance Sheet.  Improving the Critical Functions (Balance Sheet) by 20%, improves the bottom line by 40%.  The way to improve the Critical Functions is through the Generators / Blockers, the G&L.

Hard Numbers for Soft Issues

As we look at these forces, it would seem that measuring them should be the normal job of HR.  But for various reasons this is seldom the case.   In part it is because HR has increasingly taken on the role of record keeper and labor law compliance and relinquished its strategic role.  Also, for decades the entire Human Capital industry – and HR training – has looked at organization development in terms of improvements to the performance of individuals.  And bottom-line productivity – when HR looks at it at all – is again done in terms of the individual.  This does not have to be so.

But the Operating Dynamic is an attribute of the organization and must be measured from that perspective, just as the financial statements must measure performance for the company as a whole.  The CEO is the one executive who by motivation, training and practice instinctively looks at organizational performance, and the results of performance, in this way.  By extension, he intuitively looks at the causes of performance in the same way.

But how does one put hard numbers on the causes of performance or, as they are often mislabeled, “soft issues?”  One way, of course, is to interview extensively in terms of the fifteen drivers.  This was our initial process begun in 1980.  But it is cumbersome and fraught with error and spin.

When Perception is Reality

Since 1985 we have used a survey; this is now on the web.  It asks managers and supervisors (It is not designed for workers) in some 60 plus different ways, for their perceptions of the organizational forces that are at work within the company.  It takes only about five or ten minutes.

Because perception is reality when it comes to human and organizational forces, managers will act and react as they perceive these forces to be.  They respond to the survey in the same way.  Their opinions are de facto accurate.

The individual responses are passed through a model that generates a report of about thirty pages that surrounds a Balance Sheet and a G&L statement.  Each line item is scored in numeric and, for simplicity, in alpha terms.  Each line item is then expanded with definitions and expressed in ways that essentially elicit statements of corrective action when that is needed.

Changing the Operating Dynamic

Once detailed measures are available, the elephant becomes visible in all its parts, and it is extraordinarily simple to change those parts, to transform the company’s  Will to Compete.  As the component forces are entirely within the control of management, changing them costs virtually nothing.  When you think of the bottom line improvements that are possible, the ROI’s are extraordinary.

All that is needed is for the CEO to call the management team to confront the data.  And for each line item deemed negative or inadequate, get commitments to specific action steps to correct or improve them.  In our work, we enter these commitments directly into the report, with names and due dates.  In the course of a day, the report becomes the plan of transformation.

While we are speaking here about a single intervention, the process described above can and should be done periodically.   The McKinsey/LSE study indicates that a 20% improvement generates a 40% improvement in financial returns.  And that this is available to high performing companies as well as troubled.  H R could manage the survey, the CFO or the model could generate the report, and the CEO could lead the one-day planning.

An interesting exercise for senior managers is to ask what (even) a 10% improvement in profits would do for their company.  And what they would have to do to get it.

The CEO was looking again at the numbers.

They had the financial resources.  They had the opportunity.  They had the people.  But as he looked at the Balance Sheet and G&L of the company’s Operating Dynamic, he could see the company’s Will to Compete was hurting in three specific areas, Performance Management, Accountability and Corporate Decisiveness. These were hurting enough to guarantee their new thrust would flounder.  That was the bad news.

The good news was they could see precisely what to do and who would do it, that it could be done quickly, and that it would cost nothing except the CEO’s Will to do it.

 It was time for the company to make its long promised thrust into the marketplace, to create a new beginning, a new enterprise.