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Agile Organizational Value Development

 

There is a general consensus that the future of business competition will depend much more on talent and on agile organizations, and this doesn’t just mean finding better people as part of a war for talent. The shift in emphasis also requires better thinking about how we organize and deploy that talent.
We need to rethink our organizational structures from front to back starting with the customer and then working back to everything else. We also need to rethink how we manage people within those structures.

Immerse yourself in the customer experience.
Every organization in the world aims to be customer-driven. Most are not. How much of the time of your top 100 leaders is actually spent with customers? Do you have a seat in the office or a seat in your car, as you go visit your customers? How much of your energy is spent “feeding the beast” rather than being in direct service to your customers? You must free your teams and organization to focus on the customer. Spend time in your customers’ shoes. Visit them, investigate their experience, understand their world, and connect personally. You also must invest in data, insights, and intuition to understand which customer segments are most attractive. Share your personal customer insights with your teams to scale your customer impact.

According to legend, Henry Ford said that if he had just asked customers what they wanted, they’d have asked him to design faster horses, but he knew more about their needs than they did. Really understanding the customer is even more important than it used to be because of the end of information asymmetry. Companies used to have a huge information advantage over customers. Companies could pretend to be great, shiny brands even when they were not.

Adobe recognized that it was not, in fact, putting customers first, despite intending to do so. It discovered that its customers found the company not always easy to do business with, and it was not consistently delivering the level of service its customers expected. So Adobe set up a Customer Immersion Program to allow senior leaders to play the role of a customer and experience Adobe for themselves. One way senior leaders put themselves in the shoes of customers was to interact with customer service by calling in with a problem or need. Leaders learned, among other things, about how to reduce complexity in pricing and offerings that had been frustrating customers.

\Brian Cornell, who became CEO of Target in August 2014, is personally
immersing himself in the customer experience as he tries to return the retailer to the days when it was known both as chic and as a discounter. Although known as a huge consumer of data, he pops into stores unannounced—previously, visits by the CEO were scripted scrupulously and talks anonymously with customers to gain insights that he then probes with his team. Cornell moved out of the newly redone corner suite occupied by his predecessor and took a smaller office so he could be just steps away from Target’s global data nerve center, where 10 staff members monitor social media and television to track, moment by moment, how customers react to product announcements, news events, or online posts. He receives briefings from the team twice a day.

Co-innovate with customers.
You must break down barriers to your customers. Embed yourself in the value chain and innovation process for your B2B customers. Be a partner, not a vendor. Help to shape and create the future needs of your customers by challenging assumptions about what delights them and anticipating competitors’ responses rather than merely reacting to them. While protecting your critical intellectual property, invite your customers to take the journey with you. Always make decisions as if your customers were in your meeting.
Zara became an international phenomenon by, essentially, coinventing with customers at great speed as part of what is known as “fast fashion.” Zara designs clothing and stocks the items in its stores, but that is just the start of the process. Zara’s sales associates watch to see which items customers consider buying but then put back. Associates ask for feedback from customers and communicate it instantaneously to the design team, which modifies items and quickly fills stores with products that reflect customer preferences. Zara makes clothes only in small batches and locks in just 50 to 60 percent of its line at the start of the season versus the industry average of 80 percent. As a result, Zara has unusual flexibility to adapt as certain items become hot sellers.
This approach required that Zara shorten its supply chain by setting up manufacturing facilities close to its big markets in the United States and Europe, which means slightly higher costs. But the co-innovation with customers means that Zara marks down only 15 to 20 percent of its merchandise, while the industry average is 50 percent, and Zara’s profit margins are consistently double the industry average.
Restaurant chain Red Robin introduced a test burger in a small number of restaurants and had servers communicate feedback from customers instantly to the test kitchen. This allowed Red Robin to quickly make changes to the burger based on customer preferences, and it was able to roll the burger out nationally in four weeks rather than the 18 months the process normally took.

Think of business units as guests, not family.
Develop an acquisition engine, and match it with an equally powerful divestment engine. As much as 40 percent of value destruction occurs not as a result of entering doomed opportunities but by staying in businesses, geographies, or products long after the competitive advantage has waned.
Novo Nordisk, the huge Danish pharmaceutical company, has actively managed its product mix through acquisitions and divestitures. Between 2010 and the end of 2013, it acquired more than 50 companies, and it has been almost as active in divesting. For instance, it spun off an IT consulting business it had developed internally and has sold businesses devoted to anticoagulants, certain cancer drugs, and more.
Tata Consultancy Services, one of our superaccelerators, adopts a similar attitude. As Natarajan Chandrasekaran, the company’s CEO and managing director, told us: “Our approach has been not to get pinned in the trap of a portfolio approach. We believe that every business, every area we work on, must have agility so it can grow. Everything we do should be a growth business.”

Articulate an audacious objective.
Avoid the gravitational forces of lower aspirations. Galvanize the organization behind an aspiration that attracts. Ensure that objectives are aligned to an integrated set of strategic capabilities. Don’t allow distractions. Always assess whether a team decision takes the organization closer to or away from achieving its objective.
Emulate Google, which looks for opportunities that will increase its business by 10 times, not 10 percent.
Through 11 maxims, Nike has, as always, taken an audacious approach that it communicates to employees. Codified in 2000, following a rough stretch at the company, Nike’s core beliefs are the following:
1. It is our nature to innovate.
2. Nike is a company.
3. Nike is a brand.
4. Simplify and go.
5. The consumer decides.
6. Be a sponge [as in, be receptive to new ideas].
7. Evolve immediately.
8. Do the right thing.
9. Master the fundamentals.
10. We are on the offense. Always.
11. Remember the man [cofounder Bill Bowerman, still renowned at the company for his creativity and for his knowledge of athletes].
Senior executives travel around the world to discuss the maxims with every employee and have found them to be crucial anchors as Nike tries to reinvent itself every 90 days and keep up with its market.
Ajay Banga, president and CEO of MasterCard, told us that it motivates his employees to think about driving toward an efficient, cashless society. “My employee base used to be 9 percent millennials the year I joined. It’s now 40 percent millennials, and cause-based marketing excites them. And this cause is directly embedded in the business. Therefore, it’s sustainable.”

Use purpose as your fuel.
Peter Drucker was right when he said that the sole aim of a company should be filling customer needs. In fact, companies can often thrive by going beyond Drucker’s basic goal and pursuing a greater good.
We all want to be connected to something meaningful. Creating a strong sense of purpose, tied into doing something good, gets people off the fence and encourages them to act urgently. These purposes should not be turned into the long, boring (and generally meaningless) vision and mission statements of previous decades. Truly accelerating companies can tell you what they do and why they do it and get you excited, in just a few words, about the company’s “true north.”
For example, John Hammergren, the CEO of McKesson, gave his employees at the pharmaceutical distributor and health care information company a higher purpose by emphasizing that, eventually, everyone will become a patient. Employees personalized their work by imagining their loved ones, or even themselves, on the receiving end of McKesson products and services. Medtronic had employees visit hospitals to see the company’s technologies helping patients. For his part, David Cordani, the president and CEO of Cigna, the global health insurance company, emphasizes that his organization’s purpose extends far beyond merely processing insurance payments. “We exist to improve the health, well-being, and sense of security of the individuals we serve,” he told us. “And we want that fact to be absolutely front and center in the minds of all our employees.”
Monster.com announced its noble purpose with a Super Bowl ad that carried a “When I Grow Up” theme. It featured children saying what they wanted to be when they grew up—for example, “I want to be a yes-man or yes-woman” or “I want to claw my way up to middle management.” The ad ended with the question: “What did you want to be?” and a kicker: “There’s a better job out there.” The job-posting site became one of the 20 most-visited sites on the Internet, but then a new CEO, Sal Iannuzzi, took over and declared that all he wanted to do was create shareholder value. The stock sank 93 percent under his stewardship, before the board fired him in 2014. The company is now recovering.
Neuroscientific research concludes that we are motivated by a
greater good to try harder, work faster, persevere longer, cooperate better, and control our least-productive impulses. Research has found, for instance, that the morale of call center employees at a university rose when they were read letters from students who had benefited from scholarships at the school, and that the quality of food in a restaurant increased when the cooks could see those they were serving.13 Making a personal connection with others builds purpose and creates meaning. Imagine the productivity of an organization if hundreds or thousands of people are united by a shared purpose? Neuroscience also tells us that meaning from a shared purpose reduces stress and improves health.

A company’s purpose defines its existence and contribution to society. Underlying it is a set of values and beliefs. Purpose is as fundamental to a corporation as our purposes, values, and beliefs are to us as individuals. A company purpose operates on four major planes—a covenant with customers, a reciprocal human contract with employees, mutuality of interest between society and the firm, and the desire to contribute to human betterment. Purpose is the indispensable means to create a corporate culture of integrity, which is crucial to business success.

The payoffs of purpose are increasingly measurable. Operational
performance improves, innovation increases, and the cost of capital falls. Recruitment, retention, and motivation of employees all increase, while industrial relations become less adversarial.
Firms need to demonstrate in concrete terms what purpose means to them—and how they can credibly commit to it, particularly when under financial pressure.
The achievement of purpose requires both committed leadership
and widespread buy-in at every level of the firm. Techniques include promoting executives who have shown commitment to the purpose, making public commitments, piloting experiments, and signing up for international and national initiatives. Getting buy-in demands that deeds align with words.

Halve the number of metrics you use.
Organizations are able to collect any piece of data they want these days. All could potentially be used to make decisions in one way or another. This abundance of data, instead of helping companies make better decisions, is stifling their ability to react quickly and smartly to events as they unfold. Pick a limited set of metrics for your scorecard.
Understand your reasons for picking those metrics and how the metrics affect your business. Make decisions based solely on those metrics, and remain open to always questioning the applicability of the metrics to the changing realities of your business. These metrics can be like the rather modest number of traffic laws that guide millions of people around a nation’s roads. The metrics can represent the dominant logic rather than making everyone rely on the equivalent of
case law when making decisions.
Danaher’s metrics reflect the company’s focus on shareholders, customers, and people. Core growth, operating-margin expansion, working-capital returns, and return on invested capital are the four shareholder-facing financial metrics. The two customer-facing metrics are on-time delivery, measured against when the customer wanted the company to deliver something (even if that was yesterday), and external quality as a broad measure of every dimension of a customer experience. Finally, there are two human-capital metrics: internal fill rate (the percentage of managerial positions filled with internal candidates) and retention. According to CEO Thomas Joyce: “Every Danaher business uses those eight metrics to answer the following question: Are we winning?”

Reduce layers.
Simplify your structure. Have no more than five to seven layers between the CEO and the front line, depending on the scope of your organization (global versus local). If you have leaders who cannot cope with the necessary number of direct reports—usually 10 to 15— then change your leaders.
Apple’s hierarchy might remind you of a small business. The late Steve Jobs liked to keep management simple. He did not like layers of high-level people. It was Jobs’s contention that having layers of management took the focus off of the task at hand, and that task, in his opinion, was designing and building the best products on the planet. Even after his death, much remains the same at Apple. Simplicity has to start with a simple product shelf: While some companies have product incontinence, spewing products everywhere, Apple has 19 products. The company runs one P&L.
TSMC, likewise, has just one P&L. “It’s a function-driven organizational structure,” Ma told us. “We share the success. We are accountable for one organizational goal together.”
For Comcast (one of our superaccelerators), creating an organizational structure that puts leaders in physical proximity to frontline employees “is essential to the quality of the operation of the business,” noted William Strahan, executive vice president of human resources at Comcast Cable. It has an added benefit as well. “The derivative effect,” said Strahan, “is a constant tamping down on any one person’s ego, which helps keep people from taking themselves too seriously.”

Protect the space to innovate.
Create incubators and nurseries to enable growth. Create a culture in which it is safe to fail and learn fast. Bring outside ideas in. Track how often new ideas are adopted from the external world, and improve on that record. Leverage differences of perspective. Build routines and rituals that call forth a range of insights and ideas. Constantly look for and challenge biases in framing and gathering intelligence and coming to conclusions that may reinforce the status quo.
Procter & Gamble uses open-innovation networks to solve design problems and tests products with online user communities so it can be sure of a friendly reception before completing a full rollout. In 2008, 10 employees created 10,000 designs to test, reducing to hours a process for innovation that previously unfolded over a period of weeks.
Google’s Matt Brittin told us, “We try to have a culture that allows for bottom-up innovation, so we don’t have a strategy department. We hire people and encourage them to come up with projects and product ideas that they want to build. The result is a bottom-up internal market for innovation. Our engineering functions, for example, allow people to come up with a project and say, ‘Hey, I want to work on this.’ If other people get excited about the project, then it’s hard to stop the momentum. As we’ve grown, we’ve moved away from having a thousand flowers bloom, but at the same time we know that giving people flexibility is great for innovation. So we’re aiming for more coherent bouquets. We’re organizing our teams into a set of groups where they’re working on similar things. Now they’re dedicated to a project, whether that be to the cloud and infrastructure, or Android and devices, or huge video, or apps. We’re pointing people in a direction and providing just enough organization around them to allow them to move forward in a coherent way.”

Innovation carries an enormous premium, when you get it right. Although the movement of manufacturing jobs to China has been of concern for a long time, especially given the 2016 presidential election in the United States, manufacturing accounts for only 5 percent to 7 percent of the cost of an iPhone, while Apple has profit margins of 30 percent to 60 percent. Consequently, the value per employee that Apple generates eclipses that of its manufacturing partners. An employee at Foxconn, the manufacturer of the iPhone, creates value of an average of $2,000 a year, while an employee at Apple creates value in excess of $640,000 a year.

Invest with courage.
Encourage disruptive thinking. Go with instinct first, and then back it up with empirical data that includes an assessment of the risks and assumptions underlying the choices made. Use healthy and growing sources of cash and a stable platform to launch disruptive forays into the unknown. Measure innovations achieved. Target and track the introduction and impact of new products, services, processes, markets, customer interactions, and improvements for employees.

GM showed not only technical foresight when it launched its OnStar telematics system in 1996 but also the ability to invest with courage. Many inside the company wanted OnStar to be available only as an option, to limit the downside if OnStar proved unpopular. Many others wanted OnStar to be available only on luxury GM brands, viewing OnStar solely as a way to sell more cars. But management felt that OnStar needed to have critical mass to have a chance and installed it as standard equipment across much of the product line. Analysts say OnStar now accounts for a significant portion of GM’s $46 billion of market value.
GM is showing similar courage with aggressive investments in driverless cars, even though they could represent a threat to its long-
standing business model because the cars would likely be bought and operated by fleets, not individuals.
Another company that typifies this approach is Comcast, which is willing to invest heavily when it identifies “move the needle” opportunities. As Comcast Cable’s William Strahan put it: “We solve our problems more with our balance sheet than with our income statement.”

Emphasize speed to adoption.
Push the rate at which great ideas spread across your organization. Establish the systems, processes, and culture that enable good ideas to be scaled quickly. Pinpoint those who have a stake in the initiatives, and communicate intentions clearly, early, and continually.
One key to making this possible: You must have “a single source of truth.” A lack of agreement about numbers, or even a common lexicon, slows organizations, as marketing feuds with finance, finance argues with product development, and so on.
Chinese Internet company Tencent uses simultaneous product development and rapid “launch-test-improve” cycles to speed innovation in business models, effectively harnessing user feedback to rapidly improve the quality and functionality of its products after they are launched. Tencent developed WeChat, which added mobile payments in 2013; Facebook didn’t announce an online payment system until 2015. WeChat allowed users to set up online stores in 2014; Facebook added a feature that allows retailers to sell from Facebook pages in 2015.

 

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