Thursday, October 4, 2007

Leading for performance requires courage

The Summit for Globalization of HR in Taipei last week was a huge success. One of the memorable keynote talks was from Joan Magretta, author and editor of Harvard Business Review books. Her latest book is What Management Is: How It Works and Why It's Everyone's Business.

Her strong message is that the purpose of business is the creation of value. Enterprises that fixate on their own bottom line will miss the path to long-run success. No value, no customers, no bottom line, no business.

She went on to outline how organizational leaders lead for performance.

First, define your business models: how do you create value? She says that value is defined by customers, one person at a time. Value takes many forms and comes from many sources—from a product's usefulness, its quality, the image associated with it, its availability and the service that comes with it—making value intangible. Value created, therefore, is the maximum a customer is willing to pay less the cost to produce. The acid test of a business model is that the psychology makes sense and the numbers add up. Everybody wins.

She gave the example of Ikea's unique value to customers: low price (customers are willing to do some of the work, e.g. assembling; Ikea style (Ikea control the design process and buy in large quantities); and instant gratification (customers can bring home goods immediately)

Second, identify your strategy: how do you capture some of the value you create? Your strategy should be towards doing better by being different. There are different choices in which customers and markets to serve; which products and services to offer; what kind of value to create. Also how to tailor value chain that supports those choices resulting in higher prices and/or lower costs.

Some of Ikea's strategy includes: food and childcare that encourage long visits; displays that help more impulse buying, stores promote heavy traffic and self-service, sourcing from long-term suppliers, use of in-house design, use of flat packaging, suburban locations and provision of ample parking.

Ms. Magretta adds that tradeoffs are critical to strategy and to performance. Some of Ikea's tradeoffs are: no sales help in the store, no delivery, no high cost materials, no assembly, no to many furniture styles, yes to in-store meals, yes to in-store childcare and yes to big-store format.

Third, design the organization: where to draw the lines. The design of the organization must be aligned with the strategy. There is no "right way" for all companies to organize. The key strategic dimensions are scale, scope and structure.

Fourth, keep score: what should you measure? Good metrics capture performance drivers and make success visible. It is therefore vitally important to know what to measure, though they are hard to find. Was it profit per car or number of cars sold for Henry Ford? Is it gross margin or return on invested capital for Dell Inc?

Fifth, decide on values: which ones matter and why? Ms. Magretta says that ethical values—trust, integrity—are essential for all organizations. When culture is aligned with strategy, company-specific values provide the context that allows people to manage themselves in ways that contribute powerfully to performance. Inauthentic or misaligned cultures erode performance just as powerfully.

Southwest Airlines' value proposition to its customers comprise of no-frills, reliable service, frequent departures and low price. In choosing these values, they made strategic tradeoffs such as no long flights, no major, congested airports, no seat assignments, no baggage transfer, no connection with other airlines, no plans other than 737s, no meals and no ticket agents.

Finally to lead for performance, Ms. Magretta quotes Confucius: "To see what is right, and not to do it, is want of courage or of principle." Earlier she quoted Terry Gou (Han Hai Precision Industries): "The important thing in any organization is leadership, not management. A leader must have the decisive courage to b e a dictator for the common good."


No comments: