Stress Test Your Strategy

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Stress Test Your Strategy

  1. 1. Executive Summary of the book Robert Simons “Stress –Test Your Strategy”A simple approach to better execution by Ramakrishnan ( Ramki) Ramakrishnan@gmrgroup.in
  2. 2. About the AuthorRobert Simons is the Charles M. Williams Professor of BusinessAdministration at Harvard Business School. During the last 27years, Simons has taught accounting, management control, andstrategy implementation courses in both the Harvard MBA andExecutive Education Programs. During 2010/2011 he is teachinga second-year MBA course, "Designing Organizations forPerformance," a module in the CEO program, and "DrivingCorporate Performance," a program for financial executives andgeneral managers. A new book based on this work, SevenStrategy Questions : A simple approach for better execution, waspublished in 2010 by Harvard Business Press
  3. 3. PreludeAn economic downturn can quickly expose the shortcomings of your business strategy. But can you identify itsweak points in good times as well? And can you focus on those weak points that really matter ?A stress- test an assessment of how a system function under severe or unexpected pressure- can help youhome in on the most important issues to address, whatever the economic climate. By asking tough questionsabout your business, you can identify confusion, inefficiency and weakness in your strategy and itsimplementation.As Peter Drucker once warned “ The most serious mistakes are not being made as a result of wrong answers.The truly dangerous thing is asking the wrong questions. “ For the past 25 years I have researched the driversof successful strategy execution in a variety of companies. Through this work I have identified 7 questions thatall executives should ask – an be able to answer. Master this list, and you will keep the fundamentals of yourstrategy execution on track .The questions may seem obvious, but the choices they represent can be tough, and their full implementationsare not always clear. The first two questions compel to set priorities The next two assess your ability to focus on those priorities by designating critical performance variables & constraints Questions five and six investigate whether you are using right techniques that will enhance creative tension & commitment The final question deals with your ability to adapt your strategy over time.
  4. 4. Question 1Who is your primary customer
  5. 5. Primary Customer Choosing your primary customer is a make or break decision This determines the resource allocation Allocation of all resources to meet & exceed expectations of the primary customer needs.
  6. 6. McDonald‟s 32,000 restaurants, 60 million customers, 117 countries , 1.7 million employees 75 % of the outlets are operated by independent persons Over 50 years- greatest retail expansion in the history
  7. 7. McDonald‟s Key success factors  A clear choice of primary customer  An understanding of when that choice needed to change  In ‟80s & „90s they considered its primary customers to be not the people who ate , but multistate real estate developers & franchise owners  Focus was on real estate developers & franchise owners- result 1700 new stores in a year  In 2003 to satisfy varying taste across geography reallocated resources from centralized corporate functions to regional managers – encouraging local menus & stores amentias
  8. 8. McDonald‟s Geographical focus  In UK – they serve porridge for breakfast  In Portugal it offers soups  In France they offer burgers with topped with French fries Customer satisfaction scores rose each year from 2005 to 2009 Gains in the stock price
  9. 9. Home Depot In the year 2000 Bob Nardelli CEO moved out from consumer business and shifted significant resources away from the consumer business & moved to contractors Professional contractors did not fill the role Trying to accommodate multiple customers lead to trouble Laid off customer service employees Consumer satisfaction suffered the biggest drop of any US retailer ever. New CEO –Frank Blake came in refocus the business to consumers
  10. 10. Question 2 How do your core values prioritizeshareholders, employees & customers ?
  11. 11. Core values- prioritize shareholders, employees& customers Core value should reflect the relative importance of all the stakeholders Value statements that list aspirational behaviors aren‟t enough . They must indicate whose interests come first when difficult trade-offs come in. Some companies customers come first & in others it is shareholders. There is nothing right & wrong Making one & communicating it effectively is important
  12. 12. Merck Merck‟s costly decision to withdraw Vioxx- its blockbuster Cox- 2 pain suppressant from the market In Sept 04 the clinical study indicated that this drug causes high number of heart attacks & strokes after 18 months of continuous usage CEO- Gilmartin had 3 options  Merck could carry the study through to its planned conclusion to gather more data  It could ask FDA to approve a “ black box” label warning doctors & patients about the discovered risk  To take the drug out of the market foregoing US $ 2.5 billion annual revenue On 30th Sept the CEO took a withdrawal decision of the drug from the market – Putting customer first
  13. 13. Pfizer Pfizer puts the shareholders first when faced with a similar situation Celebrex- the Cox -2 inhibitor Pfizer acquired when it bought Pharmacia – sometimes caused cardiovascular problems. Decision was taken to continue manufacturing of the drug Responsible action of adding a black box warning that allowed doctors and patients to a make fully informed decisions. Shareholders thus avoided losing billions of dollar of profits
  14. 14. South-West Airlines South west CEO Her Kelleher argued  If employees are treated well, they will treat the customers well  If the customers are treated well , they will come back  If they come back there is more revenue and shareholders will be happy To drive home this point – Kelleher regularly appeared in national newspapers ads under the caption “ Employees first, Customers second , Shareholders third
  15. 15. Question 3What critical performance variables are you tracking ?
  16. 16. Critical performance variables -Tracking Companies create performance score cards with 30,40 or more variables. It is a myth that adding measures results in a more complete- and therefore better scorecard Too many measures in the scorecard drive out innovation. Late „90s Citibank had problems by trying to track too much data , then they introduced new scorecard in the consumer bank. Apart from traditional key financial measurements , the card included new metrics for strategy implementation & customer satisfaction
  17. 17. Few ExamplesAmazon Inconveniences to buyers tops the list of factors that could cause strategy to fail. Executives there focus relentlessly on making purchasing as easy as possible. They concentrate on revenue per click and revenue per page turn & not on long lists of measuresNordstrom Customer loyalty is key – Sales per hour, Revenue / sq. feetMarriot The crucial metrics are associate satisfaction, guest satisfaction, revenue and revenue per available room
  18. 18. Question-4What strategic boundaries have you set ?
  19. 19. Strategic boundaries Every strategy carries the risk than an individual‟s actions will push the business off course The risk intensifies when managers feel pressure to hit growth & profit targets Two ways to control – tell people what to do or tell them what not to do Telling people what to do assures that the people won‟t make mistakes by engaging in unauthorized activities – Prudent approach If innovation & entrepreneurial thinking are important – hire creative people and give them the freedom to exercise their creativity
  20. 20. Apple Steve Jobs followed this principle when he declared that Apple would not develop PDA. Without such discipline the company wouldn‟t have had the resources to develop the iPod. “ People think focus means saying yes to the thing you‟ve got to focus on “ but “That‟s not what it means all. It means saying no to the hundred other good ideas Setting clear boundaries also helps organizations avoid the waster & risk that inevitably accompany undisciplined growth Boundaries are powered by punishment , not rewards
  21. 21. Question-5How are you generating creative tension ?
  22. 22. Generating creative tension Primary responsibility of the business leader is to make outside market pressures felt inside the business Posing challenges will motivate the employees Bigger the business more insulated are people from the market pressures & more imperative it becomes Some aspects that can generate creative tension  Assigning stretch goals  Ranking according to performance  Setting spans of accountability that are greater than spans of control  Allocating costs  Creating cross-unit teams & matrix accountability
  23. 23. Assigning Stretch Goals Common way to motivate people is to set stretch goals Challenge goals or big hairy audacious goals Incremental improvements not enough Doing something different – differentiation
  24. 24. Ranking according to performance Rank employees on the basis of demonstrated performance Rankings affect who is promoted & who is asked to leave Challenge –is to prevent the competition becoming negative & destructive
  25. 25. Setting spans of accountability that are greaterthan spans of control For people to innovate try holding them accountable for measures that are broader than the resources they control This will foster entrepreneurial behaviorTom Siebel – Siebel systems  He based his manager‟s bonuses on customer satisfactions measures, even though no one manager controlled all the resources needed to make a customer happy  His action forced the managers to innovate their way to success
  26. 26. Allocating cost The way the corporate overheads costs are charged can stimulate creative tension Jamie Dimon – CEO JP Morgan chase  Everything from legal to marketing expenses – to the parts of the business that use them  Obvious goal is to generate accurate cost data  The more important one is to motivate managers to become actively involved in the process of value creation by corporate office
  27. 27. Creating cross- Unit teams & Matrix accountability Forcing employees to think outside the box – is to assign them a second box New perspectives emerge when people are forced out of their routines Cross unit team process serve as emissaries for their for home team and also leads to new ideas & innovations Matrix design in which every employee has two bosses - functional reporting & administrative reporting
  28. 28. Question-6How committed are your employees to helping each other ?
  29. 29. Commitment to help each other Employees must work together towards shared goals To create the high levels of commitment , leaders must build an organization that has the following attributes  Pride in purpose  Group Identification  Trust  Fairness
  30. 30. Pride in purpose If employees are proud of their organization‟s mission, they will assume shared responsibility for its success. Companies –Tagline  Marine Corps slogan “ Semper Fidelis “ ( Always faithful”) is echoed  Merck‟s – Putting patients first  Amazon – “Earths most customer centric company
  31. 31. Group Identification Belonging to an elite organization is source of pride for employees South-west airlines  Employees take pride in a rigorous selection process – 2% of 1,00,000 annual applicants  Employees from different departments are encouraged to interview job candidates & veto those they feel would not be a good fit.  People who are hired know they are part of an elite team whose members go above & beyond to help each other
  32. 32. Trust Trust is vital for people to work collaboratively When employees trust each other they are making themselves vulnerable – to put their reputation on the line to support each other Nucor  Leading steel company -Employees are encouraged to propose innovations to improve efficiency  The company shares the resulting savings with its employees apart from increasing production targets  This policy has built trust among the workers
  33. 33. Fairness To embrace the vision of shared success perception of fairness & equity above the self interest is important Need to be fair and also appear to be fair IBM- CEO – Sam Palmisano  He asked the board to reallocate half of his bonus to the executives who would be leading his new team based strategy
  34. 34. Question-7What strategic uncertainties keep you awake at night ?
  35. 35. Strategic uncertainties At the root of every failed strategy is a set of assumptions about the future that eventually proved false Today‟s strategy won‟t work tomorrow Products will become obsolete, Customers taste will change. Technology will render the business model uncompetitive Today‟s success will be tomorrow‟s old news The question is not if , but when ? To adapt successfully you must constantly monitor the uncertainties that could invalidate the assumptions underpinning your current strategy Everyone watches what boss watches & if you want your employees to focus on specific issues, focus on those issues yourself
  36. 36. What is important ? Most powerful way to signal what is important is to use business control system as interactive tools Pay close & visible attention to the data they produce & use them to generate questions that will activate the search for information & decision through out the business Goldman Sachs – Uses P & L system interactively and this enabled them to avoid the mortgage backed securities debacle that brought most of its competitors to their knees Depending on the business & the system you choose to use interactively could be a Profit plan, A new business booking system, Project management, Performance measurement system & a face to face interaction among the operating managers with focus dialogues on Strategic uncertainties generates action plans.
  37. 37. A Checklist for Executing Strategy Executing strategy successfully requires making tough often uncomfortable choices based on simple logic & clear principles. But we frequently avoid making choices in the mistaken belief that we can have it all. Instead of focusing vital few customers or one primary customer we have many kinds of customers, instead of instilling core values, we develop lists of desired behaviors. Instead of focusing on few critical measures, we build overloaded scorecards. Route success  Engage in on-going face-to-face debate with the people around your with emerging data , unspoken assumptions, difficult choices & ultimately action plans  Everyone should be able to give clear & consistent answers to the & questions posed
  38. 38. Take away from the book The 7 questions are intended to be tools for stimulating engagement Right from CEO to the frontline must be actively involved in discussions about the key factors that will enable the successful execution of the strategy Therefore how you ask the questions is crucial These commonsense principles will help you involve the whole team  Pose the questions face-to-face  Discussions must cascade down the organization, not stay struck at the top  Operating managers are key to success , involve them  The debate must be about what is right, not who is right  You must focus every discussion in the challenge “ What are you going to do about it “
  39. 39. Happy Reading, Learning & Application Mail your comments to ramakrishnan@gmrgroup.in

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