Magazine article People & Strategy

Securing Lasting Value through Organizational Health: Four Distinct "Recipes" Emerge from New Research Which Finds That the Performance Payoff from Organizational Health Exceeds Expectations, and Suggests Clear Routes to Achieve It

Magazine article People & Strategy

Securing Lasting Value through Organizational Health: Four Distinct "Recipes" Emerge from New Research Which Finds That the Performance Payoff from Organizational Health Exceeds Expectations, and Suggests Clear Routes to Achieve It

Article excerpt

Business leaders frequently tell us that "one-shot" initiatives--like cost-cutting and share buybacks-- frequently result in benefits of limited size, scope, or duration. Chasing benchmarks and best-practice gap closure has not proved to deliver on their expectations, either.

Improving organizational health is one of the most powerful levers a company can pull. Healthy companies generate total returns to shareholders triple those of unhealthy ones and achieve meaningful gains in the specific operational and financial metrics by which they manage their businesses.

Recipes for Success

Companies that consistently outperform their peers typically follow one of four distinct organizational "recipes," each characterized by a distinct set of management practices. Leaders should identify the one that most closely matches their strategic aspirations. The trick then is to be truly great in a handful of practices rather than trying to master them all, while avoiding "recipe killers."

For the past decade, we've been conducting research, writing, and working with companies on the topic of organizational health. Our work indicates that the health of an organization is based on its ability to align around a clear vision, strategy, and culture; to execute with excellence; and to renew the organization's focus over time by responding to market trends. Health also has a hard edge: Indeed, we've come to define it as the capacity to deliver--over the long term--superior financial and operating performance.

In previous articles and books, such as Beyond Performance (1) we (and others) have shown that when companies manage with an equal eye to performance and health, they more than double the probability of outperforming their competitors. Our latest research, at more than 950 organizations around the world, revealed several new twists:

* We found that the linkage between health and performance--at both the corporate and subunit level--is much clearer and much larger than we had previously thought. With the benefit of more data and a finer lens, we discovered that from 2003 (when we began collecting data on health) to 2011, healthy companies generated total returns to shareholders (TRS) three times higher than those of unhealthy ones.

* We subsequently found this that this linkage applies to industries, too. In three specific industries we examined in 2014--banking, pharmaceuticals, and retail--long-term TRS ratios of healthy companies were more than triple, double, and 1.6 times higher, respectively, than their unhealthy industry peers.

* We further discovered that companies consistently outperforming their peers followed one of four distinct organizational "recipes." We had already recognized these patterns but hadn't understood their strong correlation with health, operational success, and financial performance.

* We also uncovered a practical alternative to the common (but too often disappointing) approach of seeking to improve corporate health by closing every benchmark and best-practice gap. More tailored initiatives that combine efforts to stamp out "broken" practices while building signature strengths not only are more realistic but also increase the probability of building a healthy organization by a factor of five to 10.

In short, we're more convinced than ever that sustained organizational health is one of the most powerful assets a company can build. We're also clearer on how to achieve it, including the pitfalls to avoid on the road. We hope this is welcome news to leaders worried about the long term, who frequently complain to us that the benefits of their one-off reorganization initiatives are ephemeral. (2)

When we have done this with similar units--such as factories, processing units, and regions--in a given company, we have frequently found a strong correlation between organizational health (as measured by our survey) and the unit's financial or operating performance. …

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