Above all, boards want to help their companies seize prospects for long-term growth and avoid exposure to risks from organizational blind spots or from any unwillingness to acknowledge external change. Thinking deeply about performance and health helps executives to address both aspirations.
What Makes Companies Healthy?
Companies that attend to five different aspects of performance and health can build the resilience and the organizational capacity not only to deliver but also to sustain both.
Strategy. First, a company’s strategy should be reflected in a portfolio of initiatives (Lowell L. Bryan, “Just-in-time Strategy for a Turbulent World,” The McKinsey Quarterly, 2002 special edition: Risk and Resilience, pp. 16–27.) that consciously embraces different time horizons. A typical large company does, of course, include business units with distinct strategies, but few of them could really help it adapt to events or capitalize on new opportunities. Some initiatives in the kind of portfolio that we recommend should bolster a company’s short-term performance. Others should create options for the future — new products or services, new markets, and new processes or value chains. A key management challenge is to design and implement initiatives that balance the company’s performance and underlying health on a risk-adjusted basis.
Such a portfolio of initiatives helps companies overcome certain traditional shortcomings of strategy, such as its episodic nature and a tendency to ignore the resources and capabilities needed for execution and to plan the future instead of for the future. By developing and managing a portfolio of initiatives — rather than a single approach to strategy — companies can lower the risk that unpredictable events will place them on the wrong foot.
Metrics. A robust set of organizational metrics allows executives to monitor a company’s performance and health. What’s needed is a manageable number of metrics that strike a balance among different areas of the business and are linked directly to whatever drives its value. A vast assortment of metrics is self-defeating.
Companies should identify the health and performance metrics most important to them: product development, customer satisfaction, government relations, or the retention of talent, for example. (The answer will of course depend on a company’s industry and strategy.) Most organizations track standard financial metrics. But we would also expect some metrics to cover operations (the quality and consistency of key value-creating processes), organizational issues (the company’s depth of talent and ability to motivate and retain employees), the state of the company’s product markets and its position within them (including the quality of customer relationships), and the nature of relationships with external parties, such as suppliers, regulators, and nongovernmental organizations (NGOs).
Systematically identifying and tracking health metrics that reflect the strategy of a business — and the forces driving its value — is difficult. A useful framework is to think of value creation in the short, medium, and long term.
Short-term health metrics show how a company achieved its recent results and thus indicate its likely performance over the next one to three years. A consumer products company, for example, must know whether it increased its profits by raising prices or by launching a new marketing campaign that increased its market share. An auto manufacturer must know whether it met its profit targets only by encouraging dealers to increase their inventories. A retailer might want to examine its revenue growth per store and in new stores or its revenue per square foot compared with that of competitors.