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SPOTLIGHT ON STRATEGY IN A WEAK RECOVERY ARTVVORK Felice Varini, Trapèze dans rellipse, 2 0 0 8 -Private_exhillition, New York _ _ _

iATe You Ready _ to'Rebound.


Donald SuU ( is a professor and faculty director of executive education at London Business School. His most recent book is The Upside of Turbulence (HarperCollins, 2009), from which some of the ideas in this article were adapted.

by Donald Sull e for e th e reces sion, many companies relied I on boom-time macroeconomic condi tions (low i n t e r e s t ra t e s , ready capital, consumer con fi d e n ce , a n d t h e like) to drive profitable growth. As a result, ori Pi r ganizational reflexes slowed, the sinews required for quick action atrophied. Now, however, firms face tough market conditions and irreducible uncertainty along critical dimensions—among them, inflation or deflation, exchange rates, and regulation, as governments intervene in more sectors of the economy. And, of course, the usual sources of market turbulence — geopolitics, technological irmovation, and competitive dynamics—remain. As companies crawl out of the recession, it's not enough for leaders to craft the "perfect" strategy, put their heads down, and make it happen, confident that the market will cooperate. Instead, they must set a broad strategic directionbut remain open to unexpected opportunities that appear along the way. And make no mistake—for all their risks, volatile markets do produce opportunities. Shifting regulations generate unexpected sources of funding; changing consumer preferences create demand for new products or services; distressed competitors sell off assets cheaply. More than ever, companies need agility—the capability to consistently spot and execute on unexpected opportunities before rivals do. (For an indepth discussion of three types of agility that enable such execution, see "How to Thrive in Turbulent Markets" BER February2009.) So how can managers P4arch 2010 Harvard Business Review 71


Why Execution Stalls TOO M ANY LEADERS, NOT ENOUGH MANAGERS. The recentty ended economic boom was an era of teader worship. Middle managers aspired to leadership— often disdaining the nuts and botts of generat management. Business schoots dropped their generat management courses while beefing up their teadership offerings. There's nothing wrong with leadership, of course, but failing to develop general management tatent is a nail in the coffin of companies hoping to win through superior execution.

THERE'S NO TIM E. The organizational changes to enhance agility and execution must be made on the fly. Retiring to the sidetines while you retoot your processes is not an option.

assess whether their organizations are fit enough for the new business environment? How can they identify the obstades preventing their organizations from executing effectively, and how can they overcome those barriers? Over the past 10 years, I have studied firms that excelled at execution in some of the world's fastestchanging markets, such as China and Brazil, and most unforgiving industries, like financial services and fast fashion. Through my research, I've identified common obstacles that undermine firms' ability to execute on their established strategies and take advantage of unexpected opportunities. By asking themselves the seven questions below, managers can quicldy assess their companies' readiness to rebound. QUESTION 1

Do you miss opportunities

that others spot? After massive investrnents in sophisticated IT systems, many companies continue to miss market shifts that their rivals exploit. With IT investments, however, it's not how much you spend but how you spend it. To continually identify gaps in the market, firms need real-time data and the ability to share it widely throughout the organization. Those hard data must be supplemented with direct observations from the field. Consider Spanish retailer Zara, whose success is often attributed to its flexible supply chain. Equally impressive is Zara's ability to spot changing preferences among its fickle customers— despite spending only one-quarter of the industry average on IT. Zara's designers, marketing managers, and buyers work side by side in the company's sprawling headquarters. The open office plan fosters frequent discussions and promotes the sharing of real-time data as well as field observations and anecdotes. By colocating employees from different functions, Zara allows them to break out of their silos and develop a holistic feel for the market, see how their work fits, and sense new opportunities as they arise.

For instance, in the summer of 2007, Zara launched a line of slim-fit clothes, including pencil sldrts and tapered jeans, in response to catwalk trends and what celebrities were wearing. Marketing executives projected that the new items would fly off the racks, but the daily statistics revealed that items were not selling. So Zara marketing managers immediately went into the field to see firsthand what was happening. They talked to managers, employees, and customers and quickly realized that women loved how the dothes looked but struggled to squeeze into their usual size in the dressing room. Zara responded by recalling the items and relabeling them one size smaller. The company then watched sales boom as customers happily fit into their usual size. The shared, real-time data supplemented by firsthand observation helped employees respond quickly and tip the balance from failure to success. fr,IrSTiON 2

Are your hydrautics broken? Organizational hydraulics are the mechanisms senior executives use to translate corporate objectives into aligned action by individuals across the organization—that is, processes to set strategic priorities, cascade objectives, and measure employees' progress in achieving goals. In many companies, execution stalls when top executives deluge the organization with multiple—and often conflicting— priorities. A lack of discipline in making trade-offs in the boardroom often penneates the entire organization, generating further objective creep. Few countries rivaled Brazil for turbulence during the 1990s, and few firrns within Brazil created more economic value than those affiliated with Brazil's Garantia Bank, which include AmBev (now the lead partner in the world's largest brewer); América Latina Logistica (ALL), an integrated logistics company; and retailer Lojas Americanas. After Garantia's partners bought a controlling stake in a privatized Brazilian rail line, its new CE0 Alex Behring quickly took action to rebuild the organizational hydraulics that had deteriorated during decades of govern-

Execution stalls when executives deluge the organization with I 7 confljcting prioriLles. 72 Harvard Business Review March 20 1 0


Idea in Brief WHAT YOUR COMPANY NEEDS FOR EXECUTION The abitity to spot new opportunities Reat-time data and format reports, supplemented with direct observations from the field, that is shared widely across functions


Strong operationat hydraulics Processes for transtating priorities into individual objectives and for atigning execution throughout the organization Rewards for performance, not mediocrity Incentives that encourage both individuats and teams to focus on the long term as well as the short term

Core values with teeth Clear ly articulated values that underpin agility and drive hiring, promotion, and firing decisions

Vikings, not just farmers A cadre of ambitious, flexible, adventurous managers in key positions throughout the organization

The right conversations Awareness of the four types of dialogue required for execution, and managers who can effectivety structure and lead all of them

Constant pressure, rather than heroic efforts Senior leaders who set clear priorities and inject continual pressure, rather than set and fight fires

ment ownership. First, he capped the number of incurred to pay for their shares. Bonuses focused corporate priorities at five per year. Second, he in- employees on hitting their current goals, while their stituted a process whereby employees at each level equity stake linked their fortunes to the firm's longmet with their bosses to negotiate their personal or term performance. team targets for the following year. (The number of individual targets was also limited to five per year; QUEST1ON 4 emphasis was on quantitative targets that could be Are your core values a joke? tracked continually.) And finally, to ensure align- Companies that execute on their strategies quickly ment among objectives, Behring personally re- and effectively tend to construct solid organizational viewed the individual targets for the t o p 20 0 execu- hardware: information systems, corporate priorities, tives in the company. hydraulics, incentives, and so forth. But they also program in software—that is, the right culture, people, Q MO N 3 and leadership for execution. Indeed, the most agile Do you reward mediocrity and organizations I have studied share a core set ofvalues: call it teamwork? achievement that recognizes and rewards employees In many organizations, variable pay represents a for setting and achieving ambitious goals;ownership tiny fraction of overall compensation, and the range to take personal responsibility for results;teamwork of possible bonuses is quite narrow, barely distin- to foster coordination;creativity to challenge the staguishing between top and underperforming em- tus quo; andintegrity to offset the temptation to cut ployees. Executives socialize bonuses in the name comers that can arise when employees strive to hit of teamwork, arguing that differential payouts could ambitious performance targets. Most important, agstifle cooperation and long-term thinldng. This is a ile organizations translate these abstract principles mistake. To ensure execution, organizations should into concrete action. Rather than print posters listing recognize and reward individuals who do what they the values that then languish on conference room say they will with outsized bonuses. Paying for per- walls, executives should breathe life into the corpoformance not only ensures execution but also at- rate culture by hiring and promoting individuals on tracts and retains ambitious employees and encour- the basis oftheir adherence to values. That is the case ages them to execute on current priorities. There are at Reckitt Benckiser, a fast-growing consumer goods risks to relying onbonuses alone, but executives can company, which created a presceening tool that pomitigate them by coupling high-powered rewards tential employees can use to assess their fit with the for short-term performance with compensation that company's values. In the online simulation, interdepends on long-term company performance. For ested candidates walk through real-world business example, when Garantia bought a controlling stake situations and receive feedback on how well their sein Brazilian brewer Brahma, the new CEO, Marcel lected actions match the company's core values, such Telles, instituted a program whereby the t o p 2 0 0 as team spirit and entrepreneurship. Current employleaders could purchase large chunks of equity in ees are also regularly evaluated against values. And the company at slightly less than the market price. few actions broadcast the message that values matter These executives on average spent more than three- more clearly than firing a manager who hits his numquarters of their bonuses to service the debt they bers but disregards core values.

NOT Organizational changes that support agility and execution must necessarity cut across business units and functions—with no single unit leading the charge. Naturatty, championing these changes should fali to the CEO, but knowing that the average tenure of the position is six years, many chief executives would rather focus on short-term wins and teave tong-term problems to their successors.

THE .. BUREAUCRACY BIAS. The tevers to enhance execution inctude information systems, corporate priorities, and tatent management processes. Many executives actively avoid such initiatives, betieving that they're mostly bureaucracy and distract peopte from doing the "reatwork of setting products and services.

March 2010 Harvard Business Review 73



Manaijrz-;;'71 must ma. sLre their teams r:al conversations. are not 4S.SsTI0N S

Are you talking about the wrong things?

.THE ALLURE OF FIGHTING, NOT PREVENTING, FIRES. Heroic interventions get the adrenaline flowing, grab the attention of executives and boards, and enhance managers' reputations as indispensable players. The moves required to jmprove a company's 4xecution capabilities, on the other hand, have all the sex appeal of plumbing repairs.

THEY DON'T KNOW HOW. Many general managers rise up from specialist positions. Traders are promoted to run banks, engineers to manage technology firms, lawyers to oversee law firms. They excel in their sport, and as a reward, they're recruited to play a different game altogether, for which they are often ill suited.

Managers spend approximately three-quarters of their time in discussions—hallway encounters, formal meetings, phone chats, and e-mail exchanges. So an organization's execution depends on how well managers, up and down the organization, are able to set up and lead discussions for action. Execution requires four distinct types of conversations: making sense of volatile situations; deciding what to do, not do, or stop doing; soliciting and monitoring commitments to deliver; and making corrections midcourse. Managers who excel at one type of discussion, however, often struggle when they must communicate in ways outside their comfort zone. Strategy-focused executives, for example, may savor the intellectual thrust-and-parry to formulate strategy, but struggle to make difficult trade-offs or follow up on execution. And take-charge managers who excel at driving hard choices and holding subordinates accountable often skirt open-ended conversations to assess a situation or rethink their plans in light of unexpected circumstances. Managers must leam to set the tone appropriate for each type of discussion: A spirit of open inquiry works best when interpreting an ambiguous situation, while constructive confrontation can lead to the best choices. Managers should also make sure that their teams are discussing the right things at the right times and not avoiding critical conversations.

Irs-twoo Have your Vikings become farmers? Executives who excel at execution resemble Nordic Vikings, who attacked when they saw an unprotected spot and retreated when they realized they couldn't win, maneuvering their longboats toward the next opportunity. Once Vikings seized a bit of land, however, they often remained to farm it. Over time, they came to value the security of protecting what they had more than the adventure of pursuing new opportunities. Organizations are susceptible to a similar dynamic. As a business matures, early entrepreneurs may leave for new adventures or settle into safe routines at the firm. New employees join the company for its perceived stability, not for ad-

74 Harvard Business Review March 2010

venture. What started as a Vilcing outpost becomes a farming community. Firms need farmers, of course. But companies with too few Vikings on the payroll struggle to execute with sufficient urgency. That's why soon after assuming control of a portfolio company, Garantia's executives would implement a trainee program to attract the best and brightest college graduates, a practice the firm has continued as it has expanded. In 2 0 0 8 , for instance, AnheuserBusch InBev (created by Brahma through a series of mergers and acquisitions) hired 127 trainees out of a global pool of 78,000—an acceptance rate of two-tenths of 1%—and retained 90% of its trainees. These graduates provide a steady stream of Vikings and exert constant pressure on executives who might be lapsing into the comfort of farm life. QUESTION 7

Do you rely on heroic leadership? Senior executives who dash from crisis to crisis are a sign of organizational weakness, not leadership strength. The economic crisis forced many executives into firefighting mode, but relying on ad hoc management in the postrecession economy is unacceptable. Senior leaders' most important job is to build the organizational hardware and software for execution and prevent it from falling into disrepair. Leaders must guard the culture—walking the talk on core values, ensuring that career advancement is based on adherence to those values, and sometimes walking away from attractive opportunities that would dilute the culture, such as rapid growth or a merger with a dysfunctional company. Goldman Sachs, for example, could have turbocharged growth through acquisitions during the boom; instead it relied on organic growth to protect its unique culture. Even when things are going well, top executives must constantly inject urgency into the organization—but not by running around setting and then putting out fires. They must do so by attracting a steady flow of Vikings hungry to prove themselves; setting objectives that are almost, but not quite, impossible to achieve; giving middle managers latitude to exercise judgment and creativity in hitting those targets; and, ultimately, aligning the efforts of employees throughout the organization on what really matters. HBR Reprint R1003D



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