A Formula For Sustained Success

A Formula For Sustained Success
Eight management practices distinguish the 5% of companies that consistently outperform the market.
by William Joyce, Nitin Nohria, and Bruce Roberson
Optimize Magazine
May 2003, Issue 19
Business is full of mysteries, but none is greater than this: What are the elements that contribute to a company's
Executives have spent 100 years guessing about what makes a company succeed--and usually guessing
wrong. In the best of times, most don't fully understand what they're doing right. Even fewer really know how to
keep their companies prospering when the economy falters.
That's why 50 leading consultants and academics undertook a five-year study called the Evergreen Project, a
systematic analysis of the practices that create business winners. Using well-accepted research tools and
procedures, the Evergreen team analyzed the experiences of 160 companies over a 10-year period, from 1986
to 1996, in search of the management practices that directly correlate with superior corporate performance as
measured by total return to shareholders. Our findings are being released this month in What Really Works
(HarperBusiness, May 2003).
The study found that just eight practices, four primary and four secondary, make all the difference. Winning
companies achieved excellence in all four of the primary practices, plus two of the secondary ones--what we
came to call the 4+2 formula for success. Losing companies failed to do so. The four primary management
practices we identified are: strategy, execution, culture, and structure. The four secondary areas are talent,
leadership, innovation, and mergers and partnerships.
The correlation between 4+2 practices and business success was astonishing. Companies that scored high in
all four primary areas and any two of the four secondary ones had better than a 90% chance of consistently
delivering high shareholder value. Over the 10 years we studied, these "winners" saw their sales increase an
average of 415%, assets increase 358%, and operating income lift 326%. Total returns to their investors rose
945%. Companies that didn't follow the formula, meanwhile, produced just 62% in total returns to shareholders
over the decade; their sales rose only 83%; their assets, 97%. Operating income grew just 22%.
All eight practices covered by the 4+2 formula have features that are both intuitive and counterintuitive to most
businesspeople. We'll consider each of them below.
Practice 1:
Devise and maintain a clearly stated, focused strategy. Whether the strategy is based on low prices or
innovative products, it should double your core business every five years while simultaneously building a related
new business to about half that size. The strategy must be sharply defined, clearly communicated, and well
understood by employees, customers, partners, and investors.
One of the key mandates we found among winners was a strategy focused on growing the core business. Too
many leaders, besieged by demands for more support from all segments of the company, allow their resources
to be nibbled away. Winning companies keep their goals firmly in mind and tailor their budgets to fit.
Flawless execution
For managers, the successful pursuit of the strategy practice means following five mandates:
build your strategy around a clear value proposition for the customer.
develop strategy from the outside in. Base it on what your customers, partners, and investors have to
fine-tune the strategy to changes in the marketplace.
clearly communicate your strategy within the organization, and among customers and external
beware the unfamiliar. Grow your core business.
Practice 2:
Develop and maintain flawless operational execution. If you can't always delight your customers, you must at
least never disappoint them. There's no question that poor quality hurts. Companies are safe as long as they
remain in the top third of the perceived quality rankings in their industry, and can never afford to slip into the
bottom half. Winners constantly slash operational costs while increasing productivity by 6% to 7% every year.
Superior execution can be achieved only through intense and continuing study and effort. Managers also must
be willing to ignore some conventional wisdom. We found no relationship between outsourcing and financial
performance, for example; nor did success hinge on CRM, ERP, or supply-chain management systems. While
these applications and services are important elements of overall strategy, they don't correlate directly to the
bottom line.
Duke Power, for example, aggressively used IT to improve execution on its strategy of delivering significantly
enhanced power quality and service levels to customers in both its regulated and unregulated businesses.
Kohl's stores also are very effective in execution, so much so that they can offer department-store products at
the same cost as lower-quality goods sold in discount chains. This unique strategy, shared within the company
and embedded in its strong culture, lets it grow at a rate far exceeding its competitors.
We found three mandates for the execution practice: Deliver products and services that consistently meet
customers' expectations. Empower the front lines to respond to customer needs. And constantly strive to
improve productivity and eliminate all forms of excess and waste.
Practice 3:
Develop and maintain a performance-oriented culture. Among our more intriguing findings was the emergence
of culture as one of the four primary practices. Some quarters of the business world are just beginning to take
culture seriously. Yet the study clearly showed that companies become winners when everyone in the
organization performs at the highest level.
Corporate-culture advocates sometimes argue that if you can make the work fun, all else will follow. But our
results suggest that winning corporate cultures put fun second to high performance. First they do the job well;
then they celebrate.
We also found that too many companies fool themselves into believing they're doing well whenever their
financial results beat those of the previous year. But winners know that a year-to-year comparison is an
insufficient measure. The only meaningful way to define progress is by comparing your performance with that of
your competitors. True performance-based cultures go a step further: They aim to surpass top-ranked
companies in every industry.
The four mandates for winning corporate cultures, then, are: Inspire all to do their best. Establish and abide by
clear company values. Reward achievement with praise and pay, but keep raising the performance bar. Create
a work environment that's challenging, satisfying, and fun.
Practice 4:
Maintain a fast, flexible, flat organization. There's just one kind of structure that really counts: one that reduces
bureaucracy and simplifies work. Procedures and protocols--what bureaucracy is, after all—are absolutely
necessary to keep large organizations functioning smoothly. But an excess of them puts roadblocks in the way
of progress and dampens employees' enthusiasm and energy. Winners trim away every vestige of
bureaucracy. USAA, the insurance company, calls this "painting the bridge." When maintenance experts finish
painting one side of a bridge, they know it's time to start again on the other side. Similarly, when USAA finishes
eliminating bureaucratic obstacles to its core processes, it begins the search anew.
The mandates for winning corporate structures are: Eliminate redundant organizational layers and bureaucratic
structures and behaviors. Promote cooperation and information exchange across the company. Keep your best
people close to the action and your front-line stars in place.
Beyond the four major management practices that lead to success are four secondary ones. Oddly, we found
that it doesn't matter which two practices a company chooses to pursue. Any pair, in combination with the four
major practices, will suffice. The secondary practices are:
1. Hold onto talented employees and find more. The most important indicator of the depth and quality of
your talent is whether you can grow your own stars from within instead of buying talented outsiders in
every crisis. Winners like Citigroup, General Electric, and Procter & Gamble have mastered the deep
bench by providing broad educational and training opportunities. Winners don't completely shy away
from pursuing talent from outside, though. Their talent-rich environment helps attract even more good
2. Winning companies promote from within whenever possible, create top-of-the-line training, and design
jobs that challenge their best performers. And their leaders get personally involved in winning the war
for talent.
3. Make industry-transforming innovations. One might expect that winners would excel at innovation—but
only a bare majority did. Companies that excel keep their eye on the big opportunity—the totally new
and disruptive product or technological breakthrough with potential to transform their industry. They
don't limit innovation to product lines, either; they understand that applying new and old technologies to
internal business processes can yield as big an edge on the competition. Sony, for example, keeps its
focus on its core business of consumer electronics, but stays at the leading edge of the innovation
curve. It constantly introduces breakthrough products and new models, even if they hurt sales of
existing ones.
4. Make growth happen with mergers and partnerships. Internally generated growth is essential, but it's not
usually enough. Best practices in mergers and acquisitions include buying new businesses that
leverage your existing customer relationships and complement your strengths, and developing a
systematic capability to identify, screen, and close deals. Relatively small deals—less than 20% of a
company's own size—done on a consistent basis (two or three every year) are better than large,
occasional deals.
5. Keep leaders and directors committed to the business. Great chief executives communicate their vision
so convincingly that others adopt it, and they have great integrity in word and action. When confronted
by moral dilemmas, they don't hesitate to resolve them fairly and quickly.
Good CEOs are picked by good boards. Only two characteristics really matter: that board members truly
understand the business and are passionately committed to it. Winning companies make sure board members
have a substantial stake in their success and closely link executive pay to performance.
The scary fact is that less than 5% of all the publicly traded companies in our study maintained a total return to
shareholders greater than their industry peers for more than 10 years. Joining this elite club means running fullspeed on six tracks at once. Still, we see the Evergreen study as offering hope. In the hurly-burly of business
competition, the 4+2 formula offers solid directions for success.
William Joyce is a professor of strategy at Amos Tuck School of Business at Dartmouth College; Nitin Nohria is
chairman of the Organizational Behavior department at Harvard Business School; Bruce Roberson is a senior
manager at Safety-Kleen. They are authors of What Really Works: The 4+2 Formula for Sustained Business
Success (HarperBusiness, May 2003).