Are You Taking Care of Organizational Health?

Ignore the soft stuff, a decade of research concludes, and you could wind up losing the company.

"In Search of Excellence" and "Built to Last" are two of the most famous business books ever written, best-selling examinations of the elements necessary for business success. But by 2006, 20% of the 61 companies studied in the two books were out of business, nearly half were struggling and just a third were thriving. Since John Kotter published "Leading Change" in 1996, all the subsequent research confirms his finding that only a third of change programs in organizations succeed. And if they continue on their present trajectory, half of the S&P 500 companies won't still be on the list by 2020. Why?

After 10 years of research involving more than 600,000 respondents from more than 500 organizations, Scott Keller and Colin Price of McKinsey say the answer is that most companies focus on performance but fail to manage their "organizational health," which they define as a company's ability to align, execute and renew itself faster than its competitors. Health is so important, they write in their new book, "Beyond Performance: How Great Organizations Build Ultimate Competitive Advantage," that they believe it drives at least 50% of "any organization's long-term success."

Management Paradox Keller and Price argue that a "great paradox of management" is that when it comes to sustained excellence, a narrow focus on performance leads to many companies' downfall. "Performance-focused leaders invest heavily in those things that enable targets to be met quarter by quarter, year by year. What they tend to neglect, however, are investments in company health investments in the organization that need to be made today in order to survive and thrive tomorrow."

Atari is an example of a company that failed to mind its health. In 1980, the authors note, the company was the fastest-growing firm in U.S. history, with record revenues of $415 million. But just three years later, the company's products were poor, it lost $536 million and instituted massive layoffs. In short order, Keller and Price explain, "Teamwork began to decline, communication broke down, a culture of risk avoidance set in, investment in R&D was cut, and product quality was sacrificed to the cause of faster time-to-market." Atari's management had been so focused on its financial performance that they had been oblivious to the problems with its organizational health.

Nine Elements In "Beyond Performance," the authors identify nine elements that make up organizational health. The first is "direction," which they define as a "clear sense of where the organization is heading and how it will get there that is meaningful to all employees." They then cite three practices that underpin this element shared vision, strategic clarity and employee involvement. They follow the same process for the other elements of organizational health leadership, culture and climate, accountability, coordination and control, capabilities, motivation, external orientation, and innovation and learning. In all, they list 37 practices that they argue break these elements into actionable items that companies can pursue and measure.

Keller and Price lay out a five-stage process, called the 5As, for companies to follow to build organizational health. The process starts with Aspire (where do we want to go?) and proceeds through Assess (how ready are we to go there?), Architect (what do we need to do to get there?), Act (how do we manage the journey?) and Advance (how do we keep moving forward?). They emphasize that organizational health isn't managed in isolation from performance measures, but rather together.

Continuous Improvement Because so many manufacturers are engaged in continuous improvement efforts, I asked Keller what companies need to keep on the path of advancement. He said organizations need systems in place to facilitate continuous improvementsuch as Caterpillar's continuous product improvement process or the U.S. Army's After-Action Reviews. But he cautions that a program infrastructure by itself is not enough. They also need leadership that can "drive life into all the systems and structures they have put into place." And with that, they must also be able to recognize when a step change is needed because of an alteration to their business environment such as a technology innovation. Put those three elements together, Keller says, and you have a "truly agile, sustained-excellence kind of organization."

Steve Minter
Editor-in-Chief
sminter@industryweek.com

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