One Key to Business Success

Independent investor and market observer Brad Hall argues that there is only “one thing” needed to unlock the secrets of business success, and that is honing four fundamentals: …

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Independent investor and market observer Brad Hall argues that there is only “one thing” needed to unlock the secrets of business success, and that is honing four fundamentals: managing a business strategy, maintaining a nimble organization, cultivating a high-performance culture and executing with discipline. Hall draws his theory from the Evergreen Project, a study of the performance of four companies in each of 40 industries from 1986 to 1996. “Winners” in these groups demonstrated great skill in managing the four fundamentals. For more on this continue reading the following article from TheStreet.

In the movie City Slickers, Curly the old cowboy gives advice to a visitor, "The secret to life is one thing," he says. When asked what that one thing is, Curly answers, "That’s what you’ve got to figure out."

Could there be one thing that accounts for business success? There may be. That one thing is flawlessly executing the fundamentals. Every athlete has heard it from his/her coach. But it is also true in business.

There is good research to support this assertion. Some of the most compelling come from a massive, multi-year study called The Evergreen Project.

Project members included 50 faculty members from 10 of America’s leading business schools. Their objective was to use hard data and causal modeling to determine why some companies consistently outperform their peers. This project has a different approach than the type of studies found in the book Good to Great, which focuses on high-performing companies and then describes several management practices. It is not clear whether those practices caused the success or whether those practices will be effective in other industries.

Here are the Evergreen findings in a nutshell: When compared with average companies, executives of winning companies proactively measure and manage the fundamentals. Using a sports analogy, all coaches are obsessed with winning, but the most successful build a highly disciplined approach for improving capabilities. They believe that if they manage the fundamentals well, the score will take care of itself.

There are four fundamentals:

  1. Managing a Business Strategy
  2. Maintaining a Nimble Organization
  3. Cultivating a High-Performance Culture
  4. Executing With Discipline

For example, take Kmart and Wal-Mart. These two companies were financially similar at the start of the study. But 10 years later, Kmart was considered a loser.

During the study period, Kmart executives focused on managing quarterly financial results. Again and again, executives tried to "manage the score" by cutting headcount and slashing prices.

Wal-Mart, a winner, chose a different path. It focused on improving its fundamentals in purchasing, supply chain and data-driven merchandising. This allowed Wal-Mart to build muscle for future price fights. If it strengthened its fundamentals, financial results would follow.

Evergreen Methodology

The Evergreen Project began in 1986 by assembling four companies from 40 industries. Each company started in about the same financial condition, but performance diverged over the next decade to declare, in 1996, a winner in each industry. The research team found that there were four fundamental areas responsible for generating the win (i.e., strategy, execution, culture and structure). All winners performed well in all four areas.

Additionally, winners succeeded in any two of four secondary areas (talent, leadership, innovation and mergers/partnerships). The researchers called this the 4+2 formula. Companies meeting the 4+2 criteria had a 90% chance of being the industry winner.

More importantly, the vast majority of the winners crowned in 1996 still dominate today: For example: Wal-Mart, Dollar General, Duke Energy, FedEx, P&G, Nucor, GE, Home Depot, Seagate, Walgreen, etc., sustained success for 26 years. Diligently managing the fundamentals just might be the "one thing."

The Fundamentals

Managing a Business Strategy

Winners have strong capabilities in strategic planning and invest time to do it well. For example, for more than a decade,

IBM

has sent business unit senior teams to the IBM Strategic Leadership Forum to set strategy and execution plans in a 4½ day workshop. Contrast this with executive teams that piece together a strategy from two-hour sessions over many months. By the time their plan is complete, it’s obsolete.

Winners design their strategic plan — from the outside-in — to produce a compelling customer value proposition. Think Target. Its value proposition is "psychic comforts at value prices." That’s actually what it feels like when walking into a Target store. Job well done.

Maintaining a Nimble Organization. Evergreen researchers found that there is no "best" organizational structure (e.g., product, geography, business units with P&L). What really matters is whether organizational arrangements reduce bureaucracy and simplify work.

GE made bureaucracy-busting a core value and started its journey by deploying Work Outs across the company. Winners, like GE, view process and policy simplification like the never-ending process of painting a bridge.

Another method winners use to reduce bureaucracy is to flatten their organization. IBM annually audits sales management spans of control to exceed 12:1. Nucor deploys only four management levels. In Nucor’s flat organization, the role of the manager is to provide advice and support so that employees can make decisions on their own. In flat organizations, managers cannot be king.

Cultivating a High-Performance Culture. Despite fabled stories of the fun workplace, winners rejected the assumption that employee happiness causes success. Rather, they believe that success is a result of setting high standards and driving accountability for results. And each year they raise performance standards.

Of all the times I’ve asked the intentionally provocative question, "Do performance appraisals improve performance," only three managers have answered affirmatively. All three were from Goldman Sachs. They explained that at Goldman, every associate is assessed by an annual 360° that managers use to create a multipage appraisal. Nearly all companies conduct appraisals, but few execute this fundamental practice well.

Executing With Discipline. Winners maintain a highly disciplined approach to the operational tasks that customers view as critical. Evergreen research found that it did not matter whether companies use CRM, ERP, or LEAN practices. What matters is that they relentlessly cut operational costs and drive annual productivity improvements to twice their industry average.

But first and foremost, winners believe that the downside of disappointing customers is far greater than the upside of delighting them. That’s why, with few exceptions (e.g., FedEx, Tiffany’s), winners are not the industry leader in quality, service, etc. They realize that for many products (e.g., smartphones, shoes), customers are not willing to pay a premium for six sigma quality (99.99966%) when four sigma (99.38%) is available. How much more would you pay for a six sigma shoe?


My grandfather was a world-class speed skater in the early 1900s. Years later when he watched me run on my high school track team, he would yell, "Form, form, form, then comes the speed!" The same is true with corporations. Manage the fundamentals well and financial results will follow. That is the one thing that separates the best from the rest.

This article was republished with permission from TheStreet.

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