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Realizing the High Performance Enterprise

Mention high performance enterprise and the usual suspects come to mind. Microsoft, for its culture of innovation; Wal-Mart, for its …

Mention high performance enterprise and the usual suspects come to mind. Microsoft, for its culture of innovation; Wal-Mart, for its revolutionary distribution system; Toyota, for its production system; and Dell, for continually streamlining its supply chain, are among them. But the continuing success of these behemoths goes beyond any single defining achievement. In short, success that endures for decades rather than years is indicative of a deeply instilled and carefully refined mix of competencies and skills that allows an organization to unleash its full potential.

That there is no silver bullet to sustainable success won’t come as a news flash to CEOs. Nor will the fact that the specific solutions most widely credited for delivering consistent top-line growth and shareholder return are often sophisticated processes tailored to a company’s industry and competitive position within that industry. And yet most high performing enterprises share common characteristics and behaviors that predispose them to success. In fact, those characteristics and behaviors translate across industries, as well as across the globe, agreed CEOs gathered for a recent roundtable cosponsored by Chief Executive and Accenture.

After a three-year study of data from hundreds of companies, the consulting firm Accenture dubbed this predisposition “competitive essence,” a quality exhibited by the one company out of 10 that outperforms its competitors for a decade or more. “Competitive essence has three components: market focus and positioning, distinctive capabilities, and performance anatomy,” said Vernon Ellis, international chairman of Accenture. Distinctive capabilities refer to mastering various functions, while performance anatomy refers to the organizational characteristics that support that capability, explained Ellis. “Each is important, but even more important is that they’re kept in balance, aligned with one another, and constantly renewed.”

Procter & Gamble CEO A.G. Lafley agreed. “What I think about all of the time is whether our goals, strategies, structure, systems, culture and leadership are all on the same page and growing in the same direction,” he said. “It sounds easy, but over the past 30 years I’ve found it difficult -difficult at the country operating unit level, difficult at the category operating unit level, and very difficult at the company global strategy and operating level. But if you can achieve it, you have a much better chance of delivering consistent, sustainable growth.”

For P&G, alignment is reinforced by a customer-centric theme that runs through every aspect of the company’s operations. Where once the company relied upon its muscle as a major player to jam store shelves with dizzying array of popular brand like Crest or Tide, today emphasis has shifted to getting close enough to consumers to create brand new products. “We spend an inordinate amount of time, money and resources on truly understanding consumers of everyday household and personal care products,” Lafley noted. “The most valuable stakeholder at P&G is a loyal consumer of one of our brands or product lines.”

Beating Back Commoditization

In a business environment increasingly characterized by rapid commoditization, commitment to innovation is ever more critical-and P&G evidences that in spades. The company’s R&D spending tops that of the next five competitors combined. But equally intrinsic to its success is its ability to monitor competition and maintain a competitive edge.

“When I joined the company in the mid-’70s, we looked at branded competition from the Unilevers, Nestles, Colgate-Palmolives, and Kimberly- Clarks of the world,” explained Lafley. “But that’s just one layer of competition today. Now we have other layers in retailer brands and private labels and in the entrepreneurial companies rising in Brazil, India, Mexico, Eastern Europe, and China.”

P&G has responded to the influx of competition by weeding the products most vulnerable to commoditization from its product portfolio. The result was a dramatic evolution from a predominately food, cleaning and paper company to a beauty, health and personal care orientation. “We chose to get out of most of the food businesses because they are more commodity-like,” explained Lafley, who noted that with the exception of coffee in North America and Pringles worldwide, P&G has exited food. “It’s a lot harder to build differentiation into a food product than into a household or personal care product.”

Assessing and responding to vulnerability to commoditization is now crucial for a widening array of companies. The same global forces that undermined automakers, electronic companies and manufacturing in general are now spreading across industries-and it’s proactive companies that survive the influx of competition. New York Life, for example, declined to join its insurance industry peers in shifting to a financial services focus for fear of moving into a soon-to-be commoditizing sector, said Sy Sternberg, chairman and CEO of the insurer. “Many insurers were moving toward mutual funds and annuities and trying to redefine themselves as financial services companies,” he said. “We chose not to do that specifically because the life insurance product is less vulnerable to commoditization.”

New York Life fights commoditization by working hard to maintain and build on the strength of its brand in the insurance market. “We spend a lot of time defining the brand in a simple way: ��We have been around 160 years; you can count on us,'” said Sternberg. “It’s a simple concept, but it takes a complex product that is hard to differentiate and gives it differentiation through brand equity.”

P&G, too, focuses intensely on brand value. “We have a $200 billion market cap, but if you look at hard assets on the balance sheet, it’s probably closer to $50 billion to $60 billion,” said Lafley. “So we are a company of two intangible assets: our brands and our people-and we invest heavily in both.”

                      

The Human Element

P&G holds two- to three-day leadership council meetings every quarter where each and every top development employee is evaluated. Lafley, who personally tracks 500 employees, likens the process to the depth chart used by a World Cup soccer team. “For each individual we look at everything- how they’re doing in their current assignment, what their next assignment should be, what training they should have and who their sponsor is-every year,” said Lafley.

All too aware that today’s employees are portable knowledge workers, P&G works hard at inspiring rather than controlling its workers, he adds. “Every day our people get calls and offers for better positions at 30 to 50 percent more than what they’re making now,” Lafley said. “In a mercenary game, the other employer can always hire your people. But I think that once people make a certain amount of money, they’re motivated by other things-accomplishment, connection, self-fulfillment. We look to be exciting and inspirational.”

Does a global marketplace bring greater complexity to the challenge of developing talent? Not necessarily, noted William Mitchell, CEO of Arrow Electronics, whose plan to instill a leadership program worldwide met with criticism from naysayers.

“People said it wouldn’t work, particularly that it wouldn’t work in Asia, and that Germans are different from Brazilians and so on,” he reported. “But we found that the commonalities-in terms of how you share best practices, how you collaborate and how you develop people-are much more striking than the differences. We tend to focus on the differences when the commonalities are huge.”

P&G also met with criticism for management choices in far-flung locales. When the company appointed an Indian national to a top post in Japan, critics pointed out that in the pecking order of Asian cultures, Japanese look down at Indians. But the company stood firm, and the appointment proved a success.

That’s just one example of P&G’s commitment to developing leaders in emerging markets and fostering diversity and cross-cultural experience among its leadership team, Lafley noted. “Fifty percent of our leadership team-the top 30-are not U.S. born or raised,” he said. “They grew up in developing markets. We are much more diverse than other companies in our industry and that’s because we move people around. We won’t let you run Brazil out of Miami; you will run Brazil out of Sao Paulo. If you don’t want to move every three years, you’re at the wrong company.”

While cycling managers through posts and geographic locations has become common practice, not all CEOs see it as beneficial. In fact, George David, CEO of United Technologies, looks askance at the practice.

“I spent many years racing large sailboats,” he recounted. “I found that when you drop a new crew member into a crew of 12, you end up getting an elbow in the face-usually during a high agility maneuver. That’s because you haven’t learned to adapt to each other’s moves. You don’t know what that person is going to do in the dark.”

David argued that tenure and continuity are key elements of building and sustaining good teamwork-particularly in a business centered on complex products with long lifespans. “It’s not atypical for us to launch a product that will still be in service 40 years later,” he said. “Our people need to learn the product and develop personal relationships with customers. You can’t do that with a new assignment every three years.”

The issue, pointed out Clarke Murphy, managing director of Russell Reynolds Associates, is about developing a specific expertise vs. broad managerial skills. “Customers want expertise that is deep, but long tenures don’t produce as successful broad general managers,” he said.

 In the CEO seat, however, short tenures are far from ideal, argued Ed Kopko, CEO of Butler International, who pointed out that the average tenure of CEOs has been on the decline. “It seems to be a new, media-driven theology of boards-they throw the sitting guy out and bring a new guy in,” he said. “It’s almost as if the board has lost its developmental role with the CEO. And that can’t be good for American business.”

Consistency, Clarity and Communication

Clear communication as to the company’s mission, values and operating disciplines, backed by metrics, is an equally crucial element of strong performance, agreed business leaders. “CEOs need to project clear metrics that define success, or exactly what it is that we want the organization to do,” David said. “And that has to be consistent over time. You need to have strong convictions and beliefs. Too much of corporate America operates by group mentality, a kind of floating consensus where you never know where anyone stands. An organization needs to know where the CEO stands.”

“If you’re going to sustain the metrics, values and beliefs, the CEO has a responsibility to really be an effective and continuing communicator,” agreed Ellis. “CEOs should never worry about being redundant. Sending a consistent message-once, twice, five times-on values, beliefs and operating disciplines is a major role of the CEO.”

Yet many companies focus exclusively on communicating with customers, rather than employees. “We all tend to spend time on advertising programs for consumers, rather than communicating to our own people,” noted Farooq Kathwari, chairman of Ethan Allen. “We need to communicate on a proactive basis-not only during crises-with our people. An internal marketing program is just as critical as an external one.”

A realistic point of view also helps, added Larry Mason, president and COO of Goodyear, who said CEOs need to be realistic about the capabilities of their organizations. “Often, when you see organizations stall, it’s because they didn’t have the capability that the CEO believed they should and were unable to bridge that gap,” he pointed out.

CEOs no longer have the luxury of isolation. “When I think about what I spend time on beyond strategy, leadership development and customers, it’s learning,” said Lafley, who studies biology and physics with a biotech mentor for a few hours each month. “One of the risks of being CEO is that you can get consumed with everything going on inside and lose touch with the external world. External connections are important.”

WHO’S WHO

David Carey is president, business media, of New York City-based Cond�© Nast Publications.

George David is chairman and chief executive of United Technologies in Hartford, Conn.

J.P. Donlon is editor-in-chief of Montvale, N.J.-based Chief Executive magazine.

Vernon Ellis is international chairman of Accenture in London.

Robey Estes is president of Estes Express Lines in Richmond, Va.

Sherrill W. Hudson is chairman and chief executive of Tampa, Fla.- based TECO Energy.

Farooq Kathwari is chairman of Ethan Allen Interiors in Danbury, Conn.

Edward M. Kopko is chairman, president and chief executive of Ft. Lauderdale, Fla.-based Butler International and chairman and chief executive of Chief Executive Group.

A.G. Lafley is chairman, president and chief executive of The Procter & Gamble Company in Cincinnati, Ohio.

Lawrence D. Mason is president, consumer tires, of The Goodyear Tire & Rubber Company in Akron, Ohio.

William Mitchell is chief executive of Melville, N.Y.-based Arrow Electronics.

Clarke Murphy is managing director of Russell Reynolds Associates in New York.

Seymour Sternberg is chief executive of New York-based New York Life Insurance.

Charles Tribbett is co-leader EO/ board services of Russell Reynolds Associates in Chicago.

Gary G. Winterhalter is president of Sally Beauty Co. in Denton, Tex.

Philip R. Yates is chairman and chief executive of York, Pa.-based Graham Packaging Holdings Co.

P&G: Delivering On Innovation

Surprisingly, customers aren’t always able to articulate their needs-or even accurately predict their responses to a new idea. As a result, experienced innovators like P&G shun some of the typical methods of testing product concepts, such as focus groups.

Instead, P&G takes a collaborative approach to research and development, tapping the resources of customers, partners and stakeholders to develop new products. “We decided that what we’re really good at is not necessarily creating and inventing, but developing and qualifying or commercializing innovations,” explained A.G. Lafley, chief executive of the company, whose brands include Pampers, Tide, Gillette and Crest. “We have development and testing methods that we feel are more predictive of success. So we decided to focus on continuing to improve on those and partner on all the rest of it.”

Today, P&G’s scientists share labs and work side by side with the scientists of some of its largest suppliers. “We’ve also hired 150 designers from outside the company to mix with our biologists, chemists and chemical engineers,” added Lafley. “We used to view the distribution channel as a pipe, not as a partner. But when you work as partners you create an even bigger pie, as opposed to carving up the pie that’s been sitting there.”

The program is paying off. In 2005, 35 percent of P&G’s new products were developed in collaboration with at least one external partner; and the company plans to bring that figure to 45 percent by the end of the decade. But better still, the success rate of new introductions is on the rise.

“In our industry, between 15 and 20 percent of new brand and product introductions are successful in the sense that they return the cost of capital,” said Lafley. “We were running at a 15 to 20 percent success rate from 1998 through 2000. Today, we run at about a 50 percent success rate.”

And that’s as high as it will likely go. “If we try to push it much higher, we won’t be taking the necessary risk, betting on enough of the new space,” explained Lafley, who likens P&G’s process to the way a venture capitalist manages a portfolio. The company has a very disciplined process of collecting “fragile ideas” on the front end and then prototyping and developing them. Potential products are then assessed-or “qualified”-for further development, premarket tested and, finally, commercialized.

“We look at our innovation as a portfolio that is in various stages of development,” said Lafley. “And we are quite happy to weed and feed it every step of the way.”

About Jennifer Pellet

As editor-at-large at Chief Executive magazine, Jennifer Pellet writes feature stories and CEO roundtable coverage and also edits various sections of the publication.