Matrix management: not a structure, a frame of mind

In many of the world's leading corporations, strategic thinking has outdistanced organizational capability. As business challenges have grown more complex over the past 20 years, most companies have avoided the trap of one-dimensional strategic responses-stick to your knitting, stick to the big markets. But many of them have fallen into a second, structural trap and adopted elaborate organizational matrices that actually impair their ability to implement sophisticated strategies. Keeping a company light on its feet strategically while still coordinating its activities across divisions, functions, even continents, means eliminating parochialism, improving communications, and weaving the decision-making process into the company's social fabric. Altering formal structure from the top down is a poor way to achieve these goals. It is easier to work from the bottom up, focusing on the attitudes and behavior of individual managers. The companies that have made best use of this focus-among them NEC, Philips, and Unilever-employ three techniques to capture the capabilities and commitment of each manager: 1. They communicate a clear, consistent corporate vision. 2. They use training and career-path management to broaden individual perspectives and increase identification with corporate goals. 3. They co-opt individual energies and ambitions into the broader corporate-wide agenda. The goal is to build a matrix of corporate values and priorities in the minds of managers and let them make the judgments and negotiate the deals that make strategy pay off.     

Strategy as ecology

Microsoft's and Wal-Mart's preeminence in modern business has been attributed to any number of factors--from the vision and drive of their founders to the companies' aggressive competitive practices. But the authors maintain that the success realized by these two very different companies is due only partly to the organizations themselves; a bigger factor is the success of the networks of companies with which Microsoft and Wal-Mart do business. Most companies today inhabit ecosystems--loose networks of suppliers, distributors, and outsourcers; makers of related products or services; providers of relevant technology; and other organizations that affect, and are affected by, the creation and delivery of a company's own offering. Despite being increasingly central to modern business, ecosystems are still poorly understood and even more poorly managed. The analogy between business networks and biological ecosystems can aid this understanding by vividly highlighting certain pivotal concepts. The moves that a company makes will, to varying degrees, affect the health of its business network, which in turn will ultimately affect the organization's performance--for ill as well as for good. Because a company, like an individual species in a biological ecosystem, ultimately shares its fate with the network as a whole, smart firms pursue strategies that will benefit everyone. So how can you promote the health and the stability of your own ecosystem, determine your place in it, and develop a strategy to match your role, thereby helping to ensure your company's well-being? It depends on your role--current and potential--within the network. Is your company a niche player, a keystone, or a dominator? The answer to this question may be different for different parts of your business. It may also change as your ecosystem changes. Knowing what to do requires understanding the ecosystem and your organization's role in it.     

Finding your next core business

How do you know when your core needs to change? And how do you determine what should replace it? From an in-depth study of 25 companies, the author, a strategy consultant, has discovered that it's possible to measure the vitality of a business's core. If it needs reinvention, he says, the best course is to mine hidden assets. Some of the 25 companies were in deep crisis when they began the process of redefining themselves. But, says Zook, management teams can learn to recognize early signs of erosion. He offers five diagnostic questions with which to evaluate the customers, key sources of differentiation, profit pools, capabilities, and organizational culture of your core business. The next step is strategic regeneration. In four-fifths of the companies Zook examined, a hidden asset was the centerpiece of the new strategy. He provides a map for identifying the hidden assets in your midst, which tend to fall into three categories: undervalued business platforms, untapped insights into customers, and underexploited capabilities. The Swedish company Dometic, for example, was manufacturing small absorption refrigerators for boats and RVs when it discovered a hidden asset: its understanding of, and access to, customers in the RV market. The company took advantage of a boom in that market to refocus on complete systems for live-in vehicles. The Danish company Novozymes, which produced relatively low-tech commodity enzymes such as those used in detergents, realized that its underutilized biochemical capability in genetic and protein engineering was a hidden asset and successfully refocused on creating bioengineered specialty enzymes. Your next core business is not likely to announce itself with fanfare. Use the author's tools to conduct an internal audit of possibilities and pinpoint your new focus.     

OUTSIDE UPSIDE: FINDINGS FOCUS THROUGH FINANCE OUTSOURCING

More and more companies are outsourcing aspects of the finance and accounting function to cut costs and increase process efficiency. This article draws on survey results and numerous real-world examples to make the case for outsourcing finance and accounting functions, either outright or through shared service centers. As expected, cost and efficiency gains can be dramatic. But there are also important strategic benefits, including the freedom to focus on core businesses, greater access to specialist knowledge, standardization of processes across business units, and the ability to launch operations quickly without staffing back offices.
Maximizing the benefits of outsourcing requires careful planning and execution. Executives who have successfully navigated the process recommend allowing adequate time to ensure buy-in and consensus building, incorporating the appropriate performance-based incentives, taking steps to build morale during the transition, ensuring proper oversight, and building a strong partnership with the provider. When properly implemented, outsourcing is a powerful ally in the corporate struggle to cut costs—and it can be a vital complement to strategy as well.     

The competitive advantage of corporate philanthropy

When it comes to philanthropy, executives increasingly see themselves as caught between critics demanding ever higher levels of "corporate social responsibility" and investors applying pressure to maximize short-term profits. In response, many companies have sought to make their giving more strategic, but what passes for strategic philanthropy is almost never truly strategic, and often isn't particularly effective as philanthropy. Increasingly, philanthropy is used as a form of public relations or advertising, promoting a company's image through high-profile sponsorships. But there is a more truly strategic way to think about philanthropy. Corporations can use their charitable efforts to improve their competitive context--the quality of the business environment in the locations where they operate. Using philanthropy to enhance competitive context aligns social and economic goals and improves a company's long-term business prospects. Addressing context enables a company to not only give money but also leverage its capabilities and relationships in support of charitable causes. The produces social benefits far exceeding those provided by individual donors, foundations, or even governments. Taking this new direction requires fundamental changes in the way companies approach their contribution programs. For example, philanthropic investments can improve education and local quality of life in ways that will benefit the company. Such investments can also improve the company's competitiveness by contributing to expanding the local market and helping to reduce corruption in the local business environment. Adopting a context-focused approach goes against the grain of current philanthropic practice, and it requires a far more disciplined approach than is prevalent today. But it can make a company's philanthropic activities far more effective.     

How Corporate Diversity and Size Influence Spinoffs and Other Breakups

In recent months, the list of large diversified companies that have decided they would be worth more as several smaller, focused companies has grown sharply. In many of these cases, it has been outside pressure from activist investors that has motivated these actions by management—and with some pretty favorable results. But what is driving these strategic actions and what is most important in determining whether breakups create value? To answer this fundamental questions, it is critical to decide whether large, diversified companies have a value recognition problem or a value creation problem. In this article, the authors present and try to integrate the findings of two separate but related research studies on business diversity and size with the aim of identifying their implications for corporate strategy and helping company executives create more value for their investors. The specific reasons for underperformance by large diverse companies vary greatly, but there are a number of potential problems discussed in this article, including organizational “distance,” capital allocation, human capital allocation, cross subsidies, and ineffective governance. Instead of waiting for activist investors to demand a breakup, executives of large diverse companies should be proactive in addressing the potential weaknesses of their organizations. Private equity firms understand how to make diversification work and many of today's executives could learn some valuable lessons from these firms. Large diverse businesses should embrace “Internal Capitalism,” a corporate culture and set of practices that emphasizes the importance of strategic decision‐making that is linked through continuous performance assessment to the corporate goals of boosting efficiency and sustainable growth.     

Charting your company's future

Few companies have a clear strategic vision. The problem, say the authors, stems from the strategic-planning process itself, which usually involves preparing a large document, culled from a mishmash of data provided by people with conflicting agendas. That kind of process almost guarantees an unfocused strategy. Instead, companies should design the strategic-planning process by drawing a picture: a strategy canvas. A strategy canvas shows the strategic profile of your industry by depicting the various factors that affect competition. And it shows the strategic profiles of your current and potential competitors as well as your own company's strategic profile--how it invests in the factors of competition and how it might in the future. The basic component of a strategy canvas--the value curve--is a tool the authors created in their consulting work and have written about in previous HBR articles. This article introduces a four-step process for actually drawing and discussing a strategy canvas. Readers will learn how one European financial services company used this process to create a distinct and easily communicable strategy. The process begins with a visual awakening. Managers compare their business's value curve with competitors' to discover where their strategy needs to change. In the next step--visual exploration--managers do field research on customers and alternative products. At the visual strategy fair, the third step, managers draw new strategic profiles based on field observations and get feedback from customers and peers about these new proposals. Once the best strategy is created from that feedback, it's time for the last step--visual communication. Executives distribute "before" and "after" strategic profiles to the whole company, and only projects that will help move the company closer to the "after" profile are supported.     

Who has the D? How clear decision roles enhance organizational performance

Decisions are the coin of the realm in business. But even in highly respected companies, decisions can get stuck inside the organization like loose change. As a result, the entire decision-making process can stall, usually at one of four bottlenecks: global versus local, center versus business unit, function versus function, and inside versus outside partners. Decision-making bottlenecks can occur whenever there is ambiguity or tension over who gets to decide what. For example, do marketers or product developers get to decide the features of a new product? Should a major capital investment depend on the approval of the business unit that will own it, or should headquarters make the final call? Which decisions can be delegated to an outsourcing partner, and which must be made internally? Bain consultants Paul Rogers and Marcia Blenko use an approach called RAPID (recommend, agree, perform, input, and decide) to help companies unclog their decision-making bottlenecks by explicitly defining roles and responsibilities. For example, British American Tobacco struck a new balance between global and local decision making to take advantage of the company's scale while maintaining its agility in local markets. At Wyeth Pharmaceuticals, a growth opportunity revealed the need to push more decisions down to the business units. And at the UK department-store chain John Lewis, buyers and sales staff clarified their decision roles in order to implement a new strategy for selling its salt and pepper mills. When revamping its decision-making process, a company must take some practical steps: Align decision roles with the most important sources of value, make sure that decisions are made by the right people at the right levels of the organization, and let the people who will live with the new process help design it.     

Selling the brand inside

When you think of marketing, chances are your mind goes right to your customers--how can you persuade more people to buy whatever it is you sell? But there's another "market" that's equally important: your employees. Author Colin Mitchell argues that executives by and large ignore this critical internal audience when developing and executing branding campaigns. As a result, employees end up undermining the expectations set by the company's advertising--either because they don't understand what the ads have promised or because they don't believe in the brand and feel disengaged or, worse, hostile toward the company. Mitchell offers three principles for executing internal branding campaigns--techniques executives can use to make sure employees understand, embrace, and "live" the brand vision companies are selling to the public. First, he says, companies need to market to employees at times when the company is experiencing a fundamental challenge or change, times when employees are seeking direction and are relatively receptive to new initiatives. Second, companies must link their internal and external marketing campaigns; employees should hear the same messages that are being sent to the market-place. And third, internal branding campaigns should bring the brand alive for employees, creating an emotional connection to the company that transcends any one experience. Internal campaigns should introduce and explain the brand messages in new and attention-grabbing ways and then reinforce those messages by weaving them into the fabric of the company. It is a fact of business, writes Mitchell, that if employees do not care about or understand their company's brands, they will ultimately weaken their organizations. It's up to top executives, he says, to give them a reason to care.     

The 2003 HBR list. Breakthrough ideas for tomorrow's business agenda

International conflict. Bear markets. Corporate scandals. The events of this past year have prompted intense soul-searching in many quarters and led us, in this year's list of the best business ideas, to reassess some of the most basic assumptions about strategy, organizations, and leadership. We began by reconsidering the role of the leader. Whether the boss is a hero or villain, discussions of leadership focus almost exclusively on the CEO. But attention also needs to be paid to the other people who make organizations work, not only to the corporate boards that oversee CEOs but to the followers--to their responsibilities, their power, and their obligation not to follow flawed leaders. And we considered the fate of soft issues, like emotional intelligence, in hard times. It's tempting to dismiss them when your employees will do anything just to keep their jobs. But hard times are good times to employ such tools on yourself. They can arm you with the self-awareness you need to understand, anticipate, and outwit your enemies. Where tools may fail, an attitude adjustment may be what's needed. Despite valiant efforts to lead change and eliminate inefficiencies, organizations stay messy. Perhaps it's better to learn to live with messiness and even focus on its benefits, one of which may be growth. Not the meteoric, effortless illusion we indulged in during the 1990s, but significant gains nonetheless. These can come when managers embrace messiness not just within their organizations but along the boundaries of the firm, blurring the line between their own core assets and functions and those of other companies. There's growth potential, too, in considering the company as a portfolio of opportunities--but only if managers can sell off poorly performing business units as easily as they've been shedding ailing stocks of late.     

How executives can shape their company's information systems.

When a big New York bank expanded in London, technical specialists in the two cities disagreed about which vendor's information system was best. The debate continued for several months until finally the technical experts took the issue to a senior-management policy committee. But the senior managers didn't understand the terminology and kept postponing the decision. Meanwhile, the London office complained loudly that the slowdown was threatening the unit's growth. Like the bank, most companies need a new approach to making decisions about information technology (IT), especially since it now affects so many aspects of the business. The company's technical experts seldom understand the overall business, and the senior managers who understand the business are usually lost when it comes to computers. One way to blend both perspectives is to establish a task force that solicits input from top management and creates a set of principles to guide subsequent investments in information technology. By drawing on 10 to 15 statements that reflect management's basic beliefs about how the company should use IT, the task force translates the language of corporate strategy into computerese. For instance, an electronics company wanted various functions to act more like one company. It created a principle that said, "Information systems will provide application that support cross-functional integration of business processes." Managers making subsequent decisions about computers could immediately rule out any technologies that contradicted that statement. Principles thus speed up the decision-making process, but more important, they ensure that every investment in IT helps the corporation achieve its strategic goals.     

Making sense of corporate venture capital

Large companies have long sensed the potential value of investing in external start-ups, but more often than not, they fail to get it right. Remember the dash to invest in new ventures in the late 1990s and the hasty retreat when the economy turned? This article presents a framework that will help a company decide whether it should invest in a particular start-up by first understanding what kind of benefit might be realized from the investment. The framework--illustrated with examples from Intel, Lucent, and others--explains why certain types of corporate VC investments proliferate only when financial returns are high, why other types persist in good times and in bad, and why still others make little sense in any phase of the business cycle. The framework describes four types of corporate VC investments, each defined by its primary goal--strategic and financial--and by the degree of operational linkage between the start-up and the investing company. Driving investments are characterized by a strong strategic rationale and tight operational links. Enabling investments are also made primarily for strategic reasons, but the operational links are loose. Emergent investments, which are characterized by tight operational links, have little current--but significant potential--strategic value. Passive investments, offering few potential strategic benefits and only loose operational links, are made primarily for financial reasons. Passive corporate VC investments dry up in a down economy, but enabling and driving investments usually have more staying power. That's because their potential returns are primarily strategic, not financial. In other words, they can foster business growth. Emergent investments may make sense even in a weak market because of their potential strategic value--that is, their ability to help companies identify and spark the growth of future businesses.     

Capitalizing on capabilities

By making the most of organizational capabilities--employees' collective skills and fields of expertise--you can dramatically improve your company's market value. Although there is no magic list of proficiencies that every organization needs in order to succeed, the authors identify 11 intangible assets that well-managed companies tend to have: talent, speed, shared mind-set and coherent brand identity, accountability, collaboration, learning, leadership, customer connectivity, strategic unity, innovation, and efficiency. Such companies typically excel in only three of these capabilities while maintaining industry parity in the other areas. Organizations that fall below the norm in any of the 11 are likely candidates for dysfunction and competitive disadvantage. So you can determine how your company fares in these categories (or others, if the generic list doesn't suit your needs), the authors explain how to conduct a "capabilities audit," describing in particular the experiences and findings of two companies that recently performed such audits. In addition to highlighting which intangible assets are most important given the organization's history and strategy, this exercise will gauge how well your company delivers on its capabilities and will guide you in developing an action plan for improvement. A capabilities audit can work for an entire organization, a business unit, or a region--indeed, for any part of a company that has a strategy to generate financial or customer-related results. It enables executives to assess overall company strengths and weaknesses, senior leaders to define strategy, midlevel managers to execute strategy, and frontline leaders to achieve tactical results. In short, it helps turn intangible assets into concrete strengths.     

Building deals on bedrock

The headlines are filled with the sorry tales of companies like Vivendi and AOL Time Warner that tried to use mergers and acquisitions to grow big fast or transform fundamentally weak business models. But, drawing on extensive data and experience, the authors conclude that major deals make sense in only two circumstances: when they reinforce a company's existing basis of competition or when they help a company make the shift, as the industry's competitive base changes. In most stable industries, the authors contend, only one basis--superior cost position, brand power, consumer loyalty, real-asset advantage, or government protection--leads to industry leadership, and companies should do only those deals that bolster a strategy to capitalize on that competitive base. That's what Kellogg did when it acquired Keebler. Rather than bow to price pressures from lesser players, Kellogg sought to strengthen its existing basis of competition--its brand--through Keebler's innovative distribution system. A company coping with a changing industry should embark on a series of acquisitions (most likely coupled with divestitures) aimed at moving the firm to the new competitive basis. That's what Comcast did when changes in government regulations fundamentally altered the broadcast industry. In such cases, speed is essential, the investments required are huge, and half-measures can be worse than nothing at all. Still, the research shows, successful acquirers are not those that try to swallow a single, large, supposedly transformative deal but those that go to the M&A table often and take small bites. Deals can fuel growth--as long as they're anchored in the fundamental way money is made in your industry. Fail to understand that and no amount of integration planning will keep you and your shareholders from bearing the high cost of your mistakes.     

Getting offshoring right

The prospect of offshoring and outsourcing business processes has captured the imagination of CEOs everywhere. In the past five years, a rising number of companies in North America and Europe have experimented with this strategy, hoping to reduce costs and gain strategic advantage. But many businesses have had mixed results. According to several studies, half the organizations that have shifted processes offshore have failed to generate the expected financial benefits. What's more, many of them have faced employee resistance and consumer dissatisfaction. Clearly, companies have to rethink how they formulate their offshoring strategies. A three-part methodology can help. First, companies need to prioritize their processes, ranking each based on two criteria: the value it creates for customers and the degree to which the company can capture some of that value. Companies will want to keep their core (highest-priority) processes in-house and consider outsourcing their commodity (low-priority) processes; critical (moderate-priority) processes are up for debate and must be considered carefully. Second, businesses should analyze all the risks that accompany offshoring and look systematically at their critical and commodity processes in terms of operational risk (the risk that processes won't operate smoothly after being offshored) and structural risk (the risk that relationships with service providers may not work as expected). Finally, companies should determine possible locations for their offshore efforts, as well as the organizational forms--such as captive centers and joint ventures--that those efforts might take. They can do so by examining each process's operational and structural risks side by side. This article outlines the tools that will help companies choose the right processes to offshore. It also describes a new organizational structure called the extended organization, in which companies specify the quality of services they want and work alongside providers to get that quality.     

Holes at the top. Why CEO firings backfire

When a company does well, its CEO is showered with money and adulation. When it does poorly, the CEO gets the blame--and the boot. For better or worse, investors now view chief executives as the primary determinant of corporate performance. But the reality is that most companies perform no better after they dismiss their CEOs than they did in the years leading up to the dismissals. Worse, the organizational disruption created by a rushed firing can leave a company with deep and lasting scars. Far from being a silver bullet, the replacement of a CEO often amounts to little more than a self-inflicted wound. The blame for such poor results, the author argues, lies squarely with boards of directors. Boards often lack the strategic understanding of the business necessary to give due diligence to choosing a replacement CEO. Concern over restoring investor confidence quickly--rather than doing what's right for the company--drives the selection process. And all too often, companies continue to be dogged by the same old problems after the new CEOs come on board. But a good board can make a CEO replacement pay off if its members first develop a better understanding of the business context, worry less about pleasing the investment community and more about a replacement's strategic fit, and take an active role in overseeing the new CEO and the performance and direction of the company. In the long run, such approaches are likely to foster stability at the helm--making it less likely a company will have to fire its CEO in the first place.     

IMPLEMENTING ECONOMIC CAPITAL IN AN INDUSTRIAL COMPANY: THE CASE OF MICHELIN

Economic capital (also referred to as "risk capital" or "risk-based capital") is the amount of capital, generally in the form of equity or equity equivalents, that is necessary to provide an adequate cushion against lower-than-expected operating results. Over the last two decades, the concept has taken root among banks, particularly in determining the amount of capital needed to protect against financial distress in the event of unexpectedly large credit losses.
Michelin is in the vanguard of industrial companies that are beginning to apply economic capital concepts. The company uses an option-pricing approach that effectively allows the market to identify the level of economic capital that is expected to maximize corporate value. Michelin has also begun the process of attributing economic capital to individual business units and activities. By so doing, the company is able to use a single, company-wide hurdle rate for all projects and business units. Thus, instead of raising the discount rate when evaluating riskier projects and businesses, management assigns them larger amounts of economic capital (and, hence, a higher charge for use of that capital).
The use of economic capital to evaluate ongoing activities and contemplated investments makes it more likely that decisions will translate into increased shareholder value. A case in point is outsourcing. As illustrated in an example analyzing the company's decision to sell but continue sourcing from a textile factory, outsourcing decisions typically reduce a firm's required amount of economic capital—and thus an analysis based on the use of economic capital provides a more realistic picture of the expected value added from such transactions.     

Where to donate: The geographical distribution of corporate philanthropy in China

An emerging body of literature has demonstrated that corporate philanthropy can be an important part of a company’s business strategy. However, we know relatively little about how companies allocate philanthropic resources to achieve their strategic targets. Using geographical distribution data on corporate philanthropy in China from 2009 to 2016, we provide robust evidence of companies’ revenue-driven regional favoritism. Specifically, companies donate more to regions where they obtain revenue than to other regions. Further evidence suggests that this revenue-driven regional favoritism may have both reputational and political motivations. Further analysis suggests that China’s targeted poverty alleviation policy has compromised revenue-driven regional favoritism while increasing the amount of money donated to poor regions. Overall, we enrich understanding of decision-making on corporate philanthropy. We also demonstrate that companies can use the geographical distribution of corporate philanthropy strategically to obtain consumer and government favor in regions where they operate. The results also provide evidence at the micro company level of the effect of China’s implementation of a targeted poverty alleviation policy.     

Transforming corner-office strategy into frontline action

When CEOs push decision making out to the far reaches of an organization, good things happen: fleeting business opportunities are seized quickly and workers are motivated to innovate and take risks. But it's tricky to achieve both decentralized decision making and coherent strategic action at a company. If everyone is a decision maker, things can spin out of control. In this article, Bain consultants Orit Gadiesh and James Gilbert explore the concept of the strategic principle--a memorable and actionable phrase that distills a company's corporate strategy into its unique essence and communicates it across an organization. If it's devised and disseminated properly, a strategic principle can empower employees to seize business opportunities but also focus everyone in an organization--executives and line managers alike--on the same strategic objectives. The authors outline the three defining characteristics of a good strategic principle--it should force trade-offs between competing resource demands, it should serve as a test for the strategic soundness of a particular action, and it should set clear boundaries for employees to operate within even as it grants them freedom to experiment. They explain how managers can create a strategic principle, how they should test it, and when they should revisit it. The authors present real-world examples of how companies use their strategic principles. For instance, they describe how South-west Airlines stopped flying to Denver after it measured the high costs of providing flight service in that part of the country against its strategic principle of offering customers short-haul air travel at fares competitive with the cost of automobile travel. This tool is increasingly useful in today's rapidly changing business environment, the authors conclude, and it is likely to become even more crucial to corporate success.