Please read the following Harvard Business Review Article: (attached below)
Stress-Test Your Strategy The 7 Questions to Ask
by Robert Simons
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AILLUSTRATION: JASON FORD Robert Simons is the Charles M. Williams Professor of Busi- ness Administration at Harvard Business School. This article is adapted from his book Seven Strategy Questions: A Simple Approach for Better Execution (Harvard Business Review Press, 2010).
AN ECONOMIC DOWNTURN can quickly expose the shortcomings of your business strategy. But can you identify its weak points in good times as well? And can you focus on those weak points that really matter?
A stress testan assessment of how a system functions under severe or unexpected pressurecan help you home in on the most important issues to address, whatever the economic climate. By asking tough questions about your business, you can identify confusion, ine? ciency, and weaknesses in your strategy and its implementation.
As Peter Drucker once warned, The most serious mistakes are not being made as a result of wrong answers. The truly dangerous thing is asking the wrong questions. For the past 25 years I have researched the drivers of successful strategy execution in a variety of companies and industries. Through this work I have identi? ed seven questions that all executives should askand be able to an- swer. Master this list, and you will keep the fundamentals of your strategy execution on track.
by Robert Simons
Stress-Test Your Strategy The 7 Questions to Ask
November 2010 Harvard Business Review 93
1 The questions may seem obvious, but the choices
they represent can be tough, and their full implica- tions are not always immediately clear. The ? rst two questions compel you to set strict priorities. The next two assess your ability to focus on those priorities by designating critical performance variables and con- straints. Questions ? ve and six investigate whether you are using techniques that will enhance creative tension and commitment. The ? nal question deals with your ability to adapt your strategy over time.
Lets take a look at each question, so that you can see how youand your strategymeasure up.
Who Is Your Primary Customer? Choosing a primary customer is a make-or-break de- cision. Why? Because it should determine how you allocate resources. The idea is simple: Allocate all possible resources to meet and exceed your primary customers needs.
Consider McDonalds, whose 32,000 restaurants feed more than 58 million customers each day. The companys growth over its 50-year history has been described as the greatest retail expansion in the his- tory of the world.
What was the fast-food chains key to success? A clear choice of a primary customer and an under- standing of when that choice needed to change. In the 1980s and 1990s, McDonalds considered its pri- mary customers to be not the people who ate in its restaurants but multisite real estate developers and franchise owners. By focusing most of its resources on those customers through centralized real estate development, franchising, and procurement func- tions, it opened as many as 1,700 new stores a year.
But by 2003 same-store sales were declining. Worldwide markets were saturated, and people were
tiring of the chains standardized fare. This crisis prompted the new CEO at the time, Jim Cantalupo, to make a tough decision: The new boss at McDon- alds is the consumer, he announced.
The companys subsequent changes in resource allocation reveal the profound implications of this decision. Consumers tastes di? er widely by region and throughout the many countries in which Mc- Donalds operates. To satisfy these varying tastes, McDonalds reallocated resources from centralized corporate functions to regional managers, who were encouraged to customize local menus and store amenities. In the United Kingdom, McDonalds now serves porridge for breakfast; in Portugal, it offers soup; in France, it sells burgers topped with French cheese. The Paris design center provides franchisees with nine di? erent design options, allowing them to customize the decor for their clientele.
As of last January, McDonalds had delivered 81 consecutive months of increasing same-store sales around the world. Its customer satisfaction scores rose each year from 2005 to 2009 (they faltered slightly in early 2010, as more upscale customers be- gan to choose McDonalds over pricier alternatives). Its no accident that McDonalds was one of only two companies in the Dow Jones Industrial Average to end 2008 with a gain in stock price.
Unlike McDonalds, many companies resist choosing just one customer. Executives often at- tempt to avoid the adjective primary by announc- ing, We have multiple customers. This is a sure recipe for underperformance. Allocating resources to more than one customer results in confusion and less-than-optimal service.
Trying to accommodate multiple kinds of cus- tomers led to trouble at Home Depot. After taking
The Seven Questions
Who is your primary customer?
How do your core values prioritize shareholders, employees, and customers?1Who is your 1Who is your primary 1primary customer?1customer? What critical performance variables are you tracking? What strategic boundaries have you set?
WHO IS A CUSTOMER? Dont use the word
customer to refer to anyone inside the organization. Internal people are never a companys primary customers, and treat- ing them as such may cause you to lose sight of your true focus.
3 What critical 3 What critical 3performance 3performance 3variables are 3variables are 3you tracking?3you tracking?3 94 Harvard Business Review November 2010
STRESS-TEST YOUR STRATEGY
Idea in Brief How do you identify the weakest parts of your strategy? Ask- ing tough questions about your business seven key questions in particularwill help you understand where confusion and ineffi ciency lie.
Have you identifi ed a pri- mary customer? Who is fi rst among your stakeholders shareholders, employees, or customers? Have you nar- rowed down which perfor- mance variables you track? Set critical boundaries? Do you generate creative ten- sion? Promote coordination among your employees? And
fi nally, what questions keep you up at night, thinking about how the future will change your business?
over as CEO in 2000, Bob Nardelli concluded that the consumer home improvement business was sat- urated, and shifted signi? cant resources away from consumers in order to cater to professional contrac- tors. Consumers would no longer be the primary cus- tomersbut it wasnt clear that professional contrac- tors were ? lling that role, either. Home Depot laid o? customer service employeesthe ones walking the aisles in orange aprons at its 1,900 storesand spent the savings on an $8 billion acquisition spree, snap- ping up 30 wholesale housing-supply companies.
The acquisitions nearly doubled company rev- enue, but even so there werent enough resources to meet the needs of two such different types of customers (there never are), and neither group was well served. During Nardellis tenure Home Depots consumer satisfaction scores suffered the biggest drop of any U.S. retailer ever. At the same time, the wholesale supply operation was not getting the sup- port required to obtain the e? ciencies needed for a low-margin business.
It took a new CEO, Frank Blake, to refocus the business. In 2007 he announced that home owners
would again be the primary customers. Home Depot sold its wholesale businesses, increased the number of orange aprons on the floor, and rehired master trade specialists to o? er consumers how-to advice. Consumer satisfaction scores and same-store sales and pro? ts have begun to rebound.
Of course, your choice of primary customer may change over timerecall what happened at McDon- alds. But you need to recognize that such a change will probably require restructuring your business.
The flip side of maximizing resources for your primary customer is that you should minimize the resources devoted to everything elseincluding all external stakeholders and all internal units that do not create value for your primary customer. They should receive enough to meet the needs of their constituents, but no more.
How Do Your Core Values Prioritize Shareholders, Employees, and Customers? Companies that execute strategy well de? ne their core values to reflect the relative importance of shareholders, employees, and customers. Value
How are you generating creative tension? 6 How committed are your employ-ees to helping each other? 7What strategic uncertainties keep you awake at night?
2 creative tension?5How are you 5How are you generating 5generating creative tension?5creative tension?
November 2010 Harvard Business Review 95
statements that list aspirational behaviors arent enough. Core values must indicate whose interests come ? rst when di? cult trade-o? s must be made.
At some companies, customers come ? rst. At oth- ers, it may be shareholders. At yet others, it may be employees. There is no right or wrong choice. Each choice is based on a different theory of value cre- ation. But making one and communicating it e? ec- tively are essential.
A case in point is Mercks costly decision to withdraw Vioxx, its blockbuster Cox-2 pain sup- pressant, from the market. On September 24, 2004, then-CEO Ray Gilmartin got a call from the head of Mercks research labs, informing him that the pre- liminary results of an ongoing clinical study indi- cated that Vioxx caused unexpectedly high num- bers of heart attacks and strokes after 18 months of continuous use. Gilmartin had three options: Merck could carry the study through to its planned con- clusion to gather more data. It could ask the FDA to approve a black box label warning doctors and pa- tients about the newly discovered risks. Or it could take the drug o? the market, forgoing $2.5 billion in annual revenue.
On September 30six days after the phone call Gilmartin convened a press conference to announce the worldwide withdrawal of Vioxx. He explained his decision by citing the companys core value:
Merck puts patients ? rst. In contrast, Pfizer executives put shareholders
? rst when faced with a similar situation. After dis- covering that Celebrexthe Cox-2 inhibitor Pfizer acquired when it bought Pharmaciasometimes caused cardiovascular problems, they decided to keep manufacturing the drug. But they did so re- sponsibly, adding a black box warning that allowed patients and doctors to make fully informed deci- sions. Shareholders thus avoided losing billions of dollars in pro? ts.
A third option is to put employees ? rsta choice that can actually keep customers and shareholders content as well. As the former Southwest CEO Herb Kelleher has argued, If employees are treated well, theyll treat the customers well. If the customers are treated well, theyll come back, and the sharehold- ers will be happy. To drive this point home, Kelleher regularly appeared in national newspaper ads under the caption Employees first. Customers second. Shareholders third. Other companies have made and communicated a similar choice.
Each of these rankings worked because the com- pany made a clear decision and implemented it consistently. This is not always the case. Confusion about core values was at the root of the recent Fan- nie Mae debacle. Company executives, acting at poli- ticians behest, dedicated $1 trillion to democratizing home ownership by o? ering mortgages to disadvan- taged customers. However, they were also trying to maximize shareholder value. To boost short-term pro? ts, they built up and sold increasingly risky loan portfoliosuntil the housing market collapsed, leav- ing taxpayers with a $100 billion bailout bill.
What Critical Performance Variables Are You Tracking? Many managers complain that theyre overwhelmed by how many things theyre asked to keep track of in all-inclusive lists of performance measures. Its not uncommon for companies to create scorecards with 30, 40, or more variables, in the mistaken belief that adding measures results in a more completeand therefore betterscorecard. Information technol- ogy enables us to gather more and more data at lower and lower cost. But we cannot keep tracking so many variables. E? ective managers monitor only a small numberthose that could cause their strategy to fail.
The problems generated by trying to track too much data became evident at Citibank in the late
The seven questions are intended to be tools for stimulating engagement. Everyone in your business, from the CEO to the front line, must be actively involved in discus- sions about the key factors that will enable the successful execution of your strategy. Therefore, how you ask the questions is crucial. These commonsense principles will help you involve your whole team.
Ask the Whole Team You must pose the questions face-to-face. Look me in the eye interaction is essential. You cannot get real engage- ment remotely or by e-mail. You must be able to see the subtle body language that can tell you when to challenge, probe, and push and when to off er encouragement and support.
Discussions must cascade down the organization, not stay stuck at the top. The tone you set will echo through- out the business.
3 96 Harvard Business Review November 2010
STRESS-TEST YOUR STRATEGY
4 1990s, after executives introduced a new scorecard in their consumer bank. In addition to traditional ? nancial measures, the card included new metrics for such things as strategy implementation and cus- tomer satisfaction.
As one district manager was pondering the award level for her top branch manager, con? icting signals from the new scorecard stopped her short. Although the branch manager had delivered outstanding fi- nancials, his customer satisfaction scores were sub- par. The system would not permit a full bonus unless every measure was rated at par or above. Making an exception for one person could destroy the integrity of the system. But the branch manager might leave for a competitor if the scorecard undervalued his contri- bution. In the end his manager fudged the scorecard to ensure that he received an acceptable bonus. Be- cause of similar problems involving other employees, the bank soon dropped the new scorecard.
Apart from avoiding this sort of dilemma, there is a simple but often overlooked reason to measure just a few variables: Management attention is your scarcest resource. As you add metrics to your score- cards, you incur an opportunity cost, in that people have less time to focus on what really matters. Think of Amazon, where inconvenience for buyers tops the list of factors that could cause strategy to fail. Execu- tives there focus relentlessly on making purchasing as easy as possible: They concentrate on revenue per click and revenue per page turn, not on long lists of measures that have little to do with the customers purchasing experience. At Nordstrom customer loyalty is key, so executives keep their attention on sales per hour and revenue per square foot. At Mar- riott the crucial metrics are associate satisfaction, guest satisfaction, revenue, and RevPAR (revenue per available room).
Theres another reason to limit your focus: If you add too many measures to your scorecards, you will
drive out innovation. In the old McDonaldsthe one that prioritized franchise growth and standardized food? eld consultants visited each store to measure its compliance with prescribed operating standards. They analyzed 500 metrics, producing a 25-page re- port on each store. With all the constraints imposed by these measures, store managers had no opportu- nity to innovate or respond to consumer preferences. Standardized mediocrity was the result.
What Strategic Boundaries Have You Set? Every strategy carries the risk that an individuals actions will push the business o? course. The risk in- tensi? es when managers feel pressure to hit growth and pro? t targets.
There are two ways to control such risk: You can tell people what to do, or you can tell them what not to do. Telling people what to do helps assure that they wont make mistakes by engaging in unauthor- ized activities. This is the prudent approach if safety and quality are paramount concernsif, say, youre running a nuclear power plant or overseeing a space launch. In such cases you want employees to follow standard operating procedures to the letter.
However, if innovation and entrepreneurial thinking are important, you should follow a di? er- ent course: You should hire creative people and tell them what not to do. In other words, you should give them freedom to exercise their creativitywithin de? ned limits.
Steve Jobs followed this principle when he de- clared that Apple would not develop a PDA. He later argued that without such discipline, the company wouldnt have had the resources to develop the iPod.
People think focus means saying yes to the thing youve got to focus on, he later said. But thats not what it means at all. It means saying no to the hun- dred other good ideas.
Ask the Whole Team Your operating managers are key to the process. Staff groups can play a useful role in data input, facilitation, and follow-up, but operating man- agers are the ones who can commit to action and who are responsible for results.
The debate must be about what is right, not who is right. People should check titles and offi ce politics at the door. You should encourage everyone to take risks, state unpopular opinions, and challenge the status quo.
You must root every discus- sion in the challenge What are you going to do about it? Think of the seven questions as a means to an end. Their purpose is to inspire decisions and, ultimately, action.
4 the branch manager had delivered outstanding fi- nancials, his customer satisfaction scores were sub-
a competitor if the scorecard undervalued his contri-
to ensure that he received an acceptable bonus. Be- cause of similar problems involving other employees,
November 2010 Harvard Business Review 97
Setting clear boundaries also lets organizations avoid the waste and risk that inevitably accompany undisciplined growth. To take one dramatic exam- ple, Wells Fargo weathered the 20082009 ? nancial crisis because it strictly forbade its employees to venture into structured investment products and low-documentation mortgage loans. Unlike most of its competitors, Wells Fargo also refused to court fu- ture business from Warren Bu? ett by lending money to Berkshire Hathaway at below-market rates. This decision actually won Bu? etts respect. I got a big kick out of that, because that was exactly how they should think, he told Fortune. The real insight you get about a banker is what they dont do. And what Wells didnt do is what de? nes their greatness.
But remember: Boundaries are powered by punishment, not rewards. You must be willing to disciplineand fire, if necessaryanyone caught stepping over the line. If you follow up forcefully and consistently, word will travel throughout your organization, reinforcing the importance of your prohibitions.
How Are You Generating Creative Tension? As a business leader, one of your primary jobs is to make outside market pressures felt inside your busi- ness. This can motivate employees to think and act like winning competitors, rousing them from com- fortable ruts. The bigger your business, the more in- sulated people are from market pressures, and the more imperative this becomes.
Here is a menu of techniques that can generate creative tension and spur innovation. In this instance, unlike when de? ning a primary customer or ranking your responsibilities, you neednt choose just one; choose whichever and however many are right for your company. In fact, the more innovation you de- sire, the more techniques you should consider.
Assigning stretch goals. The most common way of motivating people to innovate is to set stretch goalssometimes called challenge goals or big hairy audacious goals. Conducting business as usual or making incremental improvements is not enough. The only way to meet aggressive targets is to do something completely di? erent.
Ranking according to performance. Many high-innovation organizations rank employees on the basis of demonstrated performance. The rank- ings a? ect who is promoted, who is placed on pro- bation, and who is asked to leave. The challenge, of
course, is to prevent the competition from becoming negative and destructive.
GEs Jack Welch is unapologetic when he argues the merits of this approach. The ranking system at GE was very controversial, he has said. Weed out the weakest. Its been portrayed as a cruel system. It isnt. The cruel system is the one that doesnt tell anybody where they stand.
You can take this approach a step further by rank- ing the performance of teams and business units. This will unquestionably produce adrenaline to com- peteand to innovate. Nikes CEO, Mark Parker, likes to ? re up friendly rivalries by posting each footwear divisions performance scores after every season.
People see each others scores, and they huddle and really look at how they can make it better next sea- son, he has explained.
Setting spans of accountability that are greater than spans of control. If you want peo- ple to innovate, try holding them accountable for measures that are broader than the resources they control. This is the well-worn path followed by every successful entrepreneur, and you can use it to foster entrepreneurial behavior within your business.
Tom Siebel, of Siebel Systems, understood this principle well when he based his managers bonuses on customer satisfaction measures, even though no one manager controlled all the resources needed to make a customer happy. His action forced the man- agers to innovate their way to success. As one busi- ness unit head put it, To do my day-to-day job, I de- pend on sales, sales consulting, competency groups, alliances, technical support, corporate marketing, ? eld marketing, and integrated marketing commu- nications. None of these functions report to me. Coordination happens because we all have customer satisfaction as our ? rst priority.
Allocating costs. The way in which you charge corporate overhead costs can also stimulate creative tension. Jamie Dimon, the CEO of JPMorgan Chase, insists on full allocation of overheadeverything from legal to marketing expensesto the parts of the business that use them.
The purpose here is twofold. The most obvious goal is to generate accurate cost data. But often the more important one is to motivate managers to be- come actively involved in discussions about the value of corporate services provided. When operat- ing managers have skin in the game, they will gener- ate ideas about how units can work together to do things better, faster, or cheaper.
55make outside market pressures felt inside your busi-55like winning competitors, rousing them from com-55fortable ruts. The bigger your business, the more in-5 creative tension and spur innovation. In this instance,
on customer satisfaction measures, even though no one manager controlled all the resources needed to make a customer happy. His action forced the man- agers to innovate their way to success. As one busi- ness unit head put it, To do my day-to-day job, I de- pend on sales, sales consulting, competency groups, alliances, technical support, corporate marketing, ? eld marketing, and integrated marketing commu- nications. None of these functions report to me. Coordination happens because we all have customer satisfaction as our ? rst priority.
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? rst loyalty of every member is to the unitto help- ing those in it no matter what.
The same principle can apply to businesses. Em- ployees of Southwest Airlines, for example, take pride in a rigorous selection process that admits fewer than 2% of the 100,000 annual applicants. To reinforce their identi? cation with the company, em- ployees from di? erent departments are encouraged to interview job candidates and veto those they feel would not be a good fit. Applicants who are hired know they are part of an elite team whose members go above and beyond to help one another.
Trust. When you trust your colleagues, youre willing to make yourself vulnerableto put your reputation on the line to support them. Trust is vital if you want people to work collaboratively. At Nucor, the industry-leading steel company, employees are encouraged to propose innovations to improve ef- ? ciency. Nucor shares the resulting savings with its employees, rather than increasing production tar- gets. This policy has built trust among the workers, who are con? dent that they and the executives are working together toward the same goals.
Fairness. The final requirement for collabora- tion is fairness. Disparities in compensation among peers pose the most obvious challenge: Nothing is more certain to kill the desire to help a colleague. In themselves, inequities in pay are easy to ? x; far more insidious are perks signaling that those at the top are more deserving than everyone else. To guard against this danger, Southwests highest executives work out of small interior o? ces that have been described as only slightly nicer than janitors closets.
Vertical pay inequity is also an issue; if you want people to commit to helping one another, you must share rewards fairly up and down the organization. Southwest has operated with a rule that executive pay increases cannot be larger, proportionately, than other employees raises. And in bad times executives take pay reductions along with everyone else. An industry analyst once calculated that as a result of these practices, Southwest generated 10 times more revenue for every dollar of executive compensation than some of its big U.S. competitors.
If you want your employees to embrace your vi- sion of shared success, you must be perceived as put- ting fairness and equity above self-interest. When Sam Palmisano took over as IBMs CEO, he asked the board to reallocate half of his bonus to the ex- ecutives who would be leading his new, team-based strategy. And early last year, when he announced
Creating cross-unit teams and matrix ac- countability. Another way of forcing employees to think outside the box is to assign them to a sec- ond box. New perspectives emerge when people are forced out of their routines. When they attend cross- unit team meetings, employees not only serve as emissaries for their home units but also return with ideas and innovations from their new colleagues.
You can push this approach to an extreme by adopting a matrix design, in which every manager has two bosses. One may be a regional head, the other a product market head. Everyone in the matrix is then accountable for con? icting priorities. Many global companies, including ABB, Novartis, and P&G, have at one time or another used this approach.
As with each of these techniques, you must be careful to balance the benefits and costs. On one hand, you will generate creative tension as people present and negotiate multiple points of view. On the other hand, you risk having the added bureaucracy slow down decision making. When P&G adopted a matrix structure, global product leaders had to get approval from the relevant regional head whenever they wanted to introduce a new product. Too many people had veto power. So in 2005 P&G abandoned the matrix in favor of global business units.
How Committed Are Your Employees To Helping Each Other? Although you want your employees to achieve their personal best, they must also work together toward shared goals. To create the high levels of commit- ment that requires, leaders must build an organiza- tion that has the following four attributes:
Pride in purpose. If people are proud of their organizations mission, they will assume shared responsibility for its success. The sort of pride em- bodied in the Marine Corps slogan Semper ? delis (Always faithful) is echoed in Mercks Putting pa- tients ? rst and Amazons Earths most customer- centric company. In each case the tagline inspires and motivates members of the organization.
Group identifi cation. Belonging to an elite or- ganization is itself a source of pride, one that carries with it a sense of responsibility toward others in the group. In the Marines (The few. The proud), the
6 As with each of these techniques, you must be
One way to force employees to think outside the box is to assign them to a second box.
November 2010 Harvard Business Review 99
77 that 250,000 IBM employees would be getting raises, he added, The executives wontbut thats ? ne. We make enough money!
What Strategic Uncertainties Keep You Awake at Night? At the root of every failed strategy is a set of assump- tions about the future that eventually proved false. We assumed housing prices would never fall simul- taneously across the country. We assumed asset di- versi? cation would eliminate risk. We assumed the migration to digital media would be slow and orderly. We assumed customers wouldnt accept fewer fea- tures in exchange for a lower price.
Only three things in life are certain: death, taxes, and the fact that todays strategy wont work tomor- row. At some point your products will become obso- lete, your customers tastes will change, or technol- ogy will render your business model uncompetitive. Todays successes will be tomorrows old news. The question is not if, but when.
To adapt successfully, yo
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