Sunday, May 23, 2010

Return Driven: Lessons From High-Performacne Companies

What can we learn from companies that have been able to achieve sustainable return on investment and grow their businesses at the same time? How can management teams adapt the strategies and practices of these “high-performance companies”as they consider their own pathways to improving profitability and growth?

For the past 10 years, I've led a research project with Joel Litman called the Return Driven Strategy Initiative that has been attempting to describe what it means to be a high-performance company in terms of performance measures.

The Return Driven Strategy framework, which I've written about in the Strategic Management column for this magazine, stems from this research project and is based on three dimensions of performance:
  1. Superior and sustainable return on investment (ROI),
  2. Growth while maintaining superior return on investment, and
  3. Superior total shareholder returns.

Here are three lessons from high-performance companies that management teams can use in assessing and executing their business strategy:
  1. Commitment to Return on Invested Capital and High Integrity. High-performance companies show a strong commitment to and discipline for creating shareholder value by focusing on return on capital. They have goals, performance measures (such as return on invested capital or ROIC), and incentives that are firmly aligned with sustainable ROI. They also find ways to grow their business in a disciplined manner so as not to sacrifice returns. These companies achieve superior returns and growth while adhering to the ethical parameters of their constituents and communities. A premise of our work in Return Driven Strategy is that the overriding goal of a business entity should be to achieve "superior long-term return on capital."Why is it important to have this commitment? Michael Porter provides insight on this point: "If you don't have the right goal of superior return on investment, you lack the anchor that will help you make good choices about how to compete in the marketplace." As Michael Jensen from the Harvard Business School stated in his work on corporate integrity and its relationship to performance: "A company with a culture of integrity will tend to have performance metrics far above those without integrity." 
  2. Focus on Unmet Customer Needs in Growing Market Segments. High-performance companies have a hypervigilant focus on customer need that's much deeper than and different from other companies' focus. To avoid commoditization, they concentrate on fulfilling otherwise unmet customer needs. They have the processes, capabilities, customer information, and customer intelligence to better identify and target customer needs. And they have the discipline to target customer needs only where they have unique capabilities and resources to fulfill those needs and where they can drive superior return on capital. These companies also target the right customer groups with the intent and ability to dominate.
  3. Innovate Offerings to Better Fulfill Customer Needs. High-performance companies constantly reexamine their products and services (their offerings), modifying existing ones and developing new ones that will better fulfill customers' unmet needs. In the Return Driven Strategy framework, "innovate" simply means "changing" your offerings to better fulfill targeted customer needs.
Full Article.