Organizational health: The ultimate competitive advantage

Here is a brief excerpt from another outstanding article from The McKinsey Quarterly, published by McKinsey & Company, in which co-authors Scott Keller and Colin Price explain why organizations must build the capacity to learn and keep changing over time to sustain high performance, To read the complete article, check out other resources, register to receive free email alerts, and obtain information about this extraordinary firm, please click here.

Source: Organization Practice

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If you’re like most senior executives, you want your organization to be exemplary. But if you’re honest with yourself, you also know that it’s not and that, in fact, you’re not even sure what exemplary means or how you’ll ever get there. Most management writing won’t help: despite the multitude of volumes written on organizational excellence, nothing we’re aware of combines a view on the “steady state” of high, sustainable organizational performance with a dynamic perspective on how companies can transform themselves to achieve it.

We’ve tried to fill that gap with our book, Beyond Performance: How Great Organizations Build Ultimate Competitive Advantage (Wiley, June 2011), from which this article is adapted. Our central message is that focusing on organizational health—the ability of your organization to align, execute, and renew itself faster than your competitors can—is just as important as focusing on the traditional drivers of business performance. Organizational health is about adapting to the present and shaping the future faster and better than the competition. Healthy organizations don’t merely learn to adjust themselves to their current context or to challenges that lie just ahead; they create a capacity to learn and keep changing over time. This, we believe, is where ultimate competitive advantage lies.

Getting and staying healthy involves tending to the people-oriented aspects of leading an organization, so it may sound “fluffy” to hard-nosed executives raised on managing by the numbers. But make no mistake: cultivating health is hard work. And it shouldn’t be confused with other people-related management concepts, such as employee satisfaction or employee engagement.

Nor should you study what other companies do and then apply their approach. While you can always learn helpful things from others, we have found that the recipe for excellence in a particular organization is specific to its history, external environment, and aspirations, as well as the passions and capabilities of its people. Creating and sustaining your own recipe—one uniquely suited to these factors—delivers results in a way that your competitors simply can’t copy.

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This spring, the authors sat down with London Business School professor Gary Hamel to discuss a number of topics related to their new book. To watch this brief video to learn more, please click here.

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Why health?

The case for health starts with an understanding of how it relates to performance. Performance is what an enterprise delivers to stakeholders in financial and operational terms. It is evaluated through such measures as net operating profit, return on capital employed, total returns to shareholders, net operating costs, and stock turns. Health is the ability of an organization to align, execute, and renew itself faster than the competition to sustain exceptional performance over time. It comprises core organizational skills and capabilities, such as leadership, coordination, or external orientation, that traditional metrics don’t capture. [Note: We have identified nine elements that contribute to organizational health: accountability, capabilities, coordination and control, culture and climate, direction, external orientation, innovation and learning, leadership, and motivation. For more on health, see two articles by Aaron De Smet, Mark Loch, and Bill Schaninger: “The link between profits and organizational performance” (August 2007) and “Anatomy of a healthy corporatio” (May 2007), on]

More than a decade of research and even more of experience have led us to believe strongly that health propels performance—and that, in fact, at least 50 percent of any organization’s long-term success is driven by its health. [Note: In addition to the evidence presented in this article, we reviewed the existing literature, including more than 900 books and articles from academic journals. We also talked to more than 30 CEOs and to a group of leading scholars.]

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To read the complete article, please click here.

Scott Keller is a director in McKinsey’s Southern California office, and Colin Price is a director in the London office. This article is adapted from Scott Keller and Colin Price’s aforementioned Beyond Performance: How Great Organizations Build Ultimate Competitive Advantage (Wiley, June 2011).


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