Strategy Implementation Session 5 - People

1. Human Resources image here Strategy ImplementationSession 5 - People

2. Agenda Intro: People Discuss Lehman Break Lehman Update People Strategic Issues & Missteps the boy is back!

3. Where are we?

4. Session 5: People & Strategy • “People are our greatest asset” • Problems with capturing value from star players • What does your strategy demand of people? • Capabilities, Cognition, Connections & Attitude • Develop through Career Paths • Develop through processes • How should you address a mismatch between people and your strategy? • Acquire: & Retain • Develop: Processes & Career Imprints • Simplify: Strategy & Structure • How can people carry your strategy to the next level? • When to put people first –top management team, moral obligation, culture & commitment

5. From Mobilizing Minds By Lowell L. Bryan and Claudia I. Joyce, p.6

6. Money – image here

7. CW: “People are our most important asset” • The conventional wisdom counts people as the fundamental strategic asset. • Yet very few firms have effective processes for hiring, promoting and developing the right people. • Collins & Good to Great firms: “First who then what” • People preceded good-great strategies: get the leadership team in place then decide the direction.

8. But people are not an asset… • They can walk out the door with a couple weeks notice. • In particular, star performers tend to capture much of the value they create. • eg: Jeffries Group, a mid-sized Wall Street brokerage, had a good 2007 trading year avoiding the (early) subprime disaster. • But the company reported its first quarterly loss in 20 years because bonuses captured all the profits. • "We did well, and I'm sorry, but that is why we need to pay out people," said Richard Handler, Jefferies chairman and chief executive, acknowledging he "wasn't proud" of the loss. Analysts estimate that Jefferies will pay out at least 60% of its net 2007 revenue as compensation, up from 54% in 2006. (WSJ 1/8/08)

9. … And firms struggle to capture value from hiring star performers. • Legacy of the War for Talent (Mckinsey, 1997) • Enron was the ultimate star machine, “The Narcissistic Corporation” (Gladwell, New Yorker 7/22/02) • Being the best defied all need for performance: star managers rose from one failure to the next. • When financial firms hire analyst stars (Groysberg et al., HBR 04 & 06) • The star’s performance declines (Institutional Investor ratings). • The group’s performance declines. • Company’s market value falls. • Stars’ tenures are short. • Women are the exception • Built success on external networks, not internal teams • Assessed match of new environments more carefully

10. People and Lehman’s Equity Research • Questions • How does Rivkin define his goals for equity research at Lehman? • Does Rivkin target or avoid hiring outside stars for the group? • What were some of the key moves that catapulted Lehman’s research group up the rankings?

11. Misfits between people & strategy at Lehman

12. Lehman – My Take

13. People are an essential building block of strategy… … But the best people are not sufficient for success. • Complementary processes put the right people in the right positions and support them with the right practices. • Relational contracts can create extraordinary commitment to strategic outcomes. eg: leaders from GE generate value when they fit the new company’s strategy, and the new company builds the processes to match their capabilities.

14. Goal: extraordinary results from ordinary people.

15. Relational contracts basics Value “Cooperate”: Act in ways that cannot be specified contractually. Punish Time

16. Nordstrom’s Relational Contract Welcome to Nordstrom We’re glad to have you with our company. Our number one goal is to provide outstanding customer service. Set both your personal and your professional goals high. We have great confidence in your ability to achieve them. Nordstrom Rules: Rule#1 – Use good judgment in all situations. There will be no additional rules. Please feel free to ask your department manager, store manager, or division manager any question at any time.

17. Relational contracts at Nordstrom Value “Use good judgment in all situations.” Well, I’ll never do that again. Time

18. Relational Contracts • Take time and costly commitments to develop and support. • Eg: Kelleher at Southwest, Nordstrom, Rivkin & analyst independence • Are the economic basis of “trust” • Account for a good portion of manager’s difficult work. • Create value when linked to simple, measurable strategic outcomes.

19. People and strategies must fit to succeed • Top Management Team: Are they committed to the company’s direction? • Valuable individuals: do positions capitalize on and extend their skills? • Pivotal jobs: is the talent available to fill the pivotal roles in the company? • eg: one Zara’s top constraints on growth is store leadership. • Four characteristics of people that need to match your strategy: • Capabilities: knowledge, experience & skills. • Connections: network inside and outside the firm. • Cognition: ways of thinking and acting. • Confidence: attitude and investment in the group and the strategy.

20. International mismatches between strategy and people are high profile. • Mismatch example: • New Lenovo tripod: China, Singapore & RTP • Putting huge demands on executives at all hours. High burnout, esp. among former Dell execs. • Global HR Strategies • International competition is putting intense demands on international positions. • Firms need to draw talent from their operations around the world. • Internal job markets. Glopats Globals Regionals Mobile Local Nationals Rooted Local Nationals The Mobility Pyramid (Quelch & Bloom S+B ‘99)

21. Three options for addressing the people demands of a strategy. • Acquire • And RETAIN: requires a very high investment in recruiting and processes to monitor and develop prospects. • eg: Bossidy at Allied Signal spent 30-40% of his day on recruiting for first 2 years, down to interviewing MBA candidates. • Develop • Processes that build capabilities, connections and leadership help support a deep bench and make the company less vulnerable to departures. • Eg: Cisco, IBM’s diverse talent initiatives • Simplify • If a strategy or structure demands more than people can give, it may need to be reconsidered.

22. Some processes to develop people. • Recruiting • A large and constant investment, starting at the top, at hiring the very best people. • Look for specific qualities matched to demands of the strategy and position. • Interview for specific evidence of those qualities • Develop support processes to help people generate the best product. • eg: Lehman Brothers institutionalized processes to evaluate research and deliver reports quickly. • Coaching and mentoring • Annual review = joint commitment of leader to support outcomes • Internal networks • Encourage relationships across functions. • Training • Benefits learners and recognizes experts. • Teams • Smart partners make each of us better. • Savvy Retention • Not just financial! Achievement, recognition…

23. Executive paths develop people. Simultaneous Representation Transfer or Promotion Exec moves Corp to BU Exec moves BU to Corp Exec sits at BU & Corp Exec sits at 2 x BU Exec moves BU to BU Time = t Time = t+1

24. Promotion paths of senior teams can contribute to innovation… or the opposite. Inertia - Less strategic change Variation - More product launches Retention - More reliable operations Exec moves between units bring fresh perspective Careers built within functions & units enhance reliability & performance Exec moves to & from the corporate office increase inertia

25. Developing entrepreneurial leaders at Baxter. **Baxter Execs were associated with 25% of Biotech IPO’s between 1979 & 1996**

26. Baxter’s “Career Imprint” accounts for its outsized role. Paths A series of experiences that develops capabilities, connections, confidence & cognition • People • developmental • readiness • developmental fit • Place • Social Reinforcement • Stretch Opportunities • Demonstrated Success Capabilities Connections Confidence Cognition * Monica Higgins, 2005

27. IBM: Diversity as a Strategic Issue • Transforming diversity into a strategic issue. • Strategic issues link internal organization with external performance. • This is a great example of drawing unique value out of the people in your firm. • Some firms miss out: eg, Chrysler and the 300. • Diversity programs tend to be symbolic or punitive. • This makes it real and valued by linking it to the bottom line.

28. People: Strategic Issues • Be careful with the new conventional wisdom: people first, then strategy • People decisions inevitably determine some aspects of strategy. • This is one approach to insure a fit between people and strategy – one of several. • When should people precede strategy? • Culture & commitment, moral obligation, strategic change, top management team • Your people are absolutely essential to successful strategies  Necessary but not sufficient • Stars tend to capture the value they create • Relational contracts & complementary processes are the invisible ingredients to build competitive advantage from people • Feedback, rewards, culture & commitment • Rotation systems can build valuable linkages across the company, but movement through corporate offices tends to constrain new initiatives.

29. Common missteps with people • Failing to support relational contracts with costly commitments. • Focusing on “buy” instead of “make” • Targeting established stars • Firms often don’t capture much of their value • Thinking of people as assets • They can leave at any moment • Embed the value in the culture and processes so that the sum is greater than the parts • Symbolic HR initiatives rarely have a strategic outcome • IBM has avoided this by launching diversity initiatives focused on customer segments • Building incentives purely around outcomes rather than key intermediate steps • Strong incentives for noisy outcomes create ‘scared workers’ • Eg: stock-picking for research analysts • Lehman focused on a raft of intermediate measures • Become an industry expert and we’ll teach you how to monetize the value of that. • Rankings, calls, publishing, relationships with team & sales • Sometimes people failures are actually failures of structure & strategy • Simplify if your strategy demands too much of your people

30. Next Up: Partnerships • Harvard mba image here Starbucks Questions: What relationships has Starbucks identified as essential to its business? How has it generated value from those relationships? To what extent is this partnership model appropriate for other companies?