What is organizational health?

December 15, 2010: 11:15 AM ET

Today, competitive advantage doesn't go to the company with the best widget. It goes to the organization that can reinvent itself and defend itself from attackers -- wherever they may come from -- better than anyone else.

By Colin Price, contributor

(managementexchange.com) -- We're at the end of an eight-year period, which was marked in the beginning by the demise of Enron and marked at the end by the demise of Lehman Brothers.

During that near decade, the quasi-religious mantra of business was shareholder value: Focus on performance and on performance alone. That's what real managers did. Everything else was stuff that needed to be done to run the machine.

We now know what that philosophy of management produced: an apparent growth in global GDP followed by an even larger decline in global GDP. It produced unsustainable corporate earnings.

The same is true in the public sector. Focusing exclusively on performance simply does not produce long-term shareholder value, sustainable competitive advantage, or an ability to achieve organizational mandates in the public sector.

So, how can we focus instead on longer term organizational health?

For me, health is the capacity of the organization to compete not only today, but tomorrow. I think of it as having three elements:

  • Organization alignment. Does the organization know where it's going? Are the people within that organization aligned about that direction? That may sound simplistic, but in many organizations it's not the case. There isn't a deep level of alignment around purpose and mandate from the leaders all the way to the frontline employees that make a difference to customers.
  • Capacity for execution. This is the ability to turn ideas into action. How much interference is there? How much complexity slows a company's metabolic rate?
  • Capacity for renewal. Is the organization changing at or just above the rate at which it's changed in the past? Or is the organization really focusing on changing at the rate required by the industry?

So, if you think of that as health, it's the ability to get aligned, to execute at a world-class level, and to renew.

This is so much more important now than in the past because returns for organizational health are far greater than they have been in the past. Focusing exclusively on performance is now just table stakes.

Today, competitive advantage doesn't go to the company with the best widget. It goes to the organization that can reinvent itself and defend itself from attackers -- wherever they may come from -- better than anyone else.

It's impossible to get a defendable, sustainable advantage unless you can adapt rapidly. That is why having a healthy organization is more important now than it's ever been.

Colin Price is a director in McKinsey's London office and leads McKinsey's Global Organisation Practice. He is also a contributor to the Management Innovation Exchange (The MIX).

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