People & Strategy Winter 2015 Vol. 38 Issue 1 - 25

Securing Lasting Value through
Organizational Health
By Michael Bazigos, Ph.D., Aaron De Smet, Ph.D., and Bill Schaninger, Ph.D.

Four distinct "recipes" emerge from new research which finds that the performance payoff from
organizational health exceeds expectations, and suggests clear routes to achieve it.

usiness leaders frequently tell us that
"one-shot" initiatives-like costcutting and share buybacks-
frequently result in benefits of limited size,
scope, or duration. Chasing benchmarks and
best-practice gap closure has not proved to
deliver on their expectations, either.
Improving organizational health is one of the
most powerful levers a company can pull.
Healthy companies generate total returns to
shareholders triple those of unhealthy ones
and achieve meaningful gains in the specific
operational and financial metrics by which
they manage their businesses.

Recipes for Success
Companies that consistently outperform
their peers typically follow one of four distinct organizational "recipes," each characterized by a distinct set of management
practices. Leaders should identify the one
that most closely matches their strategic aspirations. The trick then is to be truly great in
a handful of practices rather than trying to
master them all, while avoiding "recipe
killers."
For the past decade, we've been conducting
research, writing, and working with companies on the topic of organizational health.
Our work indicates that the health of an
organization is based on its ability to align
around a clear vision, strategy, and culture;
to execute with excellence; and to renew the
organization's focus over time by responding
to market trends. Health also has a hard edge:
Indeed, we've come to define it as the capacity

to deliver-over the long term-superior
financial and operating performance.
In previous articles and books, such as
Beyond Performance,1 we (and others) have
shown that when companies manage with an
equal eye to performance and health, they
more than double the probability of outperforming their competitors. Our latest
research, at more than 950 organizations
around the world, revealed several new
twists:
* We found that the linkage between health
and performance-at both the corporate
and subunit level-is much clearer and
much larger than we had previously
thought. With the benefit of more data and
a finer lens, we discovered that from 2003
(when we began collecting data on health)
to 2011, healthy companies generated
total returns to shareholders (TRS) three
times higher than those of unhealthy ones.
* We subsequently found this that this linkage applies to industries, too. In three
specific industries we examined in 2014-
banking, pharmaceuticals, and retail-
long-term TRS ratios of healthy companies
were more than triple, double, and 1.6
times higher, respectively, than their
unhealthy industry peers.
* We further discovered that companies
consistently outperforming their peers followed one of four distinct organizational
"recipes." We had already recognized
these patterns but hadn't understood their
strong correlation with health, operational success, and financial performance.

* We also uncovered a practical alternative
to the common (but too often disappointing) approach of seeking to improve corporate health by closing every benchmark
and best-practice gap. More tailored initiatives that combine efforts to stamp out
"broken" practices while building signature strengths not only are more realistic
but also increase the probability of building a healthy organization by a factor of
five to 10.
In short, we're more convinced than ever that
sustained organizational health is one of the
most powerful assets a company can build.
We're also clearer on how to achieve it,
including the pitfalls to avoid on the road. We
hope this is welcome news to leaders worried
about the long term, who frequently complain to us that the benefits of their one-off
reorganization initiatives are ephemeral.2
When we have done this with similar units-
such as factories, processing units, and
regions-in a given company, we have frequently found a strong correlation between
organizational health (as measured by our
survey) and the unit's financial or operating
performance.
For example, when we established health
scores at 16 refineries in the same energy
group, we noted a sharp linear relationship
between those scores and each refinery's performance as defined by gross profit per unit
of output. Health explained 54 percent of the
variation in the units' profits.
In the insurance industry, we found similar
results when we compared 11 claimsVOLUME 38/ISSUE 1 - 2015

People & Strategy Winter 2015 Vol. 38 Issue 1

Table of Contents for the Digital Edition of People & Strategy Winter 2015 Vol. 38 Issue 1