Rethinking Organizations from the Outside In: Talent, Leadership, and Culture
Dave Ulrich is a Professor at the Ross School of Business, University of Michigan and a partner at the RBL Group. He shared his White Paper on rethinking organizational values, below, with the Connex Human Resources network. For more from Dave Urlich, follow him on Twitter: @dave_ulrich
Strategy is about winning. Value is defined by the receiver more than the giver so winning is less about what an organization does and more about how customers, investors, and communities outside the organization responds to what it does. Traditional ways of creating customer value are increasingly imitable which decreases value. Competitors can quickly match price, product features, or operational systems. It is more difficult to match organization capabilities. Effective organizations enable customers to receive better service, investors to have confidence in intangibles, and communities to have stronger shared reputations of firms.
So, what does it mean to have a successful organization that can deliver unique value outside the organization?
For years, organization implied structure focused on roles, rules, responsibilities, and routines. Hierarchies became the dominant logic for organization transformation and for strategy execution. Today, organizations may be defined less by their morphology and more by the capabilities they create. Line managers as owners and HR professionals as architects create organizations that deliver successful strategies.
We have defined “organization” into by three domains: talent (people), leadership, and culture (see Figure 1). To deliver any strategy, individuals need to be more productive; organizations need to have the right culture; and leadership needs to be widely shared throughout the organization. Line managers and HR professionals who are committed to winning over time need to make choices to connect these three dimensions of organization to customers outside the firm:
- Individual: What talent or human capital do we need to external stakeholders (customers, investors, and communities)?
- Organization: What organization capabilities or culture do we need to meet external stakeholder requirements?
- Leadership: What do our leaders need to be good at to deliver value to external stakeholders?
When leaders answer these questions, they build not only strategic success, but long term competitive advantage.
Individual Ability (Talent or Human Capital).
At the risk of grossly oversimplifying, let me suggest that there is actually a deceptively simple formula for talent that makes talent more productive: Talent = Competence * Commitment * Contribution. Going forward, all three elements of this equation need to be considered and integrated to fully manage talent.
Competence means that individuals have the knowledge, skills, and values required for today’s and tomorrow’s jobs. One company clarified competence as right skills, right place, right job, right time. For example, an emerging trend in the workforce planning domain of competence improvement is to identify key positions and match people to positions. Competence clearly matters because incompetence leads to poor decision making. Competence should start outside in by turning customer expectations into the talent requirements for the future. Committed or engaged employees work hard and do what they are asked to do, but may be doing the wrong things. With an outside in focus, committed employees focus attention on work and activities that will deliver value to customers, investors, and communities.
In the last decade, commitment and competence have been the bailiwicks for talent. But, we have found the next generation of employees may be competent (able to do the work) and committed (willing to do the work), but unless they are making a real contribution through the work (finding meaning and purpose in their work), then their interest in what they are doing diminishes and their productivity wanes.
Contribution occurs when employees feel that their personal needs are being met through their participation in their organization. Leaders who are meaning makers help employees find a sense of contribution through the work that they do. There are many current frameworks for defining contribution (see Figure 2). When employees see their work as it creates meaning for others, especially those outside the company, they are more able to recognize their contribution to a greater cause. Simply stated, competence deals with the head (being able), commitment with the hands and feet (being there), and contribution with the heart (simply being). All three can be connected to external stakeholders to get the right competence, value added commitment, and meaningful contribution.
Going forward, competence definitions will likely be less about the skills of an individual and more about how those skills match the requirements of the position. Being the “employer of choice” is insufficient unless one is the employer of choice, of employees customers would choose. In addition, as employees increasingly seek purpose in their lives in general, they turn to work as a setting for finding meaning. Next generation employees will be increasingly worried about finding meaning and purpose in their lives through social responsibility, an outside in perspective.
Organization capability (Culture).
Talent is not enough. Great individuals who do not work well together as a team, or in their organization, will not be successful. Some simple statistics show the importance of teamwork over talent:
- In hockey, the leading scorer is on the team that wins the Stanley cup 22% of the time
- In soccer, the winner of the Golden Boot (leading scorer) is on the team that wins with World Cup 20% of the time
- In basketball, the player who scores the most points is on the team that wins the NBA finals 15% of the time.
- In movies, Best Movie of the year also has the leading actor (25%) and actress (15%) of the time.
Great individual talent may succeed 15 to 25% of the time, but teamwork matters more.
When we work with executives to define the organization of the future, we ask them a simple question: “can you name a company you admire?” The list of admired companies varies, but it often includes such well-known firms as Apple, Disney, General Electric, Google, Microsoft, or Unilever. We then ask the executives, “how many levels of management are in the admired firm?” Almost no one knows.
More important, no one really cares—because we do not admire an organization because of its roles, rules, or routines. Instead, we admire Apple because it seems to continually design easy-to-use products; we admire Disney for the service we experience; we admire GE because of its capacity to build leaders in diverse industries; and we admire Google and Microsoft for their ability to innovate and shape their industry. In other words, organizations are not known for their structure, but for their capabilities.
Capabilities represent what the organization is known for, what it is good at doing, and how it patterns activities to deliver value. The capabilities define many of the intangibles that investors pay attention to, the firm brand to which customers can relate, and the culture that shapes employee behavior. These capabilities also become the identity of the firm, the deliverables of HR practices, and the key to implementing business strategy. A Duke client study found HR professional today are “shifting their focus from individual competency to organizational capability.” [i] McKinsey also looked to the future and found that capabilities will become more important than individual competencies: “Nearly 60 percent of respondents to a recent McKinsey survey1 say that building organizational capabilities such as lean operations or project or talent management is a top-three priority for their companies. Yet only a third of companies actually focus their training programs on building the capability that adds the most value to their companies’ business performance.”[ii]
Shaping the right organization through a capability lens, synthesizes four current approaches to organization thinking (see Figure 3). Creating the right organization through a culture perspective focuses on defining the right organization values, norms, or patterns. Creating the right organization through a process lens means identifying and improving key processes such as new product development, continuous improvement, product diversification, order to remittance, innovation, and so forth. These processes often stand out through balanced scorecard assessments of organization alignment.[iii] Creating the right organization through core competences logic focuses on upgrading functional activities like R&D, manufacturing, quality, marketing, supply chain, HR, and information technology.[iv] Creating the right organization through a resource view means identifying key resources that an organization possesses to create value.[v] The capability logic synthesizes and advances these approaches to enable HR to create the right organization.[vi]
Organization capabilities may be contrasted with individual competencies (see Figure 4). In this figure, the individual-technical cell (1) represents a person’s functional competence, such as technical expertise in marketing, finance, or manufacturing. The individual-social cell (2) is about a person’s leadership ability—for instance, to set direction, communicate a vision, and motivate people. The organizational-technical cell (3) comprises a company’s core technical competencies. For example, a financial services firm must know how to manage risk. The organizational-social cell (4) represents an organization’s underlying DNA, culture, and personality.[vii]
In the future, these desired organization capabilities will need to be aligned with external expectations. For example, leaders should begin to see culture from the outside/in. Most often, culture is seen as “our” norms, values, and expectations… who we are. We would propose that a culture is the identity of the company in the mind of the best external stakeholders (e.g., customers). Apple’s culture should be around innovation because innovation is Apple’s core identity. Marriott’s culture should be around service because Marriott has worked to build a service identity. When the outside expectations become the basis for culture and competencies, culture endures over time and adds enormous value.
Ultimately, leaders bring together both individuals and organizations to solve customer problems. But, there is a difference between leaders and leadership. The term “leaders” refers to individuals who have unique abilities to guide the behavior of others. Leadership refers to an organization’s capacity to build future leaders. An individual leader matters, but an organization’s collective leadership matters more over time. Looking forward, HR professionals will need to not only help individual leaders be more effective through coaching, 360 feedback, and individual development plans, but build leadership depth.
In our studies of leadership, consistent with the logic of creating value for external stakeholders, the requirements of effective leaders should be defined from the outside/in. Often leadership success remains either inside the company (leaders learn from other leaders in the company who have succeed) or inside the individual (have emotional intelligence or authenticity). An outside in view sets the criteria of leadership from the point of view of customers, investors, or communities. In a number of companies, we start to define effective leadership by viewing the company’s commercials or other media presentations. These externally focused broadcasts define the company’s intended brand. We then identify the leadership behaviors consistent with this external brand. When leaders inside the company behave consistent with the expectations of customers (and other stakeholders) outside the company, the leadership will be more sustainable and effective. Investors are increasingly valuing a firm based on its intangibles; one of which is the quality of leadership. These intangibles may determine up to 50% of a firm’s market value. When investors have confidence in the firm’s leadership, they place a premium on the firm’s stock price. This leadership premium becomes an outside in view of leadership. Communities may also benefit leadership. One national oil company helped leaders recognize that their ultimate value as leaders would be determined by their grandchildren. If the leaders of this national oil company made wise investments, their progeny would honor them; if they made bad choices, their progeny would scorn them.
In addition, leaders may be assessed by 720’s not just 360’s by asking those outside the company to determine who well leaders demonstrate the right behaviors. And, leadership training may include customers as faculty or participants in training programs or as sites for job assignments. We have found that about 20% of learning from life experience. Many of us learn from experiences outside of work, in families, social settings, social networks, volunteer work, reading, and traveling. When companies can encourage and access knowledge from these life experiences, leaders will broaden their repertoire. For example, one company uses their philanthropy efforts as development opportunities for high potential leaders.
Three targets or outcomes conclusion
Having a strategy to win requires thinking outside in. Winning comes from value created from external stakeholders. Traditional avenues of winning (price, product, operations) no longer differentiate a company. Increasingly organization capability becomes a course of sustainable differentiation. Organization may be mapped into choices about talent, culture, and leadership. When these choices focus on the outside in, leaders and HR professionals deliver long term business value. These three domains become the outcomes for good HR work and the differentiators for effective leaders.
[i] Duke’s Corporate Education Client Study, Learning and Development in 2011: A focus on the future. Prepared by Duke Corporate Education.
[ii] McKinsey Global Survey Results, Building organization capabilities. Sourced at http://www.mckinseyquarterly.com/Building_organizational_capabilities_McKinsey_Global_Survey_results_2540
[iii] The process approach to organization may be seen in the balanced scorecard work:
The Balanced Scorecard: Measures That Drive Performance, with David P. Norton. Harvard Business Review, January–February 1992.
The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment, with David P. Norton. Harvard Business School Press, 2000
Strategy Maps: Converting Intangible Assets into Tangible Outcomes, with David P. Norton. Harvard Business School Press, 2004.
It is also found in process management work:
Howard Smith, Peter Fingar. Business Process Management: The Third Wave. ISBN 0-929652-33-9
Kohlbacher, Markus (2010). "The effects of process orientation: A literature review". Business Process Management Journal 16 (1): 135–152.
[iv] Approaching organizations as core competencies has been captured in work by CK Prahalad and Gary Hamel
[v] The resource based view of organizations has a more academic tradition in work by …
Barney, J.B., (1991), Firm Resources and Sustained Competitive Advantage. Journal of Management; 17, (1), pp.99–120.
Makadok, R. (2001), Toward a Synthesis of the Resource-Based View and Dynamic-Capability Views of Rent Creation. Strategic Management Journal; 22, (5), pp. 387–401
Sirmon, D.G., M.A. Hitt, & R.D. Ireland (2007). “Managing Firm Resources in Dynamic Environments to Create Value: Looking Inside the Black Box,” The Academy of Management Review, 32 (1), 273-292
Barney, J.B., (2001), Is the Resource-Based Theory a Useful Perspective for Strategic Management Research? Yes. Academy of Management Review; 26, (1), pp. 41–56.
Wernerfelt, B. (1984), The Resource-Based View of the Firm. Strategic Management Journal; 5, (2), pp. 171–180.
[vi] The concept of organization as capabilities was briefly introduced by Igor Ansoff, then advanced in 1990 in work by Dave Ulrich and Dale Lake, followed by many who worked to identify the key capabilities of an organization.
Ulrich, Dave and Dale Lake. 1990. Organizational Capability: Competing from the Inside/Out. New York: Wiley.
George Stalk and Thomas Hout. Competing Against Time.
Lominger, FYI: The Strategic Effectiveness. Architect.
Collins, David J. (1994), Research note: How Valuable Are Organizational Capabilities?, Strategic Management Journal, Winter 1994, pp. 143–152
[vii] The concept of capability is laid out in Dave Ulrich and Dale Lake. 1990. Organization Capability: competing from the inside/out. New York: John Wiley.
It is further defined in Dave Ulrich and Norm Smallwood. 2005 Capitalizing on capabilities. Harvard Business Review.