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(originally published by Booz & Company)


The Agility Factor

To enable these tests, agile organizations are not always and everywhere “lean and mean.” They must consciously build in extra organizational slack—investing in people, money, and time that don’t go directly to the bottom line, but allow the agile organization to rapidly deploy resources against opportunities that may or may not pay off, without jeopardizing day-to-day operations. The higher staffing levels also play an important role in capturing and disseminating learning that the organization can use later.

Implementing change. Agile companies have mastered the internal program management capabilities they need to convert successful tests and promising innovations into widespread practices. Their organizations are flexible enough to adopt them with unambiguous commitment—and with the speed, certainty, and precision they need. These companies have histories of successful transformations, restructurings, and merger integrations, and they also excel at the execution of new product rollouts, policy changes, and compliance mandates, as Exxon demonstrated after the Valdez spill.

The Swedish bank Svenska Handelsbanken is built on the principle of radical decentralization, and its record of financial success is unmatched; the recent financial crisis hardly dented performance. Guided by a change-friendly identity and the slogan “the branch is the bank,” branch managers are responsible for financial results and have the budget authority to take action. They control marketing decisions (except when a new product common to all branches is being launched), staffing levels, salaries, and property lease costs. In addition, on average, half of a branch’s staff has lending authority, permitting customers to receive answers very quickly. Branch managers are held accountable for results and continuous improvement by a “relative performance measurement system” that transparently compares all branches on a quarterly basis. At the end of the year, a performance-based profit-sharing system for all employees is triggered when the organization’s after-tax return on shareholders’ equity (excluding extraordinary items) is higher than the average for other Nordic banks. One-third of the excess amount is placed in an employee fund, and all employees, including the CEO, receive the same profit share.

Executives at Svenska’s headquarters are expected to support the decentralized approach through coaching, instead of through memos, instructions, and directives. If corporate managers disagree with a branch decision, they are expected to raise the issue through a short email or brief phone call, but the final decision ultimately remains with the local manager.

The implementation of change relies on managerial autonomy and shared leadership. The change capability is not relegated to a staff function at headquarters. Rather, it is embedded in line and staff organizations. Once a decision is made, managers charged with implementation are monitored, but not second-guessed. Strong-form performance management systems provide incentives for managers to follow through. Performance targets are objective and unambiguous; positive and negative consequences are real and transparent.

When we correlated the agility routine scores from the survey data with the firm performance results, a clear pattern emerged. Firms with high scores on three or four of the agility routines (strategizing, perceiving, testing, and implementing) are six times (18 percent vs. 3 percent) as likely to be outperformers in their industry. They are also twice as likely (30 percent vs. 15 percent) to have above-average ROAs between 51 and 79 percent of the time. Firms with only one or two of the agility routines, indicating an incomplete system, are much more likely to have below-average ROAs most of the time (see Exhibit 3). Although improving any one of these routines can make an organization more effective, agile companies, according to their own accounts, have at least three of these four traits in large supply.

Making Organizations More Agile

Developing the agile capability is no small feat, but it has been done. IBM, DaVita, and Harley-Davidson have all demonstrated that transformation is possible by committing to a systematic approach and following through. Even within this group, Harley-Davidson (H-D) stands out. It is one of a handful of companies in our sample that made the transition to agility. Its story demonstrates how organizations can build strategizing, perceiving, testing, and implementing routines.

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