Finally, since investors reward improvements, a company creates superior returns immediately as it moves toward the eye of the hurricane. IBM under Louis V. Gerstner is an outstanding case. Mr. Gerstner’s “solutions thrust” (another idea that’s provided the strategic platform for companies in more than a dozen industries) gave instant benefits to customers struggling with systems integration, connected IBM’s businesses to a series of growth markets, produced earnings growth of 14 percent per year between 1994 and 2001, and generated above-average returns for its shareholders.
Does an eye-of-the-hurricane strategy offer the best combination of return and risk? It may. We know the strategy of large acquisitions is clearly worse: On average it yields poor returns for the acquiring company’s investors and has high risks. For an established company, a strategy focused just on operational excellence has a poor return/risk profile. Operational excellence can be a successful strategy in only about one-third of industries where a favorable industry environment (e.g., a long bull market for investment firms) so increases the revenue and earnings growth of excellent operators that they can earn above-average returns for shareholders, longer tenure for CEOs, and greater opportunities for workers. In a second third of industries, an unfavorable industry environment causes the performance of even excellent operators to be unacceptably low and stimulates the replacement of the CEO. In the final third of industries, the performance that investors expect results in average or below-average returns to shareholders. Unfortunately, since it’s impossible to predict whether the industry environment will be favorable or unfavorable, an operational excellence strategy has a two-thirds chance of producing substandard returns for investors.
Furthermore, with a strategy of operational excellence, companies, employees, and, increasingly, managers consign their fate to factors beyond their control, such as interest rates, the stock market, and oil prices. With an eye-of-the-hurricane strategy, a company can retain control.
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Chuck Lucier, [email protected]
Chuck Lucier is senior vice president emeritus of Booz Allen Hamilton. He is currently writing a book and consulting on strategy and knowledge issues with selected clients. For Mr. Lucier’s latest publications, see www.chucklucier.com.
Jan Dyer, [email protected]
Jan Dyer spent the last 11 years at Booz Allen Hamilton, where she served as the firm’s director of intellectual capital and worked with corporations in a variety of industries. She specializes in the strategic application of knowledge and learning.