The CEO as Chief Performance Officer

By John Hagel III

Leadership in defining—and delivering—the performance imperatives of strategy must come from the very top.

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Try this test with your senior management team. Ask them, first, what is the customer proposition—the two-minute "pitch" a salesperson would give—that clearly differentiates your products and services in terms that would motivate a customer to buy from you. Then ask what are the key things your company must do superbly well in order to make this pitch real. Finally, ask what are the activities and information flows essential to delivering this level of operational performance.

Don't be surprised if your management team has a hard time answering these questions with any precision or consistency. It's likely that the business has been changing rapidly and your top team has been preoccupied with specific functional responsibilities. There has been no opportunity to step back and take stock. Yet proper answers are vital if performance shortfalls are not to leave promising strategies stranded in the desert of failed execution.

One CEO's experience

The CEO of one company wanted to drive an aggressive new growth strategy, but was concerned that it had wide-ranging implications for what people did day by day and how they were organized. The company operated a national chain of retail outlets delivering a relatively focused product line to a broad range of customers. So the CEO assembled his management team for a series of workshops to explore the new strategy's operational and organizational implications. Each workshop was to last for four to six hours. Participants included the vice presidents in charge of each of the major line functions, as well as the senior executives in finance, strategic planning, information systems, and human resources.

Defining the customer proposition

In the hope of keeping the process short, the CEO asked his team to come to the first workshop with a brief presentation identifying the core operating processes that were required to deliver the performance that the strategy demanded. Not surprisingly, each participant had a radically different outlook, shaped in part by varying and unstated assumptions about the new strategy and its implications for performance.

These differences also highlighted the managers' essentially functional views of the company. The core processes they identified all looked suspiciously like the functions that defined the current organization. Yet the discussion soon revealed that the operational performance of each function depended heavily on activities and information from others. The likely success of a new retail site, for example, was determined both by the overall market potential assessed by marketing, and by the characteristics of the specific site evaluated by real estate.

The members of the group quickly understood the magnitude of the challenge they faced in developing a common perspective. At this point, the CEO pulled them back to the strategy and asked them to condense it into a marketing pitch that could be easily communicated to target customers. The group struggled with this task because the strategy was one of growth. What did customers care about the growth of their company? What was important to their customers? Who were their customers? There was little agreement even on this most basic question, because the nature of the customer base had changed in recent years and was likely to change even more as the company implemented its growth strategy.

The discussion revealed that if the company were to succeed in achieving the aggressive growth objectives underlying its strategy, it would need to target a broad range of customers cutting across diverse population segments. This made developing a common pitch difficult. However, after much debate, the group began to realize that two important values would appeal to many different customers.

First, the company had succeeded up to now by providing good quality at a lower price than its competitors—a feature that was likely to remain a powerful element of the pitch. Second, market research indicated that convenience was becoming increasingly important to the company's customers and would have widespread appeal. The company had focused on convenience in the past, but only at the level of the individual retail outlet. Now it was becoming clear that to deliver real convenience, the company would have to expand its total number of retail outlets and give far more attention to their location.

By the end of the first workshop, the CEO began to feel more comfortable. His management group had begun to agree on a sales pitch that went something like this: "We will continue to offer the best value in our product category, and we will be the most convenient point of access when you want this product." It sounded simple, but its real benefit was in the new richness of understanding among the assembled managers.

They understood that the pitch did not specifically identify target customers: their challenge was to deliver to a broad and diverse group. They also realized that providing "the best value" was a major challenge, since competitors had begun to copy the operational approaches that had originally enabled them to achieve their low cost position. And they had just begun to appreciate the implications of expanding the notion of convenience to include access, and not just the in-store experience.

The CEO commissioned a taskforce to gather additional data to assess the customer base and competitors more rigorously, to evaluate the economics of the business, and thus to test and refine the sales pitch. But he was sufficiently comfortable with it to instruct his management group to assemble for a second workshop a week later. He announced that its purpose was to flesh out the implications of the pitch for operational performance: in other words, what would the company have to do especially well to deliver on it? Each manager was to come to the workshop with a perspective on this issue.

Understanding operational needs

In the second workshop, the initial presentations once again reflected the participants' limited outlooks. Quite naturally, each manager had translated the customer proposition into operational implications for a particular function. As a result, there were, when you added them all up, over 75 "key" operational needs on the table.

For example, the real estate executive had translated the pitch into a need to expand the number of traditional retail outlets dramatically. When pressed on whether these particular outlets were capable of delivering convenience of access, he said he could not answer the question because it was marketing's responsibility to evaluate whether other outlets were needed—and besides, all his people knew about was site evaluation for traditional outlets.

Once the members of the group had agreed that they needed to concentrate on fundamental, long-term operational needs, the CEO led them back to the customer proposition they had developed and focused the discussion on each of its elements, as well as on the strategic growth objectives that underlay them. He began with the new concept of convenience of access. What did this imply for operations? The group discussion began to reveal that, first, it implied an explosion in the number of points of access, since the goal was to be readily available whenever and wherever the customer had a need for the product. More importantly, however, it implied a radically different approach to what a point of access could be.

The company's existing retail outlets assumed the customer was in a car; they were designed as free-standing units, an approach consistent with competitors' business methods. But what if the customer happened to be walking in a downtown area? Or at work? Or at school? Or at home? It soon became apparent that the company would have to go where the customer was. This implied very different points of access tailored to various buying occasions. Operationally, it demanded the ability not only to locate and develop a dramatically larger number of points of access, but also to manage the complexity of handling many different types of access at the same time.

Convenience had some other implications for the company too. Customers would, for example, want a much broader selection in one-stop shopping, which meant that many new products needed to be rapidly developed. The performance of each product would have to be monitored and the product line quickly reconfigured to meet changing needs. Second, reaching a broad cross-section of the population would involve another issue: brand image. It was unlikely that a single own brand would be sufficient to appeal to the wide target customer base. New brands would have to be developed with images tailored to specific customer segments. Managing a portfolio of private label brands, not just one, would create a fresh set of management challenges.

Operationally, the various implications of convenience uncovered in the discussion meant that the company would have to develop entirely new capabilities. Simultaneous innovation at the level of brand, product line, and outlet type was clearly required. The organization had not faced such needs before or, at least, not on the scale that was now required. In an even greater break with its past, the company would now have to develop the ability to tailor its offerings at all three levels to specific segments of the population, and to monitor the needs of these segments over time.

Finally, the group turned to the "value management" element of the pitch, which the CEO had saved for last, thinking it would be the easiest. It wasn't. Realization quickly dawned that the whole concept of maintaining a low cost position would need to be rethought in a world of much greater complexity. Instead of meeting this challenge in a business that offered a limited product range through standardized retail outlets, they faced an environment with proliferating products and much greater retail diversity.

What this meant operationally was abandoning their traditional approach to cost management. In the past, they had aggressively taken cost out of their operations and hardwired their processes, much as Henry Ford had hardwired his automobile assembly operations. Low operating cost was easy as long as everyone wanted model A in black. Now, given the expanding product range and new approaches to distribution, processes would have much greater variability and flexibility.

By the end of the second workshop, the management group had reached broad agreement on the major operating performance imperatives implied by the strategy they had adopted. When they pulled everything apart, there were really only three such imperatives:

  • Rapidly locate and develop a much greater number and diversity of retail outlets to deliver on the promise of convenience of access.

  • Aggressively innovate on a continuing basis at the level of brand, product line, and outlet type to deliver access across a broader range of purchase occasions and customer segments.

  • Accommodate a much greater degree of flexibility to deliver on the promise of value for money, while at the same time rigorously driving out operating cost.

Despite their sense of accomplishment in encapsulating the key performance imperatives, the group had grown more and more concerned as the discussion progressed. Making their customer proposition credible and successful would require massive change. All employees at all levels would need to change their day-to-day approaches to their jobs. Many completely new jobs would have to be created; others, eliminated or redefined. For example, in a single-brand company, who was going to create, establish, and manage new brands? Would the real estate staff in the field be able to develop the breadth of skills needed to find and acquire locations for the proposed new outlets?

What troubled the group more was that they could not even articulate many of the issues they would face. Defining operating performance at the level of the entire business, without reference to traditional organizational boundaries, was, they realized, very useful—but at the same time, it introduced a major difficulty. No one person in the workshop could describe the sets of activities and information flows that shaped performance along the new dimensions they had defined. None of them managed the full range of activities or information flows involved. They each had a piece of the puzzle, but they needed to work as a group to put the complete picture together.

The CEO sensed their concern and reassured them that subsequent meetings would help them assemble the puzzle. In the meantime, he designated a taskforce to refine the three performance imperatives that had emerged. Its role was to define them in ways that could be measured and to develop a preliminary perspective on where the company stood relative to its competitors on each one. This taskforce was to work in parallel with the one formed after the first workshop to test and refine the sales pitch.

Identifying core processes

When the group met again in a third workshop, they began with the first of their newly defined performance imperatives: the need rapidly to locate and develop a much greater number and diversity of points of access. They started with such obvious activities as identifying and acquiring new sites. The CEO wrote them on a whiteboard and then pushed the group to identify less obvious "upstream" and "downstream" activities. How, for example, would the field real estate people know where to look for potential sites? Who would select broader trading areas to target? How were these areas selected? And who would assess the market potential and competitive status of metropolitan areas?

The rule for the group was that they were not to stop moving upstream or downstream until they reached the boundary of the corporation—typically either a supplier (upstream) or a customer (downstream). Internal organizational boundaries were deemed irrelevant; the object of the exercise was to render a full account of the activities in the process, no matter where they resided within the company. The criterion was: does the activity directly affect the ability to meet the performance imperative? If so, the next question was: where does it fit in the overall sequence of activities listed on the board? The board quickly began to fill up with a stream of activities that cut across all the major boundaries in the business—a "core" process.

When the group hit diminishing returns on the process associated with the first performance imperative, they moved to the second, repeating this approach. By the time they reached the third, the energy in the room had intensified. For the first time, the managers were looking at their business in a way that was explicitly tied to the performance needs of their strategy. The processes on the board were defined at a high level: they captured broad categories of activities, rather than the minute details. But the participants could see that most of the major operations of the company were being captured in one or more of the processes, and that their relationships with the performance imperatives were becoming more visible.

Perhaps the most difficult process to define was the third: rigorously driving operating cost out of the business. Since all activities incurred operating cost, potentially they could all be part of this process. The breakthrough came when the finance executive noted that almost 90 percent of operating cost derived from a much more limited set of activities: those associated with operating the stores and with managing the product flows from suppliers through distribution centers and ultimately into the stores. This insight led the group to define a process that captured the product logistics flows and the activities involved in managing the stores.

Once the group had completed a high-level first pass at each of the three processes, the CEO asked them to take their findings back to their individual management teams to check whether any major activities had been missed, and to test the relevance of each activity to the underlying performance need. He also asked them to think about the information flows associated with each process. The third workshop came to a close after six hours of intense discussion.

Mapping information flows

A week later, the fourth workshop began with a second pass through the three processes, capturing additional activities that had been overlooked in the previous session. The group then moved on to the primary focus of the workshop: mapping the information flows associated with each process at a high level and pushing on activities that could arguably be represented in more than one process.

In locating appropriate sites for retail stores, for example, the field real estate people depended on information from within the company as well as from external sources. Marketing provided high-level analyses of target metropolitan areas in terms of evolving demographics and competitors' store deployment. Brokers provided listings of available sites. Such examples enriched participants' understanding of the role that information played in shaping performance, and showed how far multiple sources had to be tapped and the resulting data integrated.

Categories of activities that had been listed in more than one process represented a gray area. Sometimes this indicated that the category itself had been defined too broadly. Many activities fitted clearly in one process or another, but some genuinely played a dual role. In such cases the group had to determine where the impact on performance was the greatest. One example was advertising in specific metropolitan markets. Arguably this was critical to the process of brand and product innovation in communicating consistent positioning messages to target customers. However, it also promoted the success of local outlets by making customers aware of their accessibility and drawing traffic into them. So this activity could reasonably fall in either the second process—market innovation—or the third—product logistics and access management.

After heated debate, the group decided that local advertising would have a much greater impact on the third process, since the substantial fixed costs in a network of local retail outlets would lead to escalating operating costs unless traffic flows could be maximized. The concern for consistent positioning messages could be addressed by locating the design of advertising programs in the second process and their execution—the decisions on how much to spend and what advertising mix to deploy in a given area—in the third.

These debates were frustrating to the participants because the issues involved were difficult, but they found it helpful to keep returning to the performance imperatives and to use them as the criteria for judgment. At the end of the workshop they could legitimately call each of the three processes a core process.

Testing the insights

The fifth workshop, a week later, was the "testing" workshop. As preparation, the CEO had asked a staff group to take each activity category from each core process and break it down to the next level of detail. Rather than flying at 50,000 feet, the group was now at 30,000 feet. The objective was to test what each participant meant when talking about a given category.

This exercise revealed that managers did not all attach the same meanings to the categories they had been discussing. Each had grouped a different set of activities in any given category, and in some cases the divergences in interpretation proved substantial. Though they had walked into the workshop thinking they were in full agreement, the group found by the half-way stage that their consensus was in some jeopardy. However, by the end of the session they had resolved most of their differences and felt even more secure in the strength of their agreement.

The sixth and final workshop was in many respects the most critical. The management group was in accord about the general outline of the core operating processes of the business. Their goal now was to test and refine their definitions and to prioritize the needs for performance improvement within each process.

The off-line work of the taskforce shed light on these performance imperatives. It confirmed, for example, that the core processes did, indeed, play a fundamental role in driving the economics of the business. The first—delivering convenient points of access—accounted for more than 80 percent of the company's total asset base. The second—market innovation—was expected to deliver more than 60 percent of target revenues over the next decade. The third—product logistics and access management—represented more than 90 percent of operating expense in the business.

The taskforce also deepened the group's understanding of the performance imperatives, which in turn yielded new insights about the core processes. In the first, for example, past discussion had focused chiefly on the need for rapid expansion in the number and type of retail outlets, which led in turn to debate about the mechanics of identifying, acquiring, and constructing new store sites. Having analyzed the performance of recently opened stores, however, the taskforce had discovered that, as the number of new sites had grown, there had been a corresponding decline in the return on invested assets. It turned out that most of the poor performance could be attributed to the nature of the host metropolitan area rather than to the specific characteristics of a particular site.

The taskforce also drew out the implications of the new commitment to convenience of access. As the number and diversity of outlets grew in particular metropolitan areas, so did the risks of cannibalization. Conversely, there was more opportunity to think creatively about enhancing accessibility through combinations of points of access. This led to the realization that the real key to success in this core process lay further upstream, in an area that the company was not even addressing at that moment: network management.

Rather than focus on individual sites, the company should develop the capability to manage a network of outlets in given market areas to maximize both customer convenience for target segments and its own return from the entire local network. Because the company currently had a strong "site mentality," the group recognized that a major shift in culture and performance measurement would be needed. As the taskforce reported on the company's actual performance in each core process, the participants began to develop a sense of the magnitude and urgency of the needed improvements. The deteriorating performance of new sites was a near-term issue that was already eroding the company's profitability. Tackling the "delivering points of access" core process thus became the first priority. At the same time, the company would begin some of the market research and analysis required to kick-start the "market innovation" core process, but defer any efforts fundamentally to redesign it.

At the end of the session, one of the participants summed up the group's sentiment by commenting that the workshops had helped the senior management team bridge the chasm separating strategy from business operations and organization. Without this bridge, their new strategy of growth would have stalled at the outset. Now their task was to launch targeted initiatives that would deliver the performance breakthroughs required to make their chosen strategy a reality.

The death of key functions

The individual details of this performance review are, of course, limited to one company's experience. But their overall pattern is not unusual. Senior managers in most industries have slashed costs, reduced workforces, and executed tactical revenue-enhancement plans, but their actions have often not been enough to provide a solid foundation for implementing strategy. Shaking his head, a senior executive of a company renowned for new product development recently remarked that, although his organization had reduced its workforce by over 60 percent during the past three years, introduced a new and superior product line, and increased revenue, it was now in a worse position relative to competitors than when it started downsizing.

The truth is that it is no longer adequate to build a business around excellence in a single key function. The performance levels now required simply to stay in the game, much less win it, demand that all parts of a business be involved. Every person and every activity counts. And what counts most is the role of each in processes that deliver value to customers.

In the computer industry, for example, "insanely great" products and technology used to be what determined success. Today, products and technology must still excel, but cross-functional activities such as channel management, logistics, and order fulfillment must also meet demanding standards of performance. Similarly, in banking and insurance, the management of spreads used to be the key to success. It is still important, but no longer sufficient by itself to deliver ever-higher levels of value to customers at ever-lower cost.

This broadening of the performance challenge directly affects what CEOs do. In the past, they could often rely on a functional manager to drive a major performance improvement effort, especially if he or she "owned" the core competence required for success. Today, however, the mechanisms for delivering necessary levels of operational performance have become too broad-based for effective single-function intervention, which can all too easily underestimate performance needs in a well-intentioned effort to translate them into terms on which functional organizations can act.

The vice-president of product development in one data networking company, for example, interpreted "time to market" performance objectives as the time from product concept to handover to manufacturing because he could not directly influence downstream activities. Similarly, he confined "cost of commercialization" to product development expenses because it was difficult to identify other relevant costs in the company's accounting systems. The result was a significant improvement in product development performance, but a deterioration in technology commercialization overall as functional managers inadvertently made tradeoff decisions that prolonged cycle times and increased downstream operating expense.

Moreover, when a performance challenge of this magnitude pervades an entire business, it becomes the focal point around which all the activities of that business must be re-integrated. Local solutions are not enough. Empowering the front line, for example, is of little help when the introduction of a new product by a software house brings a torrent of calls to the customer support center. The challenge is systemic: hiring more customer service operators may improve phone response times so much that customers using the company's older products begin using the free help line as a substitute for reading instruction manuals. As calls proliferate at an alarming rate, should the company charge for support? If it does, how will that affect customers' perceptions of value?

The core process perspective

There is no effective way to carry out a systemic, performance-oriented re-integration of a business other than by working to view that business as a limited set of, say, three to five "core" end-to-end operating processes. The value of this core process perspective is that it organizes all activities in terms of the role they play in shaping the relevant dimensions of performance in the eyes of the customer. And as the case study demonstrates, these operating processes rarely correspond to existing functional boundaries; rather, they normally cut across several functions.

Equally important, supposedly "core" processes that have no performance imperatives to meet are unlikely to be important. When performance imperatives are dependent on more than one core process, either they are too vague or the core processes are too narrowly defined. Although businesses in the same industry may well have core processes that are similar, they are unlikely to be identical. Because these processes are ultimately shaped by the strategy of the business and its distinctive value proposition, their precise nature will vary as strategy varies. For example, exactly where a computer company's customer service and support activities fit into its core processes will depend on whether its strategy emphasizes account control, technology innovation, or a low cost position.

A personal agenda

Ultimate responsibility for a cross-functional, performance-oriented re-integration of a business must lie with the CEO, a company's chief performance officer. It is not a responsibility that can be delegated to the head of a function, no matter how important the function is. Effectively integrating strategy with operations means getting a senior team genuinely to agree on a value proposition and on the processes essential to its delivery. Experience shows that such agreement is impossible until—and unless—those processes have been made visible and their value-adding logic has been understood.

Making the invisible visible—building consensus on what truly drives relevant dimensions of performance—is the CEO's job.

That job may also entail process reengineering or process redesign. Or it may not. It may entail overhauling information systems. Or it may not. What it certainly does include, however, is establishing a systematic, organization-wide focus on the performance imperatives implied by strategy. Without this, nothing will work.

If this is not near the top of a CEO's personal agenda, it will not get done. And if it does not get done, no amount of well-intentioned effort will deliver the level of performance implied by strategy.

About the author(s)

John Hagel is a principal in McKinsey's San Jose office.

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