The " Secrets " of Enduring Business High Performance

1. The "Secrets" of Enduring Business High Performance Genworth Financial ALM January, 2011 Ed Hess Professor of Business Administration Batten Executive-in-Residence Hesse@darden.virginia.edu www.EDHLTD.com

2. What Do We Know? • The DNA of HPOs- We know the “secrets” • Consistent HP requires the RIGHT kind of leadership, internal System, and processes • Growth results from behaviors NOT strategies • Growth results from experimental learning • HPOs build 2 X 2 X 4 Growth Portfolios • HPOs distance the competition in bad markets and tough times

3. A Growth Inhibitors • Individuals : Corporations: • Cognitive blindness Failure to experiment • Cognitive dissonance Standardization/No variance • Legacy thinking Short-termism • Hiring & promotion biases Low employee engagement • Arrogance ROE-it is • Fear of failure Punishment of mistakes • Product centricity • Group think

4. HPOs: 30 Years of Research • The “best” 8 studies: • 1982, Peters &Waterman, The Search for Excellence • 1994, Collins & Porras, Built to Last • 1997, DeGeus, The Living Company • 2000, O’Reilly & Pfeffer, Hidden Value • 2001, Collins, Good to Great • 2003, Joyce, et. al., What Really Works • 2007, Hess, The Road to Organic Growth • 2009, Simon, Hidden Champions

5. HPOs • Sysco • UPS • Starbucks • Southwest Airlines • Wal-Mart • Best Buy • Tiffany • Costco • USMC • San Antonio Spurs • McKinsey • Room & Board • Ritz Carlton • Outback • Walgreen • Chick-fil-A • Levy Restaurants • SAS • McDonalds • Corning • Danaher

6. 9 Consistent Findings • The “Not so secret sauce”: • 1. Simple focused strategy- an “elevator pitch” business model • 2. Structures that enable entrepreneurial behavior- “Small company soul in a large company body” • 3. Higher purpose than shareholder value/profit- Money is not enough • 4. Culture of relentless constant improvement- the DNA of growth • 5. High employee engagement- an implied social contract – an accountable “family”

7. 9 Consistent Findings (cont.) 6. Customer centricity & closeness- Being better is more important than being bigger 7. Humble passionate operators who are servant leaders- devaluation of elitism 8. Execution & service champions- excellence everyday every way by everyone 9. An Internal aligned consistent self-reinforcing System ( strategy, culture, structure, HR policies, leadership behavior, measurements, rewards, communications) that enables, motivates, and rewards desired behaviors

8. Notice What Is Missing • Diversified complex best strategies • Unique products or services • Visionary or charismatic leaders • Lowest costs • Most innovative • Best talent

9. Why So Rare? • Short-termism: mentality, tenure, comp • Easier to be external facing • Focus on financial metrics not behaviors • Alignment is hard to create and maintain • Hypocrisy • Leaders fail to role model desired behaviors

10. Common Growth Progression 2 Studies: McKinsey & Hess • Geographical expansion • Complimentary products to existing customers • New customer segments w/existing products • Complimentary services for existing customers • Cost efficiencies • Technology productivity in creation &delivery • Small strategic acquisitions • Move from selling products to selling solutions • All of the above continuously

11. Darden Growth/Innovation Model New S Curves (5) (3) (1) (2) (7) (4) (6) • An Enabling Internal Growth System • Strategic Ideation • Ideation Communication and Evaluation Processes • Learning Launches • LL Project Tracking and Portfolio Management System • A Growth Initiatives Portfolio • Growth Portfolio Management/Review Process

12. 2 X 2 X 4 Growth Portfolio • HPOs create and continually manage a diversified portfolio of growth initiatives: • 2: both short-term & long-term initiatives • 2: both top-line & bottom line initiatives • 4 Ways to Grow: • Improvements: better, faster & cheaper • Innovations: something new • Scaling: doing more of what works • Strategic acquisitions

13. 3 Key Growth Processes • Strategic Reframing: Illuminating & challenging your underlying assumptions “givens” about your industry, business model, customers, distribution channels • Customer Experience Mapping: A granular charting of every step in a customer or channel distributor experience - “in their shoes” • Learning Launch Experiments: Uncovering and testing key CV and execution assumptions to generate better data to make investment decisions

14. How Do HPOs Distance Themselves in Tough Markets? • They keep doing what they do everyday but with even more resolve and intensity by focusing on: • Becoming even closer to existing customers • Aggressive acquisition of key customers from weaker competitors • Being even better & faster & cheaper • Continuing to invest • Becoming even more easier to do business with

15. How Do HPOs Distance Themselves in Tough Markets? (cont.) Focusing on helping their customers survive hard times- “in their shoes” Taking care of their people- leaders are on the front lines even more Expanding judiciously into the right customer segments and geographies where growth is likely by leveraging existing capabilities Creating new “bundles ” or offerings and new distribution channels MORE OF WHAT THEY DID BEFORE !!!!....... More “farming” not magic

16. HPOs Constantly Question & Debate • The following slides are intended only to spur more “growth thinking” • HPOs continuously engage in critical and constructive debate about their business assumptions

17. Questions For You? • Do you have a culture of constant improvement? • Do you have a servant stewardship leadership model? • Do you have a highly engaged workforce? • Have you defined the right behaviors to drive growth? • Do you measure and reward the right behaviors?

18. Questions For You? (cont.) Are you structured to maximize growth behaviors? Is being better & faster part of every employee’s job and measurements? Do you- the leaders- spend meaningful time listening to customers and line employees? Do you have an experimental learning process? Do you proactively review quarterly your Growth Portfolio?

19. In Tough Times, You Should • Deepen competencies & capabilities • Improve your Internal System • Experiment more • Rethink how you market, position & sell your products in this psychological environment • Become even more customer-centric • Become even much easier to do business with • Challenge & rethink the basic assumptions underlying your industry & business