Identifying correct criteria for a successful business

Anyone who owns a company wants to know the formula as to  ‘what makes a successful business’. Whether you are a small shop on the edge of an Australian desert or a sophisticated multinational, the question has limped along, over decades and centuries.

Two submissions to the Harvard Business Review during 2012 appear to offer a serious solution, at least when they are considered together.

In February 2012, Heidi Grant Halvorson suggested that there are nine characteristics or approaches that ‘successful people do differently’. Her leading concept implores readers to “get specific”. Why? “…because it gives you a clear idea of what success looks like”, and thus what you need to do to achieve that target.

Significantly, the very same idea was attributed to the late Steve Jobs by his biographer, Walter Isaacson.

Jobs began taking his “top 100” people on a retreat each year. On the last day, he would stand in front of a whiteboard (he loved whiteboards, because they gave him complete control of a situation and they engendered focus) and ask, “What are the 10 things we should be doing next?” People would fight to get their suggestions on the list. Jobs would write them down—and then cross off the ones he decreed dumb. After much jockeying, the group would come up with a list of 10. Then Jobs would slash the bottom seven and announce, “We can only do three.”

Psychologists will also have a field day with Grant’s last point – focus on what you will do and not what you will not do. This is very similar to saying to people that they should work through their strengths, which in turn will compensate for weaknesses.

What links all of Grant’s analysis is that success comes through the individual performing better. In contrast, Michael Mauboussin’s approach looks at the performance of the company itself and how to analyse it. He questions if senior managers really understand a true measure of success. So many top managers are driven by sales or value per share that they ignore the micro issues, which can be equally crucial.

Mauboussin offers a four point plan: –

  • Define clear business objectives
  • Develop an unambiguous methodology to assess presumed drivers of the objectives
  • Identify specific employee activities to promote these aims
  • Evaluate findings against a control state.

Above all, Mauboussin insists that any stats used by the CEO must be ‘persistent and predictive’. His example is incisive.

What statistics, then, should executives use to guide them in this value creation? As we’ve noted, EPS is the most popular………But will EPS growth actually create value for shareholders? Not necessarily. Earnings growth and value creation can coincide, but it is also possible to increase EPS while destroying value. EPS growth is good for a company that earns high returns on invested capital, neutral for a company with returns equal to the cost of capital, and bad for companies with returns below the cost of capital. Despite this, many companies slavishly seek to deliver EPS growth, even at the expense of value creation. The survey…..found that the majority of companies were willing to sacrifice long-term economic value in order to deliver short-term earnings.

 

So where does this leave our CEO, desperately wondering what they need to do inorder to generate the culture of success? The answer would seem to come in two layers, which need to be created in tandem. The CEO has to embrace a series of personal attributes. In parallel, the CEO must learn that to identify the components of success within the enterprise, a process that requires more than saying “how many sales did we make this month?”.

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