The systems and capabilities table

Strategy on a handAs companies seek to grow and achieve scale while maintaining their Founder’s MentalitySM, they face one constant: the tension between building a professional organization and maintaining a company’s entrepreneurial energy.

As we’ve discussed previously in these blog posts, companies can and must thoughtfully add professional management without destroying the founding culture. We’ve talked about the value of “upside-down management” and adding structure without sinking into the quicksand of bureaucracy. None of this, of course, is clear cut. For a fascinating look at the lively debate around the wisdom of replacing founders with outside talent, consider the well-argued, but opposing, viewpoints of Ben Horowitz (on behalf of founders) and Reid Hoffman (in support of professional management).

What we haven’t talked about as much in this space is the importance of building professional systems and capabilities without creating energy-sapping complexity. That was a key focus of our recent DM100 event in Shanghai, and from those discussions emerged a valuable tool for prioritizing decisions about which types of systems deserve leadership attention and which don’t. We call it the systems and capabilities table.

Earlier this year, we presented a similar tool called the talent table after meetings in Southeast Asia and South America. The key insight there was that growing companies increasingly need to link their talent requirements to the top value-creating jobs in the company. This focuses leadership’s energy on the people that really matter.

The same applies to the systems and capabilities table: Rather than focus on generic upgrades to professional systems, leadership needs to target the systems and capabilities that add the most value and create frontline pull for the required changes. There’s a useful analogy here. A few years back I had a conversation with a mid-level executive at Kodak, who was reflecting on what went wrong with the company’s response to digital. He had a very interesting insight. “Maybe it was different at the very top,” he said, “but in my position as a middle manager, one of the biggest issues was that we never actually defined what problem we were trying to solve. Everyone was saying we needed to address the digital threat, but I never saw the problem broken down into manageable sub-components. From my level, it felt like we were all extremely worried about the issue—digital—but we lacked a roadmap to address the threat. We never defined the vocabulary further.”

The terms “professionalize” or “build systems” are the equivalent of “digital.” They highlight an issue, but are uniquely unhelpful in drawing a roadmap. No company needs systems as an end in themselves. No company needs to professionalize as a strategic goal. But every company needs to strengthen core capabilities, and the right systems can help. What’s crucial is that leadership focuses the conversation on the capabilities the company needs to build, not the act of professionalizing.

In Shanghai, we set out five specific steps leaders can take to identify the capabilities that really matter and the right systems to support them.

Step 1: Start with your “strategy on a hand.” We will assume for a moment your company has a good strategy (the right market definition, a well-defined core, a clear path to leadership, a focus on customer advocacy, and so on). But you also need to pass the hand test: If you hold your hand flat, your thumb represents your ability to define the company’s strategy in a single sentence. It should set out your core customers and your unique proposition for serving them. With your four fingers, you should be able to check off three to four key activities (no more) in which you must be world-class on delivering something differentiated to that core customer group. (As noted in our book Repeatability, building a repeatable model amounts to the sum of these activities and how they work together).

Consider this “hand statement,” roughly derived from conversations with a founder at the Shanghai meeting: “We deliver safe baby food at fair prices, online, for the mass Chinese customer (the thumb). To do this, we must have: 1) the best testing labs in China to ensure a safe product, 2) the best baby food supply chain to guarantee the provenance of all supply, 3) an online platform that offers next-day delivery for loyal customers and no-questions-asked returns, and 4) a buying team that becomes the ‘partner of choice’ for the highest-quality baby food suppliers.”

This statement not only encapsulates the company’s core strategy but also captures the primacy of food safety in its founding value system. Defining these core activities is not easy, but this kind of strategic focus and clarity is the critical foundation of the systems and capabilities table.

Step 2: Define the “kings” and, with them, co-create critical non-negotiables.

Every organization has its kings —or those accountable for delivering on the most important elements of the customer proposition. The goal is to work closely with them to translate the company’s strategy into a set of “non-negotiables” that define the essential frontline routines and behaviors required to deliver the strategy.

Continuing with the example above, let’s assume the real kings of this company are the buyers. To fulfill activity 2 (“We must have the best baby food supply chain to guarantee the provenance of all supply”), they must create a very tight system of supply-chain control to support provenance. To succeed at activity 4 (“We must have a buying team that becomes the ‘partner of choice’ for the highest-quality baby food suppliers”), they must nurture the relationships with manufacturers that will make the company the “partner of choice” within the industry.

Activity 2 alone implies several non-negotiables:

  • We will only buy directly from the baby food manufacturer and only after its CEO has signed on to our food safety code of conduct.
  • We will always control chain of custody, from purchase to post, with a single team member responsible for each package.
  • Every product we send will be labeled with the manufacturer’s brand (and the name of its quality agent), as well as our brand (and the name of our chain-of-custody agent). Food safety is personal.

Step 3: Use the non-negotiables to define the right systems. For each non-negotiable, the company should ask itself three questions:

  • What do we need to do culturally to reinforce the necessary behaviors?
  • What systems do we need to build to create the right routines and feedback?
  • What capabilities and talent are required?

Each of these questions is critical to creating the right balance between freedom and framework as the company grows. The key is identifying where the company needs to put in place systems, tools and procedures that constrain and direct frontline behaviors, and where it needs to enforce values that empower the front line to act on its own initiative to maintain the Founder’s Mentality. Let’s examine this balance by looking at the third non-negotiable above: Every product we send will be labeled with the manufacturer’s brand (and the name of its quality agent), as well as our brand (and the name of our chain-of-custody agent). Food safety is personal.

Clearly, this non-negotiable demands some very tight systems. First, the company must develop an unambiguous set of processes establishing single-point accountability for product safety with each manufacturing partner. Second, the company needs to build a separate set of processes to produce the brand labels that signal “food safety is personal” by requiring two individuals to sign off on each product.

But as valuable as these systems might be, they are not sufficient to ensure the intent of the non-negotiable. It is just as crucial that the company relies on its kings to adopt the founding values that underlie these systems, and use them to make individual choices. The leaders of this team will only succeed if everyone—both internally and at the manufacturer—believes that food safety is critical. Success is not just a set of systems—the buying group must share the founder’s passion in creating supply chains defined by a personal sense of accountability.

Identifying requirements in this way leads to a clear definition of the talent and capabilities needed to achieve each non-negotiable. This, in turn, feeds information into the talent table and helps set the training agenda.

Step 4: Work with the kings to create a roadmap for the systems and cultural change. A crucial objective of this process is to engage top leadership in a deep discussion with the front line of the organization about the next steps required in building the right capabilities. The discussion should be rooted in the key things the company needs to accomplish in order to deliver its strategy, and how to create a balanced list of priorities that include both cultural changes and new systems. With that in hand, the next step is to co-create a roadmap that sets out how the company will execute against the full set of changes over time.

The roadmap will include both “quick wins” and multi-year initiatives. But it won’t be a “systems” initiative imposed from the top down to “professionalize” the organization. The plan should be strategy-driven and frontline-driven—a set of changes demanded by those who are in charge of execution. The objective is to pull the required change up from the bottom, not push it down from the top. (For more on how important this concept has become, see our blog post Old processes, new reality). Moreover, working on the roadmap should also create a huge “stop list” of all the other “professionalizing” initiatives that were launched before the company defined the non-negotiables. These should be stopped, since they no longer serve the strategy and will distract everyone from pursuing the new roadmap.

Step 5: Set up systems allowing the kings and their teams to learn from each other. The final step in the systems table is to ensure that the teams on the front line can continuously learn from each other and improve as they execute on the non-negotiables. There must be peer-to-peer exchanges of best practices, not just hub-and-spoke learning systems.

That’s it—and it really is a table. At the top of the page is a single sentence that defines the strategy (the hand’s thumb). Then there’s the table: Column 1 sets out the core activities (the fingers). Column 2 defines the non-negotiables. Column 3 lists the key cultural initiatives to reinforce behaviors. Column 4 outlines the systems, tools and routines needed to deliver on the non-negotiables. Column 5 includes the key capabilities the company must build. Column 6 sets out the feedback loops and learning systems required to improve continuously.

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