What Really Works: The 4+2 Formula

What Really Works: The 4+2 Formula for Sustained Business Success.

The book, “What Really Works – The 4+2 Formula for Sustained Business Success” researched 160 large companies in equivalent industries over a 10 year period. The researchers looked at successful companies (winners), unsuccessful companies (losers), and also those whose performance changed for better or worse over the 10 year period (climbers and tumblers). They identified 8 management practices that were directly correlated with superior performance (in terms of total shareholder returns) over the 10 years.

I have written previously that many business books observe what successful leaders or companies do and try to reverse engineer it. They look for common themes, package them up and sell them as a guaranteed “success formula”. They fall victim to “survivorship bias”, which is our tendency to study the people or companies who “survived” or were victorious in a certain situation while ignoring those that failed. In many endeavors, it is probable that the failures used the exact same formula as the winners, but they still failed.

I also wrote that when it comes to business research, there are pitifully few rigorous studies, let alone a meta-analysis of multiple similar studies to validate findings.

I do commend the authors of this book for at least attempting to address the survivorship bias issue by studying both winners and losers. Here’s is my summarized take of the key findings:

The 4 Primary Management Practices: 

(excellence in all 4 of these practices is required)

  1. Strategy – Make your strategy clear and narrowly focused
  2. Execution – Flawless business execution
  3. Culture – Build a performance-based culture
  4. Structure – Make your organization fast & flat

The 4 Secondary Management Practices: 

(excellence in 2 out of these 4 is required)

  1. Talent – Make talent stick around and develop more
  2. Leadership – Make your leaders committed to your business
  3. Innovation – Make industry-transforming innovations
  4. Mergers & Partnerships – Make growth happen with mergers and partnerships

The 4 Primary Management Practices:

(excellence in all 4 of these is required)

1. Strategy: Make your strategy clear and narrowly focused

  • Communicate your strategy clearly. It must be well understood by employees & investors (a one-page strategic plan is ideal for this)
  • A hallmark of winning companies was their ability to share their strategy with customers
  • Communicate a clear brand promise for the customer
  • Match company capabilities (your core activities) with your target customers’ needs
  • Stick to your knitting. Leverage your core competencies
  • Continually research customers, and monitor the competitive environment
  • Fine-tune your strategy to match changes in environment and customer behavior

2. Execution: Flawless execution

  • Consistent and disciplined execution of your strategic priorities
  • Choose both growth and efficiency, not one or the other
  • Consistently deliver your brand promise
  • Create and manage customer expectations. Never disappoint them
  • Empower front-line staff with the authority to make decisions to respond to customer needs
  • Convenience. Make it easy for your customers to deal with you
  • Eliminate unproductivity and waste

3. Culture: Build a performance-based culture

  • Clear company core values. Ensure your people know and live by these values
  • Set goals that inspire people to do their best
  • Create a challenging, fulfilling work environment
  • Having fun can be useful but it is secondary to performance
  • Courage to get rid of poor performers

4. Structure: Make your organization fast and flat

  • There is no ideal company structure
  • Reduce bureaucracy and complexity. Simplify where possible
  • Promote cooperation & information exchange across the whole company
  • Eliminate internal competition and turf wars
  • Regular meetings to bring department heads together and force cooperation
  • Put your best people closest to the action (don’t let them get stuck in the office)
  • Keep your frontline stars in place. Provide recognition and rewards to make it worth their while to stay at the coalface & specialize in their role
  • Eliminate the distinctions between managers and any other role. Every role is equally valuable

The 4 Secondary Practices

(excellence in 2 out of these 4 is required)

I. Talent: Make talent stick around and develop more

  • Senior managers must be personally involved in finding and retaining talent
  • Preference for developing talent from within. Hired guns are less loyal
  • Provide top of the line education and training to grow and retain staff
  • Retain talent by providing work that is meaningful and challenging for them
  • Have internal replacements for each role groomed and ready to step in

II. Leadership: Make your leaders committed to your business

  • CEO must be fully committed to the business
  • CEO accounts for 15% of a company’s performance for better or for worse
  • On average 50% of executive pay was linked to performance in winning companies (losing company executives had less pay at risk)
  • The Board of Directors need to have a substantial financial stake in the business, thoroughly understand the business, and be passionately committed to its long-term success
  • Board must not rubber-stamp CEO decisions. They must play an active strategic role

III. Innovation: Make industry-transforming innovations

  • Future-focused. Anticipate rather than react to industry changes
  • Introduce disruptive technologies and business models (not just continuous improvement)
  • Cannibalize your existing offerings. Continually create new products/services to make your existing model obsolete

IV. Mergers and partnerships: Make growth happen with mergers and partnerships

  • Merge for growth and synergy, not diversification (e.g. purchase for their customer base that you can sell your offerings to, or for assets that complement your existing strengths)
  • Partner with companies to create synergies for both parties
  • Regular, small strategic deals rather than occasional mega-mergers
  • Have a planned process for spotting and processing deals.
  • Do not make ad-hoc spur of the moment deals

What doesn’t work:

The research found no correlation between the following practices and total shareholder returns:

  • Attracting high quality outside directors
  • Investment in information technology
  • Corporate change programs
  • Supply chain management programs
  • Learning organizations
  • Team-based management
  • Total Quality Management (TQM)
  • Outsourcing
  • Enterprise Resource Planning (ERP)
  • Customer Relationship Management (CRM)
  • Whether the business is structured geographically, or by product
  • Whether business units have profit and loss responsibility or not
  • Fast track development programs
  • Formal mentoring programs
  • 360-degree performance appraisals
  • Diversification as a reason for mergers and acquisitions

Interestingly, the research found that the leader’s decision-making style does not matter, nor does their personal characteristics. Winning CEOs were patient or impatient, secure or insecure, big picture or detail-oriented, quantitative or qualitative, independent or collaborative in their approach.

No particular leadership style was correlated with winning performance. All that mattered was how effective the CEO and leadership team were with their strategic choices and business execution.


Until next time…