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A recipe for organizational health

November 7, 2017 - 4 minute read

Organizational health is much more important than commonly believed and is of great value to a company. It is about making an organization function effectively by establishing a united management team, creating a real clarity among the leadership and then communicating that clarity to all the employees throughout the company.

The advantages of organizational health are undeniable and many. It improves productivity, retention and problem solving, making the company more competitive and able to provide a better customer service. Scientists at McKinsey have previously shown that healthy organizations, are more than double as likely to exceed the competition.

Measuring organizational health

McKinsey have been measuring organizational health for more than 10 years in hundreds of organizations (around 1,5 million employees) worldwide. They ask the workers about how they perceive the organizational health and what management practices are applied to achieve it. Then a health index is created that reflects how good the employees think their respective companies are in each of the nine dimensions of organizational health. To establish the organization’s strengths and weaknesses, the management practices are also identified in four to five fields.

Especially in factories, there is a correlation between organizational health and the company’s operational and financial performance. When establishing the organizational health scores by surveying employees in 16 refineries, McKinsey found there was a sharp linear connection between the health scores and the performance, as defined in gross profit per unit. 54% of the variation in the profits was traced back to organizational health.

A strong correlation between health and performance was also found when comparing 11 claims-processing sites in the insurance industry. About one third of the variation in performance was due to organizational health differences. This is a considerable amount when we realise that the remaining two thirds are mainly made up of forces that managers are not able to control, such as macroeconomic forces, local market dynamics and competition.

The importance of management practices

When analyzing the practices which the highest scoring companies applied in organizational health, four main angles were found among the 37 practices that management teams focus on to achieve a healthy organization. Companies that kept to these four “recipes” were found to be healthier and deliver a strong and lasting performance when compared to organizations with mixed strategies.

The four identified recipes are based on core management beliefs about values that improve a company’s performance. Each is based on a set of management methods that companies follow.

The first recipe is the leader-driven practice, the main characteristic being the presence of talented and high-potential managers at all organization levels. They have the freedom to create their own methods for delivering results and are made responsible for their decisions. This transparent culture of trust is typical for new, highly decentralized businesses, where strong leaders are essential when starting from scratch. Instead of using career opportunities to motivate their employees, these healthy organizations use them as a management-development method through role modeling and real experience.

The second, market-focused recipe gives the companies following it a strong external relationship with customers, competitors, stakeholders, business partners and the public community. The objective of these organizations is to create innovative products, shape market trends and build a solid brand portfolio in order to maintain a competitive position. They answer to customer demands, while developing products that reshape the consumer market. The healthiest organizations have a shared vision and clear strategy that guarantee strong financial management, confident employee decisions regarding market opportunities, as well as the right responses to market trends in order to generate profit.

The third recipe, the execution-edge strategy, is used by organizations that strive for steady improvement at the frontline, by continuously raising quality and productivity, while cutting down on waste and inefficiency. Knowledge sharing across the organization is highly emphasized and seen not only as a way to drive innovation, but also to achieve standardization. Sharing the knowledge supports a two-way communication and organization-wide consistency. This fosters employee engagement and facilitates the spreading of the best ideas throughout the company. Unlike marketing focused companies, these execution focused ones don’t push from the top down by analyzing market trends, but aim for communication and strategies from the bottom up.

Finally, the fourth recipe is the talent and knowledge-core approach. It is often found among successful professional-service providers, professional sports teams and entertainment organizations. These businesses are focused on creating a competitive advantage by acquiring the best talents and building a high-quality knowledge base. The employees are motivated and engaged by a combination of financial and non-financial benefits and are given the opportunity for development. Companies making use of the talent and knowledge-core approach succeed because of the highly skilled individual employees.

The advantages of organizational health for improving long-term performance can not be ignored, given the rapid pace of change in most industries. These four recipes can help companies achieve this organizational health. But the recipes and ingredients must be chosen carefully in order to create a smooth path to success. Read how to successfully implement the recipes for organizational health in our follow-up article:

Katy Renner

Written by Katy Renner

Katy is shaping the new voice of Speakap. When she's not writing for work, she's writing for fun. When she's not writing, then she's probably out looking for the best taco in the city.