Dr. Mark L. Frigo
Director, The Center for Strategy, Execution and Valuation
RESEARCH ON HIGH-PERFORMANCE COMPANIES
During the last three decades, there have been many attempts to study high performance companies. An article in Harvard Business Review (Kirby, Julia, "Toward a Theory of High Performance" Harvard Business Review, 2005) profiled some of these studies, including:
• Peters, Thomas J. and Robert H. Waterman, In Search of Excellence: Lessons from America's Best-Run Companies (1982)
• Kotter, John P. and James L. Heskett, Corporate Culture and Performance (1992)
• Collins, James C. and Jerry I. Porras, Built to Last: Successful Habits of Visionary Companies (1994)
• Foster, Richard and Sarah Kaplan, Destruction: Why Companies That Are Built to Last Underperform the Market-and How to Successfully Transform Them (2001)
• Zook, Chris and James Allen, Profit from the Core: Growth Strategies in an Era of Turbulence (2001)
Works have included:
• Kim, W. Chan and Renee Mauborgne, Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant (2005)
• Collins, James C. Good to Great: Why Some Companies Make the Leap and Others Don't, HarperBusiness (2001)
• Collins, Jim and Morten T. Hansen, Great By Choice: Uncertainty, Chaos and Luck – Why Some Thrive Despite Them All (2011)
Each of these works has made certain contributions. Yet the question and comment by Julia Kirby in Harvard Business Review guides future work and inquiry: "What does it mean to be a high-performance company? Twenty-three years after In Search of Excellence, we're still searching — and just maybe getting closer to answers." One of the intentions of our ongoing research on high performance companies and the book DRIVEN: Business Strategy, Human Actions and the Creation of Wealth, is to describe what it means to be a high-performance company in terms of performance metrics and the strategic activities and traits that led to sustained periods of exceptionally high performance in terms of return on investment, growth and wealth creation. For more information, seminars, keynote presentations and articles on high-performance company research, please visit www.markfrigo.com.
The research listed below is based on the Return Driven Strategy Initiative, which started with more than 15,000 public companies in North America, Europe and Asia. We examined the performance of these companies over the last 20 to 30 years using a three-part lens of economic performance.
Identify companies with superior performance meeting the following stringent criteria:
1. Cash Flow Return on Investment had to exceed twice the cost of capital consistently for over 10 years straight (Rate of Return on Equity was used for financial services companies).
2. Growth rates must exceed the GDP growth rate over the same period.
3. Total Shareholder Returns (TSR) had to exceed market performance over the time period — consistent with the growth and return levels.
The Return Driven Strategy Initiative identified companies that met the three criteria of sustained high performance. The first two criteria drive shareholder returns. First and foremost, high-performance companies must achieve superior and sustainable Return on Investment (ROI). Second, high performance companies must grow the business, but only if they can continue to achieve superior ROI (we refer to this as discipline growth). The third criteria (superior shareholder returns) will be driven by the first two criteria, assuming the company has adhered to the ethical parameters of its constituents and communities, which define the first tenet of Return Driven Strategy "Ethically Maximize Wealth."
What were the common patterns of activities of these high-performing companies? It took us and our research teams more than 10 years to come up with the answers: 11 tenets of business strategy and three foundations that describe the pathway to sustainable high performance and shareholder wealth creation.
The next step in the research was to study the characteristics and traits of these companies during the period of high performance. We and our research teams reviewed hundreds of articles, books, case studies and annual reports covering each company; conducted intensive financial analyses for each company; conducted interviews with managers and leaders of the companies, conducted interviews with customers and suppliers of the companies; carefully analyzed compensation plans for the companies; and examined how the companies created wealth while adhering to the ethical parameters of their communities.
The findings are described in the book Driven: Business Strategy, Human Actions and the Creation of Wealth.
The Return Driven Strategy Initiative also looked at the "other side" of performance: mediocre companies, average performers, below average performers and companies that have become failed businesses. How did the characteristics and traits of these companies differ from those identified as high-performing companies? Here, we and our research teams studied these companies using the lens of the Return Driven Strategy framework.
What we found were distinct differences in the business activities of these companies compared with high-performing companies. Companies that did not achieve sustainable high performance and wealth creation seemed to fail to execute on many of the tenets of the Return Driven Strategy framework.
The research and analysis of the Return Driven Strategy Initiative spans over a decade using some of most powerful financial tools available with data encompassing over 15,000 companies globally, for as many as 50 years of data.
The ideas, tenets and strategies in the Return Driven Strategy framework have been tested and refined by executives, board members, employees, money managers, hedge funds and academicians in North America, Europe and Asia.
The research found that high-performing companies think and act differently than the rest. These companies have found ways to escape from the grind of commoditization and competition by focusing on customers, customer needs and markets (groups of customers). At the same time, they conscientiously developed unique capabilities and resources (which are called "Genuine Assets") that provide protection from competition and in some respects made competitors irrelevant.
It was found that there are no permanent high-performance companies. What the Return Driven Strategy Initiative identified were specific periods of high performance for a particular company and then studied the activities of that company preceding and during the time of high performance.
Every one of the companies that met the stringent criteria of the Return Driven Strategy Initiative faces the risk of fading. Some have already begun to fade somewhat. But the pathway to fading can be charted by observing how the tenets in the Return Driven Strategy framework were neglected. Similarly, the rise of these companies and the sustainability of high performance can be attributed to attention to these tenets. For companies with average or below-average performance levels, gaps in their business strategy can be revealed and addressed when viewed through the lens of Return Driven Strategy.
The promise of the Return Driven Strategy framework is its ability to guide leaders and their companies toward higher levels of sustainable performance and create greater shareholder wealth.
Frigo, Mark L. and Joel Litman, DRIVEN: Business Strategy, Human Actions and the Creation of Wealth, Strategy & Execution Press (2008)
http://www.amazon.com/Driven-Business-Strategy-Actions-Creation/dp/0981457304
This book describes the Return Driven Strategy framework and the performance criteria for identifying high performance companies.
Frigo, Mark L. "Return Driven: Lessons from High Performance Companies" Strategic Finance, July 2008 (cover article)
Frigo, M. and J. Litman, "When Strategy and Valuation Meet – Five lessons from Return Driven Strategy" Strategic Finance (August 2004) (cover article)
Frigo, Mark L and Venkat Ramaswamy, "How Enterprises Can Create New Value" Strategic Finance (October 2010)
Frigo, Mark L. and Vijay Govindarajan, "How CFOs Can Drive Innovation" Strategic Finance (July 2010)
Frigo, Mark L. "Strategic Risk Management: The New Core Competency" Balanced Scorecard Report (Harvard Business Publishing) January-February 2009
Beasley, M. and M. Frigo, "Strategic Risk Management: Protecting and Creating Value" Strategic Finance May 2007 (cover article)
Frigo, Mark L. and Venkat Ramaswamy, "Co-Creating Strategic Risk-Return Management" Strategic Finance, May 2009 (cover article)
Needles, Jr., Belverd E., Anton Shigaev, Marian Powers, and Mark Frigo, "Strategy and Integrated Financial Ratio Performance Measures: A Longitudinal Multi-Country Study of High Performance Companies," Studies in Financial and Managerial Accounting, (London: JAI Elsevier Science Ltd.), 18, (2010)
Banergee, Bhabatosh, Needles, Belverd E. and Mark L. Frigo, "Corporate Governance in India: Issues and Practices of High Performance Companies" Indian Accounting Review June 2009 Vol. 13 No. 1
Needles, Belverd E., Powers, Marian. and Mark L. Frigo. "Performance Measurement and Executive Compensation: Practices of High Performance Companies" Studies in Managerial and Financial Accounting. Vol. 18, 2008
Needles, Belverd E., Marian Powers, Anton Shigaev and Mark L. Frigo "Financial Characteristics of High-Performance Companies in India" Indian Accounting Review, (Vol. 11, No. 1 June 2007)
Needles, Belverd E., Marian Powers, and Mark L. Frigo, "Performance Measurement and Executive Compensation: Practices of High Performance Companies," Studies in Financial and Managerial Accounting, (London: JAI Elsevier Science Ltd.), 18, 2008, forthcoming.
Needles, B.E., M. Powers, A. Shigaev and M. Frigo "Financial Characteristics of High-Performance Companies in India" Indian Accounting Review, 2007
Needles, B, Frigo, M. and M. Powers, "Strategy and Integrated Financial Ratio Performance Measures: Further Evidence of the Financial Performance Scorecard and High Performance Companies" Studies in Managerial and Financial Accounting Volume 16, (2006)
Frigo, M, Needles, B and M. Powers, "Strategy and Integrated Financial Ratio Performance Measures: Further Evidence of the Financial Performance Scorecard and High Performance Companies" Studies in Managerial and Financial Accounting Volume 16, (2006)
Frigo, M, Needles, B and M. Powers, "Strategy and Integrated Financial Ratio Performance Measures: Empirical Evidence of the Financial Performance Scorecard and High Performance Companies" Studies in Managerial and Financial Accounting Volume 15, (2004)
Frigo, M. L, "Growth isn't always good: Knowing When and Where to Grow" Strategic Management (December 2004)
Frigo, M.L, "Strategy and Execution: A Continual Process" Strategic Finance (April 2004)
Frigo, M. L, "Focusing Strategy on Fulfilling Customer Needs" Strategic Finance (January 2004)
Frigo, M. L, "The Segments, Offerings, Needs Matrix" Strategic Finance (December 2003)
Frigo, M. L, "Performance Measures that Drive the Goal Tenets of Strategy" Strategic Finance (October 2003)
Frigo, M. L, "Performance Measures that Drive the First Tenet of Business Strategy" Strategic Finance (September 2003)
Frigo, M. L, "Mission Driven Strategy" Strategic Finance (August 2003)
Frigo, M. L, "Strategy and the Board of Directors" Strategic Finance (June 2003)
Frigo, M. L, "What's Missing in Our Strategic Plans?" Strategic Finance (May 2003)
Frigo, M. L, "Building the Verbs of Strategy on the Nouns of a Business" Strategic Finance (April 2003)
Frigo, M.L., B. E. Needles, Jr, and M. Powers, "Strategy and Financial Ratio Performance: The Case of an Emerging Economy," Indian Accounting Review (January, 2003).
Frigo, M. L., B. Needles and M. Powers, "Strategy and Financial Ratio Performance Measures" Studies in Managerial and Financial Accounting Volume 14, (2002)
Frigo, M. L, "Supporting Competencies of Return Driven Strategy" Strategic Finance (July 2002)
Frigo, M. L, "Strategic Competencies of Return Driven Strategy" Strategic Finance (June 2002)
Frigo, M. L, "Strategy, Business Execution and Performance Measures" Strategic Finance (May 2002)
Frigo, M. L. and J. Litman, "What is Return Driven Strategy?" Strategic Finance (February 2002)
Frigo, M. L. and J. Litman, "What is Strategic Management?" Strategic Finance (December 2001)
RELATED RESEARCH ON STRATEGIC RISK MANAGEMENT
Frigo, Mark L. and Richard J. Anderson, Strategic Risk Management: A Primer for Directors and Management Teams (2012)
www.markfrigo.com
Frigo, Mark L. and Richard J. Anderson, "What is Strategic Risk Management?" Strategic Finance (March 2011)
Frigo, Mark L. and Richard J. Anderson "Strategic Risk Assessment: A First Step for Risk Management and Governance" Strategic Finance December 2009 (cover article)
Beasley, Mark S. and Mark L. Frigo, "Strategic Risk Management: Creating and Protecting Value" Singapore Accountant, January-February 2008 (adapted by the Singapore Accountant from Strategic Finance)
Frigo, M., "When Strategy and ERM Meet" Strategic Finance, January 2008.