Chapter 1
What Is Agility?

Organization agility is a deliberately cultivated capability. Many organizations founded over the last ten to fifteen years have benefited from the experience and knowledge of others and are often more agile than older firms. The usual suspects of agility—Google, Apple, Microsoft, Cisco—are all great companies, but even some of them fail to meet the agility standards we believe are appropriate. What we found most interesting in our research was that there are organizations—often twenty, thirty, fifty, or more years old—that do meet the organizational and performance criteria for agility.

Agility allows an organization to respond in a more timely, effective, and sustained way than its competitors when changing circumstances require it. The management literature now increasingly refers to this ability as a “dynamic capability” that senses opportunities and threats, solves problems, and changes the organization’s resource base.1 While agile organizations often change, they do not pursue change for change’s sake and are not overburdened by it. Unlike regular capabilities whose value can wither over time, dynamic capabilities allow sustained high performers, such as Limited Brands, Honda, and Campbell’s, to maintain or enhance their relative performance advantages in ways their competitors fail to see or do not fully implement.

Defining agility as the ability to make timely, effective, and sustained change has two implications. First, agile organizations ought to post profitability rates that are (1) higher than the average of their competitive group and (2) that above-average performance should be sustained. Survival is related to but not the same thing as agility. Organization agility results in sustained high performance. Thus our research asked the question, “Are there organizations that have demonstrated sustained high performance?” The answer is “yes.”

We studied the performance patterns in more than twenty different industries, ranging from specialty retail to regulated utilities, over a thirty-two-year period (1980 to 2012). In every industry there were three patterns of profit performance.2 There were firms whose profitability was consistently below industry average, firms whose profitability thrashed below and above average over time, and firms that consistently outperformed the industry. When a firm’s annual profitability exceeded the industry average more than 80 percent of the time, we considered it an agility candidate.

The second implication of our definition of agility is organizational. Agile companies ought to have a set of strategies, structures, and systems that distinguish them and drive their sustained high-performance pattern. Our research asked, “What’s different, organizationally and managerially, about the outperformers compared to the thrashers and the underperformers?” Using the survey described in Chapter Two, we found that four routines of agility, summarized in Exhibit 1.1, distinguish the high-performing organizations from the thrashers and the low performers. The high-performing companies have the ability to strategize in dynamic ways, accurately perceive changes in their external environment, test possible responses, and implement changes in products, technology, operations, structures, systems, and capabilities. Individually, these routines may simply seem like basic practices of good management. However, the hard work and expertise necessary to implement and orchestrate them in ways that produce consistent high performance are advanced and uncommon. By executing these routines in concert, over and over again, the agile organizations consistently outperformed their competitors.

Exhibit 1.1 The Routines of Agility

Strategizing

The strategizing process is how executives manage purpose, strategy, and the capacity of the organization to execute. Few would argue that having a clear, relevant, and shared strategy is an important, well-accepted contributor to organization effectiveness. However, agile organizations don’t define strategy like other firms. For them, strategy has three explicit parts: a sense of shared purpose, a change-friendly identity that is nonetheless stable enough to ground the organization, and a robust strategic intent that clarifies how the firm differentiates itself. Thrashers and underperformers lack one or more of these. Either they have no clear or shared purpose and no integrated view of the central, enduring, and differentiated reasons for their success,3 or they embrace outdated notions of “sustainable” competitive advantage.

Perceiving

The perceiving process is about understanding the context in which the organization operates. Agile companies take special care to accurately sense what is going on in the environment, through multiple touch points, structures, and practices that put managers and employees in direct contact with the business environment, including customers, regulators, and other stakeholders. Employees are skilled at communicating their perceptions of the external world in unbiased and unfiltered ways to company decision makers. They also have the knowledge they need to interpret those messages as important or unimportant, opportunity or threat. All three elements of perceiving environmental change are essential. Sensing without communicating is wasteful; communicating without interpreting is noise.

Thrashers and underperformers are often inward-looking and politicized. They find a high level and intensity of communication and transparency congenitally difficult. They are too busy vying for turf, resources, and position to consider dispassionately the implications of outside signals. In contrast, the external focus of agile companies enables them to face up to brutal facts and embrace versatility.

Testing

An important part of successful innovation is setting up, running, and evaluating tests of new ideas, products, capabilities, or businesses. Agile organizations test and refine their insights from the perceiving process with relatively low-cost experiments. They encourage innovation but also tolerate a good deal of the right kinds of failure. Effective testing and innovation activities range from gathering intelligence, to trying out new ideas on a small scale, to launching full-scale product development programs. In most cases, there are explicit risk management processes with valid success criteria so the plug can be pulled if the test fails. There also are continuous learning efforts so that the insights gained from the tests spread to all relevant parts of the company. Agile organizations invest in learning and continuous improvement, never resting on their laurels or believing they have “cracked the code” once and for all.

Thrashers and underperformers often worship at the altar of efficiency. Some build massive six-sigma programs that are unleashed on everyone and everything, everywhere. They do not understand the potentially strategic value of slack resources. Agile organizations consciously build organizational slack in the right places. They hire people, spend money, and allocate time that doesn’t go directly to the bottom line but allows the organization to rapidly deploy resources against opportunities that may or may not pay off, without jeopardizing day-to-day operations. The higher staffing levels play an important role in capturing and disseminating learning that the organization can use later.

Implementing

No organization can rightfully claim to be agile unless it can demonstrate the ability to carry out change. Agile companies master the program management capabilities they need to convert successful tests and promising innovations into widespread practices. Their organizations are flexible enough to adopt them with full and unambiguous commitment—and with the speed, certainty, and precision they need. Agile companies have histories of successful transformations, restructurings, and merger integrations, and they excel at the execution of new product rollouts, policy changes, and compliance mandates.

Most agile companies deploy some form of talent management and performance management that supports change without sacrificing effectiveness. Their systems leverage high levels of managerial autonomy and shared leadership. Their change capability is not relegated to a staff function at headquarters; rather, it is embedded in the organization. Once a decision is made,...