Organizational health is (still) the key to long-term performance

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Organizational health is (still) the key to long-term performance

By Alex Camp et al., | McKinsey & Company | February 12, 2024

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For decades we’ve seen companies’ fortunes rise and fall based on their ability to react to, and recover quickly from, geopolitical shocks, technological advances, economic uncertainty, competitors’ bold moves, and other disruptions. Amid this volatility, which these days is accelerating rather than abating, many have a hard time staying the course. But some continue to survive and thrive despite the challenges. Why do these companies manage to succeed, year after year—operationally, financially, and otherwise—while others don’t?  Twenty-plus years of proprietary McKinsey research tells us that one of the main reasons is organizational health.

Organizational health refers to how effectively leaders “run the place”—that is, how they make decisions, allocate resources, operate day to day, and lead their teams with the goal of delivering high performance, both near term and over time. Organizational health comprises three elements: how well the entire organization rallies around a common vision and strategy, how well the organization executes its strategy, and how well the organization innovates and renews itself over time.

In latest Organizational Health Index findings, three trends in particular stand out: how leaders are leading through decisive leadership; creating links between technology, data, and innovation; and by dynamic deployment of talent.

Sustained organizational success really comes down to leaders gathering the data that will help them understand which behaviors can help them to meet their performance goals as well as the type and scale of health improvements their organization should target.  

It’s critical for leaders to establish a baseline of the organization’s current strengths as well as the strengths it is targeting. With that baseline in mind, leaders can set clear behavioral priorities and begin to act—but it’s also critical to remember that context matters. Organizations will need to launch health interventions that are specific to the business, their performance goals, and their customer value proposition.  McKinsey research points to four foundational behaviors, what we call power practices, that can have disproportionate effects on organizational performance—and whose absence can create a significant drag on organizations: strategic clarity, role clarity, personal ownership, and competitive insights.  If any of these power practices are missing or at risk, organizations should take steps to address them; it’s a no-regrets move for achieving good organizational health.

In addition to this list, companies also need to identify which kinds of talent and behaviors are required for them to truly differentiate themselves from competitors—the organizations’ so-called “secret sauce.” Industry insights and benchmarks can provide some direction, but the final list of behaviors that convey competitive advantage to one company and not others can only be identified by an organization’s senior leaders.

3 key takeaways from the article

1. For decades we’ve seen companies’ fortunes rise and fall based on their ability to react to, and recover quickly from, geopolitical shocks, technological advances, economic uncertainty, competitors’ bold moves, and other disruptions. Amid this volatility, which these days is accelerating rather than abating, many have a hard time staying the course. But some continue to survive and thrive despite the challenges. Why do these companies manage to succeed, year after year—operationally, financially, and otherwise—while others don’t?  Twenty-plus years of proprietary McKinsey research tells us that one of the main reasons is organizational health.
2. Organizational health refers to how effectively leaders “run the place”—that is, how they make decisions, allocate resources, operate day to day, and lead their teams with the goal of delivering high performance, both near term and over time. 
3. Organizational health comprises three elements: how well the entire organization rallies around a common vision and strategy, how well the organization executes its strategy, and how well the organization innovates and renews itself over time.

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Topics:  Strategy, Business Model, Strategy