What matters most: companies can prosper and grow in a time of constant change. Beating the odds lies in managing organizational health with the same rigor and discipline as financial performance.

• Author: Keller, Scott
• Position: GROWTH

Living in times of unprecedented change--economic, social and technological--evidence suggests that businesses are finding it hard to keep up. Consider how long an average S&P 500 company stays in the index. In 1955 it was 45 years; in 1975, it was 26 years; and in 2009, 17 years. At this rate, half of the companies in this year's index are likely to have dropped out of it in 10 years' time.

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The fate of companies lauded in management literature is equally bleak. In 1982, Tom Peters and Robert Waterman's blockbuster book In Search of Excellence featured 43 of "American's best-run companies." Twelve years later, in Built to Last, Jim Collins identified 18 businesses that he determined to have staying power. Yet by 2006--well before the financial crisis--a fifth of all these companies had ceased to exist, 46 percent were struggling and only a third were still doing well.

This churn at the top of high-performance companies demonstrates that the forces shaping the global economy are fatally weakening traditional sources of competitive advantage.

Consider strategy. Not so long ago, having a smart strategy could put a company ahead of the pack for years. Today, obtaining information is so easy, quick and cheap--thanks to the staggering explosion in Internet bandwidth--that a successful strategy can be cloned in a matter of weeks.

In such an environment, where can senior managers find competitive advantage?

Put simply, the answer lies in managing the health of their organizations as rigorously as they manage its performance. In other words, developing their ability to align, execute and renew the company faster than competitors so that it can sustain exceptional performance over time.

A decade of research and practical client work has shown that managing organizational health with the same discipline as financial results can help almost any organization reach and maintain peak levels of performance.

A New Management Accounting

Analysis shows that when companies fall from grace, the reason is often, paradoxically enough, a focus on managing performance. Fixated on meeting quarterly and annual targets, managers are blind to the things they need to do to keep their organization healthy for the long term. Understanding what these things are and making sure they get enough attention is essential to avoiding this trap.

Research by McKinsey & Co. has identified nine elements that combine in various ways to support organizational health (see exhibit on page 32). Each of these elements can be further broken down into a set of component management practices--37 in all. (For example, some of the practices that underpin motivation are meaningful values, career opportunities, inspirational leadership and incentives.)

These practices take the elements of health and make them tangible, observable and above all actionable, which means that companies can manage them as effectively as they manage performance measures like operating profits and return on capital.

It also means...