Everyone knows that great strategy can’t produce great performance without great planning and execution. Yet companies routinely fall short of the financial results spelled out in their strategic plans. In fact, our research suggests that companies typically deliver less than two-thirds of their strategy’s performance potential and, more importantly, that the causes of this "strategy-to-performance gap" are all but invisible to top management. Not surprisingly, then, leaders often pull the wrong levers in their attempts to turn performance around – they press for better execution when what’s really needed is a better strategy, or they opt to change direction when they really need to focus the organization more sharply on execution. The result: wasted energy, lost time and continued underperformance.
As serious as these problems are, a select group of high-performing companies has managed to close the strategy-to-performance gap through improved planning and execution. These companies develop strategic plans that are solidly grounded in the underlying economics of their markets and use these plans to drive performance delivery. They have a set of planning and execution disciplines that make it far less likely they will face a shortfall between actual and planned performance, and if they do, the disciplines enable top management to quickly discern the cause and take corrective action. These practices become widespread and deep-rooted, creating a self-reinforcing culture of overperformance. While the disciplines are broad in scope – ranging from unique forms of planning to integrated processes for deploying and tracking resources – our experience suggests that they can be applied by any business to help craft great plans and turn those plans into great performance.
The Strategy-to-Performance Gap
At most companies, there is a significant disparity between the potential financial performance management believes its strategy can produce and the actual results the company delivers over time. In some cases, this shortfall is due to unrealistic plans – that is, the results embedded in management’s projections simply cannot be achieved no matter how well the team executes. But in other instances, the shortfall stems from breakdowns in execution. Closing this strategy-to-performance gap can be a significant source of performance improvement for most companies. But before action can be taken to narrow the gap, executives must first understand its size and root cause.
In the fall of 2004, Marakon Associates, in collaboration with the Economist Intelligence Unit, surveyed senior executives from 197 large companies worldwide. The goal of this research was to determine just how successful companies are at translating their strategies into performance. Specifically, we wanted to know how effective companies are at meeting the financial projections set forth in their strategic plans. And when shortfalls do arise, what are the most common causes and what actions are most effective in closing the strategy-to-performance gap. The findings were revealing – and troubling.
While the executives we surveyed compete in very different product markets and geographies, they share many concerns about planning and execution. Virtually all of them said they struggle to produce the level of financial performance forecast in their long-range plans. Furthermore, the processes they use to develop plans and monitor results make it difficult to discern whether the strategy-to-performance gap stems from poor planning, poor execution, both or neither. Specifically, we found:
- Companies rarely track performance relative to long-term plans – Few companies routinely track actual performance relative to their plans over extended periods of time. As a result, it is difficult for top managers to know whether the projections that underlie their capital investment and portfolio strategy decisions are in any way predictive of actual performance. Moreover, the fact that actual versus planned performance is seldom monitored helps explain why so many companies seemingly pour good money after bad – continuing to fund losing strategies rather than searching for new and better options.
- Multi-year results rarely meet projections – When companies do track actual performance relative to planned projections over a number of years, what commonly emerges is a picture one of our clients recently described as a series of "diagonal Venetian blinds," where each year’s performance projections, when laid side by side, resemble Venetian blinds hung diagonally (see Figure 1). If things are going reasonably well, then the starting point for each year’s new "blind" may be a bit higher than the prior year’s starting point, but rarely does it match the prior year’s projection. The obvious implication: year after year of underperformance relative to plan.
In our experience, this diagonal-Venetian-blinds problem creates any number of related challenges. First, because the financial forecasts embedded in the plan are unreliable, it is difficult for senior management to confidently tie capital approval to strategy development. Strategic planning and resource allocation become decoupled, and the annual operating plan (or budget) ends up driving the company’s long-term investments and strategy. Second, portfolio management gets derailed. Without credible financial forecasts, it is difficult for top management to know whether a particular business is worth more to the company and its shareholders than it is to potential buyers. As a result, value-destroying businesses stay in the portfolio too long (in the hope that performance will eventually turn around) and value-creating businesses are starved for capital and other resources. Third, poor financial forecasts complicate communications with the investment community. Indeed, to avoid coming up short at the end of the quarter, the CFO or head of investor relations is forced to impose an implicit or explicit "contingency" or "safety margin" on top of the bottom-up forecasts produced by consolidating the individual business-unit plans. Since the top-down contingency is wrong just as often as it is right, poor financial forecasts run the risk of damaging a company’s reputation with analysts and investors.
- The strategy-to-performance gap is substantial – Given the poor quality of financial forecasts embedded in most strategic plans, it is probably not surprising that most companies fail to realize their strategies’ potential value. In fact, the executives we surveyed indicated that, on average, they deliver only 63% of their strategy’s potential due to breakdowns in planning or execution. And more than a third of those surveyed placed the figure at less than 50%. Put differently, if management were to successfully realize the full potential of its current strategy through more effective planning or execution, the increase in performance would be nearly 60%, on average. As shown in Figure 2, the performance shortfall can be traced to a combination of factors, ranging from poorly formulated plans to misapplied resources to breakdowns in communication.
- Performance bottlenecks are frequently invisible to top management – The processes most companies use to develop plans, allocate resources and track performance make it difficult for top management to discern whether the strategy-to-performance gap stems from poor planning, poor execution, both or neither. Indeed, because so many plans imbed overly ambitious projections, performance shortfalls are frequently written off as "just another hockey-stick forecast." And when plans are realistic and performance falls short, executives have few early warning signals. They often have no way of knowing whether critical actions were carried out as planned, resources were deployed on schedule, competitors responded as anticipated, etc. Of course, without clear information on how and why performance is falling short, it is virtually impossible for top management to take appropriate corrective action.
- The strategy-to-performance gap fosters an underperformance culture – In many companies, planning and execution breakdowns are reinforced – even magnified – by an insidious shift in culture. This change occurs subtly but quickly, and is very hard to reverse once it has taken root. First, unrealistic plans create the expectation throughout the organization that plans simply will not be fulfilled. Then, as the expectation becomes experience, it becomes the norm that performance commitments won’t be kept. So commitments cease to be binding promises with real consequences. Rather than stretching to ensure commitments are kept, managers, expecting failure, seek to protect themselves from the eventual fallout. They spend time covering their tracks rather than identifying actions to enhance performance. The organization becomes less self-critical and less intellectually honest regarding its shortcomings, losing its capacity to perform.
Closing the Strategy-to-Performance Gap
As significant as the strategy-to-performance gap is at most companies, there are ways to close it. Indeed, a number of high-performing companies – Barclays, Boeing, Cisco Systems, Dow Chemical, 3M, Roche, Textron and others – have taken steps to realize more of their strategies’ underlying potential. Rather than focus on individual process improvements to close the strategy-to-performance gap, these companies strive to avoid the gap altogether by creating an integrated strategy-to-performance loop (as illustrated in Figure 3). They work on both sides of the planning and execution equation, raising standards for both activities simultaneously and creating clear and specific linkages between the two. The process involves six steps:
- Ground plans in economic reality – High-performing companies ensure that the financial assumptions underlying their business plans reflect both the real economics of their markets and the actual performance experience of the company relative to competitors. This provides top management with an objective assessment of the level of financial performance that can be realistically achieved by each business over time. While seemingly straightforward, for most companies, grounding plans in economic reality requires a fundamentally different approach to business planning.
Typically, two different groups are involved in generating a business’s strategic plan. The high-level strategy is most often developed by the marketing or strategy organization, based on its assessment of market trends, customer needs and competing offers, among other things. Once the high-level strategy is set, it is up to the finance organization to produce the requisite financial projections – usually in the form of a "line-item" forecast. Disconnected from the realities of the market, the finance team projects revenues by estimating the market’s growth rate along with changes in the business’s market share. It forecasts costs and working capital requirements by estimating some annual rate of productivity gain – typically tied to Six Sigma and/or other companywide efficiency programs. Of course, with revenues going up and costs going down, the finance team’s forecasts almost always embed an upward bias – the all-too-common "hockey stick." From the start, the plan’s assumptions are unrealistic.
What this process overlooks, of course, are the all-important market and competitive factors that ultimately drive financial performance. The profitability of any market is determined by the intensity of direct competition among the existing players, the level of customer power and other structural factors. Accordingly, a business’s financial performance reflects the profitability of the markets it serves and its competitive position in these markets. High-performing companies like Barclays, Dow Chemical, Textron and others integrate their strategy, marketing and finance teams to develop grounded assumptions about potential future performance. These assumptions combined with an in-depth understanding of market profitability and their company’s relative offer, cost and price position, enable them to create more realistic strategic plans.
- Use timing as well as level of performance to sharpen plans – High-performing companies use the timing of results, as well as the absolute level of performance, to produce more realistic and measurable projections. Focusing only on long-term performance goals – e.g., "By 2009 we want to be generating an ROI of at least 20%" – leads to narrow and often bitter debates about annual targets and prospective bonus plans. The dialogue around strategy becomes a political process, with business unit management arguing for lower profitability projections (to secure annual bonuses) and top management pressing for more stretch (to satisfy the board and other external constituents). The plans that emerge from these negotiations usually specify the level of performance that each business will be expected to deliver, but typically say nothing about the timing of resource deployment required to execute the strategy and, therefore, little about the timing of performance delivery.
Using timing to challenge plans focuses management on what actually needs to happen across the company in order to execute the proposed strategy. It also helps test the feasibility of the plan. For example, breakthrough strategies frequently require multiple functions to meet specific objectives in tight sequence. At many consumer goods companies such as Unilever and Procter & Gamble, portfolio repositioning often relies on building profitable core brands. But this growth can only be achieved if funds are first unlocked by restructuring the supply chain or by exiting or repositioning non-core brands. Using timing to challenge plans helps ensure that all necessary actions – and their sequence – are well thought through and feasible. The debate becomes more focused and much more productive. Critical questions invariably surface: "How long will it take for us to change customers’ purchase patterns? How fast can we deploy our new sales force? How quickly will competitors respond? How long will we be able to maintain our offer advantage?" These are tough questions. They do more than ensure effective execution; they make the strategy stronger and the plan more realistic.
- Convert plans into actions and priorities – For any strategy to be executed successfully, thousands of tactical decisions and actions need to be taken. But not all of these tactics are equally important. In most instances, a few key steps must occur – at the right time and in the right way – to realize a strategy’s performance potential. High-performing companies devote extra time to making these priorities explicit and then make sure they are carried out appropriately.
At Textron, for example, top management has put in place a rigorous "Goal Deployment Process" to specify and monitor the precise actions required to deliver planned performance. Each BU at Textron identifies "improvement priorities" that must be acted upon in order to realize the performance outlined in its strategic plan. Each improvement priority is, in turn, translated into action items with clearly defined accountabilities and timetables. These improvement priorities and action items are cascaded to every level at the company – from the Management Committee (consisting of Textron’s top five executives) down to the lowest levels in each of the company’s 10 BUs. Regular operating reviews percolate performance shortfalls (or "red light" events) up through the management ranks, providing Textron’s leadership with the information needed to spot and fix potential breakdowns in strategy execution.
- Monitor performance vs. plan in real time – One of the biggest challenges companies face in driving strategy execution is to understand the precise level of inputs (e.g., sales resources, capital investment, etc.) required to produce the desired level of performance or output. Seasoned executives have a keen sense for these relationships, but they develop this capability over time through trial and error. High-performing companies like Wal-Mart, Cisco Systems and others use real-time performance monitoring to help executives accelerate this trial-and-error process. Specifically, these companies continuously track their resource deployment patterns and their results against plan, using this continuous feedback to reset planning assumptions and realign resources. This real-time performance information allows management to detect and remedy plan flaws and execution shortfalls – and to avoid confusing one with the other.
Boeing Commercial Aircraft (BCA) is a case in point. Airplane production has always been a highly cyclical business, with total aircraft deliveries swinging wildly from year to year. Managing performance in such a cyclical environment requires careful planning and monitoring. Under CEO Alan Mulally, BCA’s leadership team holds weekly performance reviews to track the division’s results against "a living plan." By tracking the actual deployment of resources as a leading indicator of whether plans are being executed effectively, BCA’s leadership team can take immediate action rather than waiting for quarterly results to roll in. And by proactively monitoring the elements of performance, BCA is better able to accelerate or even "double down" when the strategy is exceeding expectations. These processes, combined with a capable and experienced management team, have enabled BCA to produce consistently solid financial results year over year, despite the sharp decline in aircraft deliveries post-9/11.
- Identify and remove the real bottlenecks to execution – Perhaps the most troubling element of the strategy-to-performance gap is the fact that most companies do not have a clue as to why it exists – or persists. As a result, top management wastes time and energy attacking symptoms rather than tackling the underlying disease. By contrast, executives at high-performing companies are much more forensic in their approach to resource allocation, working hard to identify the real bottlenecks to effective strategy execution and then deploying resources to remedy the situation.
Take Coca-Cola, for example. Now that Coke is available in even the tiniest villages in the remotest parts of the world, it’s easy to forget how hard it is for fast-moving consumer goods companies to make widespread availability economically attractive. There are numerous bottlenecks, including the capacity of the sales force to make calls and fill orders. Many players still treat their sales-force capabilities as a constraint and consequently struggle to access new points of distribution. Long ago, Coke realized that equipping its sales reps with the best technology was critical to making Coke’s product ubiquitous. Accordingly, the company made sizable investments in information technology and sales training. In effect, the company turned a previously constrained resource into a source of competitive advantage. Despite the company’s recent troubles, in many markets Coke’s sales people are still the best equipped and supported. This enables Coke’s sales staff to spend far more time with customers, generate significantly higher revenues per customer call and earn commissions that other beverage companies simply can’t match.
- Build lasting execution disciplines – Once the plans are economically grounded, performance is being monitored real-time and execution logjams have been identified and cleared, leading companies focus on improving the underlying capabilities of their people. They strive to make each employee 15% better at what they do – irrespective of the individual’s role or his or her business’s strategy. Improving the core skills and capabilities of a company’s workforce is no easy task – often built up over many years. But once they are in place, they can drive superior planning and execution for many decades.
At 3M, for example, former CEO Jim McNerney endeavored to build "a culture of accountability" after becoming CEO in 2000. For the most part, 3M has always been a strong performer, producing impressive margins and above-average growth rates. But before McNerney’s arrival, the company often slipped on accountability and execution. To sharpen the organization’s focus on performance, McNerney and his top management team spent 18 months hashing out a new leadership model. Challenging debates among the company’s executives led to agreement on six "leadership attributes" – namely, the ability to "chart the course," "energize and inspire others," demonstrate ethics, integrity and compliance," "deliver results," "raise the bar" and "innovate resourcefully." 3M’s top management team views these six attributes as essential for the company to become skilled at execution and known for accountability. Today, the attributes drive more than 3M’s performance evaluation procedures and leadership succession plans; they shape all of the key processes at the company, from leadership training to performance measurement to compensation. This has helped 3M sustain and even improve its consistently strong performance year after year.
In September 2004, Marakon Associates, in collaboration with The Economist Intelligence Unit (EIU), conducted a global survey of senior executives at large companies (sales of at least $500 million). Representatives from 197 companies responded. More than a third were from companies with sales greater than $1 billion. The survey was designed by Marakon and conducted by the EIU online.
The survey’s content questions focused on:
The profile of the survey respondents broke down as follows:
The prize from closing the strategy-to-performance gap is huge – an increase in performance of anywhere from 60% to 100% for most companies. But this almost certainly understates the true benefits of creating a strategy-to-performance loop. Companies that achieve tight linkage between their strategies, their plans and ultimately their performance often experience a cultural "multiplier effect." Over time, as strategies are successfully turned into performance, leaders in these organizations become much more confident in their own capabilities and much more willing to make the kinds of stretching commitments needed to inspire and transform large companies. In turn, individual managers who keep their commitments are rewarded with faster progression and fatter paychecks, reinforcing the behaviors needed to drive any company forward.
Eventually, a culture of overperformance emerges. Investors start giving management the benefit of the doubt when it comes to bold moves and uncertain news. The result is a performance premium on the company’s stock – one that further rewards stretching commitments and performance delivery. Before long, the company’s reputation with potential recruits rises and a virtuous circle is created, where talent begets performance, performance begets rewards, rewards beget even more talent. In short, closing the strategy-to-performance gap is not only a source of immediate performance improvement, it can be an important driver of cultural change with large and lasting impact on the organization’s capabilities, strategies and competitiveness.
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Marakon Associates advises some of the world’s best-known companies on the issues that most drive their performance and long-term value. The firm’s focus on value creation enables it to bring an original, independent view and unique expertise to the critical challenges business leaders face. Marakon has offices in New York, London, Chicago, San Francisco and Singapore.