What is your strategy-to-performance gap?
Written by Mankins & Steele this well cited article published in the Harvard Business Review challenged many senior executives to seriously examine what they were accepting in their business in terms of the year on year performance of their strategic endeavours.
Companies typically realise only about 60% of their strategies’ potential value because of defects and breakdowns in planning and execution.
Mankins & Steele’s survey indicates that, on average, most strategies deliver only 63% of their potential financial performance, and more than one-third of the executives surveyed placed the figure at less than 50%. Put differently, if management were to realise the full potential of its current strategy, the increase in value could be as much as 60% to 100%!
Why such a low percentage of their promised financial value? Leaders press for better execution when they really need a sounder strategy. Or they craft a new strategy when execution is the true weak spot.
In order to avoid these errors you need to view strategic planning and execution as inextricably linked—then raise the bar for both simultaneously.
The graph below outlines where the performance can be lost.
Companies rarely track performance against long term plans. In the author’s experience, less than 15% of companies make it a regular practice to go back and compare the business’ results with the performance forecast for each unit in its prior years’ strategic plans.
Multiyear results rarely meet projections. When companies do track performance relative to 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 viewed side by side, resemble venetian blinds hung diagonally.
A lot of value is lost in translation. Given the poor quality of financial forecasts in most strategic plans, it is probably not surprising that most companies fail to realise their strategies’ potential value.
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.
The strategy-to-performance gap fosters a culture of underperformance. In many companies, planning and execution breakdowns are reinforced—even magnified—by an insidious shift in culture. This change occurs subtly but quickly, and once it has taken root it is very hard to reverse. First, unrealistic plans create the expectation throughout the organisation 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.
The author’s offers seven suggestions to narrowing the gap:
- Keep it simple. Avoid drawn-out descriptions of lofty goals. Instead, clearly describe what your company will and won’t do.
- Challenge assumptions. Ensure that the assumptions underlying your long-term strategic plans reflect real market economics and your organisation’s actual performance relative to rivals’.
- Speak the same language. Unit leaders and corporate strategy, marketing, and finance teams must agree on a common framework for assessing performance. For example, some high-performing companies use benchmarking to estimate the size of the profit pool available in each market their company serves, the pool’s potential growth, and the company’s likely portion of that pool, given its market share and profitability. By using the shared approach, executives easily agree on financial projections.
- Discuss resource deployments early. Challenge business units about when they’ll need new resources to execute their strategy. By asking questions such as, “How fast can you deploy the new sales force?” and “How quickly will competitors respond?” you create more feasible forecasts and plans.
- Identify priorities. Delivering planned performance requires a few key actions taken at the right time, in the right way. Make strategic priorities explicit, so everyone knows what to focus on.
- Continuously monitor performance. Track real-time results against your plan, resetting planning assumptions and reallocating resources as needed. You’ll remedy flaws in your plan and its execution—and avoid confusing the two.
- Develop execution ability. No strategy can be better than the people who must implement it. Make selection and development of managers a priority.
This is one of my favourite articles as it identifies areas of improvement that are internal and not external i.e. the improvement comes from internal changes as opposed to external factors which are largely within our control and thus can be actioned independent of waiting for external factors.
The concepts from this article have helped me to build a strategy review process that I have used with clients to identify the area(s) in their business that are contributing to their strategy-to-performance gap.
Unfortunately this is not an uncommon problem. The upside is that this potential improvement is already sitting within the business – waiting to be capitalised.