• What criteria should a company consider for its capital allocation policy?
• What kinds of companies are most likely to generate internal capital (i.e., retained earnings and leverage) and why don't they have as much access to external capital (investors)?
• Resource deployment to execute strategies should be decided early. Why?

Turning Great Strategy into Great Performance Companies typically realize only about 60% of their strategies' potential value because of defects and breakdowns in planning and execution. By strictly following seven simple rules, you can get a lot more than that Turning Great Strategy into Great Performance by Michael C. Mankins and Richard Steele The Idea in Brief Most companies' strategies deliver only 63% of their promised financial value. Why? 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 How to avoid these errors? View strategic planning and execution as inextricably linked-then raise the bar for both simulta- neously. Start by applying seven decep- tively straightforward rules, including, keep- ing your strategy simple and concrete, making resource allocation decisions early in the planning process, and continuously monitoring performance as you roll out your strategic plan By following these rules, you reduce the likelihood of performance shortfalls. And even if your strategy still stumbles, you quickly determine whether the fault lies with the strategy itself, your plan for pursu- ing it, or the execution process. The payoff? You make the right midcourse correc tions-promptly. And as high-performing companies like Cisco Systems Dow Chemi- cal, and 3M have discovered, you boost your company's financial performance 60% to 100% The Idea in Practice Seven rules for successful strategy execution: Keep it simple. Avoid drawn-out descrip- Discuss resource deployments early. Chal- tions of lofty goals. Instead, clearly describe lenge business units about when they'll what your company will and won't do need new resources to execute their strat- Example: egy. By asking questions such as, "How fast Executives at European investment-bank can you deploy the new sales forceland "How quickly will competitors respond?" ing giant Barclays Capital stated they wouldn't compete with large US invest- you create more feasible forecasts and plans ment banks or in unprofitable equity- market segments. Instead, they'd position Identify priorities. Delivering planned per- Barclays for investors' burgeoning need for formance requires a few key actions taken foed income at the right time in the right way. Make strategic priorities explicit, so everyone Challenge assumptions. Ensure that the knows what to focus on assumptions underlying your long-term strategic plans reflect real market econom- . . Continuously monitor performance. Track ics and your organization's actual perfor real-time results against your plan, resetting mance relative to rivals! planning assumptions and reallocating re sources as needed You'll remedy flaws in Example Struggling conglomerate Tyco commis- your plan and its execution and avoid sioned cross-functional teams in each busi- confusing the two. ness unit to continuously analyze their mar- Develop execution ability. No strategy can kets profitability and their offerings, costs, be better than the people who must imple- and price positioning relative to competi- ment it. Make selection and development tors. Teams met with corporate executives of managers a priority. biweekly to discuss their findings. The re- Example vamped process generated more realistic Barclays top executive team takes responsi- plans and contributed to Tyco's dramatic turnaround bility for all hiring. Members vet each oth- ers potential hires and reward talented Speak the same language. Unit leaders newcomers for superior execution. And and corporate strategy,marketing, and fi- stars aren't penalized if their business enters nance teams must agree on a common new markets with lower initial returns. framework for assessing performance. For example, some high-performing compa- nies 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 profit- ability. By using the shared approach, exec- utives easily agree on financial projections. NICHTS RESERVED Three years ago, the leadership team at a major manufacturer spent months developing a new strategy for its European business. Over the prior half-decade, six new competitors had entered the market, each deploying the latest in low-cost manufacturing technology and slashing prices to gain market share. The per- formance of the European unit-once the crown jewel of the company's portfolio-had deteriorated to the point that top manage- ment was seriously considering divesting it. To turn around the operation, the unit's leadership team had recommended a bold new "solutions strategy"-one that would le- verage the business's installed base to fuel growth in after-market services and equip- ment financing. The financial forecasts were exciting-the strategy promised to restore the business's industry-leading returns and growth. Impressed, top management quickly approved the plan, agreeing to provide the unit with all the resources it needed to make the turnaround a reality. Today, however, the unit's performance is nowhere near what its management team had projected. Returns, while better than be fore, remain well below the company's cost of capital. The revenues and profits that manag. ers had expected from services and financing have not materialized, and the business's cost position still lags behind that of its major competitors. At the conclusion of a recent half-day review of the business's strategy and performance, the unit's general manager remained steadfast and vowed to press on. "It's all about execution," she declared. "The strategy we're pursuing is the right one. We're just not delivering the numbers. All we need to do is work harder, work smarter." The parent company's CEO was not so sure He wondered: Could the unit's lackluster per- formance have more to do with a mistaken strategy than poor execution? more impor tant, what should he do to get better perfor mance out of the unit? Should he do as the general manager insisted and stay the course- focusing the organization more intensely on The venetian blinds phenomenon creates a number of related problems. First, because the plan's financial forecasts are unreliable, senior management cannot confidently tie capital approval to strategic planning. Conse- quently, strategy development and resource allocation become decoupled, and the an nual operating plan (or budget) ends up driv- ing the company's long-term investments and strategy. Second, portfolio management gets derailed. Without credible financial forecasts, top management cannot know whether a par- ticular business is worth more to the com- pany and its shareholders than to potential buyers. As a result, businesses that destroy shareholder value stay in the portfolio too long (in the hope that their performance will eventually turn around), and value-creating businesses are starved for capital and other re- sources. Third, poor financial forecasts com- plicate communications with the investment community. Indeed, to avoid coming up short at the end of the quarter, the CFO and head of investor relations frequently impose a contingency or "safety margin" on top of the forecast produced by consolidating the business-unit plans. Because this 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 ana- lysts and investors. A lot of value is lost in translation. Given the poor quality of financial forecasts in most stra- tegic plans, it is probably not surprising that most companies fail to realize their strategies potential value. As we've mentioned, our sur- vey indicates that, on average, most strategies deliver only 63% of their potential financial performance. And more than one-third of the cxecutives surveyed placed the figure at less than 50%. Put differently, if management were to realize the full potential of its curren strategy, the increase in value could be as much as 60% to 100%! As illustrated in the exhibit "Where the Per formance Goes," the strategy to performance gap can be attributed to a combination of fac- tors, such as poorly formulated plans, misap- plied resources, breakdowns in communica- tion, and limited accountability for results. To execution-or should he encourage the leader- companies are at translating their strategies ship team to investigate new strategy options? into performance. Specifically, how effective If execution was the issue, what should he do are they at meeting the financial projections set to help the business improve its game? Or forth in their strategic plans? And when they should he just cut his losses and sell the busi- fall short, what are the most common causes, ness? He left the operating review frustrated and what actions are most effective in closing and confused-not at all confident that the the strategy-to-performance gap? Our findings business would ever deliver the performance were revealing and troubling its managers had forecast in its strategic plan. While the executives we surveyed compete Talk to almost any CEO, and you're likely to in very different product markets and geogra- hear similar frustrations. For despite the enor- phies, they share many concerns about plan- mous time and energy that goes into strategy ning and execution. Virtually all of them strug development at most companies, many have gle to produce the financial performance little to show for the effort. Our research sug- forecasts in their long-range plans. Further- gests that companies on average deliver only more, the processes they use to develop plans 63% of the financial performance their strate and monitor performance make it difficult to gies promise. Even worse, the causes of this discern whether the strategy to performance strategy-to-performance gap are all but invisi- gap stems from poor planning, poor execution, ble to top management. Leaders then pull the both, or neither. Specifically, we discovered: wrong levers in their attempts to turn around Companies rarely track performance against performance-pressing for better execution long-term plans. In our experience, less than when they actually need a better strategy, or 15% of companies make it a regular practice to opting to change direction when they really go back and compare the business's results should focus the organization on execution. with the performance forecast for each unit in The result wasted energy, lost time, and con- its prior years' strategic plans. As a result, top tinued underperformance managers can't easily know whether the pro- But, as our research also shows, a select jections that underlie their capital-investment group of high-performing companies have and portfolio-strategy decisions are in any way managed to close the strategy-to-performance predictive of actual performance. More im- gap through better planning and execution. portant, they risk embedding the same discon- These companies Barclays, Cisco Systems, nect between results and forecasts in their fu- Dow Chemical, 3M, and Roche, to name a ture investment decisions. Indeed, the fact few-develop realistic plans that are solidly that so few companies routinely monitor ac- grounded in the underlying economics of their tual versus planned performance may help ex- markets and then use the plans to drive execu- plain why so many companies seem to pour tion. Their disciplined planning and execution good money after bad-continuing to fund processes make it far less likely that they will losing strategies rather than searching for new face a shortfall in actual performance. And, if and better options. they do fall short, their processes enable them Multiyear results rarely meet projections. to discern the cause quickly and take corrective When companies do track performance rela- action. While these companies' practices are tive to projections over a number of years, broad in scope-ranging from unique forms of what commonly emerges is a picture one of planning to integrated processes for deploying our clients recently described as a series of "di- and tracking resources our experience sug- agonal venetian blinds," where each year's per- gests that they can be applied by any business formance projections, when viewed side by to help craft great plans and turn them into side, resemble venetian blinds hung diago- great performance nally. (See the exhibit "The Venetian Blinds of Business.") If things are going reasonably well, The Strategy-to-Performance Gap the starting point for each year's new "blind" In the fall of 2004, our firm, Marakon Associ- may be a bit higher than the prior year's start- ates, in collaboration with the Economist Intel- ing point, but rarely does performance match ligence Unit, surveyed senior executives from the prior year's projection. The obvious impli- 197 companies worldwide with sales exceeding cation: year after year of underperformance $500 million. We wanted to see how successful relative to plan. Where the Performance Goes This chart shows the average performance loss implied by the importance ratings that managers in our survey gave to specific breakdowns in the planning and execution process. Average 37% Performance Loss Hrvard Business Schod Publishing Corporation. All tighiste 63% Average Realized Performance 7.5% Inadequate or unavailable resources 5.2% Poorly communicated strategy 4.5% Actions required to execute not dearly defined 4.1% Unclear accountabilities for execution 3.7% Organizational silos and culture blocking execution 3.0% Inadequate performance monitoring 3.0% Inadequate consequences or rewards for failure or success 2.6% Poor senior leadership 1.9% Uncommitted leadership 0.7% Unapproved strategy 0.7% Other obstacles including inadequate skills and capabilities) Michael C. Mankins (mmankins marakon.com) is a managing partner in the San Francisco office of Marakon Associates, an international strategy consulting firm. He is also a coauthor of The Value Imperative Managing for Superior Shareholder Returns (Free Press, 1994). Richard Steele (rsteelamarakon.com) is a partner in the fim's New York office. less self-critical and less intellectually honest about its shortcomings. Consequently, it loses its capacity to perform. elaborate, management starts with a strategy it believes will generate a certain level of fi- nancial performance and value over time (100%, as noted in the exhibit). But, according to the executives we surveyed, the failure to have the right resources in the right place at the right time strips away some 7.5% of the strategy's potential value. Some 5.2% is lost to poor communications, 4.5% to poor action planning, 4.1% to blurred accountabilities, and so on. Of course, these estimates reflect the average experience of the executives we surveyed and may not be representative of every company or every strategy. Nonethe- less, they do highlight the issues managers need to focus on as they review their compa- nies' processes for planning and executing strategies. The Venetian Blinds of Business This graphic illustrates a dynamic com- projecting uninspiring results for the first mon to many companies. In January year and once again promising a fast rate 2001, management approves a strategic of performance improvement thereafter, plan (Plan 2001) that projects modest as shown by the second solid line (Plan performance for the first year and a high 2002). This, too, succeeds only partially, rate of performance thereafter, as shown so another plan is drawn up, and so on. in the first solid line. For beating the first the actual rate of performance improve year's projection, the unit management ment can be seen by joining the start is both commended and handsomely re- points of each plan (the dotted line). warded. A new plan is then prepared What emerges from our survey results is a sequence of events that goes something like this: Strategies are approved but poorly com- municated. This, in turn, makes the transla- tion of strategy into specific actions and re- source plans all but impossible. Lower levels in the organization don't know what they need to do, when they need to do it, or what resources will be required to deliver the per- formance senior management expects. Conse- quently, the expected results never material- ize. And because no one is held responsible for the shortfall, the cycle of underperfor- mance gets repeated, often for many years. Performance bottlenecks are frequently invisible to top management. The processes most companies use to develop plans, allocate resources, and track performance make it diffi- cult for top management to discem whether the strategy to performance gap stems from poor planning, poor execution, both, or nei- ther. Because so many plans incorporate overly ambitious projections, companies fre- quently write off performance shortfalls as just another hockey-stick forecast. And when plans are realistic and performance falls short, executives have few carly-warning signals. They often have no way of knowing whether critical actions were carried out as expected, resources were deployed on schedule, compet- itors responded as anticipated, and so on. Un- fortunately, without clear information on how and why performance is falling short, it is vir- tually impossible for top management to take appropriate corrective action. The strategy-to-performance gap fosters a culture of underperformance. In many com- panies, planning and execution breakdowns are reinforced-even magnified-by an insidious shift in culture. In our experience, 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 or- ganization that plans simply will not be ful filled. Then, as the expectation becomes expert ence, it becomes the norm that performance commitments won't be kept. So commitments cease to be binding promises with real conse quences. Rather than stretching to ensure that 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 en- hance performance. The organization becomes Closing the Strategy.to Performance Gap As significant as the strategy-to-performance gap is at most companies, management can close it. A number of high-performing compa- nies have found ways to realize more of their strategies' potential. Rather than focus on im- proving their planning and execution pro- cesses separately to close the gap, these com- panies work both sides of the equation, raising standards for both planning and execution si- multaneously and creating clear links be- tween them. Our research and experience in working with many of these companies suggests they follow seven rules that apply to planning and execution. Living by these rules enables them to objectively assess any performance shortfall and determine whether it stems from the strat- egy, the plan, the execution, or employees' ca- pabilities. And the same rules that allow them to spot problems early also help them prevent performance shortfalls in the first place. These rules may seem simple-even obvious-but when strictly and collectively observed, they can transform both the quality of a company's strategy and its ability to deliver results. Rule 1: Keep it simple, make it concrete. At most companies, strategy is a highly ab- stract concept-often confused with vision or aspiration-and is not something that can be easily communicated or translated into action But without a clear sense of where the com- pany is headed and why, lower levels in the or- ganization cannot put in place executable plans. In short, the link between strategy and performance can't be drawn because the strat- egy itself is not sufficiently concrete. To start off the planning and execution pro- cess on the right track, high-performing compa nies avoid long, drawn-out descriptions of lofty goals and instead stick to clear language de scribing their course of action. Bob Diamond, CEO of Barclays Capital, one of the fastest growing and best performing investment bank- ing operations in Europe, puts it this way: "We've been very clear about what we will and will not do. We knew we weren't going to go head-to-head with U.S. bulge bracket firms. We communicated that we wouldn't compete in this way and that we wouldn't play in unprofit- able segments within the equity markets but in- stead would invest to position ourselves for the curo, the burgeoning need for fixed income, and the end of Glass Steigel. By ensuring every one knew the strategy and how it was different, we've been able to spend more time on tasks that are key to executing this strategy." By being clear about what the strategy is and isn't, companies like Barclays keep every one headed in the same direction. More im- portant, they safeguard the performance their counterparts lose to ineffective communica- tions, their resource and action planning be- comes more effective and accountabilities are casier to specify. Rule 2: Debate assumptions, not forecasts. At many companies, a business unit's strategic plan is little more than a negotiated settle- ment-the result of careful bargaining with the corporate center over performance targets and financial forecasts. Planning, therefore, is largely a political process with unit manage- ment arguing for lower near-term profit pro- jections (to secure higher annual bonuses) and top management pressing for more long-term stretch (to satisfy the board of directors and other external constituents). Not surprisingly, the forecasts that emerge from these negotia- tions almost always understate what each business unit can deliver in the near term and overstate what can realistically be expected in the long-term-the hockey-stick charts with which CEOs are all too familiar. Even at companies where the planning process is isolated from the political concerns of performance evaluation and compensa- tion, the approach used to generate financial projections often has built-in biases. Indeed, financial forecasting frequently takes place in complete isolation from the marketing or strategy functions. A business unit's finance function prepares a highly detailed line-item forecast whose short-term assumptions may be realistic, if conservative, but whose long- term assumptions are largely uninformed. For example, revenue forecasts are typically based on crude estimates about average pricing, market growth, and market share. Projections of long-term costs and working capital re- quirements are based on an assumption about annual productivity gains-expedi- ently tied, perhaps, to some companywide ef- ficiency program. These forecasts are difficult Performance (return on capital) 2001 2002 2003 2004 25% 20% 15% 10% Publishing Corporation. All rights reserved actual performance 5% 04 4 2000 2001 2002 2003 2004 2005 2006 Turning Great Strategy into Great Performance Companies typically realize only about 60% of their strategies' potential value because of defects and breakdowns in planning and execution. By strictly following seven simple rules, you can get a lot more than that Turning Great Strategy into Great Performance by Michael C. Mankins and Richard Steele The Idea in Brief Most companies' strategies deliver only 63% of their promised financial value. Why? 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 How to avoid these errors? View strategic planning and execution as inextricably linked-then raise the bar for both simulta- neously. Start by applying seven decep- tively straightforward rules, including, keep- ing your strategy simple and concrete, making resource allocation decisions early in the planning process, and continuously monitoring performance as you roll out your strategic plan By following these rules, you reduce the likelihood of performance shortfalls. And even if your strategy still stumbles, you quickly determine whether the fault lies with the strategy itself, your plan for pursu- ing it, or the execution process. The payoff? You make the right midcourse correc tions-promptly. And as high-performing companies like Cisco Systems Dow Chemi- cal, and 3M have discovered, you boost your company's financial performance 60% to 100% The Idea in Practice Seven rules for successful strategy execution: Keep it simple. Avoid drawn-out descrip- Discuss resource deployments early. Chal- tions of lofty goals. Instead, clearly describe lenge business units about when they'll what your company will and won't do need new resources to execute their strat- Example: egy. By asking questions such as, "How fast Executives at European investment-bank can you deploy the new sales forceland "How quickly will competitors respond?" ing giant Barclays Capital stated they wouldn't compete with large US invest- you create more feasible forecasts and plans ment banks or in unprofitable equity- market segments. Instead, they'd position Identify priorities. Delivering planned per- Barclays for investors' burgeoning need for formance requires a few key actions taken foed income at the right time in the right way. Make strategic priorities explicit, so everyone Challenge assumptions. Ensure that the knows what to focus on assumptions underlying your long-term strategic plans reflect real market econom- . . Continuously monitor performance. Track ics and your organization's actual perfor real-time results against your plan, resetting mance relative to rivals! planning assumptions and reallocating re sources as needed You'll remedy flaws in Example Struggling conglomerate Tyco commis- your plan and its execution and avoid sioned cross-functional teams in each busi- confusing the two. ness unit to continuously analyze their mar- Develop execution ability. No strategy can kets profitability and their offerings, costs, be better than the people who must imple- and price positioning relative to competi- ment it. Make selection and development tors. Teams met with corporate executives of managers a priority. biweekly to discuss their findings. The re- Example vamped process generated more realistic Barclays top executive team takes responsi- plans and contributed to Tyco's dramatic turnaround bility for all hiring. Members vet each oth- ers potential hires and reward talented Speak the same language. Unit leaders newcomers for superior execution. And and corporate strategy,marketing, and fi- stars aren't penalized if their business enters nance teams must agree on a common new markets with lower initial returns. framework for assessing performance. For example, some high-performing compa- nies 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 profit- ability. By using the shared approach, exec- utives easily agree on financial projections. NICHTS RESERVED Three years ago, the leadership team at a major manufacturer spent months developing a new strategy for its European business. Over the prior half-decade, six new competitors had entered the market, each deploying the latest in low-cost manufacturing technology and slashing prices to gain market share. The per- formance of the European unit-once the crown jewel of the company's portfolio-had deteriorated to the point that top manage- ment was seriously considering divesting it. To turn around the operation, the unit's leadership team had recommended a bold new "solutions strategy"-one that would le- verage the business's installed base to fuel growth in after-market services and equip- ment financing. The financial forecasts were exciting-the strategy promised to restore the business's industry-leading returns and growth. Impressed, top management quickly approved the plan, agreeing to provide the unit with all the resources it needed to make the turnaround a reality. Today, however, the unit's performance is nowhere near what its management team had projected. Returns, while better than be fore, remain well below the company's cost of capital. The revenues and profits that manag. ers had expected from services and financing have not materialized, and the business's cost position still lags behind that of its major competitors. At the conclusion of a recent half-day review of the business's strategy and performance, the unit's general manager remained steadfast and vowed to press on. "It's all about execution," she declared. "The strategy we're pursuing is the right one. We're just not delivering the numbers. All we need to do is work harder, work smarter." The parent company's CEO was not so sure He wondered: Could the unit's lackluster per- formance have more to do with a mistaken strategy than poor execution? more impor tant, what should he do to get better perfor mance out of the unit? Should he do as the general manager insisted and stay the course- focusing the organization more intensely on The venetian blinds phenomenon creates a number of related problems. First, because the plan's financial forecasts are unreliable, senior management cannot confidently tie capital approval to strategic planning. Conse- quently, strategy development and resource allocation become decoupled, and the an nual operating plan (or budget) ends up driv- ing the company's long-term investments and strategy. Second, portfolio management gets derailed. Without credible financial forecasts, top management cannot know whether a par- ticular business is worth more to the com- pany and its shareholders than to potential buyers. As a result, businesses that destroy shareholder value stay in the portfolio too long (in the hope that their performance will eventually turn around), and value-creating businesses are starved for capital and other re- sources. Third, poor financial forecasts com- plicate communications with the investment community. Indeed, to avoid coming up short at the end of the quarter, the CFO and head of investor relations frequently impose a contingency or "safety margin" on top of the forecast produced by consolidating the business-unit plans. Because this 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 ana- lysts and investors. A lot of value is lost in translation. Given the poor quality of financial forecasts in most stra- tegic plans, it is probably not surprising that most companies fail to realize their strategies potential value. As we've mentioned, our sur- vey indicates that, on average, most strategies deliver only 63% of their potential financial performance. And more than one-third of the cxecutives surveyed placed the figure at less than 50%. Put differently, if management were to realize the full potential of its curren strategy, the increase in value could be as much as 60% to 100%! As illustrated in the exhibit "Where the Per formance Goes," the strategy to performance gap can be attributed to a combination of fac- tors, such as poorly formulated plans, misap- plied resources, breakdowns in communica- tion, and limited accountability for results. To execution-or should he encourage the leader- companies are at translating their strategies ship team to investigate new strategy options? into performance. Specifically, how effective If execution was the issue, what should he do are they at meeting the financial projections set to help the business improve its game? Or forth in their strategic plans? And when they should he just cut his losses and sell the busi- fall short, what are the most common causes, ness? He left the operating review frustrated and what actions are most effective in closing and confused-not at all confident that the the strategy-to-performance gap? Our findings business would ever deliver the performance were revealing and troubling its managers had forecast in its strategic plan. While the executives we surveyed compete Talk to almost any CEO, and you're likely to in very different product markets and geogra- hear similar frustrations. For despite the enor- phies, they share many concerns about plan- mous time and energy that goes into strategy ning and execution. Virtually all of them strug development at most companies, many have gle to produce the financial performance little to show for the effort. Our research sug- forecasts in their long-range plans. Further- gests that companies on average deliver only more, the processes they use to develop plans 63% of the financial performance their strate and monitor performance make it difficult to gies promise. Even worse, the causes of this discern whether the strategy to performance strategy-to-performance gap are all but invisi- gap stems from poor planning, poor execution, ble to top management. Leaders then pull the both, or neither. Specifically, we discovered: wrong levers in their attempts to turn around Companies rarely track performance against performance-pressing for better execution long-term plans. In our experience, less than when they actually need a better strategy, or 15% of companies make it a regular practice to opting to change direction when they really go back and compare the business's results should focus the organization on execution. with the performance forecast for each unit in The result wasted energy, lost time, and con- its prior years' strategic plans. As a result, top tinued underperformance managers can't easily know whether the pro- But, as our research also shows, a select jections that underlie their capital-investment group of high-performing companies have and portfolio-strategy decisions are in any way managed to close the strategy-to-performance predictive of actual performance. More im- gap through better planning and execution. portant, they risk embedding the same discon- These companies Barclays, Cisco Systems, nect between results and forecasts in their fu- Dow Chemical, 3M, and Roche, to name a ture investment decisions. Indeed, the fact few-develop realistic plans that are solidly that so few companies routinely monitor ac- grounded in the underlying economics of their tual versus planned performance may help ex- markets and then use the plans to drive execu- plain why so many companies seem to pour tion. Their disciplined planning and execution good money after bad-continuing to fund processes make it far less likely that they will losing strategies rather than searching for new face a shortfall in actual performance. And, if and better options. they do fall short, their processes enable them Multiyear results rarely meet projections. to discern the cause quickly and take corrective When companies do track performance rela- action. While these companies' practices are tive to projections over a number of years, broad in scope-ranging from unique forms of what commonly emerges is a picture one of planning to integrated processes for deploying our clients recently described as a series of "di- and tracking resources our experience sug- agonal venetian blinds," where each year's per- gests that they can be applied by any business formance projections, when viewed side by to help craft great plans and turn them into side, resemble venetian blinds hung diago- great performance nally. (See the exhibit "The Venetian Blinds of Business.") If things are going reasonably well, The Strategy-to-Performance Gap the starting point for each year's new "blind" In the fall of 2004, our firm, Marakon Associ- may be a bit higher than the prior year's start- ates, in collaboration with the Economist Intel- ing point, but rarely does performance match ligence Unit, surveyed senior executives from the prior year's projection. The obvious impli- 197 companies worldwide with sales exceeding cation: year after year of underperformance $500 million. We wanted to see how successful relative to plan. Where the Performance Goes This chart shows the average performance loss implied by the importance ratings that managers in our survey gave to specific breakdowns in the planning and execution process. Average 37% Performance Loss Hrvard Business Schod Publishing Corporation. All tighiste 63% Average Realized Performance 7.5% Inadequate or unavailable resources 5.2% Poorly communicated strategy 4.5% Actions required to execute not dearly defined 4.1% Unclear accountabilities for execution 3.7% Organizational silos and culture blocking execution 3.0% Inadequate performance monitoring 3.0% Inadequate consequences or rewards for failure or success 2.6% Poor senior leadership 1.9% Uncommitted leadership 0.7% Unapproved strategy 0.7% Other obstacles including inadequate skills and capabilities) Michael C. Mankins (mmankins marakon.com) is a managing partner in the San Francisco office of Marakon Associates, an international strategy consulting firm. He is also a coauthor of The Value Imperative Managing for Superior Shareholder Returns (Free Press, 1994). Richard Steele (rsteelamarakon.com) is a partner in the fim's New York office. less self-critical and less intellectually honest about its shortcomings. Consequently, it loses its capacity to perform. elaborate, management starts with a strategy it believes will generate a certain level of fi- nancial performance and value over time (100%, as noted in the exhibit). But, according to the executives we surveyed, the failure to have the right resources in the right place at the right time strips away some 7.5% of the strategy's potential value. Some 5.2% is lost to poor communications, 4.5% to poor action planning, 4.1% to blurred accountabilities, and so on. Of course, these estimates reflect the average experience of the executives we surveyed and may not be representative of every company or every strategy. Nonethe- less, they do highlight the issues managers need to focus on as they review their compa- nies' processes for planning and executing strategies. The Venetian Blinds of Business This graphic illustrates a dynamic com- projecting uninspiring results for the first mon to many companies. In January year and once again promising a fast rate 2001, management approves a strategic of performance improvement thereafter, plan (Plan 2001) that projects modest as shown by the second solid line (Plan performance for the first year and a high 2002). This, too, succeeds only partially, rate of performance thereafter, as shown so another plan is drawn up, and so on. in the first solid line. For beating the first the actual rate of performance improve year's projection, the unit management ment can be seen by joining the start is both commended and handsomely re- points of each plan (the dotted line). warded. A new plan is then prepared What emerges from our survey results is a sequence of events that goes something like this: Strategies are approved but poorly com- municated. This, in turn, makes the transla- tion of strategy into specific actions and re- source plans all but impossible. Lower levels in the organization don't know what they need to do, when they need to do it, or what resources will be required to deliver the per- formance senior management expects. Conse- quently, the expected results never material- ize. And because no one is held responsible for the shortfall, the cycle of underperfor- mance gets repeated, often for many years. Performance bottlenecks are frequently invisible to top management. The processes most companies use to develop plans, allocate resources, and track performance make it diffi- cult for top management to discem whether the strategy to performance gap stems from poor planning, poor execution, both, or nei- ther. Because so many plans incorporate overly ambitious projections, companies fre- quently write off performance shortfalls as just another hockey-stick forecast. And when plans are realistic and performance falls short, executives have few carly-warning signals. They often have no way of knowing whether critical actions were carried out as expected, resources were deployed on schedule, compet- itors responded as anticipated, and so on. Un- fortunately, without clear information on how and why performance is falling short, it is vir- tually impossible for top management to take appropriate corrective action. The strategy-to-performance gap fosters a culture of underperformance. In many com- panies, planning and execution breakdowns are reinforced-even magnified-by an insidious shift in culture. In our experience, 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 or- ganization that plans simply will not be ful filled. Then, as the expectation becomes expert ence, it becomes the norm that performance commitments won't be kept. So commitments cease to be binding promises with real conse quences. Rather than stretching to ensure that 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 en- hance performance. The organization becomes Closing the Strategy.to Performance Gap As significant as the strategy-to-performance gap is at most companies, management can close it. A number of high-performing compa- nies have found ways to realize more of their strategies' potential. Rather than focus on im- proving their planning and execution pro- cesses separately to close the gap, these com- panies work both sides of the equation, raising standards for both planning and execution si- multaneously and creating clear links be- tween them. Our research and experience in working with many of these companies suggests they follow seven rules that apply to planning and execution. Living by these rules enables them to objectively assess any performance shortfall and determine whether it stems from the strat- egy, the plan, the execution, or employees' ca- pabilities. And the same rules that allow them to spot problems early also help them prevent performance shortfalls in the first place. These rules may seem simple-even obvious-but when strictly and collectively observed, they can transform both the quality of a company's strategy and its ability to deliver results. Rule 1: Keep it simple, make it concrete. At most companies, strategy is a highly ab- stract concept-often confused with vision or aspiration-and is not something that can be easily communicated or translated into action But without a clear sense of where the com- pany is headed and why, lower levels in the or- ganization cannot put in place executable plans. In short, the link between strategy and performance can't be drawn because the strat- egy itself is not sufficiently concrete. To start off the planning and execution pro- cess on the right track, high-performing compa nies avoid long, drawn-out descriptions of lofty goals and instead stick to clear language de scribing their course of action. Bob Diamond, CEO of Barclays Capital, one of the fastest growing and best performing investment bank- ing operations in Europe, puts it this way: "We've been very clear about what we will and will not do. We knew we weren't going to go head-to-head with U.S. bulge bracket firms. We communicated that we wouldn't compete in this way and that we wouldn't play in unprofit- able segments within the equity markets but in- stead would invest to position ourselves for the curo, the burgeoning need for fixed income, and the end of Glass Steigel. By ensuring every one knew the strategy and how it was different, we've been able to spend more time on tasks that are key to executing this strategy." By being clear about what the strategy is and isn't, companies like Barclays keep every one headed in the same direction. More im- portant, they safeguard the performance their counterparts lose to ineffective communica- tions, their resource and action planning be- comes more effective and accountabilities are casier to specify. Rule 2: Debate assumptions, not forecasts. At many companies, a business unit's strategic plan is little more than a negotiated settle- ment-the result of careful bargaining with the corporate center over performance targets and financial forecasts. Planning, therefore, is largely a political process with unit manage- ment arguing for lower near-term profit pro- jections (to secure higher annual bonuses) and top management pressing for more long-term stretch (to satisfy the board of directors and other external constituents). Not surprisingly, the forecasts that emerge from these negotia- tions almost always understate what each business unit can deliver in the near term and overstate what can realistically be expected in the long-term-the hockey-stick charts with which CEOs are all too familiar. Even at companies where the planning process is isolated from the political concerns of performance evaluation and compensa- tion, the approach used to generate financial projections often has built-in biases. Indeed, financial forecasting frequently takes place in complete isolation from the marketing or strategy functions. A business unit's finance function prepares a highly detailed line-item forecast whose short-term assumptions may be realistic, if conservative, but whose long- term assumptions are largely uninformed. For example, revenue forecasts are typically based on crude estimates about average pricing, market growth, and market share. Projections of long-term costs and working capital re- quirements are based on an assumption about annual productivity gains-expedi- ently tied, perhaps, to some companywide ef- ficiency program. These forecasts are difficult Performance (return on capital) 2001 2002 2003 2004 25% 20% 15% 10% Publishing Corporation. All rights reserved actual performance 5% 04 4 2000 2001 2002 2003 2004 2005 2006