Executives say that they lose 40% of their strategy’s potential value to breakdowns in execution. However, this strategy-to-performance gap is rarely the result of shortcomings in implementation; it happens because the plans are flawed from the start.
Too many companies still follow a “Plan-then-Do” approach to strategy: Organizations work tirelessly to create their best forecasts about the future market and competitive landscape. Leadership then specifies a plan that it believes will position the company to win in the predicted future – this approach may have made sense when it was first popularized by GE and others in the 1970s. But in today’s fast-paced world the “cone of uncertainty”, surrounding future market and competitive conditions, is too great for companies to prescribe every element of a multiyear strategy. The Plan-then-Do approach is obsolete – even dangerous.
Today’s successful companies close the strategy-to-performance gap with a new strategy approach best described as “Decide-Do/Refine-Do”. This agile, test-and-learn approach, is better suited to today’s tumultuous environment. It also helps bridge the chasms that exists at so many companies between great strategy, great execution, and great performance.
Here are five lessons gleaned from what some companies are doing:
Treat strategy as evergreen. The best companies see strategy less as a plan and more as a direction & agenda of decisions. In effect, a company’s strategy is the sum of decisions it effectively makes and executes over time. This mindset focuses leadership on making near-term decisions with the longer-term destination in mind, but it doesn’t presume that there is only one path from here to there. Strategy development should not be tied to a planning calendar; it is a continuous process.
Value flexibility. When the road is obstacle-free, the value of maneuverability is low. Leadership is better off selecting a single path forward, even if it limits the company’s ability to steer around potential roadblocks. In today’s world, however, flexibility matters.
The rise and fall of Webvan illustrates the cost of an inflexible strategy. In 1996, Webvan was the world’s first online grocery delivery business. It was a time when internet usage was growing fast. They promised to deliver the best quality groceries at the cheapest price at the click of a button. The strategy required massive capital investment in a nationwide system of distribution centers with robotic stock-picking equipment. To justify the investment, Webvan made bold forecasts of future usage, order sizes and costs. There were no reliable proxies to use for creating this forecast. Any deviation from management’s forecast meant failure, regardless of how effectively the strategy was executed. Unfortunately, usage turned out to be far lower than expected, order sizes much smaller, and capital costs far higher. Webvan was forced to cease operations by 2001.
Think of strategy as a portfolio of options, not bonds. The traditional plan-then-do model treats the value of any strategy like a bond. Management forecasts the future coupon payments (or cash flows) associated with various strategies and then selects the one that has the highest discounted value. When volatility is high, however, strategic decisions should be treated more like call options. Leadership decides whether the small up-front investment is worth making as a call on potential profits. As long as the option appears “in the money,” management can continue to invest; the moment the strategy becomes “out of the money,” leadership can stop investing, cut its losses, and move on. This approach allows a company to double down on promising ventures and build them into profitable new businesses.
Create response mechanisms. In a world where the best laid plans can go awry, companies that react quickly and effectively come out on top. Rigorous contingency planning is as important as disciplined action planning. It requires that you identify the most important known unknowns associated with your company’s strategy, specify concrete steps to adjust course if you see an unplanned change in the external environment, and put in place mechanisms to continuously monitor market competitive conditions.
Test and learn, then test some more. Agile planning can be thought of as a series of time-boxed sprints—or micro-battles, with the objective of moving forward, testing the waters, learning, and refining the strategy based on the results. Most companies do not take advantage of their opportunities to test and learn. They go for a big bang — and risk a big bust — when a series of smaller, more productive bangs could generate better results.
The team at Actuate Business Consulting, a knowledge based management consulting firm in India, believes, great performance requires both great strategy and great execution – but often poor execution is used as an excuse for flawed strategy. Today’s leaders need a new approach to strategy development. They can no longer define a plan over many years and then just do. Success requires identifying the next few steps along a broadly defined strategic path and then learning as well as refining along the way. This approach makes execution easier and increases the odds of delivering great results.