Bridging the Strategy-to-Performance Gap

We all seem to understand that bad execution taxes the business, literally and figuratively. But do you know by how much? A twenty-year-old article in the Harvard Business Review estimates that poor execution leads to underperformance of between 60% and 100%—and this is just the direct impact. In the long term, it creates a permanent and devastating culture of poor performance. Though the research focuses on large companies, growth-stage founders can learn from these findings to improve their own company’s performance.

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I read a lot of articles about leadership and execution. Every once in a while I come across one that reminds us of the very steep price we pay when we execute poorly.

One of the most compelling is a piece in the July 2005 issue of Harvard Business Review, entitled “Turning Great Strategy into Great Performance”. What I like about this article, and what sets it apart, is its broad approach and its attempt to quantify the gap between strategy and performance. While the existing literature offers numerous case studies spotlighting individual challenges, this article is the only one I’ve found that systematically explores execution across varied industries and regions. The authors not only pinpoint universally applicable causes but also assign hard numbers to the cost of poor execution.

The money shot from the article is this:

The prize for 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. Companies that create tight links between their strategies, their plans, and, ultimately, their performance often experience a cultural multiplier effect. Over time, as they turn their strategies into great performance, leaders in these organizations become much more confident in their own capabilities and much more willing to make the stretch commitments that inspire and transform companies.

I think most leaders intellectually understand that execution is important. But sometimes it takes data, like a cold shower, to wake us up and say “I really need to do something about this.” And if that 60-100% figure doesn’t light a fire in your belly, maybe this will:

In many companies, 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 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 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 enhance performance. The organization becomes less self-critical and less intellectually honest about its shortcomings. Consequently, it loses its capacity to perform.

Wow.

You would think that given the glaring benefits of effective strategy implementation, companies would develop the competency to do it well. This turns out not to be the case:

Virtually all of [the businesses we studied, across industries and geographies,] struggle to produce the financial performance forecasts in their long-range plans. Furthermore, the processes they use to develop plans and monitor performance make it difficult to discern whether the strategy-to-performance gap stems from poor planning, poor execution, both, or neither.

The authors diagnose the strategy-to-performance gap by five common symptoms:

• Companies rarely track performance against long-term plans
• Multiyear results rarely meet projections
• Most of the value is lost in translation
• Performance bottlenecks are often invisible to management
• Over the long term, failure to execute creates a culture of underperformance

And they offer the following advice:

• Keep the strategy simple so that action can be concrete
• Debate assumptions, not forecasts
• Use a rigorous framework for analysis, with common terms that everyone understands
• Discuss resources early on
• Be crystal clear about priorities
• Continuously monitor performance
• Reward and develop execution capabilities

These recommendations are excellent, and consistent with how I’ve operated in every company I’ve led. There is more in the article in terms of what these challenges feel like for executives that is interesting, but not critical reading. What’s important is understanding the size of the prize.

Insights for smaller companies

The data in this article comes from a survey of senior executives from 197 companies worldwide with sales exceeding $500 million. These are obviously large companies whose workforces surely number in the thousands. How relevant are the findings for smaller companies, though?

Very relevant, actually. Though smaller companies—whether they have $10 million or $100 million in sales—have inherently different advantages and challenges, there is plenty they can learn from this study.

The good news for smaller companies is that, simply because they are smaller, they don’t face the severe coordination problems their larger counterparts do. Strategy by its nature requires broad alignment across a business. As the authors of this article illustrate, that is easier said than done. Startups and scaleups have the advantage of working in tighter teams where regular contact is the rule. If the founders and leadership team are focused, fewer gears need to turn to get the company to move.

Unfortunately, that’s generally where the advantages end. Smaller companies tend to face two significant impediments to disciplined strategy implementation.

Lack of experience

Developing and implementing strategy—particularly strategy that is transformational—is not an everyday experience. Even under ideal circumstances, operating under uncertainty, building and transforming teams, making the right investments in the right people at the right time (especially when funds are limited) is challenging. Many founders and senior leaders don’t have this experience.

Speed, size, and maturity of the business

In any business, people tend to gravitate toward doing rather than planning. The urgency of daily work is more concrete and ever-present. This is especially true for smaller, rapidly scaling businesses. In this context, the formality of planning and goal setting and the discipline of tracking business KPIs can feel like an extravagance. Even founders and leaders who know they should be doing it tend to devote insufficient time to it.

And yet, at some point the business must mature. Small businesses are like teenagers: they need constant feeding, they are easily distracted, and they don’t always respond in predictable ways or make wise choices. Getting past this “adolescent” phase means that founders and leaders need to start working ON the business as opposed to IN the business. It is simply impossible to efficiently scale a business without doing this, especially if you are aiming for an exit.

Mind the gap

Recognizing that there is a strategy-performance gap is the first step to addressing it. Fortunately, in smaller companies, poor execution is pretty easy to spot, even if you don’t have metrics:

• Missed deadlines: Consistently failing to meet goals and targets
• Unsatisfying financial performance: Revenues not growing as expected, or costs that rise faster than revenue
• The cash burn that won’t stop burning: At some point you need to turn a profit
• Declining employee morale: Flagging motivation, bickering, burnout, turnover—you’ll know this is happening
• Customer challenges: Fewer orders, declining customer satisfaction
• Harder to get things done: Operating the business is increasingly difficult, and the only solution seems to be adding more people
• Your own personal burnout: Does it feel like the business simply won’t run without your personal involvement?

By virtue of their size, smaller companies can’t call on internal resources to help out. Founders must rely on their investors’ experience, find advisors who’ve operated through similar challenges, or self-educate through publicly available resources.

Conclusion

If executing well can potentially double performance in large companies, there is every reason to believe the same is possible in smaller ones. The prize is at least as great, and the cost of poor execution is even steeper.

I’ve written elsewhere about how founders can overcome challenges to execution—planning under conditions of uncertainty, gaining alignment with the team, setting the right goals and measuring performance. But I can’t emphasize enough how important it is to face up to them. While early investors may be enamored by a company’s vision, subsequent ones seek tangible evidence of a well-oiled machine that seamlessly transforms ideas into actions. The better that machine performs, the better the exit.