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Friday, August 16, 2013

The Strategy-Execution Gap, Part 1

Lately I have been thinking about the challenge executives face in turning strategy into effective execution. Over the years I have read numerous reports on studies and surveys of executives who routinely list "failure to execute" as the leading cause of why the company underperformed. From my experience I am inclined to think this is true and happens a lot. And I've certainly seen companies succeed brilliantly with mediocre strategies that were effectively executed.

While there are undoubtedly causes specific to a given company and why it failed to properly execute a strategy and reap the rewards, with anything that is widespread like this phenomenon, there must be some common causes at the root too. Whenever I look for such underlying causes I immediately start with basic principles of management that are of a more generic nature, things that are likely to be common in most organizations.

One of the most common practices of management is to divide to conquer. In other words in order to manage a large and/or complex business we will break it into functions, departments, business units, regions, etc. in order to more effectively manage the many pieces. And then of course we have to have some measurements in order to evaluate and control what each function, level, department, etc. does. Measurements are one of the great tools of management because not only do they help tell us how we are doing, they also drive what gets done and how it gets done. I believe the old saying is true: "tell me how you measure me, and I will tell you how I will behave."

While every company has global measures, like Net Profit and ROI, they tend to have many more measures that are used to evaluate and drive the performance of the individual parts of the business. Since individual departments can't fully control the global profit and ROI measures (e.g. manufacturing can produce great products but if sales can't sell them profitably, the company won't make money), these local measures are needed to evaluate the performance of the local area and will tend to be the more important measures for those managers and staff.

The beauty of this breakdown is obvious as it enables managers to influence, control, and direct a far bigger operation than one could supervise directly. Unfortunately the very potency of such a powerful mechanism means that it can also do great damage to if not used carefully. And this is one of the main ways I think strategy can go off the rails when it comes to execution. If the local measures are not closely tied to the strategy, and designed in a way to produce the needed collaboration between departments, functions, etc. the organization can quickly find itself working at cross-purposes with itself. In my experience this mis-alignment happens often and undermines the organization's ability to reach its goals, though often in ways that are not obvious or readily recognized by management.

Here are some examples of how some common local measures contribute to profits being lost:
  • Manufacturing is often measured according to costs using some form of efficiency measure. This drives each department and plants in general to produce goods in large batches to maximize these measures. But large batches delay the production of other items and many companies find themselves with surpluses of some items and shortages of others--increasing working capital, and lowering sales. 
  • In many companies purchasing is driven to buy items at the lowest cost using a measure like purchase-price variance. While everyone wants to buy their parts and supplies at a low cost this can lead to buying from less reliable or lower quality suppliers, or to purchasing in large batches (to get a lower unit cost), resulting in production problems or even late shipments, and elevated inventory levels or even write-offs, respectively.
  • In one of my former employers we measured manufacturing engineers on cost savings generated. So they used their powerful knowledge to come up with ways to run more parts through a given machine faster, often investing thousands in new tooling. Often though these were not bottlenecks and the neither produced more throughput, nor resulted in laying anyone off, they were just cost-savings on paper--but they sure looked good on their local measures.
  • Many consumer goods companies motivate their business units using quarterly sales targets. This creates the incentive to sell at discounts in order to achieve the goal, and the retailer to wait and stock up on goods when the end of the quarter sale rolls around, undermining full-price sales. 
  • In software design and other types of project environments, it is common to measure people on  how well they deliver on their individual work tasks within a project. This naturally causes people to provide lengthy estimates on their tasks in order to be reliable in the face of the inherent uncertainty of project work. And then, knowing that if they deliver ahead of time they will be forced to cut their estimates the next time, there is a disincentive to finish early--no wonder projects take so long!
  • Of course the same thing happens with budgets. Budgets are used almost universally in companies to try to control spending--certainly a good idea. However since how much money one needs for the year is an inherently uncertain thing, everyone will pad their estimates, inflating the budget, and then spend it because if they don't the will get less the next year.
There are many more examples one can bring, but I think the connection is clear--local objectives and their supporting measurements often result in actions that are counter-productive to the company's performance. If they are not carefully analyzed and aligned both to the strategy and to each department/function's role in supporting the strategy, can readily undermine the execution of any strategy, no matter how good it may be. I think this is a major contributor to why many companies fail to realize the promise of their strategies and underperform expectations.

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