The Two Numbers on Every Executive’s Mind
Today’s blog will be brief. Today, we are looking straight at reality. We are considering the two numbers that summarize the plight of most leaders: 90% and 95%.
Bad and Not Getting Better
In 2005, famed Harvard researchers Robert Kaplan and David Norton published a groundbreaking article on strategy.
The opening salvo of their research was a sobering number: out of nearly 2,000 large corporations round the world, 90% of them failed to achieve their strategic targets. Worse, the vast majority of them failed to achieve profitable growth - they did not grow enough to earn their cost of capital.
You may think that the state of business has improved since then. It has not. In 2013, McKinsey considered how companies generate economic profit. The landscape it revealed was as dire as when Kaplan and Norton published their paper. McKinsey found that 60% of companies in the “big middle” of the economic profit curve generated very little profit: only $29 billion. Most of the profit was created by the 20% of companies in the top quintile: a whopping $677 billion, 70x more than the middle. The bottom 20% of companies were destroying a staggering $411 billion of profit.
The Fastest Way to Destroy Value
Why does the vast majority of companies fail to meet their goals and grow? That is where the second number comes in. Kaplan and Norton found out that the single biggest factor to determine whether the strategy will be successful is obvious: the entire company must be aware of the strategy.
In their own words, “If the employees who are closest to customers and who operate processes that create value are unaware of the strategy, they surely cannot help the organization implement it effectively.”
Their research revealed that 95% of a company’s employees were unaware of, or did not understand, its strategy.
Here too, the number has barely budged since their article. In fact, The Predictive Index’s most recent CEO survey shows that in 2022 less than 1 in 2 companies have a business strategy to start with. The number has steadily eroded: it was 66% in 2020 and 76% in 2021, when the pandemic forced companies to be surgically focused on survival and adaptation strategies.
The absence of strategy in most companies means that employees are left on their own devices when it comes to figuring out on which basis to make key decisions.
How Do You Become a Member of the Club?
… The elite club of companies that achieve their objectives and create more value than they consume, that is.
The antidote to destroying value is simple. As Kaplan and Norton summarize with simplicity: “The goal is to make strategy everyone’s job.”
In small and medium-sized businesses, that means taking simple actions:
- Documenting the strategy, you are pursuing; if that strategy is in the head of the founder or the CEO, it is just a matter of writing it down and setting clearly stated objectives.
- Communicating this strategy to everyone, often: setting up town halls to share it formally and providing regular updates at every opportunity.
- As leaders, practicing “management by wandering around” to catch employees “in the act of doing something good” to reinforce the good behaviors in real time and being available to employees who have questions or suggestions about the strategy.
- Focusing dashboards and metrics on the outcomes that measure your execution.
- Training and developing your people to give them the tools they need to successfully perform the tasks that make the strategy happen.
Where to start
When we intervene with CEOs to improve their strategy execution, we first assess how well their current strategy is understood in the organization. We use the Line-of-Sight platform to reach out to every employee and evaluate what they think the strategy is - we call it Strategic Understanding. We also evaluate the “execution health” of the company in the four other dimensions that matter:
- How is the leadership perceived to lead execution?
- How relevant are metrics for guiding people in their daily decisions?
- How related are daily activities to the strategy, and how does the structure make it easy to perform them?
- How well is talent recruited and developed to directly support the strategy?
The Line-of-Sight data identifies where execution capabilities are the most vulnerable, and we develop action plans that can focus on these areas only, leaving alone the parts of the organization that are already humming.
If you want to evaluate how much execution tax the lack of strategic understanding by employees cost you, give us a call. We can discuss how other companies have eliminated that tax, and how you can do it too.