The Line-of-Sight – Two Numbers

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 comp any 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.

• Leadership more focused on empowering teams for creativity

• Flatter structure, more cross-functional to accelerate problem resolution in the face of new challenges

• Talent: more electrical engineers, battery experts, materials specialists

H-D rightly understood that execution and strategy must be in sync. In fact, they did not choose one strategy over the other: they intend to maximize the remaining potential of the traditional large bike market, while building market leadership in electric bikes; but they identified the risk of pursuing two very different strategies with a single execution model. What are you trying to do and how well are you doing it? Not every company needs to spin off some of their operations to succeed. But every company CEO should be crystal clear about their goals and able to determine whether they are executing them well. One Line-of-Sight client is a large family office and wealth management firm. Employees’ morale was low, and the firm struggled to reach its goals for assets under management. After running a Health Scan on their operations, they realized they were in fact pursuing two very different segments with a single operating model: on one end, high net-worth individual requiring individual touch and a delivery model based on customer intimacy, and on the other end, mid-market clients who needed to be serviced at scale to be profitable. The mix of high-service and phone-based support was inadequate for either segment, costing both sales and profit. After a comprehensive review of their execution capabilities, they set up two delivery models in two divisions for their two segments: a customer-intimacy based model to serve clients with very high investable income, and an operational excellence-based model for mid-market. As a result, the client increased their retention in both segments, and they doubled their assets under management despite the pandemic. Where to start If you feel that your execution capabilities and your strategy are increasingly at odds, run a health scan to evaluate how clearly you have articulated your strategy (to yourself, to your executive team, and to your employees), and how much your execution capabilities are enabling, or preventing success. Are employees focusing on the right things, and are you helping them do so? It’s ok to develop new goals when circumstances demand it, but goals and execution should remain in lockstep. If you want to evaluate how much execution tax you’re paying due to misalignment with your objectives, give us a call. We can discuss how other companies have done it, and how you can do it too.