Editor’s Note: This article is an excerpt from the full Integrated Strategy Execution (ISE) Executive Briefing report, available for free download from Flevy here.
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Is poor execution inevitable?
The short answer is no, but let’s explore this further. A recent Harvard Business Review article highlighted that over 70% of organisations admit they are failing at strategy execution and it is the #1 reason behind Global 500 CEO turnover (according to a Ram Charan study). In spite of these results, strategy execution is consistently listed as a top priority for CEOs within the annual Conference Board survey. Given its importance, is a paradox that poor execution still plagues the majority of organizations.
The good news is that more recent research, including the 2012 study by the Business Research and Analysis Group covering 252 large organisations, indicates that more organisations are being successful at execution. Critically, a blueprint for an Integrated Strategy Execution (ISE) Business System that can be rapidly and effectively replicated to dramatically improve execution results is emerging.
Why do the best so spectacularly and consistently out-perform the rest?
When we think of great performers, we are tempted to think of new-tech leaders, like Apple, Google, Facebook or Amazon. Perhaps it is because of their rapid growth, which has led them, over last 10 years, to become ubiquitous and immensely valuable. However, if you take a longer term view, the jury is still out on whether these organisations will continue to out-execute their competition. They have either not been in existence for long enough to demonstrate their adaptability to fundamental shifts in the market and environmental conditions, or in the case of Apple, haven’t always been this successful. Whilst clearly still benefiting from product innovation, it’s a matter of speculation whether Apple will continue to generate the same level of shareholder returns over the next two decades as it has under Steve Jobs for the last 10. It wasn’t so long ago that Microsoft, with its Windows monopoly, seemed unassailable, but it is now struggling to keep up with new rivals.
Maintaining exceptional long term performance over multiple decades demands two key capabilities: the ability to adapt to changing circumstances; and the ability to systematically and consistently reinvent business models. Innovation cycles are continuing to compress – compare the 70 years it took for telephones to reach 40% adoption in the US market with the 10 years it has taken smart phones to achieve the same target – and the rate of change is continuing to increase. There is therefore a huge premium, not to mention a basic survival requirement (witness Kodak, GEC, Saab and Borders), in being able to pivot strategy quickly and execute consistently.
A few remarkable organisations have clearly demonstrated an ability to consistently out-execute their peers over multiple decades. One of these is the Danaher Corporation. Although not as well-known as other S&P companies like Apple, this $20Bn US industrial conglomerate is one of the world’s best long term performers. Since their inception as DMG Inc. in 1969, (the company was renamed Danaher in 1984), Danaher have consistently out-performed the S&P index over 30 years, successfully integrating over 400 acquisitions along the way.
With a portfolio of nearly 600 subsidiary companies that manufacture amongst other things, engine brakes for trucks, diagnostic instruments and dental braces, Danaher attributes its success to an integrated strategy execution system that it calls the Danaher Business System (DBS). Lawrence Culp, who served as the company’s CEO for the past two decades described their DBS as “the most valuable asset we have, even though it doesn’t appear on the balance sheet.” Borrowing heavily from the Toyota Production System, the DBS builds on the lean production philosophy by integrating additional tools such as Hoshin Kanri for strategy deployment and systematic ideation, to create a holistic “execution” system.
Whilst Danaher are understandably and justifiably proud of their business system, there is clear evidence that it both can, and is being, replicated within a reasonable timeframe. This is evidenced in the chart below, which shows the relative performance in terms of shareholder returns of two other S&P stocks relative to the S&P large cap index.
Belden and Idex are large conglomerates manufacturing a range of industrial and consumer products. Revealingly, both have appointed ex-Danaher senior executives as CEOs (who have quickly moved to create equivalents of the DBS) and both have consistently achieved stellar results over the last decade. Other exceptional organisations with similar business systems include the Virginia Mason and Thedacare hospital systems, Southwest Airlines, United Technologies and Toyota Motors, all of whom have also demonstrated market beating performance over multiple decades.
Our conclusion is that the “secret sauce” behind the success of Danaher, Belden and Idex, as well as the other exceptional organisations listed, is their commitment to investing in the creation of an integrated operating system that they use religiously to drive execution of strategy and manage daily operations.
In essence, these integrated operating systems – increasingly being referred to as an Integrated Strategy Execution (ISE) Business System – integrate the ‘hard’ stuff (e.g management processes) with the ‘soft’ stuff (e.g. cultural norms) to successfully manage large scale transformation and make it stick. To clarify further, management processes include the methodologies that organisations use to set and deploy goals and targets; execute and monitor the resulting initiatives; manage and improve daily operations; adapt strategy and execution to changing circumstances; as well as the different tools, methodologies and technology that enable those processes. Conversely, the ‘soft’ stuff includes organisational guiding principles, values, behaviours and underlying cultural norms. An ISE Business System successfully combines the two to ensure successful transformation.
Why do the majority of organizations struggle with execution?
To understand how an ISE Business System helps large organisations to execute better, it’s worth first considering what happens in organisations that take a more traditional approach to strategy execution.
Traditionally, the majority of large organisations operate an annual planning calendar that goes something like this. Somewhere, towards the end of the second quarter, top management retreat to an off-site location for a few days to contemplate the future. This retreat is typically part of a strategic planning process which scans the environment, considers strengths, weaknesses, opportunities and threats and results in reasonably broad consensus, usually captured in a PowerPoint deck, on the general direction the business should be heading and the main things it needs to do to get there. Upon returning, the executive team typically then sets about creating more detailed strategies and plans for their individual units/functions (usually involving a similar process with the next level of management) based on the high level intent/vision/building blocks “agreed” at executive level.
Download the full Integrated Strategy Execution (ISE) Executive Briefing report here.