This article originally appeared on HBR.org.
Executives say that they lose 40% of their strategy’s potential value to breakdowns in execution. In our experience at Bain & Company, however, this strategy-to-performance gap is rarely the result of shortcomings in implementation; it is because the plans are flawed from the start.
Too many companies still follow a “Plan-then-Do” approach to strategy: The organization works tirelessly to create its best forecasts about the future market and competitive landscape. Leadership then specifies a plan that it believes will position the company to win in this predicted future. This approach may have made sense when first popularized by GE and others in the 1970s, but in today’s fast-paced world, the “cone of uncertainty” surrounding future market and competitive conditions is too great for companies to prescribe every element of a multiyear strategy. The Plan-then-Do approach is obsolete—even dangerous.
Today’s successful companies close the strategy-to-performance gap with a new strategy approach best described as “Decide-Do/Refine-Do”. This agile, test-and-learn approach is better suited to today’s tumultuous environment. It also helps bridge the chasms that exists at so many companies between great strategy, great execution, and great performance.
Here are five lessons we’ve gleaned from what we see the best companies doing:
Treat strategy as evergreen. The best companies see strategy less as a plan and more as a direction and agenda of decisions. In effect, a company’s strategy is the sum of decisions it effectively makes and executes over time. This mindset focuses leadership on making near-term decisions with the longer-term destination in mind, but it doesn’t presume that there is only one path from here to there.
Take Dell Technologies, for example. Following the company’s go-private transaction in October 2013, Dell put in place new models for strategy development, resource allocation, and performance management. Instead of formulating detailed, long-term financial plans, executives at Dell now align around a common performance ambition—a cash flow vector consistent with growing the company’s intrinsic value faster than competitors. Executives then delineate a multiyear outlook for each of Dell’s businesses, capturing the current performance trajectory of the business given the decisions management has made to date. Finally, the team defines a strategy agenda comprising the highest value at stake and most urgent issues that leadership must address to close the gap between its ambition and Dell’s current trajectory.
Dell’s executive leadership team focuses on systematically addressing the issues on the company’s strategy agenda. Once they address an issue and make a decision, they allocate the resources needed and turn to the next issue on the agenda. Strategy development at Dell is no longer a batch process tied to some planning calendar; it is a continuous process.
Value flexibility. When the road is obstacle-free, the value of maneuverability is low. Leadership is better off selecting a single path forward, even if it limits the company’s ability to steer around potential roadblocks. In today’s world, however, flexibility matters.
The rise and fall of Webvan illustrates the cost of an inflexible strategy. Internet usage was growing fast when the world’s first online grocery delivery business hit the scene in 1996. Webvan promised to deliver the best quality groceries at the cheapest price by the click of a button. The strategy required a massive capital investment in a nationwide system of distribution centers with robotic stock-picking equipment. To justify the investment, Webvan made a bold forecast of future usage, order sizes and costs. There were no reliable proxies to use to create this forecast. Any deviation from management’s forecast meant failure, regardless of how effectively the strategy was executed. Unfortunately, usage turned out to be far lower than expected, order sizes much smaller, and capital costs far higher. Webvan was forced to cease operations by 2001.
Think of strategy as a portfolio of options, not bonds. The traditional plan-then-do model treats the value of any strategy like a bond. Management forecasts the future coupon payments (or cash flows) associated with various strategies and then selects the one that has the highest discounted value. When volatility is high, however, strategic decisions should be treated more like call options. Leadership decides whether the small up-front investment is worth making as a call on potential profits. As long as the option appears “in the money,” management can continue to invest; the moment the strategy becomes “out of the money,” leadership can stop investing, cut its losses, and move on.
Take Google. Since 2005, Google (and more recently, its parent company, Alphabet) has invested in countless new ventures. Some have been highly publicized (YouTube, Nest, Google Glass, Motorola phones, Google Fiber, self-driving cars); others are less well known (grocery delivery, photo sharing, online car insurance comparison). While many of the company’s investments have succeeded, some have not. Larry Page and his team have been quick to respond, shedding these investments and doubling down on others. Over the past three years, Alphabet has closed smart home company Revolv, shut down Google Compare, paused Google Fiber, and sold Motorola Mobility to Lenovo. During this same period, the company has increased its stake in cloud services and various new undertakings managed by the company’s X lab group. By treating strategic investments like options, Alphabet has avoided committing too early to new businesses. This approach has also allowed the company to double down on promising ventures and build them into profitable new businesses.
Create response mechanisms. In a world where the best laid plans can go awry, companies that react quickly and effectively come out on top. Rigorous contingency planning is as important as disciplined action planning. It requires that you identify the most important known unknowns associated with your company’s strategy, specify concrete steps to adjust course if you see an unplanned change in the external environment, and put in place mechanisms to continuously monitor market and competitive conditions. Caterpillar, for example, is reported to have put in place robust contingency plans in advance of the global financial crisis in 2007. Well before the crash, Caterpillar’s CEO insisted that all division heads develop contingency plans for a recession. At the time, Caterpillar and its competitors were at full capacity, and global demand was high. Few of Caterpillar’s competitors were contemplating a downturn. When the recession hit, Caterpillar put its contingency plans into effect, safeguarding the company’s profits and giving it the ability to support critical players in the value chain.
Test and learn, then test some more. Agile planning can be thought of as a series of time-boxed sprints—or micro-battles, as my Bain colleague James Allen would say—with the objective of moving forward, testing the waters, learning, and refining the strategy based on the results.
Caesars Entertainment has built test-and-learn into its marketing investments. For gaming companies such as Caesars, promotions are a major strategic investment. Successful promotions (free hotel rooms, subsidized flights, comped meals) bring new customers to the casino, and the profits generated by the games they play offset the cost of the promotion. Many promotions are unsuccessful. They either fail to spawn new customer interest or the cost of the promotion is too high relative to the incremental gains. Caesars uses its network of more than 50 casinos to test promotions before rolling them out. This test-and-learn approach lets Caesars limit the unsuccessful promotions and ensures that its most successful promotions are pushed out to as many casinos as possible.
Most companies do not take advantage of their opportunities to test and learn. They go for a big bang—and risk a big bust—when a series of smaller, more productive bangs would generate better results.
Great performance requires great strategy and great execution, but poor execution is often used as an excuse for flawed strategy. Today’s leaders need a new approach to strategy development. They can no longer define a plan over many years and then just do. Success requires identifying the next few steps along a broadly defined strategic path and then learning and refining as you go. This approach makes execution easier and increases the odds of delivering great results.
Michael Mankins is a partner in Bain & Company’s San Francisco office and a leader in the firm’s Organization practice. He is a coauthor of Time, Talent, Energy: Overcome Organizational Drag and Unleash Your Team’s Productive Power (Harvard Business Review Press, 2017).